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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 January 30, 1999, or
Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the transition period from __________ to
__________.
Commission file number 1-12814
COLE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 34-1453189
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
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. [X] YES [ ] 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 23, 1999 was approximately $229,045,000, based upon the
last price reported for such date by the New York Stock Exchange.
As of March 23, 1999, 14,861,857 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 10, 1999 are incorporated herein by reference
into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Cole National Corporation was incorporated as a Delaware corporation in
1984. Cole National Corporation, primarily through the subsidiaries owned by its
direct subsidiary, Cole National Group, Inc. is a leading provider of eyewear
products, optometric services and personalized gifts with 2,884 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. Cole National Corporation's businesses are conducted
through two principal operating units: Cole Vision and Things Remembered. Cole
Vision consists of Cole Licensed Brands, Cole Managed Vision Care and Pearle,
which was acquired on November 15, 1996. Cole National Corporation believes
that, based on industry data, Cole Vision is one of the largest optical retail
companies in the world. Things Remembered operates the only nationwide chain of
personalized gift stores. Cole National Corporation differentiates itself from
other specialty retailers by providing value-added services at the point of sale
at all of its retail locations.
COLE VISION
Cole Vision contributed 77.3% of Cole National Corporation's net
revenue in fiscal 1998 with 2,066 company-owned and franchised locations
throughout the United States, Canada and the Caribbean as of January 30, 1999.
Cole Licensed Brands and Pearle share purchasing power and corporate support
functions. The Cole Managed Vision Care programs give participants 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",
"Ward's Optical", "Target Optical" and "BJ's Optical Department" names. As of
January 30, 1999, Cole Licensed Brands operated 1,186 locations in 47 states and
Canada, including 788 departments on the premises of Sears department stores,
179 departments in Montgomery Ward stores, 82 departments in BJ's Wholesale Club
stores, 12 departments in Target stores, 121 freestanding stores operated under
the name "Sears Optical" and four other locations. 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 to Cole Licensed Brands on a weekly basis.
Cole Licensed Brands' locations are, in most cases, full-service retail
eyecare stores offering brand name and private label prescription eyeglasses,
contact lenses and accessories, with an on-premises 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 doctor of optometry, a department manager, and from one to seven
opticians depending on store sales volume. The majority of the doctors of
optometry are independent, as is often required by state law, with the remainder
being employed by Cole Licensed Brands. The independent doctors sublease space
and equipment from Cole Licensed Brands where permitted by law, or from the
host, and retain their examination fees.
Each of the retail locations is computer linked to five centralized
manufacturing laboratories, which grind, cut and fit lenses to order and ship
them to the stores. Cole Licensed Brands provides next day delivery on most of
the eyewear it offers when requested by its customers. All of the frames and
lenses used in its eyeglasses are purchased from outside suppliers, both in the
United States and several foreign countries.
A variety of marketing and promotional efforts, primarily newspaper,
direct mail, yellow pages and host advertising, are used to build and maintain
its customer base. Host advertising includes the placement of promotional
material within sales circulars or credit card billings sent out by the host
store to its customers.
PEARLE
At January 30, 1999, Pearle's operations consisted of 471 company-owned
and 409 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 manufacture most glasses in
approximately one hour. Mainline stores can manufacture over 50% of
prescriptions on-site in approximately one hour. Other prescriptions are sent to
the main
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laboratory in Dallas. At January 30, 1999, 304 of the company-owned stores and
118 of the franchised stores were Express, with the balance being Mainline.
The Express stores typically are located in high traffic freestanding,
strip centers and mall locations with most stores averaging 3,000 square feet.
The Express stores are usually staffed with two managers and a support staff of
four to eight people. 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 generally carry a smaller assortment of inventory than
Express stores and are usually staffed with one manager and two to three
associates. Most Pearle stores have a doctor of optometry on site with
approximately 80% leasing space from Pearle on an independent basis and the
remaining being direct employees of Pearle.
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
approximately half 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 advertising slogans, Nobody Cares for Eyes Better Than Pearle and The
Doctor Is In.
Pearle operates a warehouse facility in Dallas 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 franchise operations, with no franchisee operating
more than ten stores. With the proper financial approvals, a franchise purchase
can be financed through Pearle. Currently, Pearle offers financing over periods
up to ten years at variable interest rates ranging from prime plus one point to
prime plus three points adjusted periodically.
Each franchisee is required to enter into a franchise agreement
requiring payment of an initial franchise fee. The term of the typical franchise
agreement is equal to the earlier of ten years or the expiration or termination
of the underlying base lease. Royalty and advertising contributions typically
are based on a percentage of the franchisee's gross revenues from the retail
operation and/or non-surgical professional fee revenues. The total monthly
advertising contribution is distributed between 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.
Cole National Corporation also has an approximate 24% equity interest
in Pearle Europe B.V., which operates 519 company-owned and franchised optical
locations in the Netherlands, Belgium, Germany and Austria. In terms of market
share, Pearle Europe is the largest optical retailer in the Netherlands, Belgium
and Austria, and second largest in Germany.
COLE MANAGED VISION CARE
In the last several years, Cole Vision has expanded its managed vision
care program that provides low cost, comprehensive eyecare benefits marketed
directly to large employers, HMO's and other organizations, primarily under the
name "Vision One." Vision One's basic program gives plan sponsors the
opportunity to offer their members a group discount at locations within the
managed vision care network with minimal direct cost to the plan sponsor. An
enhanced Vision One program allows plan sponsors to provide their members with
prepaid eye examinations, as well as pricing discounts or reimbursements.
Cole Managed Vision Care's network has over 6,000 points of service,
including all Cole Vision company-owned retail locations, approximately 90% of
franchised locations, 700 locations in a nationwide chain store's optical
departments, and 3,000 independent ophthalmologists, making it the largest chain
provider of managed vision care in the United States. Cole Managed Vision Care
generated approximately 31% of Cole Vision's revenues in fiscal 1998.
THINGS REMEMBERED
Things Remembered contributed 22.7% of Cole National Corporation's net
revenue in fiscal 1998. As of January 30, 1999, Things Remembered operated 818
stores and kiosks generally located in large, enclosed shopping malls located in
46 states. Each location carries a wide assortment of engravable items and
provides "while you shop" personalization services for any occasion including
holiday, business and special occasion gift events. Things Remembered offers
engraving for items purchased at the store as well as for items purchased
elsewhere.
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Merchandise sold at Things Remembered stores consists of a broad
assortment of gift categories and items at prices generally ranging from $10 to
$75. Things Remembered's offering of gifts includes writing instruments, clocks,
music boxes, picture frames and albums, executive desk sets and accessories, ID
bracelets, glassware, lighters, keys and key rings, door knockers and Christmas
ornaments. 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, sweaters, bathrobes, jackets, baseball caps, towels and baby blankets.
These softgoods are also available in most of Things Remembered's other
locations with personalization services provided from a central fulfillment
facility.
At January 30, 1999, Things Remembered locations consisted of 450
stores and 368 kiosks. The typical store consists of about 1,000 square feet,
while kiosks, which are units generally located in the center of the common mall
area, are typically 200 square feet in size.
Things Remembered locations are usually operated by one or two
employees during non-peak periods and up to 15 employees during the peak
Christmas season. Locations typically employ a store manager on a full-time
basis and a full or part-time assistant manager, while the balance of the
employees is part-time sales associates.
Nearly all locations are equipped with computerized engravers and key
duplicating machines. Many stores also have equipment for etching glassware
items. All locations are equipped with point-of-sale terminals.
Most of 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 fill a store order.
HOST RELATIONSHIPS
Cole National Corporation believes it has developed excellent
relationships with the host stores in which Cole Licensed Brands operates. Cole
National Corporation has maintained its relationships in the optical business
with Sears and Montgomery Ward for over 35 years. Approximately 90% of the Sears
stores and all of the BJ's Wholesale and Montgomery Ward stores that offer
optometric services are operated by Cole Licensed Brands. Although leases with
major hosts are terminable by either party 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.
PURCHASING
The merchandise, supplies and component parts required for the various
products sold by Cole National Corporation 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. Cole National Corporation
believes that the loss of any one supplier or manufacturer should not have a
material adverse effect on its operations.
COMPETITION
Cole National Corporation operates in highly competitive businesses.
Cole Vision competes with other optical companies, private ophthalmologists,
optometrists and opticians and a growing number of HMOs in a highly fragmented
marketplace on the basis of the patient service it provides, as well as price
and product quality. In addition, Pearle competes on the basis of its highly
recognized brand name and one-hour express service. Cole National Corporation
believes that, based on industry data, Cole Vision is one of the largest optical
retail companies in the world. Although Things Remembered operates the only
nation-wide 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 of Cole
National Corporation's competitors have greater financial resources than Cole
National Corporation.
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EMPLOYEES
As of January 30, 1999, Cole National Corporation and its subsidiaries
had approximately 9,200 full-time and 3,900 part-time employees. During October,
November and December, Cole National Corporation employs additional full- and
part-time employees. In fiscal 1998, approximately 3,500 additional employees
were employed during such period. Approximately 150 employees at certain Pearle
locations are represented by labor unions. Cole National Corporation considers
its present labor relations to be satisfactory.
ITEM 2. PROPERTIES
Cole National Corporation leases an office in Highland Heights, Ohio,
and leases its executive offices and an office in Cleveland, Ohio.
During fiscal 1998, Cole National Corporation purchased a building in
Twinsburg, Ohio, which comprises approximately 175,000 square feet of office
space. All of Cole Vision's home office functions moved to this facility during
fiscal 1998.
All Cole Licensed Brands retail locations are leased or operated under
a license with the host store, and none of the individual retail locations is
material to operations. Leases for departments operated in Sears stores and
freestanding stores operated under the name "Sears Optical" are generally for
terms of 90 days and five years, respectively.
Pearle leases most of their retail stores under non-cancelable
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.
Cole Vision leases five optical laboratories, located in Knoxville,
Tennessee (two labs); Memphis, Tennessee; Salt Lake City, Utah; and Richmond,
Virginia, pursuant to leases expiring (including renewals at the option of Cole
Vision) in 2002, 2005, 2002, 2001 and 2013, respectively. Pearle owns its Dallas
Support Center, which comprises 88,721 square feet of office space and 147,336
square feet of laboratory and distribution facilities. Pearle also owns a small
headquarters and laboratory in Puerto Rico. Cole Vision also leases a home
office, lab and distribution center facility for its Canadian operations
pursuant to leases expiring in 2000.
Leases for Things Remembered stores and kiosks are generally for terms
of ten and five years, respectively. During the first quarter of fiscal 1999,
Things Remembered moved its home office functions to the leased facility in
Highland Heights, Ohio. The office and warehouse facility that Things Remembered
owns and occupied during fiscal 1998 is expected to be sold in fiscal 1999. In
fiscal 1997, a 210,000 square foot warehouse and distribution facility was
constructed for Things Remembered. On December 31, 1998, Things Remembered
entered into an agreement with a third party for the sale and leaseback of its
distribution center that expires in 2013 and includes three options to renew the
lease for five-year terms.
Cole National Corporation believes that its relationships with its
lessors are generally good.
ITEM 3. LEGAL PROCEEDINGS
While Cole National Corporation is not presently involved in any
material legal proceedings, from time to time during the ordinary course of
business, it is threatened with, or may become a party to legal actions and
other proceedings incidental to its business. Management believes that Cole
National Corporation's potential exposure to such legal actions is adequately
covered by its general liability insurance and reserves.
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 January 30, 1999.
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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, having 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
---- --- ----------------------------------------
Leslie D. Dunn 54 Senior Vice President -
Business Development,
General Counsel and Secretary
George H. Bernstein, Jr. 37 Executive Vice President of Strategic
Planning and Chief Financial Officer
Joseph Gaglioti 53 Vice President and Treasurer
Wayne L. Mosley 45 Vice President and Controller
(b) The following is a brief account of the positions held during the past
five years by each of the above named executive officers:
Ms. Dunn has been Senior Vice President - Business
Development, General Counsel and Secretary since September 1997. Prior
to joining Cole National Corporation, she was a partner in the law firm
of Jones Day Reavis & Pogue for more than five years.
Mr. Bernstein has been Executive Vice President of Strategic
Planning and Chief Financial Officer since March 1, 1999. Mr. Bernstein
was the Senior Vice President and General Manager of Things Remembered
from October 1997 to March 1999. Before joining Cole National
Corporation, Mr. Bernstein was President of American Vision Centers,
Inc., an optical retailer, from July 1996 to September 1997 and
President of Hess Shoes, a footwear retailer, from February 1992 to
June 1996.
Mr. Gaglioti has been Vice President since 1992 and Treasurer
since 1991. Mr. Gaglioti joined Cole National Corporation in 1981.
Mr. Mosley has been Vice President and Controller, Assistant
Secretary and Assistant Treasurer since 1992. Mr. Mosley joined Cole
National Corporation in 1986.
Information concerning Jeffrey A. Cole and Brian B. Smith,
Cole National Corporation 's executive officers who are also Directors,
will be included in Cole National Corporation's Proxy Statement for the
1999 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 1998 Fiscal 1997
---------------------------- --------------------------
Quarter High Low High Low
------- ----------- ------------ ------------ -----------
First $ 41 $ 32 3/4 $ 35 1/8 $ 26 1/2
Second $ 40 3/8 $ 33 $ 48 1/4 $ 33
Third $ 33 $ 16 5/8 $ 46 $ 40 3/16
Fourth $ 21 3/16 $13 3/16 $ 43 1/2 $ 27 3/4
Cole National Corporation'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 23, 1999 there were 214 shareholders of record.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below reflect continuing
operations only and should be read in conjunction with the consolidated
financial statements and the notes thereto and other information contained
elsewhere in this report (dollars in thousands, except per share amounts).
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net revenue $1,068,182 $1,000,198 $ 628,496 $ 515,892 $ 464,821
Operating income (loss) (1) $ 42,346 $ 62,864 $ (11,486) $ 43,651 $ 38,096
Income (loss) from continuing
operations (1) (2) $ 14,276 $ 19,933 $ (24,698) $ 13,798 $ 23,331
Income (loss) from continuing
operations per common share (1) (2)
Basic $ 0.96 $ 1.48 $ (2.18) $ 1.32 $ 2.48
Diluted $ 0.94 $ 1.43 $ (2.18) $ 1.31 $ 2.44
Weighted average number of shares
outstanding (000's)
Basic 14,802 13,481 11,333 10,415 9,395
Diluted 15,176 13,981 11,333 10,565 9,571
Total assets $ 628,024 $ 651,384 $ 578,456 $ 296,669 $ 280,298
Working capital $ 68,695 $ 73,175 $ 56,404 $ 61,275 $ 56,628
Stockholders' equity at year end $ 145,360 $ 132,015 $ 19,718 $ 17,133 $ 3,306
Current ratio 1.38 1.35 1.26 1.68 1.64
Long-term obligations and redeemable
preferred stock $ 276,013 $ 277,401 $ 317,547 $ 181,903 $ 184,388
Number of stores at year end (3) 2,884 2,833 2,657 1,834 1,741
Comparable store sales growth 3.1% 3.6% 7.2% 4.5% 5.4%
(1) Fiscal 1998 amounts include a $23,120 pretax charge for restructuring
and other unusual items, of which $5,247 relates to inventory markdowns
that are included in cost of sales; fiscal 1997 amounts include an
$8,000 pretax charge for business integration related to the
acquisition of American Vision Centers; and fiscal 1996 amounts include
a $61,091 pretax charge for business integration and other
non-recurring items primarily related to the acquisition of Pearle.
