COLE NATIONAL CORP /DE/, 424B4, 1997-07-18

COLE NATIONAL CORP /DE/
424B4, 1997-07-18
RETAIL STORES, NEC

Previous: COLE NATIONAL CORP /DE/, S-3MEF, 1997-07-18

Next: COLE NATIONAL CORP /DE/, 424B4, 1997-07-18

<PAGE> 1
File Pursuant To Rule 424b(4)
Registration No. 333-29401
and
Registration No. 333-31527

2,250,000 SHARES

[LOGO] COLE NATIONAL CORPORATION
CLASS A COMMON STOCK

---------------------

All of the shares of Class A Common Stock, par value $.001 per share,
offered hereby (the "Offering") are being offered by Cole National Corporation,
a Delaware corporation (the "Company"). The Class A Common Stock ("Common
Stock") is the only class of common stock outstanding and each share of Common
Stock is entitled to one vote per share. The shares of Common Stock offered
hereby will be listed on the New York Stock Exchange under the symbol "CNJ." On
July 17, 1997, the last reported sale price of the Common Stock on the New York
Stock Exchange Composite Tape was $47.8125 per share.
------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THE PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES
OF THE COMMON STOCK OFFERED HEREBY.
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $47.00 $2.115 $44.885
- -------------------------------------------------------------------------------------------------
Total (3)........................ $105,750,000 $4,758,750 $100,991,250
=================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."

(2) Does not include expenses payable by the Company estimated at $175,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 337,500 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $121,612,500, $5,472,562.50 and $116,139,937.50,
respectively. See "Underwriting."
------------------

The shares of Common Stock are offered by the Underwriters, subject to
receipt and acceptance of the shares by them. The Underwriters reserve the right
to reject any order in whole or in part. It is expected that delivery of the
shares of Common Stock will be made against payment therefor at the offices of
McDonald & Company Securities, Inc. or through the facilities of the Depository
Trust Company on or about July 23, 1997.
---------------------------------------------

Joint Lead Managers and Joint Bookrunners
SMITH BARNEY INC. MCDONALD & COMPANY
SECURITIES, INC.
---------------------------------------------
DEUTSCHE MORGAN GRENFELL

The date of this Prospectus is July 18, 1997
<PAGE> 2

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained at
prescribed rates by writing the Commission, Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site,
located at http://www.sec.gov, that contains reports, proxy and information
statements and other information regarding registrants, including the Company,
that file electronically with the Commission. The Company's Class A Common Stock
is listed on the New York Stock Exchange, and reports, proxy statements and
other information concerning the Company may also be inspected at the offices of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.

The Company has filed with the Commission a registration statement (the
"Registration Statement," which term shall include any amendments thereto) on
Form S-3 under the Securities Act of 1933 (the "Securities Act"), with respect
to the shares of Common Stock offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission, and to which reference is hereby made.
For further information, reference is hereby made to the Registration Statement
and the exhibits and schedules thereto.

Unless the context otherwise requires, references herein to the "Company"
include the Company and its direct and indirect subsidiaries.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus
and shall be deemed to be a part hereof:

1. The Company's Annual Report on Form 10-K for the year ended February 1,
1997 (File No. 1-12814).

2. The Company's Quarterly Report on Form 10-Q for the period ended May 3,
1997 (File No. 1-12814).

3. The description of the Company's Common Stock set forth in the Company's
Registration Statement on Form 8-A filed February 14, 1994, as amended April 6,
1994.

4. The description of the Company's Stockholders' Rights Plan set forth in
the Company's Registration Statement on Form 8-A filed September 7, 1995.

5. The Company's Current Report on Form 8-K/A-1 filed December 19, 1996
(File No. 1-12814) (includes financial statements for Pearle, Inc. for the
period ended September 30, 1996).