(2) Fiscal 1998 amounts also include $6,000 of income from cash received in
a nontaxable settlement of claims against the former owner of Pearle.
(3) Includes Pearle and American Vision Centers franchise locations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Fiscal years end on the Saturday closest to January 31 and are
identified according to the calendar year in which they begin. For example, the
fiscal year ended January 30, 1999 is referred to as "fiscal 1998." Fiscal 1998,
1997 and 1996 each consisted of 52-week periods.
Cole National Corporation has two reportable segments: Cole Vision,
which accounted for 77% of total revenue, and Things Remembered, which accounted
for 23% of total revenue. Most of Cole Vision's revenue is provided 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, interest income on notes receivable and initial franchise fees from
franchisees and by fees from managed vision care programs. Things Remembered's
revenue is provided by sales of engravable gift merchandise and personalization
and other services primarily through retail stores and kiosks. See Note 12 of
the Notes to Consolidated Financial Statements for further discussion of
reportable segments.
On January 13, 1998, the Company announced the closing of its Cole Gift
Centers business that included 445 key duplicating, greeting card and gift
departments on the premises of hosts' stores. Cole Gift Centers has been
accounted for as a discontinued operation in the accompanying financial
statements. Accordingly, the results of operations and loss on disposition of
Cole Gift Centers have been excluded from the results of continuing operations.
See Note 4 of the Notes to Consolidated Financial Statements for further
discussion of discontinued operations.
On August 5, 1997, the Company acquired all of the issued and
outstanding common stock of American Vision Centers, Inc. ("AVC"). The
acquisition was accounted for using the purchase method of accounting.
Accordingly, AVC's results of operations, which included 80 company-owned
optical stores and 75 franchised locations at January 31, 1998, have been
included in the consolidated statements of operations since the date of
acquisition. For the six-month period ended January 31, 1998, AVC's net revenue
was approximately $25.0 million. See Notes 2 and 3 of the Notes to Consolidated
Financial Statements for further discussion of this acquisition.
On November 15, 1996, the Company acquired the North American and
Caribbean operations of Pearle, Inc. and a minority interest in Pearle's
European business. The acquisition of Pearle has been accounted for under the
purchase method of accounting. Accordingly, Pearle's results of operations,
which included 348 company-owned stores and 338 franchised locations at February
1, 1997, have been included in the consolidated statements of operations since
the date of acquisition. For the eleven-week period ended February 1, 1997,
Pearle generated net revenue of $58.3 million. See Notes 2 and 3 of the Notes to
Consolidated Financial Statements for further discussion of this acquisition.
RESULTS OF OPERATIONS
The following is a discussion of the results of continuing operations
for the three fiscal years ended January 30, 1999. This discussion should be
read in conjunction with the consolidated financial statements and notes thereto
included in Item 8 of the Form 10-K.
FISCAL 1998 COMPARED TO FISCAL 1997
Net revenue increased 6.8% to $1.1 billion in fiscal 1998 from $1.0
billion in fiscal 1997. The increase in revenue was primarily attributable to
the inclusion in fiscal 1998 of additional Cole Vision units, including the AVC
stores acquired in August 1997, and a consolidated comparable store sales
increase of 3.1%. The consolidated comparable store sales increase in fiscal
1998 reflected a comparable store sales increase of 1.6% at Cole Vision and 7.4%
at Things Remembered. The Cole Vision comparable store sales increase resulted
from a 3.1% increase at Cole Licensed Brands partially offset by a 0.8% decrease
at Pearle. The Cole Vision sales increase reflected an increase in the number of
transactions due to more locations, as the average selling price was essentially
flat between years. The Pearle comparable store sales were impacted by a weaker
than expected reception to marketing and merchandising programs implemented in
the first quarter, as well as increased competitive pressures in the optical
business and what the Company perceives may be a general softening in the retail
optical market. At Things Remembered, the comparable store sales growth
reflected increased sales of additional personalization and new products
increasing the average transaction amount, while the number of transactions in
fiscal 1998 was similar to fiscal 1997. At January 30, 1999, the Company had
2,884 retail locations including 818 Things Remembered stores, 1,186 Licensed
Brands locations and 880 Pearle stores, of which 409 were franchised locations,
compared to 2,833 retail locations at January 31, 1998.
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Gross profit increased to $704.1 million in fiscal 1998 from $659.3
million in fiscal 1997. The gross profit increase was primarily attributable to
the increased revenue at both Cole Vision and Things Remembered, partially
offset by $5.2 million of inventory markdowns at Pearle in connection with
restructuring its operations. Excluding the inventory markdowns, gross margins
were 66.4% and 65.9% in fiscal 1998 and fiscal 1997, respectively. Gross margin
at Things Remembered improved to 71.0% in fiscal 1998 from 68.7% the prior year
with most of the improvement from increased personalization sales. At Cole
Vision gross margins were 65.1% in both fiscal 1998 and fiscal 1997.
Operating expenses increased 9.2% to $610.1 million in fiscal 1998 from
$558.5 million in fiscal 1997. As a percentage of revenue, operating expenses
were 57.1% in fiscal 1998 compared to 55.8% in fiscal 1997. The unfavorable
expense leverage was attributable to a 0.6 percentage point increase in managed
vision care expenses, a 0.6 percentage point increase in information systems
costs including $2.4 million incurred in connection with the Company's Year 2000
Readiness Program (see Year 2000 below for additional information) and a 0.5
percentage point increase in advertising expenditures, partially offset by a 0.4
percentage point leverage gain in store occupancy costs. The increase in managed
vision care expenses was primarily the result of increased administrative costs
necessary to handle the growth in call and claims volume. The increase in
advertising expenditures as a percentage of revenue was mainly due to
inefficient advertising efforts at Cole Vision, a result of the optical market
conditions mentioned above and the unexpected weakness of Pearle's first quarter
marketing and merchandising programs. Store occupancy expenses increased as a
result of more locations and higher percentage rents caused by increased
comparable store sales but gained leverage from the strong comparable store
sales increase at Things Remembered. Payroll costs also increased primarily
because of more retail units open in 1998 and additional payroll to support
increased sales, maintaining leverage to last year. Fiscal 1998 depreciation and
amortization expense of $33.7 million was $3.8 million more than fiscal 1997
reflecting increased amortization of systems development costs and the AVC
acquisition in fiscal 1997.
Fiscal 1998 included a $23.1 million pretax charge for restructuring
and other unusual items, including the inventory markdowns at Pearle, and fiscal
1997 included an $8.0 million pretax charge for non-recurring items related to
the integration of AVC into the Company's operations. See Restructuring,
Business Integration and Other Unusual Charges below.
Operating income, excluding the charges for restructuring, business
integration and other unusual charges from each year, decreased 7.6% to $65.5
million in fiscal 1998 from $70.9 million the prior year, as improved sales and
earnings at Things Remembered and Cole Licensed Brands were more than offset by
the disappointing results at Pearle.
Net interest expense and other income for fiscal 1998 of $18.7 million
decreased $9.2 million compared to fiscal 1997. The decrease was primarily
attributable to the recognition of $6.0 million of other income in the third
quarter of fiscal 1998 from cash received in the non-taxable settlement of
certain contingencies related to several claims against and indemnifications
from the former owner of Pearle, and lower interest expense following the
purchase and retirement of $150.9 million of 11-1/4% Senior Notes in connection
with a tender offer in September 1997, partially offset by additional interest
expense on $125.0 million of 8-5/8% Senior Subordinated Notes due 2007 issued in
August 1997.
The income tax provisions for fiscal 1998 and 1997 include $7.4 million
and $3.4 million, respectively, of income tax benefits related to the charges
for restructuring and other unusual items. The effective tax rate on income
excluding these charges and the $6.0 million settlement included in other income
was 41.0% in fiscal 1998 and 43.0% in fiscal 1997. This rate reflects the
significant impact of non-deductible amortization of goodwill in both years. A
more complete discussion of income taxes is included in Note 10 of the Notes to
Consolidated Financial Statements.
Net income increased to $14.3 million in fiscal 1998 from a net loss of
$6.2 million the prior year. The net loss in fiscal 1997 included a $14.0
million loss, net of an income tax benefit of $8.5 million, related to the
operations and closing of Cole Gift Centers and a $12.2 million extraordinary
loss, net of an income tax benefit of $7.5 million, recorded in the third
quarter of fiscal 1997 in connection with the early extinguishment of debt. The
loss on early extinguishment of debt represented the tender premium, write-off
of related unamortized debt discount and other costs associated with redemption
of the 11-1/4% Senior Notes.
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FISCAL 1997 COMPARED TO FISCAL 1996
Net revenue increased 59.1% to $1.0 billion in fiscal 1997 from $628.5
million in fiscal 1996. The increase in revenue was primarily attributable to
the acquisitions of Pearle and AOCO Limited, which operated 73 Sears locations
in Canada, in November 1996, and AVC in August 1997, which accounted for $290.7
million of the increase for the fiscal year. See Notes 2 and 3 of the Notes to
Consolidated Financial Statements for further discussion of the acquisitions.
Consolidated comparable store sales increased 3.6% in fiscal 1997 with a 5.9%
comparable store growth at Cole Vision and a 0.5% comparable store sales decline
at Things Remembered. The Cole Vision comparable store sales increase resulted
from a 6.1% increase at Cole Licensed Brands and a 2.5% increase at Pearle. The
increase at Cole Vision was primarily a result of successful eyewear promotions
and growth in managed vision care sales. The net revenue increase was also
attributable to the classification of capitation and other fees associated with
its growing managed vision care business as revenue. Prior to fiscal 1997, such
fees were netted with operating expenses in the financial statements. For fiscal
1997, these fees were approximately $41.8 million. The opening of additional
Cole Vision and Things Remembered units also contributed to the revenue
increase. At January 31, 1998, the Company had 2,833 retail locations, including
831 Things Remembered stores, 1,157 Licensed Brand locations and 845 Pearle
stores, of which 401 were franchised locations, compared to 2,657 retail
locations at February 1, 1997.
Gross profit increased to $659.3 million in fiscal 1997 from $427.3
million in fiscal 1996. The gross profit increase was primarily attributable to
the acquisitions and the growth of managed vision care fees now classified as
revenue. Gross margins for fiscal 1997 and fiscal 1996 were 65.9% and 68.0%,
respectively. The lower gross margin percentage in fiscal 1997 resulted
primarily from the addition of Pearle which operates at a lower gross margin
than the Company has historically experienced due to the higher costs of
in-store laboratories and lower margin wholesale sales to franchised stores.
This was partially offset by revenue generated by Pearle's franchise royalties
and fees, interest income on Pearle's franchise notes receivable and the managed
vision care fees, each of which has no corresponding cost of goods sold. As a
result, gross margin at Cole Vision was 65.1% in fiscal 1997 compared to 66.9%
in fiscal 1996. At Things Remembered, gross margin was 68.7% and 69.9% in fiscal
1997 and fiscal 1996, respectively. The lower gross margin at Things Remembered
was primarily attributable to increased sales of clearance and promotional
merchandise, partially offset by an increase in sales of additional
personalization.
Operating expenses increased 55.5% to $558.5 million in fiscal 1997
from $359.1 million in fiscal 1996. As a percentage of revenue, operating
expenses decreased to 55.8% in fiscal 1997 from 57.1% in fiscal 1996. The
leverage improvement was primarily a result of the addition of Pearle, which has
lower operating expenses as a percentage of revenue than the rest of the
Company, along with leverage gains achieved by Cole Vision's comparable store
sales increase. This was offset in part by leverage losses at Things Remembered
resulting from the decline in comparable store sales. Operating expenses
increased primarily because of the acquisitions and the classification of
capitation and other fees as revenue. The expense increase reflected higher
advertising expenditures, payroll costs, and store occupancy expenses, as well
as expenses related to the growth of managed vision care. Advertising
expenditures at Cole Vision were increased for optical promotions and Pearle
name awareness. Payroll costs increased because of more higher-volume retail
units open in 1997 and additional payroll to support increased sales. Store
occupancy expenses increased primarily as a result of more locations and higher
percentage rents caused by increased comparable store sales. As a percentage of
revenue, payroll and store occupancy costs improved by 1.2 and 2.1 percentage
points, respectively, over fiscal 1996, partially offset by the leverage loss
from other operating expenses which were affected by the reclassification of
managed vision care fees. Fiscal 1997 depreciation and amortization expense of
$30.0 million was $11.4 million more than fiscal 1996 reflecting the
acquisitions and an increase in capital expenditures.
The third and fourth quarter of fiscal 1997 included a total of $8.0
million of charges for non-recurring items related to integration of AVC into
the Company's operations. In the fourth quarter of fiscal 1996, a $61.1 million
pretax charge was recorded for certain unusual non-recurring items primarily
related to the integration and consolidation of Pearle. See Restructuring,
Business Integration and Other Unusual Charges below.
Operating income, excluding charges for business integration and other
unusual items from each year, increased 42.9% to $70.9 million in fiscal 1997
from $49.6 million the prior year, primarily the result of the acquisitions and
comparable store sales growth at Cole Vision, offset in part by soft sales
performance at Things Remembered.
Net interest expense for fiscal 1997 of $27.9 million increased $7.7
million compared to fiscal 1996. The increase was primarily attributable to the
additional interest expense on $150.0 million of 9-7/8% Senior Subordinated
Notes due 2006 issued in connection with financing the Pearle acquisition and
$125.0 million of 8-5/8% Notes. This
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was partially offset by a decrease in interest expense due to the purchase and
subsequent retirement of $15.1 million of 11-1/4% Senior Notes in the second
quarter of fiscal 1996 and the purchase and retirement of an additional $150.9
million of the 11-1/4% Senior Notes in conjunction with a tender offer in
September 1997.
The income tax provisions for fiscal 1997 and 1996 include $3.4 million
and $20.0 million, respectively, of income tax benefits related to the charges
for business integration and other unusual items. The effective tax rate on
income excluding the charge for business integration and other unusual items was
43.0% in fiscal 1997 and 44.3% in fiscal 1996. This rate reflects the
significant impact of non-deductible amortization of goodwill in both years.
The net loss in fiscal 1997 of $6.2 million included a $14.0 million
loss, net of an income tax benefit of $8.5 million, related to the operations
and closing of Cole Gift Centers and a $12.2 million extraordinary loss, net of
an income tax benefit of $7.5 million, recorded in the third quarter of fiscal
1997 in connection with the early extinguishment of debt. A similar charge for
$0.7 million, net of an income tax benefit of $0.5 million, was recorded in the
second quarter of fiscal 1996.
RESTRUCTURING, BUSINESS INTEGRATION AND OTHER UNUSUAL CHARGES
In the fourth quarter of fiscal 1996, the Company recorded a $61.1
million pretax charge primarily related to its acquisition of Pearle, which
included costs related to the integration and consolidation of Pearle into the
Company's operations, as well as other unusual charges. The charge included
$15.8 million for store closings, $1.8 million for other facility closings,
$21.6 million related to computer systems, which included the settlement costs
of terminating an outsourcing agreement, $6.1 million for the writeoff of
goodwill pursuant to Statement of Financial Accounting Standards (SFAS) No. 121
and $15.8 of other unusual charges. The other charges related to employee
matters, including severance and hiring costs, costs associated with developing
and implementing a new franchise agreement, and compensation costs associated
with accelerated vesting of a stock option grant to executives.
In connection with the 1996 business integration charge, management
developed a plan, approved by the Board of Directors, that among other things
identified 29 Pearle stores that would be closed and 112 in-store labs that
would be taken out of stores. This plan consisted of a store-by-store analysis
of profitability, size, lease term and type of lab. In addition, the Company
decided to retain Pearle's distribution and central lab facilities, but close
the home office facility in Dallas, Texas. The Company's intent was to close the
stores, on average, over a six month period and labs, on average, over an
eighteen month period following February 1, 1997. The estimated costs of
closure, primarily related to lease obligations and impairment of fixed assets,
were determined based upon management's and Pearle's past experience in closing
stores and represented a portion of the remaining noncancellable term of the
operating leases after the expected closing dates. The estimate assumed the
Company would be able to avoid certain lease penalty provisions through
negotiations with landlords. This resulted in an accrual of $12.9 million being
recorded pursuant to EITF No. 94-3 as part of the original charge discussed
above.
The Company, whose integration efforts were initially focused primarily
on the new franchise agreement, closed one store in each of the first and second
quarters of fiscal 1997. The Company then acquired AVC in August 1997, and
recorded an additional $8.0 million integration charge in fiscal 1997, which
included costs of closing an additional 12 stores, six in-store labs, the AVC
central lab and the AVC home office, transitional costs incurred to change the
brand identity to Pearle and duplicate costs incurred through fiscal year end in
connection with the consolidation of the AVC home office functions.
The expected benefits of these business integration activities included
a stronger franchise network and reductions in (1) home office personnel and
occupancy costs, (2) purchasing costs for materials, (3) manufacturing costs
upon the completion of the removal of full in-store labs and closing of the AVC
lab, and (4) operating losses upon closure of certain unprofitable stores. The
consolidation of Pearle's home office and purchasing functions was substantially
completed in fiscal 1997, with the exception of lab systems, which are expected
to be completed in fiscal 1999. The consolidation of AVC functions, including
the shutdown of its central lab, was completed by the third quarter of fiscal
1998.
Negotiations with various landlords throughout fiscal 1997 proved more
difficult than originally anticipated. Also, due to other priorities of
integrating Pearle and the acquisition of AVC in mid-fiscal 1997, the original
plan was not fully implemented by the end of fiscal 1997. At the end of fiscal
1997 management reaffirmed its intent to close the remaining 27 stores and
convert the 112 lab locations as soon as practicable. The estimated cost of
closure was revised to equal the remaining lease liability assuming, on average,
stores would be closed six months after January 31, 1998.
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This revised estimate did not differ materially from the previously established
accrual and therefore no adjustment to the reserve was required. Had
management's original plan corresponded to only the actual stores closed prior
to January 31, 1998, the restructuring charges would have been reduced by $9.1
million and $1.6 million for the fiscal years ended February 1, 1997 and January
31, 1998, respectively.
Of the facilities originally identified for closing, five stores were
closed in the first quarter and one store was closed in the second quarter of
fiscal 1998, and 17 full service labs were closed in the third quarter of fiscal
1998.
In the third quarter of fiscal 1998, several consultants were retained
to help assess various aspects of Cole National Corporation's optical
operations. As a result, in the fourth quarter of 1998, the original
restructuring plan was revised and a net pretax charge of $23.1 million was
recorded, related to further restructuring of its Pearle business along with
other unusual charges. The net pretax charge consisted of charges associated
with the restructuring of $13.9 million, a reversal of previously established
restructuring accruals of $12.3 million and other unusual charges totaling $21.5
million.
The restructuring charge of $13.9 million relates to changes made to
the Pearle operating model and structure of the home office organization.
Consultants conducted market research and helped develop and implement changes
to Pearle's marketing message, merchandise offerings and presentation, store
locations, organizational structure and other operational opportunities. In
addition, home office facilities and personnel, including Cole Managed Vision
Care administration and systems were relocated and consolidated into one central
facility. The results of these efforts resulted in charges for inventory
writedowns related to products that will no longer be carried, severance and
hiring costs primarily related to home office organizational changes,
consolidation of the home office facilities, including the writeoff of fixed
assets at the old facilities, consultant fees and changing the Pearle brand
message through signing, production and other costs. The charge related to the
inventory writedown has been reflected in cost of sales in accordance with EITF
No. 96-9.
As part of the revised plan, which was approved by the Board of
Directors in March 1999, it was determined that certain stores originally
identified for closure would either remain open or be closed at a much lower
cost than originally estimated. The plan is to close 26 stores, of which nine
were identified in the original store closing plan, over the next 12 months and
remove surfacing equipment from full service labs of 226 stores over the next
six to eighteen months. As a result of the revised plan, the expected cost of
closure is estimated to approximate $1.0 million, requiring a reversal of $12.3
million of the previous accrual. The primary reasons for the significant
reduction in the accrual were the passage of time of not closing stores earlier,
many of the stores now will be closed at the end of their lease terms, and the
shift in strategy in that only surfacing equipment would be removed from
full-service stores as opposed to the original plan of completely removing labs.
Management believes it will be able to implement its revised plan based on the
current status of lease termination negotiations and the expected installation
of new lab systems, along with a new central lab facility in 1999.
For the restructuring charges recorded in 1996, 1997 and 1998,
approximately $29.4 million represented non-cash charges and $34.2 million
represented cash outlays through January 30, 1999, including a total of $10.6
million that had been incurred and paid during the respective periods that each
charge was initially recorded. At January 30, 1999, approximately $7.1 million
of restructuring reserves remained, all of which is expected to result in cash
outlays over the next twelve months for lease settlement, severance and other
costs incurred in fiscal 1998 but paid in fiscal 1999.
The unusual charges in fiscal 1998 related to the writeoff of $8.8
million associated with the abandonment in the fourth quarter of previously
capitalized system development costs (including $1.9 million of incurred costs
that will be paid in the first half of fiscal 1999) and $2.7 million primarily
related to restricted stock issued to two senior executive officers. Cole
National Corporation also made an unconditional commitment in the fourth quarter
of fiscal 1998 to contribute $10 million through 2009, with payments beginning
in 2004, to a leading medical institution supporting the development of a
premier eye care research and surgical facility.
Refer to Note 3 of the Notes to Consolidated Financial Statements for
additional information regarding the restructuring, business integration and
other unusual charges.
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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 available to them working capital commitments of $75.0
million, reduced by commitments under letters of credit, under a credit facility
put in place at the time of the Pearle acquisition.
There were no working capital borrowings outstanding as of January 30,
1999, and the maximum amount outstanding at any time during fiscal 1998 was
$13.6 million. There were no working capital borrowings outstanding during
fiscal 1997. The credit facility contains covenants restricting the ability of
its operating subsidiaries to, among other things, pay dividends or make other
restricted payments to Cole National Corporation or Cole National Group. The
credit facility permits Cole National Group's subsidiaries to pay dividends to
the extent necessary to permit payment of all interest and principal on the
9-7/8% Notes and the 8-5/8% Notes when due.
During the second quarter of fiscal 1997, Cole National Corporation
completed a public offering of 2,587,500 shares of its common stock at an
offering price of $47.00 per share. The net proceeds of approximately $116.0
million were used for general corporate purposes including reducing outstanding
indebtedness and financing acquisitions, including the purchase of AVC.
In August 1997, Cole National Group issued $125.0 million of 8-5/8%
Notes. The net proceeds of the issuance were $121.8 million. Cole National Group
also commenced a tender offer which expired on September 12, 1997, to purchase
up to all of its $165.8 million outstanding 11-1/4% Senior Notes at $1,105.61
per $1,000 principal amount, plus accrued interest thereon, using the net
proceeds of the 8-5/8% Notes issuance and cash on hand. A total of $151.3
million of 11-1/4% Senior Notes was tendered, with the remaining amount redeemed
in October 1998.
In November 1998, the Board of Directors authorized the repurchase from
time to time of up to 1 million shares of common stock, or approximately 6.7% of
Cole National Corporation's outstanding shares, through open market or block
transactions. It is expected that the purchase price will be 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. During
fiscal 1998, 259,500 shares of common stock were repurchased for an aggregate
purchase price of $5.5 million. As of January 30, 1999, Cole National
Corporation had purchased a total of 279,500 shares of common stock, and has
authority to purchase up to 720,500 shares of common stock in the open market
and block purchases.
At year end, $150.0 million of 9-7/8% Notes and $125.0 million of
8-5/8% Notes were outstanding. The 9-7/8% Notes and the 8-5/8% Notes are
unsecured and mature December 31, 2006 and August 15, 2007, respectively, with
no earlier scheduled redemption or sinking fund payment. Interest on the 9-7/8%
Notes is payable semi-annually on each June 30 and December 31, while the
interest on the 8-5/8% Notes is payable semi-annually on each February 15 and
August 15. The indentures pursuant to which the 9-7/8% Notes and the 8-5/8%
Notes were issued contain certain optional and mandatory redemption features and
other financial covenants, including restrictions on the ability of Cole
National Group to pay dividends or make other restricted payments to Cole
National Corporation. The indentures permit dividend payments equal to one-half
of Cole National Group's consolidated net income, provided that no default or
event of default has occurred under the indentures and that Cole National Group
has met a specified fixed charge coverage ratio test. The indentures also permit
payments to Cole National Corporation for certain tax obligations and for
administrative expenses not to exceed .25% of net sales. See Note 6 of the Notes
to Consolidated Financial Statements.
No significant principal payment obligations are due under its
outstanding indebtedness until the 9-7/8% Notes mature in 2006. The ability of
Cole National Corporation and its subsidiaries to satisfy these obligations will
be primarily dependent upon future financial and operating performance of the
subsidiaries and upon its ability to renew or refinance borrowings or to raise
additional equity capital.
Cash balances at year end were $51.1 million compared to $68.1 million
at January 31, 1998. Operations generated net cash of $62.4 million in fiscal
1998, $8.0 million in fiscal 1997 and $82.8 million in fiscal 1996. The primary
sources of the $54.4 million improvement in cash provided from operations in
fiscal 1998 compared to fiscal 1997 were from net income tax refunds received in
fiscal 1998 of $7.1 million compared to income taxes paid in fiscal 1997 of
$19.9 million, $20.6 million from a decrease in accounts and notes receivable,
prepaid expenses and other assets versus an increase last year and $6.8 million
from a smaller increase in inventories in fiscal 1998, partially offset by a
$5.5 million larger decrease in accounts payable and accrued liabilities. The
$74.8 million decrease in cash
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provided by operations in fiscal 1997 compared to fiscal 1996 was primarily
attributable to a decrease in accounts payable and accrued liabilities of $11.8
million due in part to the payment of non-recurring charges, an increase in
inventories of $11.2 million versus $3.9 million in fiscal 1996, and a decrease
in accrued and deferred income taxes of $25.8 million versus an increase of
$16.3 million in fiscal 1996. These cash flow decreases were partly offset by a
$15.9 million decrease in the net assets of discontinued operations, increased
income from operations of $13.5 million, excluding the charge for integration
and other non-recurring items, and increased depreciation and amortization
expense of $11.4 million.
Net capital additions were $37.6 million, $32.6 million and $25.1
million in fiscal 1998, 1997 and 1996, respectively. The majority of the capital
additions was for store fixtures, equipment and leasehold improvements for new
stores and the remodeling of existing stores. Capital expenditures for fiscal
1998 include the purchase and furnishing of Cole Vision's headquarters office
building for $15.3 million. In fiscal 1997 construction of a new warehouse and
distribution facility for Things Remembered was completed at a cost of
approximately $9.3 million (of which $6.6 million is included in capital
expenditures in fiscal 1997). In fiscal 1998, proceeds of $8.8 million were
received from the sale and leaseback of this facility and a portion of the land.
In addition, the Company used $7.2 million for additional net investment in
Pearle Europe in connection with Pearle Europe's acquisition in 1998 of the
second largest optical retailer in Germany and the largest optical retailer in
Austria. The Company also used $7.2 million for several acquisitions of local
optical chains in fiscal 1998, $27.8 million for the purchase of AVC and $2.8
million for additional investment in Pearle Europe in fiscal 1997, and $157.4
million for the purchases of Pearle and AOCO Limited and $6.1 million for the
investment in Pearle Europe in fiscal 1996. In addition, Cole National
Corporation paid approximately $16.8 million and $17.9 million for systems
development costs in 1998 and 1997, respectively. Such costs have been
capitalized and are being amortized over their estimated useful lives.
For fiscal 1999, management plans to expand the number of stores, as
well as remodel and relocate stores, and currently estimates that capital
expenditures in fiscal 1999 will be approximately $30.0 million, excluding
acquisitions and systems development costs. Management estimates that it will
incur approximately $13.0 million in systems development costs in 1999 that will
be capitalized and subsequently amortized.
Cole National Corporation believes that funds provided from operations
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.
YEAR 2000
Cole National Corporation has been working with a consultant to assess
and resolve the potential impact of the Year 2000 on the ability of its
computerized information systems to accurately process information that may be
date-sensitive (the "Year 2000 Readiness Program"). Any of the programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures.
During fiscal 1998, Cole National Corporation completed the assessment
of its internal critical and non-critical hardware and software. Included in the
assessment was the identification of all critical and non-critical computer
programs and hardware, including non-information technology systems such as
HVAC, telephone and others containing embedded microcontrollers, and an
evaluation of their Year 2000 readiness. Cole National Corporation utilizes over
500 separate computer information systems across its operations, many of which
were recently installed and are Year 2000 ready. In addition, modifications to
many other critical programs has been completed and testing of these programs is
in process. Management currently believes that all critical programs and
hardware will be Year 2000 ready, including testing, by the end of the third
quarter of fiscal 1999.
Concurrent with this internal assessment, Cole National Corporation
identified and contacted critical vendors, host stores and managed health care
partners with whom it does business regarding their Year 2000 readiness.
Although not all responses from third parties have been received, management is
not currently aware of any critical third party whose Year 2000 issues are
likely to have a material effect on the Company.
Cole National Corporation has not yet developed contingency plans and
such plans will depend primarily on the responses from critical third parties in
the event that it or critical third parties should fail to become Year 2000
ready. Cole National Corporation expects any necessary contingency plans to be
completed by the end of the third quarter of fiscal 1999.
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Notwithstanding that Cole National Corporation is proceeding diligently
with the implementation of its own Year 2000 Readiness Program, including
ascertaining Year 2000 readiness of critical third parties, the inability of it
or critical third parties to effectuate timely and cost effective solutions to
Year 2000 issues could have a material adverse effect on the Company.
Management estimates the total cost of the Year 2000 Readiness Program
will be approximately $3.5 million, including approximately $0.3 million of new
hardware and software that will be capitalized. The remaining $3.2 million will
be expensed as incurred (approximately $2.4 million in fiscal 1998 and $0.8
million in fiscal 1999). These costs include only external costs as internal
costs, which consist primarily of payroll-related costs of employees, are not
tracked separately for the Year 2000 Readiness Program. The estimate of external
costs does not include costs associated with addressing and resolving issues as
a result of the failure of third parties to become Year 2000 ready.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1998, SFAS No. 130 "Reporting Comprehensive Income," SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information," and
SFAS No. 132 "Employees Disclosures about Pensions and Other Postretirement
Benefits" were adopted. Adoption of these standards did not have a material
impact on the results of operations, financial position or cash flows.
RECENT DEVELOPMENTS AND FORWARD-LOOKING INFORMATION
The Company expects results in the first quarter of fiscal 1999 to be
below last year from continuing softening of sales at Cole Vision.
Certain sections of this Form 10-K Report, including this Management's
Discussion and Analysis, contain forward-looking statements within the meaning
of the Private Securities Litigation Act of 1995. Actual results may differ
materially from those forecast due to a variety of factors that can affect
operating results, liquidity and financial condition, such as risks associated
with the timing and achievement of the restructuring of the optical business,
the timing and achievement of improvements in the operations of the optical
business, the integration of acquired operations, the ability of Cole National
Corporation and its suppliers, host stores, and managed care organization
partners to achieve Year 2000 readiness, the ability to select and stock
merchandise attractive to customers, the implementation of its store acquisition
program, economic and weather factors affecting consumer spending, operating
factors affecting customer satisfaction, including manufacturing quality of
optical and engraved goods, the relationships with host stores and franchisees,
the mix of goods sold, pricing and other competitive factors, and the
seasonality of the business. Forward-looking statements are made based upon
management's expectations and beliefs concerning future events impacting Cole
National Corporation. All forward-looking statements involve risk and
uncertainty.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cole National Corporation is exposed to market risk from changes in
foreign currency exchange rates, which could impact its results of operations
and financial condition. Foreign exchange risk arises from the Company's
exposure in fluctuations in foreign currency exchange rates because Cole
National Corporation'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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item appears on pages F-1 through F-29 of
this Form 10-K and is incorporated herein by reference. Other financial
statements and schedules are filed herewith as "Financial Statement Schedules"
pursuant to Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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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 reference. The information required by
this item as to executive officers who are not Directors is included in Item 4A
in Part I of this report.
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 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
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 reference.
PART IV
ITEM 14. 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 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-6.
(b) REPORTS ON FORM 8-K
Report on Form 8-K dated January 12, 1999.
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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
April 30, 1999 By: /s/ Wayne L. Mosley
-----------------------------------
Wayne L. Mosley
Vice President and 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.
* Chairman and Chief April 30, 1999
- --------------------------------- Executive Officer and
Jeffrey A. Cole Director (Principal Executive Officer)
* President and Director April 30, 1999
- ---------------------------------
Brian B. Smith
* Executive Vice President of Strategic April 30, 1999
- --------------------------------- Planning and Chief Financial Officer
George H. Bernstein, Jr. (Principal Financial Officer)
/s/ Wayne L. Mosley Vice President and Controller April 30, 1999
- --------------------------------- (Principal Accounting Officer)
Wayne L. Mosley
* Director April 30, 1999
- ---------------------------------
Timothy F. Finley
* Director April 30, 1999
- ---------------------------------
Irwin N. Gold
* Director April 30, 1999
- ---------------------------------
Peter V. Handal
* Director April 30, 1999
- ---------------------------------
Charles A. Ratner
* Director April 30, 1999
- ---------------------------------
Walter J. Salmon
* The undersigned, by signing his 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/ Wayne L. Mosley
- -------------------------------------
Wayne L. Mosley, Attorney-in-Fact
16
18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Public Accountants F - 2
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998 F - 3
Consolidated Statements of Operations for the 52 weeks ended
January 30, 1999, January 31, 1998, and February 1, 1997 F - 4
Consolidated Statements of Cash Flows for the 52 weeks ended
January 30, 1999, January 31, 1998, and February 1, 1997 F - 5
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the 52 weeks ended January 30, 1999, January 31, 1998, and
February 1, 1997 F - 6
Notes to Consolidated Financial Statements F - 7
FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on the Financial Statement
Schedules F - 25
Schedule I - Condensed Financial Information of Registrant F - 26
Schedule II - Valuation and Qualifying Accounts F - 29
All financial statement schedules not included have been omitted because they
are not applicable or because the required information is otherwise furnished.
F-1
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
TO THE BOARD OF DIRECTORS OF COLE NATIONAL CORPORATION:
We have audited the accompanying consolidated balance sheets of Cole
National Corporation (a Delaware corporation) and subsidiaries as of January 30,
1999 and January 31, 1998, and the related consolidated statements of
operations, stockholders' equity and comprehensive income and cash flows for
each of the three years in the period ended January 30, 1999. These financial
statements are the responsibility of Cole National Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cole
National Corporation and subsidiaries as of January 30, 1999 and January 31,
1998 and the results of their operations and their cash flows for each of the
three years in the period ended January 30, 1999 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 17, 1999.
F-2
20
COLE NATIONAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
----------------------
January 30, January 31,
1999 1998
---------- ------------
Assets
- -------
Current assets:
Cash and temporary cash investments $ 51,057 $ 68,053
Accounts receivable, less allowance for doubtful accounts
of $7,189 in 1998 and $7,132 in 1997 45,561 52,030
Current portion of notes receivable 2,707 4,177
Refundable income taxes 9,556 9,520
Inventories 119,881 119,970
Prepaid expenses and other 8,582 9,195
Deferred income tax benefits 14,048 21,534
---------- ----------
Total current assets 251,392 284,479
Property and equipment, at cost 261,605 242,966
Less - accumulated depreciation and amortization (135,731) (115,162)
----------- ----------
Total property and equipment, net 125,874 127,804
Other assets:
Notes receivable, excluding current portion 32,039 25,783
Deferred income taxes and other 59,021 54,241
Intangible assets, net 159,698 159,077
---------- ----------
Total assets $ 628,024 $ 651,384
========== ==========
Liabilities and Stockholders' Equity
- -------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,497 $ 16,027
Accounts payable 73,065 75,271
Accrued interest 6,216 6,615
Accrued liabilities 101,791 112,434
Accrued income taxes 128 957
---------- ----------
Total current liabilities 182,697 211,304
Long-term debt, net of discount and current portion 276,013 277,401
Other long-term liabilities 23,954 30,664
Stockholders' equity:
Preferred stock - -
Common stock 15 15
Paid-in capital 257,981 251,405
Accumulated deficit (101,843) (116,119)
Accumulated other comprehensive loss (1,205) (1,749)
Treasury stock at cost (6,084) (611)
Unamoritized restricted stock awards (2,598) -
Notes receivable-stock option exercise (906) (926)
---------- ----------
Total stockholders' equity 145,360 132,015
---------- ----------
Total liabilities and stockholders' equity $ 628,024 $ 651,384
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
F-3
21
COLE NATIONAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Dollars in thousands, except per share amounts)
------------------------------------------------
52 Weeks Ended
-------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
-------------- ------------- --------
Net revenue $ 1,068,182 $ 1,000,198 $ 628,496
Costs and expenses:
Cost of goods sold 364,090 340,849 201,229
Operating expenses 610,131 558,531 359,085
Depreciation and amortization 33,742 29,954 18,577
Restructuring and other unusual charges 17,873 8,000 61,091
----------- ----------- -----------
Total costs and expenses 1,025,836 937,334 639,982
----------- ----------- -----------
Operating income (loss) 42,346 62,864 (11,486)
Interest and other (income) expense:
Interest expense 27,565 30,365 21,855
Interest and other income (8,841) (2,472) (1,704)
----------- ----------- -----------
Total other (income) expense 18,724 27,893 20,151
----------- ----------- -----------
Income (loss) from continuing operations before income taxes 23,622 34,971 (31,637)
Income tax provision (benefit) 9,346 15,038
----------- ----------- -----------
(6,939)
Income (loss) from continuing operations 14,276 19,933 (24,698)
----------- ----------- -----------
Discontinued operations:
Operating loss, net of income tax provision (benefit) of
$(39) and $180, respectively -- (67) (2,935)
Loss on disposal, net of income tax benefit of $8,500 -- (13,900) --
----------- ----------- -----------
Loss from discontinued operations -- (13,967) (2,935)
----------- ----------- -----------
Income (loss) before extraordinary item 14,276 5,966 (27,633)
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $7,467 and $494,
respectively -- (12,183) (682)
----------- ----------- -----------
Net income (loss) $ 14,276 $ (6,217) $ (28,315)
=========== =========== ===========
Earnings (loss) per common share:
Basic -
Income (loss) from continuing operations $ .96 $ 1.48 $ (2.18)
Loss from discontinued operations -- (1.04) (.26)
Extraordinary loss -- (.90) (.06)
----------- ----------- -----------
Net income (loss) $ .96 $ (.46) $ (2.50)
=========== =========== ===========
Diluted -
Income (loss) from continuing operations $ .94 $ 1.43 $ (2.18)
Loss from discontinued operations -- (1.00) (.26)
Extraordinary loss -- (.87) (.06)
----------- ----------- -----------
Net income (loss) $ .94 $ (.44) $ (2.50)
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-4
22
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
52 Weeks Ended
-----------------------------------------
January 30, January 31, February 1,
1999 1998 1997
------------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 14,276 $ (6,217) $ (28,315)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt -- 12,183 682
Restructuring and other unusual charges 11,886 546 19,983
Depreciation and amortization 33,742 29,954 18,577
Non-cash interest, net (555) 142 440
Deferred income tax provision (benefit) 13,001 12,823 (16,194)
Change in assets and liabilities net of effects from acquisitions:
Decrease (increase) in accounts and notes receivable, prepaid
expenses and other assets 11,131 (9,513) (4,374)
Increase in inventories (4,404) (11,222) (3,935)
Decrease in net assets of discontinued operations -- 19,926 4,002
Increase (decrease) in accounts payable, accrued
liabilities and other liabilities (17,324) (11,812) 73,107
Increase (decrease) in accrued interest (399) (3,015) 2,580
Increase (decrease) in accrued, refundable and
deferred income taxes 1,038 (25,826) 16,256
--------- --------- ---------
Net cash provided by operating activities 62,392 7,969 82,809
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net (37,591) (32,645) (25,148)
Proceeds from sale/leaseback, net 8,835 -- --
Acquisitions of businesses, net of cash acquired (7,231) (27,926) (157,426)
Investment in Pearle Europe (10,296) (2,819) (6,102)
Repayment of loan by Pearle Europe 3,144 -- --
Systems development costs (16,802) (17,922) (2,933)
Other, net 277 (696) 111
--------- --------- ---------
Net cash used by investing activities (59,664) (82,008) (191,498)
--------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt (16,040) (170,705) (17,105)
Payment of deferred financing fees -- (3,191) (6,066)
Common stock repurchased (5,473) (611) --
Net proceeds from public stock offering -- 115,878 26,202
Net proceeds from long-term debt -- 125,000 148,875
Net proceeds from exercise of stock options and warrants 1,998 2,903 546
Other (209) (323) 118
--------- --------- ---------
Net cash provided (used) by financing activities (19,724) 68,951 152,570
--------- --------- ---------
Cash and temporary cash investments:
Net increase (decrease) during the period (16,996) (5,088) 43,881
Balance, beginning of the period 68,053 73,141 29,260
--------- --------- ---------
Balance, end of the period $ 51,057 $ 68,053 $ 73,141
========= ========= =========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-5
23
COLE NATIONAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------
(Dollars in thousands)
---------------------
January 30, January 31, February 1,
1999 1998 1997
--------- --------- ---------
Common Stock:
Balance at beginning of period $ 15 $ 12 $ 10
Net proceeds from sale of common stock -- 3 1
Exercise of stock options -- -- 1
--------- --------- ---------
Balance at end of period 15 15 12
--------- --------- ---------
Paid In Capital:
Balance at beginning of period 251,405 131,238 99,827
Net proceeds from sale of common stock -- 115,875 26,201
Stock options granted -- -- 4,153
Stock compensation 357 635 --
Exercise of stock options and warrants 3,577 3,657 1,057
Issuance of restricted stock 2,642 -- --
--------- --------- ---------
Balance at end of period 257,981 251,405 131,238
--------- --------- ---------
Accumulated Deficit:
Balance at beginning of period (116,119) (109,902) (81,587)
Net income (loss) 14,276 (6,217) (28,315)
--------- --------- ---------
Balance at end of period (101,843) (116,119) (109,902)
--------- --------- ---------
Accumulated Other Comprehensive Income (Loss):
Balance at beginning of period (1,749) (606) --
Other comprehensive income (loss) 544 (1,143) (606)
--------- --------- ---------
Balance at end of period (1,205) (1,749) (606)
--------- --------- ---------
Treasury Stock:
Balance at beginning of period (611) -- --
Common stock repurchased (5,473) (611) --
--------- --------- ---------
Balance at end of period (6,084) (611) --
--------- --------- ---------
Unamoritized Restricted Stock Awards:
Balance at beginning of period -- -- --
Issuance of restricted stock (2,642) -- --
Amortization of restricted stock awards 44 -- --
--------- --------- ---------
Balance at end of period (2,598) -- --
--------- --------- ---------
Notes Receivable -- Stock Option Exercise:
Balance at beginning of period (926) (1,024) (1,117)
Exercise of stock options -- -- (49)
Repayment of notes receivable 20 98 142
--------- --------- ---------
Balance at end of period (906) (926) (1,024)
--------- --------- ---------
Total Stockholders' Equity $ 145,360 $ 132,015 $ 19,718
========= ========= =========
Comprehensive Income:
Net income (loss) $ 14,276 $ (6,217) $ (28,315)
Cumulative translation adjustment 544 (1,143) (606)
--------- --------- ---------
Total comprehensive income $ 14,820 $ (7,360) $ (28,921)
========= ========= =========
The accompany notes to consolidated financial statements are an integral part of
the consolidated statements.
F-6
24
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 and its wholly owned subsidiaries, including
Cole National Group, Inc. and its wholly owned subsidiaries
(collectively, the Company). Cole National Group's subsidiaries include
Pearle, Inc. which was acquired on November 15, 1996 (see Note 2). 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. Fiscal
years 1998, 1997 and 1996 each consisted of 52-week periods.
NATURE OF OPERATIONS -
Cole National Corporation is a specialty service retailer,
operating in both host and non-host environments, whose primary lines
of business are eyewear products and services and personalized gifts.
Cole National Corporation sells its products through 2,475
company-owned retail locations and 409 franchised locations in 50
states, Canada, and the Caribbean, and differentiates itself from other
specialty retailers by providing value-added services at the point of
sale at all of its retail locations. Cole National Corporation has two
reportable segments: Cole Vision and Things Remembered (see Note 12).
INVENTORIES -
Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market.
Property and Depreciation -
The policy is to provide depreciation using the straight-line
method over a period which is sufficient to amortize the cost of the
asset over its useful life or lease term.
The estimated useful lives for depreciation purposes are:
Buildings and improvements 5 to 40 years
Equipment 3 to 10 years
Furniture and fixtures 2 to 10 years
Leasehold improvements 2 to 20 years
Property and equipment, at cost, consist of the following at
January 30, 1999 and January 31, 1998 (000's omitted):
1999 1998
-------- ------
Land and buildings $ 23,463 $ 22,782
Furniture, fixtures and equipment 157,302 149,795
Leasehold improvements 80,840 70,389
---------- ----------
Total property and equipment $ 261,605 $ 242,966
========== ==========
STORE OPENING EXPENSES -
Store opening expenses are charged to operations in the year the
store is opened, which is generally the year the expense is incurred.
F-7
25
INVESTMENT IN PEARLE EUROPE B.V. -
Included in other assets is Cole National Corporation's minority
investment in Pearle Europe B.V., which is in the retail optical
business in Europe. The largest investor in Pearle Europe owns a 73%
interest, Cole National Corporation owns a 24% interest, and Pearle
Europe's management owns the remaining 3% interest.
Cole National Corporation's common equity investment of $3.3
million at January 30, 1999 is accounted for using the equity method.
Included in interest and other income is Cole National Corporation's
equity share of Pearle Europe's earnings (loss), which totaled $0.9
million, $0.3 million and ($0.1) million in fiscal 1998, 1997, and
1996, respectively.
Included in notes receivable is $13.5 million and $6.2 million
of net shareholder loans receivable from Pearle Europe and its
subsidiaries at January 30, 1999 and January 31, 1998, respectively.
The shareholder loans provide for interest at rates ranging from 8% to
12.7%. Cole National Corporation reported interest income of $1.5
million on the notes in fiscal 1998 as compared to $0.5 million and
$0.1 million in 1997 and 1996, respectively. During fiscal 1998, Cole
National Corporation received interest payments against the balances
accrued over the period from fiscal 1996 through fiscal 1998 totaling
$0.9 million.
In February 1998, Cole National Corporation repaid a $3.1
million note payable to a subsidiary of Pearle Europe and invested an
additional $7.2 million in the form of 8% shareholder loans to Pearle
Europe in connection with Pearle Europe's acquisition of optical
operations in Germany and Austria. After these acquisitions, Pearle
Europe's annualized sales are estimated to be in excess of $300.0
million. In June 1998, Pearle Europe repaid to Cole National
Corporation a shareholder loan, including interest thereon, in the
amount of $3.7 million.
NOTES RECEIVABLE -
In addition to the notes receivable from Pearle Europe are notes
receivable from Pearle's franchisees throughout the U.S. The franchise
notes are collateralized by inventory, equipment, and leasehold
improvements at each location, generally bear interest at the prime
rate plus 3%, and require monthly payments of principal and interest
over periods of up to ten years.
INTANGIBLE ASSETS -
Intangible assets, net, consist of the following at January 30,
1999 and January 31, 1998 (000's omitted):
1999 1998
------ -----
Tradenames $ 46,725 $ 47,962
Goodwill 112,973 111,115
--------- ----------
$ 159,698 $ 159,077
========= ==========
Tradenames acquired in connection with the Pearle acquisition
are being amortized on a straight-line basis over 40 years and are
presented net of accumulated amortization of $2,735,000 and $1,498,500
at January 30, 1999 and January 31, 1998, respectively.
Goodwill generally is being amortized on a straight-line basis
over 40 years and is presented net of accumulated amortization of
$37,880,000 and $34,008,000 at January 30, 1999 and January 31, 1998,
respectively. Management regularly evaluates its accounting for
goodwill considering primarily such factors as historical
profitability, current operating profits and cash flows. Cole National
Corporation believes that, at January 30, 1999, the asset is realizable
and the amortization period is still appropriate.
OTHER ASSETS -
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.
F-8
26
In March 1998 the Accounting Standards Executive Committee
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP
provides that direct costs to develop or obtain internal use software,
including internal costs, should be capitalized and amortized over the
estimated useful life of the software.
Such costs incurred have been capitalized and are included in
other assets. These costs are being amortized on a straight-line basis
over periods ranging from two to seven years, beginning when the
software is placed in service. At January 30, 1999 and January 31,
1998, these costs, net of accumulated amortization, were $34,267,000
and $23,963,000, respectively.
VALUATION OF LONG-LIVED ASSETS -
Long-lived assets, such as property, plant and equipment,
goodwill and other intangibles, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the total of the expected future
undiscounted cash flows is less than the carrying amount of the asset,
a loss is recognized for the difference between the fair value and the
carrying value of the asset.
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.
CAPITAL STOCK -
At January 30, 1999 and January 31, 1998, there were 14,835,746
and 14,727,325, respectively, shares of common stock, par value $.001
per share, outstanding. At January 30, 1999, there were 40,000,000 and
5,000,000 authorized shares of common stock and undesignated preferred
stock, respectively.
FOREIGN CURRENCY TRANSLATION -
The assets and liabilities of Cole National Corporation's
foreign subsidiaries and its investment in 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 monthly rates
of exchange. Translation adjustments are presented as a component of
accumulated other comprehensive income within stockholders' equity.
REVENUES -
Revenues include sales of goods and services 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, interest income on notes
receivable and initial franchise fees, and capitation and other fees
associated with its growing managed vision care business.
Franchise revenues based on sales by franchisees are accrued as
earned. Initial franchise fees are recorded as income when all material
services or conditions relating to the sale of the franchises have been
substantially performed or satisfied by Cole National Corporation and
when the related store begins operations.
F-9
27
ADVERTISING -
Advertising production costs and other advertising costs are expensed
as incurred, a portion of which are reimbursed by franchisees based on a
percentage of their sales. Advertising expense is summarized as follows (000's
omitted):
1998 1997 1996
-------- -------- ------
Gross advertising expense $ 82,492 $ 74,553 $ 37,427
Less: Franchisee contribution (20,244) (19,656) (4,230)
--------- --------- ---------
Net advertising expense $ 62,248 $ 54,897 $ 33,197
========= ========= =========
EARNINGS PER SHARE -
Statement of Financial Accounting Standards (SFAS) No. 128 requires
that earnings per share be presented as two calculations: basic and diluted.
Basic earnings per share for 1998, 1997 and 1996 have been based on 14,802,023;
13,480,792 and 11,333,453, respectively, weighted average number of common
shares outstanding. Stock options and warrants that are outstanding are
considered to be potentially dilutive common stock. Diluted earnings per share
for 1998, 1997 and 1996 have been based on 15,176,469; 13,980,727 and
11,333,453, respectively, weighted average number of common shares outstanding
after consideration of the dilutive effect, if any, for these common share
equivalents.
CASH FLOWS -
For purposes of reporting cash flows, all temporary cash investments
which have original maturities of three months or less, are considered to be
cash equivalents. The carrying amounts of cash and cash equivalents approximate
fair value due to the short maturity of those instruments.
Net cash flows from operating activities reflect cash payments for
income taxes and interest as follows (000's omitted):
1998 1997 1996
-------- -------- ------
Income taxes $ 1,644 $ 19,889 $ 5,300
Interest $ 26,112 $ 33,682 $ 20,834
Fiscal 1997 cash paid for income taxes includes $15.0 million of taxes
due on the sale of Pearle Holdings B.V. that were reimbursed to Cole National
Corporation by the seller in connection with the Pearle acquisition in fiscal
1996 and paid by Cole National Corporation in fiscal 1997.
During 1998, 1997 and 1996, non-cash financing activities included
incurring $77,000, $799,000 and $2,504,000, respectively, in capital lease
obligations.
USE OF ESTIMATES -
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
RECLASSIFICATIONS -
Certain prior year amounts have been reclassified to conform with the
1998 presentation.
F-10
28
(2) ACQUISITIONS OF BUSINESSES
On November 15, 1996, Cole National Corporation purchased, for
an aggregate purchase price of $219.7 million, including the costs of
acquisition, certain assets and all of the issued and outstanding
common stock of Pearle. Pearle consisted of 346 company-operated
optical stores and 340 franchised locations in the United States,
Canada and the Caribbean and 193 locations in the Netherlands and
Belgium. Immediately following the acquisition, Cole National
Corporation sold Pearle Holdings B.V., Pearle's European operations, to
Pearle Trust B.V. for approximately $62 million. No gain or loss was
recorded on this transaction. As more fully described in Note 1, Cole
National Corporation has retained an ownership interest in Pearle
Europe, the parent company of Pearle Trust B.V.
The Pearle acquisition was accounted for under the purchase
method of accounting. The results of operations of Pearle have been
included in the consolidated financial statements since the date of
acquisition. The purchase price was allocated to the assets acquired
and liabilities assumed based upon their relative fair values as of the
closing date. This resulted in an excess of purchase price over net
assets acquired of $24.5 million, including final adjustments of $4.3
million. The relative fair values of the assets acquired and
liabilities assumed were based upon valuations and other studies and
included tradenames of $49.5 million, unfavorable leasehold interests
of $7.5 million, accruals for involuntary severance and termination
benefits of $4.4 million and deferred tax assets of $16.7 million.
On a pro forma basis, if the Pearle acquisition had taken place
at the beginning of fiscal 1996, the unaudited consolidated net
revenues would have been $878.3 million for fiscal 1996. After giving
effect to certain pro forma adjustments, including adjustments to
reflect the amortization of tradenames and goodwill, the elimination of
transactions between Pearle and its former parent, the elimination of
Pearle's provision for impairment of intangible assets and related
costs which resulted from the acquisition, increased interest expense
and reduced interest income associated with acquisition funding and the
estimated related income tax effects, pro forma net loss in fiscal 1996
would have improved by $1.7 million or $0.15 per share from the amounts
reported. The unaudited pro forma results have been prepared for
informational purposes only and should not be considered indicative of
the actual results of operations which would have occurred had the
acquisition been in effect at the beginning of fiscal 1996, and do not
purport to be indicative of results of operations which may occur in
the future.
The 1998 results include the recognition of $6.0 million of
income from cash received in a nontaxable settlement of certain
contingencies related to several claims against and indemnifications
from the former owner of Pearle. In connection with this settlement,
Cole National Corporation assumed secondary liability for approximately
$10.0 million of loans to certain franchisees held by a third party.
Cole National Corporation is contingently liable should any of these
franchisees default, and also for prepayment penalties of up to $1.1
million. Cole National Corporation has established reserves for
potential losses on the loans, which mature through 2001. The
settlement also included a release of the former owner of Pearle from
certain future non-tax claims related to Pearle.
Cole National Corporation also made the following acquisitions,
each of which has been accounted for under the purchase method of
accounting. Pro forma financial results have not been presented for
these acquisitions, as they did not have a material effect on results
of operations.
In fiscal 1998, Cole National Corporation acquired ten Buckeye
Optical stores in Columbus, Ohio, and all of the issued and outstanding
common stock of Management Associates, Inc., whose operations consisted
of four 20/20 Eyecare stores located in Las Vegas, Nevada. The total
purchase price for these acquisitions was $7.2 million.
On August 5, 1997, Cole National Corporation acquired all of the
issued and outstanding common stock of American Vision Centers, Inc.
(AVC), whose operations consisted of 79 company-owned and 85 franchised
optical stores, for an aggregate purchase price of approximately $28.9
million, including debt assumed. The purchase price was allocated to
the assets acquired and liabilities assumed based upon their relative
fair values as of the closing date. This resulted in an excess of
purchase price over net assets acquired of $20.0 million. The relative
fair values of the assets acquired and liabilities assumed included
unfavorable leasehold interests of
F-11
29
$3.4 million, accruals for involuntary severance and termination
benefits of $0.5 million, write-off of deferred assets of $1.4
million and deferred tax assets of $7.5 million.
In November 1996, Cole National Corporation acquired all of the
issued and outstanding stock of AOCO Limited, which operated 73 Sears
Optical Departments and two freestanding Vision Club stores in Canada,
for a purchase price of $2.6 million.
(3) RESTRUCTURING AND OTHER UNUSUAL CHARGES
In the fourth quarter of fiscal 1998, Cole National Corporation
began implementation of a restructuring plan and recorded a net pretax
charge of $23.1 million, related to restructuring its Pearle business
along with other unusual charges. The net pretax charge consisted of
charges associated with the restructuring of $13.9 million, a reversal
of previously established restructuring accruals of $12.3 million and
other unusual charges totaling $21.5 million. The restructuring charge
of $13.9 million relates to changes made to the Pearle operating model
and structure of the home office organization. These changes resulted
in charges for inventory write-downs related to products that will no
longer be carried, severance and hiring costs primarily related to home
office organizational changes, consolidation of the home office
facilities, including the write-off of fixed assets at the old
facilities, consultant fees and changing the Pearle brand message
through signing, production and other costs. The charge related to the
inventory write-down ($5.2 million) has been included in cost of sales
in fiscal 1998.
Additionally, Cole National Corporation had recorded
restructuring and other nonrecurring charges of $8.0 million and $61.1
million in fiscal 1997 and 1996, respectively. These charges consisted
primarily of costs of integrating and consolidating the recent
acquisitions of both AVC and Pearle, including costs of store and other
facility closings, a computer system termination fee and related asset
impairment costs. The accrual established in fiscal 1996 was based in
part upon the closure of certain stores and in-store labs. As part of
the revised restructuring plan discussed above, it was determined that
certain stores originally planned to be closed would either remain open
or be closed at a much lower cost than originally estimated. In
addition, management determined that, while it still plans to reduce
the number of full service labs, the lease costs and equipment to be
removed from the stores would be less than originally anticipated. Cole
National Corporation plans to close 26 stores over the next twelve
months and remove surfacing equipment from the full service labs of 226
stores over the next six to eighteen months. As a result, $12.3 million
of previously established accruals have been reversed into income as a
restructuring credit.
During fiscal 1997, an $8.0 million pretax business integration
charge associated with the AVC acquisition was recorded. Such charge
included costs incurred related to the integration and consolidation of
AVC into Cole National Corporation's operations, including costs of
store and other facility closings, transitional costs incurred to
change the brand identity to Pearle and duplicate costs incurred
through fiscal year end in connection with the consolidation of the AVC
home office functions. The charge consisted of $4.3 million of costs
incurred in fiscal 1997, $0.7 million of asset write-downs and $3.0
million of costs accrued in accordance with EITF No. 94-3.
The fiscal 1996 pretax charge of $61.1 million is primarily
related to the integration and consolidation of Pearle into Cole
National Corporation's operations, as well as certain other
non-recurring charges, including store and other facility closings,
computer systems and asset impairments. The charge consisted of $29.4
million of costs incurred in fiscal 1996, $17.4 million of asset
write-downs and $14.3 million of costs accrued in accordance with EITF
No. 94-3. Cole National Corporation had identified 29 unprofitable
Pearle stores which it intended to close along with 112 other retail
locations at which it intended to close the in-store labs and supply
these locations from other facilities. In addition, Cole National
Corporation decided to retain Pearle's distribution and central lab
facilities, but to close Pearle's home office facility in Dallas,
Texas. The charge in fiscal 1996 for store and other facility closings
consists primarily of the remaining noncancellable term of operating
leases and other obligations remaining on these facilities subsequent
to their estimated date of closing, along with the loss on fixed
assets. The charge for computer systems was primarily for settlement
costs of prematurely terminating an outsourcing agreement that was
providing systems integrations and data processing services. The asset
impairment charge related to goodwill associated with portions of its
optical business that would not be recoverable as the carrying values
of these businesses exceeded fair value, as measured by projected
future discounted cash flows, in accordance with SFAS No. 121.
F-12
30
Other charges in fiscal 1996 include costs related to employee
matters, including duplicate costs incurred through the end of fiscal
1996 and costs related to hiring employees in connection with the
consolidation of the Pearle home office functions, and other costs of
management realignment. In addition, the other charges include
incremental travel and professional fees incurred in connection with
the integration of Pearle, along with costs of developing and
implementing a new franchise agreement. Also, in February 1996, the
Board of Directors granted stock options to executive officers at a
share price equal to the market price of the common stock on the date
of grant, which were subject to stockholder approval. The increase in
the price of the common stock between the grant date and the date of
stockholder approval resulted in $4.2 million of compensation expense.
The following summarizes the major components of the
restructuring charges recorded in fiscal 1996, 1997 and 1998, along
with cash and non-cash charges against the reserves (in millions):
Charges to Reserve Charges to Reserve
1996 1997
---------------------- Remaining ---------------------- Remaining
Original Non- Reserve Non- Reserve
Charge Cash Cash at 2/1/97 Cash Cash at 1/31/98
----------- --------- ----------- ----------- --------- --------- ------------
1996 Charge
- -----------------------
Store and other
facilities closing $ 17.6 $(0.2) $ - $ 17.4 $ (0.6) $(0.2) $ 16.6
Computer systems 21.6 (0.5) (4.0) 17.1 (12.6) - 4.5
Asset impairment 6.1 0.0 (6.1) - 0.0 - -
Other 15.8 (4.8) (6.8) 4.2 (3.5) - 0.7
------ ----- ------- ------ ------- ----- ------
Total $ 61.1 $(5.5) $ (16.9) $ 38.7 $ (16.7) $(0.2) $ 21.8
====== ===== ======= ====== ======= ===== ======
1997 Charge
- -----------------------
Store and other
facilities closing $ 2.5 $ - $ - $ 2.5
Severance 0.9 (0.1) - 0.8
Operating costs and
losses 1.7 (1.6) (0.1) -
Marketing and brand
conversion 1.5 (0.6) - 0.9
Other 1.4 (0.8) - 0.6
----------- ----------- --------- ------------
Total $ 8.0 $ (3.1) $(0.1) $ 4.8
=========== =========== ========= ============
1998 Charge
- -----------------------
Facilities relocations $ 2.6
Inventory 5.2
Marketing and brand
conversion 2.3
Professional fees 1.9
Severance/hiring 1.9
-----------
Total $ 13.9
===========
Charges to Reserve
1998
-------------------------------------- Remaining
Non- Reserve
Cash Cash Reversal at 1/30/99
--------- --------- ----------- -----------
1996 Charge
- -----------------------
Store and other
facilities closing $(0.4) $ (5.7) $ (9.5) $ 1.0
Computer systems (4.0) (0.5) - -
Asset impairment 0.0 0.0 - -
Other (0.2) 0.0 (0.5) -
----- ------ ------- -----
Total $(4.6) $ (6.2) $ (10.0) $ 1.0
===== ====== ======= =====
1997 Charge
- -----------------------
Store and other
facilities closing $(0.4) $ - $ (2.1) $ -
Severance (1.0) - 0.2 -
Operating costs and
losses - - - -
Marketing and brand
conversion (0.7) - (0.2) -
Other (0.2) (0.2) (0.2) -
-------- ----------- ----------- -----------
Total $(2.3) $ (0.2) $ (2.3) $ -
======== =========== =========== ===========
1998 Charge
- -----------------------
Facilities relocations $(0.5) $ (0.5) $ - $ 1.6
Inventory - (5.2) - -
Marketing and brand
conversion (0.2) - - 2.1
Professional fees (0.8) (0.1) - 1.0
Severance/hiring (0.5) - - 1.4
-------- ----------- ----------- -----------
Total $(2.0) $ (5.8) $ - $ 6.1
======== =========== =========== ===========
The reserves remaining at January 30, 1999 equal the amount of
future expected cash outlays, which for the 1996 charge are for lease
settlement costs for stores to be closed and are expected to be
incurred over the next twelve months. Of the remaining cash outlays
related to the 1998 charge, approximately $4.0 million had been
incurred in fiscal 1998 and is expected to be paid in the first quarter
of fiscal 1999. The remainder related primarily to severance
arrangements and operating costs of idle facilities that will be paid
through the fourth quarter of fiscal 1999.
The unusual charges in fiscal 1998 related to the write-off of
$8.8 million associated with the abandonment in the fourth quarter of
previously capitalized system development costs (including $1.9 million
of incurred costs that will be paid in the first half of fiscal 1999)
and $2.7 million primarily related to restricted stock issued to two
senior executive officers. See Note 8 for further discussion of the
restricted stock grants. Cole National Corporation also made an
unconditional commitment in the fourth quarter of fiscal 1998 to
F-13
31
contribute $10.0 million through 2009, with payments beginning in 2004,
to a leading medical institution supporting the development of a
premier eye care research and surgical facility. This charge has been
recognized as a liability in accordance with SFAS No. 116.
(4) DISCONTINUED OPERATIONS
On January 13, 1998, Cole National Corporation announced the
closing of its Cole Gift Centers chain of personalized gift and
greeting card departments located in host stores. The decision to close
Cole Gift Centers was based on declining sales and profitability trends
in recent years and management's desire to focus its gift retailing
efforts on Things Remembered. For financial statement purposes, the
assets, liabilities, results of operations and cash flows of Cole Gift
Centers are included in the consolidated financial statements as
discontinued operations. The estimated loss on disposal of $13.9
million (net of an applicable income tax benefit of $8.5 million)
includes provisions for severance and other closing costs, inventory
and other asset write-offs and estimated operating losses for the
period from January 13, 1998 through February 1998 when all locations
were closed.
Cole Gift Centers' net revenue was $50.9 million and $55.5
million in 1997 and 1996, respectively. Consolidated interest expense
that was not directly attributable to other operations of Cole National
Corporation was allocated to discontinued operations based on the ratio
of the net assets of discontinued operations to total net assets of
Cole National Corporation plus consolidated debt of Cole National
Corporation not directly attributable to other operations. As a result,
the operating loss from discontinued operations includes allocated
interest expense of $1.3 million and $1.9 million in fiscal 1997 and
1996, respectively. The net loss of discontinued operations also
includes a non-recurring charge of $3.3 million in fiscal 1996,
primarily related to the write-off of goodwill at Cole Gift Centers, in
accordance with SFAS No. 121.
(5) PUBLIC OFFERINGS
On July 18, 1997, Cole National Corporation completed a public
offering of 2,587,500 shares of its common stock at a price of $47.00
per share. Net proceeds from the offering were approximately $116.0
million. The net proceeds from the offering were used for the purchase
of American Vision Centers, for Cole National Group's tender offer to
purchase up to all of its $165.8 million outstanding 11-1/4% Senior
Notes due 2001 (see Note 6) and for general corporate purposes,
including reducing outstanding indebtedness and financing possible
future acquisitions.
In 1996, Cole National Corporation completed a public offering
of 1,437,500 shares of common stock at a price of $19.25 per share. The
net proceeds from the offering were $26.2 million. A portion of the
proceeds was used to purchase $15.1 million of the 11-1/4% Senior
Notes, plus accrued interest thereon (see Note 6).
(6) LONG-TERM DEBT
Long-term debt at January 30, 1999 and January 31, 1998 is
summarized as follows (000's omitted):
1999 1998
--------- --------
7-1/2% Obligation in connection with Industrial Revenue Bonds $ - $ 168
11-1/4% Senior Notes - 14,476
9-7/8% Senior Subordinated Notes:
Face value 150,000 150,000
Unamortized discount (964) (1,041)
---------- ----------
Total 9-7/8% Senior Subordinated Notes 149,036 148,959
8-5/8% Senior Subordinated Notes 125,000 125,000
Capital lease obligations (see Note 13) 3,474 4,825
-------- ----------
277,510 293,428
Less current portion (1,497) (16,027)
---------- ----------
Net long-term debt $ 276,013 $ 277,401
========= ==========
F-14
32
On August 15, 1997, Cole National Group announced a tender offer
to purchase up to all of its 11-1/4% Senior Notes at a price of
$1,105.61 per $1,000 of principal, plus accrued interest. The tender
offer expired on September 12, 1997, at which time a total of $151.3
million principal amount of the 11-1/4% Senior Notes were tendered,
leaving $14.5 million outstanding. As a result of the tender offer, in
the third quarter of fiscal 1997 Cole National Corporation recorded an
extraordinary charge of $12.2 million, net of an income tax benefit of
$7.5 million, representing the tender premium, the write-off of the
related unamortized debt discount and other costs associated with
redeeming the debt. The remaining 11-1/4% Senior Notes not tendered in
1997 were called and retired in October 1998.
On August 22, 1997, Cole National Group issued $125.0 million of
8-5/8% Senior Subordinated Notes that mature in 2007 with no earlier
scheduled redemption or sinking fund payments. Proceeds from this debt
issuance of approximately $121.8 million, along with cash on hand, were
used to fund the above-described tender offer. Interest on the 8-5/8%
Notes is payable semi-annually on February 15 and August 15.
On November 15, 1996, Cole National Group issued $150 million of
9-7/8% Senior Subordinated Notes that mature in 2006 with no earlier
scheduled redemption or sinking fund payments. The 9-7/8% Notes were
used to finance a portion of the Pearle acquisition (see Note 2).
Interest on the 9-7/8% Notes is payable semi-annually on June 30 and
December 31.
The 8-5/8% Notes and the 9-7/8% 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 9-7/8%
Notes were issued restrict dividend payments to Cole National
Corporation to 50% of Cole National Group's net income after October
31, 1993, plus amounts due to Cole National Corporation under a tax
sharing agreement and for administrative expenses of Cole National
Corporation not to exceed 0.25% of Cole National Group's net revenue.
The indentures also contain certain optional and mandatory redemption
features and other financial covenants. Cole National Group was in
compliance with these covenants at January 30, 1999.
Cole National Corporation recorded an extraordinary loss of $0.7
million in 1996, net of an income tax benefit of $0.5 million,
representing the payment of premiums, the write-off of unamortized
discount and other costs associated with retiring $15.1 million of the
11-1/4% Senior Notes.
At January 30, 1999, the fair value of long-term debt was
approximately $282.7 million compared to a carrying value of $277.5
million. The fair value was estimated primarily by using quoted market
prices. There are no significant principal payment obligations under
its outstanding indebtedness until the 9-7/8% Notes mature in 2006.
(7) CREDIT FACILITY
Concurrent with the Pearle acquisition, the principal operating
subsidiaries of Cole National Group entered into a credit facility. The
credit facility replaced the existing revolving credit facility.
The credit facility provides the principal operating
subsidiaries of Cole National Group with a four-year revolving line of
credit of up to the lesser of a "borrowing base" or $75 million. Up to
$30 million of the credit facility is available for the issuance of
letters of credit. Borrowings under the credit facility initially bear
interest at a rate equal to, at the option of the principal operating
subsidiaries of Cole National Group, either (a) the Eurodollar Rate
plus 1.25% or (b) 0.25% plus the highest of (i) the prime rate, (ii)
the three-week moving average of the secondary market rates for
three-month certificates of deposit plus 1% and (iii) the federal funds
rate plus 0.5%. Cole National Group pays a commitment fee of 0.375% per
annum on the total unused portion of the facility. Additionally, 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
to comply with certain financial covenants, including covenants
regarding minimum interest
F-15
33
coverage, maximum leverage and consolidated net worth. The principal
operating subsidiaries of Cole National Group were in compliance with
these covenants at January 30, 1999.
The credit facility restricts dividend payments to Cole National
Group to amounts needed to pay interest on the 9-7/8% Notes and the
8-5/8% Notes, and certain amounts related to taxes, along with up to
$8.0 million plus 0.25% of Cole National Group's consolidated net
revenue annually for other direct expenses of Cole National Corporation
or Cole National Group. In addition, dividends of up to $20.0 million
are permitted to repurchase the 8-5/8% Notes and/or the 9-7/8% Notes.
No borrowings under the credit facility were outstanding as of
January 30, 1999, and the maximum amount of borrowings during fiscal
1998 was $13.6 million. No borrowings under the credit facility were
outstanding as of January 31, 1998, or at any time during fiscal 1997.
(8) STOCK COMPENSATION AND WARRANTS
The 1998 Equity and Incentive Performance Plan provides for the
granting of up to 884,000 shares of common stock to officers, key
employees and consultants of Cole National Corporation in the form of
stock options, performance stock and performance units, restricted
stock and deferred stock.
At January 30, 1999, Cole National Corporation had stock options
outstanding under the 1998 Equity and Incentive Performance Plan and
other 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 was based on the market price,
were fixed at the dates of grant. As of January 30, 1999, there were
219,644 shares available for future grants to officers, key employees,
non-employee Directors and consultants under Cole National
Corporation's various stock-based plans.
A summary of the status of Cole National Corporation's stock
options and related weighted average exercise prices ("Price") as of
the end of fiscal 1998, 1997 and 1996, and changes during each of the
fiscal years is presented below:
1998 1997 1996
----------------------- --------------------- ----------------------
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- --------- ---------
Outstanding, beginning of year 1,471,906 $14.30 1,443,788 $12.29 749,297 $ 9.76
Granted 818,303 16.89 122,000 35.13 804,000 13.87
Exercised (181,701) 11.01 (80,856) 8.27 (97,787) 6.08
Canceled (21,362) 27.72 (13,026) 24.49 (11,722) 10.19
----------- ---------- --------
Outstanding, end of year 2,087,146 15.46 1,471,906 14.30 1,443,788 12.29
========== ========== ==========
Exercisable at end of year 707,343 13.59 595,838 11.57 508,530 9.86
A summary of information for stock options outstanding at
January 30, 1999 and related weighted average remaining contract life
("Life") and Price is presented below:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ---------- --------- -------- ---------- --------
$ 3.00 42,995 3.9 years $ 3.00 42,995 $ 3.00
$ 9.75 to $16.94 1,782,223 7.8 13.27 566,223 11.38
$24.88 to $44.94 261,928 8.5 32.40 98,125 31.01
---------- ----------
2,087,146 7.8 15.46 707,343 13.59
========== ==========
Payment for certain options exercised between 1993 and 1996 has
been made by executing promissory notes, of which $906,000 were
outstanding at January 30, 1999. The promissory notes are secured by
the shares of common stock acquired and are payable on various dates
through April 2001 at interest rates ranging from 5.33% to 6.37%.
At January 30, 1999, 178,750 restricted shares of common stock
are outstanding under awards made to two senior executives 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 Cole National Corporation's
common stock or on March 1, 2004. In connection with these restricted
shares, Cole
F-16
34
National Corporation also awarded 146,250 restricted shares of its
treasury stock to these executives that were subsequently returned to
treasury in payment of related withholding taxes.
At March 7, 1999, there were warrants outstanding to purchase
2,625 shares of common stock at $1.00 per share that expire in 2000.
Cole National Corporation applies APB Opinion 25 and related
Interpretations in accounting for its stock-based compensation plans.
In connection with the restricted stock awards described above,
compensation cost of $2.3 million has been charged against income in
fiscal 1998 and unamortized restricted stock awards of $2.6 million is
expected to be amortized over future vesting periods. Compensation cost
of $0.1 million was also charged against income in fiscal 1998 for
13,803 stock options granted in connection with certain consulting
services . No compensation cost was recognized for its stock-based
plans in fiscal 1997. Compensation cost that has been charged against
income for its stock-based plans in fiscal 1996 was $4.2 million as
discussed in Note 3. Had compensation cost for Cole National
Corporation's stock-based compensation plans and agreements been
determined based on the fair value at the dates of awards consistent
with the method of SFAS No. 123, Cole National Corporation's net income
and diluted earnings per share would have been $13,589,000 and $0.90 in
fiscal 1998. Cole National Corporation's net loss and diluted loss per
share would have been increased to $6,731,000 and $.48 in fiscal 1997,
and $30,234,000 and $2.67 in fiscal 1996, respectively.
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 4.7%, 5.7% and 6.2%
for grants in fiscal 1998, 1997 and 1996, respectively, volatility of
35-39%, 35% and 33% in fiscal 1998, 1997 and 1996, respectively, and
expected lives of six years for options granted in all fiscal years.
The weighted average fair value of options granted during fiscal 1998,
1997 and 1996 were $7.33, $15.81 and $10.87, respectively. The effects
of applying SFAS No. 123 in the pro forma disclosure above are not
indicative of future amounts. SFAS No. 123 does not apply to options
granted prior to January 29, 1995 and additional awards in future years
are anticipated.
(9) STOCKHOLDERS' EQUITY
In August 1995, Cole National Corporation's Board of Directors
approved a Stockholders' Rights Plan. The Stockholders' Rights Plan
provides for the distribution of one right for each outstanding share
of Cole National Corporation's common stock held of record as of the
close of business on September 1, 1995 or that thereafter become
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 entitles the registered holder to purchase from Cole National
Corporation one one-hundredth of a share of Series A Junior
Participating Preferred Stock, without par value, at a price of $180,
subject to adjustment. The rights are only exercisable if a person or
group buys or announces a tender offer for 15% or more of Cole National
Corporation'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 Cole National Corporation)
having a market value of two times the exercise price of the right. The
rights will expire on August 31, 2005, unless extended or unless the
rights are earlier redeemed by Cole National Corporation in whole, but
not in part, at a price of $0.01 per right, or exchanged.
F-17
35
(10) INCOME TAXES
The income tax provision (benefit) for continuing operations
reflected in the accompanying consolidated statements of operations for
fiscal 1998, 1997 and 1996 are detailed below (000's omitted):
1998 1997 1996
------ ------ -----
Currently payable -
Federal $ (5,922) $ (270) $ 7,245
State and local 1,486 1,705 2,010
Foreign 781 781 -
--------- --------- ---------
(3,655) 2,216 9,255
--------- --------- ---------
Deferred -
Federal 13,545 12,817 (16,194)
Foreign (544) 5 -
---------- --------- ---------
13,001 12,822 (16,194)
--------- --------- ---------
Income tax provision (benefit) $ 9,346 $ 15,038 $ (6,939)
========= ========= =========
The income tax provision (benefit) for continuing operations
differs from the federal statutory rate as follows (000's omitted):
1998 1997 1996
------ ------ -----
Tax provision (benefit) at statutory rate $ 8,268 $ 12,240 $ (11,073)
Tax effect of -
Amortization of goodwill 1,234 1,176 897
State income taxes, net of federal
tax benefit 1,095 1,216 1,306
Nontaxable settlement (2,100) - -
Non-recurring charges 537 - 1,578
Other, net 312 406 353
--------- --------- ---------
Tax provision (benefit) $ 9,346 $ 15,038 $ (6,939)
========= ========= =========
The tax effects of temporary differences that give rise to
significant portions of Cole National Corporation's deferred tax assets
and deferred tax liabilities at January 30, 1999 and January 31, 1998
are as follows (000's omitted):
1999 1998
-------- ------
Deferred tax assets:
Employee benefit accruals $ 3,540 $ 3,836
Restructure accruals 2,730 8,530
Other non-deductible accruals 9,910 17,986
State and local taxes 1,790 1,352
Net operating loss carryforwards 3,449 2,918
Intangibles 5,506 5,939
Contribution carryforward 4,440 -
Inventory reserves 2,348 2,633
Bad debt reserves 2,516 2,496
Other 967 928
--------- ---------
Total deferred tax assets 37,196 46,618
Valuation allowance (1,141) (1,141)
--------- ---------
Net deferred tax assets 36,055 45,477
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (7,856) (4,353)
Other (1,728) (1,964)
---------- ---------
Total deferred tax liabilities (9,584) (6,317)
--------- ---------
Net deferred taxes $ 26,471 $ 39,160
========= =========
F-18
36
At January 30, 1999, Cole National Corporation has approximately
$8.3 million of tax net operating loss carryforwards acquired in
connection with the acquisition of American Vision Centers, which
expire between 2005 and 2010. Due to the change in ownership
requirements of the Internal Revenue Code, utilization of the American
Vision Centers net operating loss is limited to approximately $338,000
per year. A valuation allowance of $1.1 million has been established to
reduce the deferred tax asset related to the net operating loss to the
amount that will likely be realized.
No provision for 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 for foreign tax
credits) and withholding taxes payable.
(11) RETIREMENT PLANS
Cole National Corporation 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.
Cole National Corporation'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. Actuarial present values of benefit obligations are
determined using the projected unit credit method.
Pension expense for fiscal 1998, 1997 and 1996 includes the
following components (000's omitted):
1998 1997 1996
------ ------ -----
Service cost - benefits earned during the period $ 1,446 $ 637 $ 646
Interest cost on the projected benefit obligation 1,582 1,490 1,467
Less:
Return on plan assets -
Actual (2,494) (2,424) (1,669)
Deferred 690 893 477
----------- ---------- ---------
(1,804) (1,531) (1,192)
Amortization of transition asset over 17.9 years (179) (179) (179)
----------- ----------- ---------
Net pension expense $ 1,045 $ 417 $ 742
=========== ========== =========
F-19
37
The following sets forth changes in the benefit obligation and
the plan assets during the year and reconciles the funded status of the
pension plan with the amounts recognized in the consolidated balance
sheets (000's omitted):
1998 1997
----------- ------
Change in Benefit Obligation:
Benefit obligation at beginning of period $ 21,272 $ 19,046
Service cost 1,446 637
Interest cost 1,582 1,490
Actuarial gain 1,509 1,200
Benefits paid (917) (836)
Expenses paid (293) (265)
---------- ---------
Benefit obligation at end of period $ 24,599 $ 21,272
========== =========
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 19,751 $ 16,774
Actual return on plan assets 2,494 2,808
Employer contributions 2,181 1,270
Benefits paid (917) (836)
Expenses paid (293) (265)
---------- ---------
Fair value of plan assets at end of year $ 23,216 $ 19,751
========== =========
Reconciliation of Funded Status:
Benefit obligation at end of period $ 24,599 $ 21,272
Fair value of plan assets, primarily money market and
equity mutual funds 23,216 19,751
---------- ---------
Funded status (1,383) (1,521)
Unrecognized prior service cost 81 111
Net unrecognized loss 2,052 1,204
Unamortized transition asset (1,057) (1,236)
---------- ---------
Pension liability included in accrued liabilities $ (307) $ (1,442)
========== =========
The weighted average discount rate used to measure the projected
benefit obligation was 7.25% in 1998 and 7.5% in 1997. For both years,
the rate of increase in future compensation levels was 5.0% and the
expected long-term rate of return on plan assets was 9.5%.
Cole National Corporation 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. Prior to
January 1, 1998, there was no mandatory matching of employee
contributions by Cole National Corporation; effective January 1, 1998,
the plan was amended to, among other things, provide for a mandatory
company match of 10% of employee contributions. Total company matches
of $757,000, $374,000 and $327,000 were recorded as expense for 1998,
1997 and 1996, respectively.
Prior to January 1, 1998, Cole National Corporation had separate
contributory profit-sharing plans for Pearle and American Vision
Centers employees meeting certain service requirements as defined in
the plans. Company contributions to the Pearle plan consisted of a
minimum matching contribution of $861,000 and $229,000 in 1997 and
1996, respectively. There were no company contributions required or
made in connection with the American Vision Centers plan in 1997.
Effective January 1, 1998, eligible employees of Pearle and American
Vision Centers became eligible to participate in Cole National
Corporation's defined contribution plan. The Pearle and American Vision
Centers plans will be merged into Cole National Corporation's plan.
Cole National Corporation has two Supplemental Executive
Retirement Plans that provide for the payment of retirement benefits to
participating executives supplementing amounts payable under Cole
National Corporation 's noncontributory defined benefit pension plan.
The first plan is an excess benefit plan designed to replace benefits
that would otherwise have been payable under the pension plan but that
were limited as a result of certain tax law changes. The second plan is
a defined contribution plan under which participants receive an annual
credit based on a percentage of base salary, subject to vesting
requirements. Expenses for these plans for fiscal 1998, 1997 and 1996
were $651,000, $541,000 and $468,000, respectively.
F-20
38
(12) SEGMENT INFORMATION
Cole National Corporation has two reportable segments: Cole
Vision and Things Remembered. Most of Cole Vision's revenue is provided
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, interest income on
notes receivable and initial franchise fees from franchisees and by
fees from managed vision care programs. The Cole Licensed Brands and
Pearle segments have been aggregated in accordance with SFAS No. 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 engravable 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). Performance is evaluated based on operating income from operations
before interest, income taxes, and non-recurring or unusual charges.
The reportable segments are strategic business units that offer
different products and services. They are managed separately because
each business requires different technology and marketing strategies.
Cole Vision is subject to various state regulations related to the
dispensing of prescription eyewear and its relationship with the
doctors of optometry.
Reported segment revenue, depreciation and amortization, and
income or loss, with reconciliations to consolidated amounts are as
follows (000's omitted):
1998 1997 1996
---- ---- ----
Net revenue:
Cole Vision $ 826,235 $ 774,488 $ 407,504
Things Remembered 241,947 225,710 220,992
----------- ----------- -----------
Consolidated net revenue $ 1,068,182 $ 1,000,198 $ 628,496
=========== =========== ===========
Depreciation and amortization:
Cole Vision $ 21,745 $ 19,514 $ 9,445
Things Remembered 10,485 8,947 8,509
----------- ----------- -----------
Total segment depreciation and
amortization 32,230 28,461 17,954
Corporate 1,512 1,493 623
----------- ----------- -----------
Consolidated depreciation and
amortization $ 33,742 $ 29,954 $ 18,577
=========== =========== ===========
Income or loss:
Cole Vision $ 54,267 $ 65,995 $ 37,810
Things Remembered 17,647 11,504 18,480
----------- ----------- -----------
Total segment profit 71,914 77,499 56,290
Unallocated amounts:
Unusual and non-recurring items (23,120) (8,000) (61,091)
Corporate expenses (6,448) (6,635) (6,685)
------------ ----------- -----------
Consolidated operating income (loss) 42,346 62,864 (11,486)
Interest and other expense, net (18,724) (27,893) (20,151)
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes $ 23,622 $ 34,971 $ (31,637)
=========== =========== ===========
F-21
39
Reported segment assets, expenditures for capital additions
and systems developments costs and acquisitions of businesses, with
reconciliations to consolidated amounts, are as follows (000's
omitted):
1998 1997 1996
---- ---- ----
Segment assets:
Cole Vision $ 443,089 $ 439,808 $ 364,123
Things Remembered 132,832 131,105 121,432
----------- ----------- -----------
Total segment assets 575,921 570,913 485,555
Elimination of intercompany receivables (36,440) (11,754) (14,777)
Corporate cash and temporary cash investments 34,506 54,872 64,522
Other corporate assets 54,037 37,353 26,705
Net assets of discontinued operations - - 16,451
----------- ----------- -----------
Consolidated assets $ 628,024 $ 651,384 $ 578,456
=========== =========== ===========
Expenditures for capital additions
and systems development costs:
Cole Vision $ 35,793 $ 34,833 $ 12,071
Things Remembered 8,228 20,496 13,392
----------- ----------- -----------
Total segment expenditures 44,021 55,329 25,463
Elimination of intercompany transfers - (5,300) -
Corporate 10,372 538 2,618
----------- ----------- -----------
Consolidated expenditures $ 54,393 $ 50,567 $ 28,081
=========== =========== ===========
Expenditures for acquisitions of
businesses, net of cash acquired:
Cole Vision $ 7,231 $ 27,926 $ 157,426
=========== =========== ===========
Revenue from external customers of each group of similar products and
services is as follows (000's omitted):
1998 1997 1996
---- ---- ----
Sales of optical products and services $ 759,232 $ 712,923 $ 403,496
Royalties, interest income and initial fees
from franchisees 21,518 19,743 4,008
Fees from managed vision care programs 45,485 41,822 -
----------- ----------- -----------
Total Cole Vision net revenue 826,235 774,488 407,504
Retail sales of gift merchandise and services 241,947 225,710 220,992
----------- ----------- -----------
Consolidated net revenue $ 1,068,182 $ 1,000,198 $ 628,496
=========== =========== ===========
Prior to fiscal 1997, fees from managed vision care programs
were not captured separately, but were netted against operating
expenses.
Cole National Corporation operates primarily in the United
States. Net revenue attributable to Cole Vision's Canadian operations
was $27.5 million, $27.2 million and $5.6 million in fiscal 1998, 1997
and 1996, respectively. Long-lived assets located in Canada totaled
$2.2 million, $2.1 million and $2.2 million in fiscal 1998, 1997 and
1996, respectively. Cole National Corporation also has an investment in
and notes receivable from Pearle Europe (see Note 1).
F-22
40
(13) COMMITMENTS
Cole National Corporation leases a substantial portion of its
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 options. Certain of the store
locations have been sublet to franchisees. 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, Cole
National Corporation 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 1998, 1997 and 1996 (000's
omitted):
1998 1997 1996
------ ------ -----
Occupancy costs based on sales $ 54,563 $ 52,300 $ 46,058
All other rental expense 92,068 87,699 45,207
Sublease rental income (22,606) (21,725) (5,936)
----------- ----------- ----------
$ 124,025 $ 118,274 $ 85,329
=========== =========== ==========
At January 30, 1999 and January 31, 1998, property under capital
leases consisted of $7,119,000 and $7,113,000 in equipment with
accumulated amortization of $2,887,000 and $1,610,000, respectively.
At January 30,1999, future minimum lease payments and sublease
income receipts under noncancellable leases, and the present value of
future minimum lease payments for capital leases are as follows (000's
omitted):
Operating Leases
Capital --------------------------
Leases Payments Receipts
----------- ----------- -----------
1999 $ 1,733 $ 75,926 $ 12,941
2000 1,569 61,154 9,474
2001 444 48,867 7,031
2002 87 39,856 5,252
2003 - 31,433 3,481
2004 and thereafter - 71,873 5,601
----------- ----------- -----------
Total future minimum lease payments 3,833 $ 329,109 $ 43,780
=========== ===========
Amount representing interest (359)
-----------
Present value of future minimum lease payments $ 3,474
===========
F-23
41
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly financial data for the
52 weeks ended January 30, 1999 and January 31, 1998. The fourth
quarter of fiscal 1998 includes net pretax charges of $23.1 million
related to restructuring and other unusual items, of which $5.2 million
relates to inventory markdowns that are included in cost of sales. The
third quarter of fiscal 1998 includes $6.0 million of income from cash
received in a nontaxable settlement of claims against the former owner
of Pearle. The third and fourth quarters of fiscal 1997 include pretax
charges of $1.1 million and $6.9 million, respectively, for business
integration charges related to American Vision Centers.
Fiscal 1998
- ------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share amounts)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Net revenue $ 271,828 $ 267,611 $ 256,654 $ 272,089
Gross margin 181,539 178,479 171,744 172,330
Net income (loss) 6,112 9,800 9,062 (10,698)
Earnings (loss) per common share:
Basic - 0.41 0.66 0.61 (0.72)
Diluted - 0.40 0.64 0.60 (0.72)
Fiscal 1997
- ------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share amounts)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Net revenue $ 239,686 $ 242,163 $ 252,744 $ 265,605
Gross margin 157,274 161,001 166,232 174,842
Income from continuing operations 3,354 7,228 3,535 5,816
Income (loss) from discontinued
operations, net (906) 130 (841) (12,350)
Extraordinary item, net -- -- (12,183) --
----------- ----------- ----------- -----------
Net income (loss) $ 2,448 $ 7,358 $ (9,489) $ (6,534)
=========== =========== =========== ===========
Earnings (loss) per common share:
Basic -
Income from continuing operations $ .28 $ .58 $ .24 $ .40
Income (loss) from discontinued
operations, net (.08) .01 (.05) (.84)
Extraordinary item, net -- -- (.83) --
----------- ----------- ----------- -----------
Net income (loss) $ .20 $ .59 $ (.64) $ (.44)
=========== =========== =========== ===========
Diluted -
Income from continuing operations $ .27 $ .56 $ .23 $ .38
Income (loss) from discontinued
operations, net (.07) .01 (.05) (.81)
Extraordinary item, net -- -- (.80) --
----------- ----------- ----------- -----------
Net income (loss) $ .20 $ .57 $ (.62) $ (.43)
=========== =========== =========== ===========
F-24
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULES
To COLE NATIONAL CORPORATION:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Cole National Corporation
and Subsidiaries included in this Form 10-K and have issued our report thereon
dated March 17, 1999. Our audit was made for the purpose of forming an opinion
on those statements taken as a whole. The financial statement schedules are the
responsibility of Cole National Corporation's management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the consolidated
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 17, 1999.
F-25
43
SCHEDULE I
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
================================================================================
COLE NATIONAL CORPORATION
CONDENSED BALANCE SHEETS
JANUARY 30, 1999 AND JANUARY 31, 1998
(Dollars in millions)
1999 1998
------ -----
Assets:
Receivable from subsidiaries $ 68.8 $ 89.1
Refundable income taxes 8.4 9.5
Investment in subsidiaries 48.4 27.7
Notes receivable and investment in Pearle Europe 16.9 7.8
Property and equipment, net 12.8 4.0
Other 5.7 1.4
---------- ---------
Total assets $ 161.0 $ 139.5
========== =========
Liabilities and Stockholders' Equity:
Accounts payable and accrued expenses $ 3.2 $ 3.9
Long-term debt 2.4 3.3
Deferred income taxes - .3
Other long term liabilities 10.0 -
Stockholders' equity 145.4 132.0
---------- ----------
Total liabilities and stockholders' equity $ 161.0 $ 139.5
========== =========
F-26
44
SCHEDULE I
(CONTINUED)
COLE NATIONAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS
52 WEEKS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
(Dollars in millions)
January 30, January 31, February 1,
1999 1998 1997
--------- ---------- ----------
Revenue:
Dividends from subsidiaries $ - $ - $ 15.4
------- ------- ------
Services to affiliates 2.7 1.8 .6
Total revenue 2.7 1.8 16.0
Operating expenses (12.7) (1.8) (.8)
Interest income 1.4 .3 .8
------- ------- ------
Pre-tax income (loss) (8.6) .3 16.0
Income tax benefit (expense) 2.6 (.2) (.3)
------- ------- ------
Income (loss) before equity in undistributed
earnings (loss) of subsidiaries and
extraordinary item (6.0) .1 15.7
Equity in undistributed earnings (loss) of subsidiaries 20.3 (6.3) (43.4)
------- ------- ------
Income (loss) before extraordinary item 14.3 (6.2) (27.7)
Extraordinary loss -- -- (.6)
Net income (loss) 14.3 (6.2) (28.3)
------- ------- ------
Adjustments to reconcile net income
(loss) to cash provided (used) by
operating activities (14.2) (18.8) 43.9
------- ------- ------
Net cash provided (used) by operating
activities .1 (25.0) 15.6
------- ------- ------
Financing activities:
Repayment of long-term debt (.9) (1.0) (.3)
Proceeds from sale of common stock -- 115.9 26.2
Common stock repurchased (5.5) (.6) --
Proceeds from stock option exercises 2.0 2.9 .6
------- ------- ------
Net cash provided (used) by financing activities (4.4) 117.2 26.5
------- ------- ------
Investing activities:
Advances from (to) affiliates 21.2 (61.7) (35.0)
Purchase of property and equipment (9.7) -- --
Purchase of Cole National Group Notes -- -- (16.1)
Acquisition of business -- (27.8) --
Proceeds from sale of Cole National Group Notes -- -- 14.9
Investment in Pearle Europe (10.3) (2.8) (6.0)
Repayment of notes receivable 3.1 .1 .1
------- ------- ------
Net cash provided (used) by investing activities 4.3 (92.2) (42.1)
------- ------- ------
Net change in cash -- -- --
Cash, beginning of period -- -- --
------- ------- ------
Cash, end of period $ -- $ -- $ --
======= ======= ======
F-27
45
SCHEDULE I
(CONTINUED)
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
===============================================================================
The accompanying financial information of Cole National Corporation is as
of January 30, 1999 and January 31, 1998, and for the 52 weeks ended January 30,
1999, January 31, 1998 and February 1, 1997. 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 on pages elsewhere in this Form 10-K.
F-28
46
SCHEDULE II
COLE NATIONAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
52 WEEKS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 (DOLLARS
IN MILLIONS)
Additions
-------------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------------ --------------- --------------- --------------- --------------- ----------------
JANUARY 30, 1999
Allowance for Doubtful Accounts $ 7.1 $ 0.9 $ - $ 0.(A) $ 7.2
Franchise Repurchase Reserve 6.7 - - 1.5(A) 5.2
Discontinued Operation Reserve 1.3 - - 1.3(B) -
JANUARY 31, 1998
Allowance for Doubtful Accounts 6.6 1.1 1.8(C) 2.4(A) 7.1
Franchise Repurchase Reserve 5.5 0.6 1.5(C) 0.9(A) 6.7
Discontinued Operation Reserve - 1.3 - - 1.3
FEBRUARY 1, 1997
Allowance for Doubtful Accounts 0.8 0.2 5.7(D) 0.1(A) 6.6
Franchise Repurchase Reserve - - 5.5(D) - 5.5
(A) Receivable balances written off, net of recoveries.
(B) Discontinued operation charges taken against the reserve.
(C) Purchase price accounting reserves created as a result of the
acquisition of AVC.
(D) Purchase price accounting reserves created as a result of the
acquisition of Pearle.
Reserve balances presented in the Notes to Consolidated Financial Statements are
not represented in this schedule.
F-29
47
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1 (i) Restated Certificate of Incorporation of the Company,
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 the Company, 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 Certificate of Designations of Series A Junior Participating
Preferred Stock, incorporated by reference to Exhibit 3.3 of
Cole National Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
4.1 Indenture dated November 15, 1996, by and among Cole National
Group, Inc. and Norwest Bank Minnesota, National Association, as
trustee, relating to the 9 7/8% Senior Subordinated Notes Due
2006 (the form of which Senior Subordinated Note is included in
such Indenture), incorporated by reference to Exhibit 4.1 of
Cole National Corporation's Report on Form 8-K, filed with the
Commission on December 2, 1996 (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 dated as of August 22, 1995 by and between the
Company and National City Bank as Rights Agent, incorporated by
reference to Exhibit 4.3 of Cole National Corporation's Annual
Report on Form 10-K for the year ended February 3, 1996 (File
No. 1-12814).
4.4 Amendment No. 1, dated as of August 21, 1997, to the Rights
Agreement, dated as of August 22, 1995, between the Company and
National City Bank, as Rights Agent, incorporated by reference
to Exhibit 4.1 of Cole National Corporation's current report on
Form 8-K, filed with the Securities and Exchange Commission on
August 22, 1997 (File No. 1-12814).
4.5 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.
X-1
48
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------
10.2* Employment Agreement entered into as of April 1, 1996 by and
among Cole National Corporation, Cole National Group, Cole Gift
Centers, Inc., Cole Vision Corporation, Things Remembered, Inc.
and Brian B. Smith, incorporated by reference to Exhibit 10.2 of
Cole National Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
10.3* 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* Agreement dated April 9, 1993 between Cole National Corporation
and Wayne L. Mosley regarding termination of employment,
incorporated by reference to Exhibit 10.9 to Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 33-66342).
10.5* 1992 Management Stock Option Plan, including forms of
Nonqualified Stock Option Agreement (Time Vesting) and
Nonqualified Stock Option Agreement (Performance Option), as
amended, and forms of promissory notes and pledge agreements,
incorporated by reference to Exhibit 10.11 to Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 33-66342).
10.6* 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).
10.7* Form of Option Agreement for Directors of the Company,
incorporated by reference to Exhibit 10.41 to Cole National
Corporation's Registration Statement on Form S-1 (Registration
No. 33-74228).
10.8* Amended and Restated Nonqualified Stock Option Plan for
Non-employee Directors, incorporated by reference to Exhibit A
to Cole National Corporation 's Proxy Statement for the 1997
Annual Meeting (File No. 1-12814).
10.9* Form of Nonqualified Stock Option Agreement for Non-employee
Directors, incorporated by reference to Exhibit 10.9 of Cole
National Corporation's Annual Report on Form 10-K for the year
ended February 3, 1996 (File No. 1-12814).
10.10* 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).
10.11* Management Incentive Bonus Program, incorporated by reference to
Exhibit 10.11 to Cole National Corporation's Annual Report on
Form 10-K for the period ended January 31, 1999 (File No.
1-12814).
10.12* 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).
10.13* 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).
X-2
49
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
10.14* 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).
10.15 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).
10.16 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).
10.17 Lease Agreement (Knoxville) dated as of November 28, 1979 by and
between Tommy Hensley, as agent for the real property of Mrs.
Don Siegel and Cole Vision Corporation, as amended and
supplemented, incorporated by reference to Exhibit 10.15 to Cole
National Group, Inc.'s Registration Statement on Form S-1
(Registration No. 33-66342).
10.18 Lease Agreement (Memphis) dated as of October 2, 1991 by and
between Shelby Distribution Park and Cole Vision Corporation,
incorporated by reference to Exhibit 10.16 to Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 33-66342).
10.19 Lease Agreement (Richmond) dated as of April 23, 1982 by and
between Daniel, Daniel & Daniel and Cole Vision Corporation, as
amended and supplemented, incorporated by reference to Exhibit
10.17 to Cole National Group, Inc.'s Registration Statement on
Form S-1 (Registration No. 33-66342).
10.20 Lease for Multi-Tenancy Space (Salt Lake) dated as of October
30, 1981 by and between East Centennial Joint Venture and Cole
Vision Corporation, as amended and supplemented, incorporated by
reference to Exhibit 10.18 to Cole National Group, Inc.'s
Registration Statement on Form S-1 (Registration No. 33-66342).
10.21 Lease Agreement (Knoxville) dated as of April 11, 1995 by and
between Richard T. Fox and Cole Vision Corporation, incorporated
by reference to Exhibit 10.29 of Cole National Corporation's
Annual Report on Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
10.22 Form of Lease Agreement Finite 19518 dated as of December 29,
1988 between Sears, Roebuck and Co. and Cole Vision Corporation,
incorporated by reference to Exhibit 10.23 to Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 33-66342).
10.23 Master License Agreement dated as of October 2, 1986, between
Montgomery Ward & Co., Incorporated and Cole Vision Corporation,
as amended, incorporated by reference to Exhibit 10.21 to Cole
National Group, Inc.'s Registration Statement on Form S-1
(Registration No. 33-66342).
X-3
50
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.24 Master License Agreement dated as of June 12, 1986, between
Montgomery Ward & Co., Incorporated and Bay Cities Optical
Company, as amended, incorporated by reference to Exhibit 10.22
to Cole National Group, Inc.'s Registration Statement on Form
S-1 (Registration No. 33-66342).
10.25 Form of License Agreement (Optical), incorporated by reference
to Exhibit 10.24 to Cole National Group, Inc.'s Registration
Statement on Form S-1 (Registration No. 33-66342).
10.26 Form of License/Lease Agreement (Optical), incorporated by
reference to Exhibit 10.25 to Cole National Group, Inc.'s
Registration Statement on Form S-1 (Registration No. 33-66342).
10.27 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).
10.28 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).
10.29* 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).
10.30* 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).
10.31 Warrant Agreement dated as of September 25, 1990 between Cole
National Corporation and the purchasers named therein,
incorporated by reference to Exhibit 10.36 to Cole National
Corporation 's Registration Statement on Form S-1 (Registration
No. 33-74228).
10.32 Lease agreement (Salt Lake) dated as of November 1, 1996 by and
between Gibbons Realty Company and Cole Vision Corporation,
incorporated by reference to Exhibit 10.01 of Cole National
Corporations Quarterly Report on Form 10-Q for the period ended
November 2, 1996 (File No. 1-12814).
10.33 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
with the Commission on December 2, 1996 (File No. 1-12814).
10.34 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).
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EXHIBIT
NUMBER DESCRIPTION
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10.35 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).
10.36 Cole National Group, Inc. Guarantee and Cash Collateral
Agreement, dated as of November 15, 1996, by the Company and
Cole National Corporation, incorporated by reference to Exhibit
99.3 of Cole National Corporation's Report on Form 8-K, filed
with the Commission on December 2, 1996 (File No. 1-12814).
10.37 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 with the Commission on December 2, 1996 (File
No. 1-12814).
10.38 Form of Cole National Corporation 401(k) Savings Plan,
incorporated by reference to Exhibit 4.1 of Cole National
Corporation's Registration Statement on Form S-8, filed with the
Commission on November 20, 1997 (Registration No. 333-40609).
10.39* 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).
10.40* Form of Cole National Corporation Non Qualified Stock Option
Agreement (Non employee 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).
10.41* Form of Cole National Corporation Non Employee 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).
10.42* Form of Cole National Corporation Non Employee Director Equity
and Deferred Compensation Plan Participation Agreement Plan Year
1997, 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. 1-2814).
10.43 Form of Cole National Corporation's 1998 Equity and Performance
Incentive Plan, incorporated by reference to Exhibit A to Cole
National Corporation's definitive Proxy Statement dated May 1,
1998 (File No. 1-12814).
10.44 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).
10.45 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.
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EXHIBIT
NUMBER DESCRIPTION
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10.46* Nonqualified Stock Option Agreement between Cole National
Corporation and Jeffrey A. Cole dated as of December 17, 1998.
10.47* Nonqualified Stock Option Agreement between Cole National
Corporation and Brian B. Smith dated as of December 17, 1998.
10.48* Form of Nonqualified Stock Option Agreement for Executive
Officers (other than Messrs. Cole and Smith) under the Cole
National Corporation 1998 Equity Performance and Incentive Plan.
10.49* Restricted Stock Agreement between Cole National Corporation and
Jeffrey A. Cole dated as of December 17, 1998.
10.50* Restricted Stock Agreement between Cole National Corporation and
Brian B. Smith dated as of December 17, 1998.
10.51* Cole National Group, Inc. 1999 Supplemental Retirement Benefit
Plan dated as of December 17, 1998.
10.52* Instrument Designating Participants of the Cole National Group,
Inc. 1999 Supplemental Retirement Benefit Plan dated December
17, 1998.
10.53* Cole National Group, Inc. Deferred Compensation Plan effective
as of February 1, 1999.
10.54* Amendment No. 1, dated as of December 17, 1998, to the Cole
National Group, Inc. Supplemental Pension Plan.
21 Subsidiaries of Cole National Corporation.
24 Power(s) of Attorney.
27 Financial Data Schedule.
* Reflects management contract or other compensatory arrangement
required to be filed as an exhibit pursuant to Item 14(c) of
this Form 10-K.