All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the Offering shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from their respective
dates of filing. Any statement contained herein or in any document incorporated
or deemed to be incorporated shall be deemed to be modified or superseded for
all purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any subsequently filed document which also is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO
WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON WRITTEN OR ORAL REQUEST
OF SUCH PERSON, A COPY OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN
INCORPORATED BY REFERENCE IN THIS PROSPECTUS (OTHER THAN EXHIBITS TO THE

2
<PAGE> 3

INFORMATION THAT ARE INCORPORATED BY REFERENCE UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS
INCORPORATES). REQUESTS SHOULD BE DIRECTED TO TRACY L. BURMEISTER, SECRETARY,
COLE NATIONAL CORPORATION, AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICES, 5915
LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124, TELEPHONE NUMBER (216)
449-4100. PERSONS REQUESTING COPIES OF EXHIBITS TO SUCH DOCUMENTS THAT WERE NOT
SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS WILL BE CHARGED THE
COSTS OF REPRODUCTION AND MAILING.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

3
<PAGE> 4

THE COMPANY

Cole National Corporation (the "Company") is a leading vision care and
personalization retailer. The Company's businesses are conducted through two
principal operating units: (i) Cole Optical, consisting of Cole Vision
Corporation ("Cole Vision") and Pearle, Inc. ("Pearle"), which was acquired on
November 15, 1996; and (ii) Cole Gift, consisting of Things Remembered, Inc.
("Things Remembered") and Cole Gift Centers, Inc. ("CGC"). The Company also has
a 20% interest in Pearle Trust BV, which has 193 optical stores in the
Netherlands and Belgium. Cole Optical is the largest optical retail company in
the United States in terms of number of locations. Cole Gift operates the only
nationwide chain of gift stores offering "while you shop" gift personalization,
key duplicating, engraving, monogramming and related merchandise. With the
acquisition of Pearle, approximately 70% of the Company's net revenue is
expected to be derived from Cole Optical and the remaining 30% is expected to be
derived from Cole Gift. The Company differentiates itself from other specialty
retailers by providing value-added services at the point of sale at all of its
retail locations.

COLE OPTICAL

Cole Vision operates principally under the "Sears Optical," "Montgomery
Ward Vision Center" and "BJ's Optical Department" names. As of May 3, 1997, Cole
Vision operated 1,146 locations in 46 states and Canada, including 750
departments on the premises of Sears department stores, 213 departments in
Montgomery Ward stores, 76 departments in BJ's Wholesale Club stores, 24
departments located in five other retailers and 83 freestanding stores operated
under the name "Sears Optical." Cole Vision departments 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 Vision on a weekly basis. Cole Vision's product line includes
a broad selection of prescription eyeglasses, contact lenses and accessories at
all of its locations. At most Cole Vision locations, a doctor of optometry
provides eye examination services on the premises. Each of Cole Vision's optical
departments are computer linked to its five centralized manufacturing
laboratories, enabling it to provide next day delivery on most eyewear when
requested by its customers.

At May 3, 1997, Pearle's operations consisted of 355 company-owned and 327
franchised stores located in 43 states, Canada and the Caribbean. Pearle's
highly recognized brand name and slogan, Nobody Cares For Eyes More Than Pearle,
have been used for over 15 years. All 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 a nearby Express location or to Pearle's main
laboratory in Dallas, which can generally complete orders for next day delivery
upon request. Like Cole Vision, a doctor of optometry provides eye examination
services at the Pearle stores. While Pearle stores also sell a broad range of
optical products, Pearle features well-recognized designer brand names which
appeal to the more affluent and fashion-conscious consumer.

Cole Vision also offers a managed vision care program, which provides
comprehensive eyecare benefits marketed directly to employers, other employee
benefit plan sponsors and insurance companies, primarily under the name "Vision
One." Vision One's basic program gives employers the opportunity to offer their
employees a group discount at the managed vision care network with minimal
direct cost to the employer. An enhanced Vision One program allows employers to
provide their employees with prepaid eye examinations as well as pricing
discounts or reimbursements. Recently, all Pearle company-owned and a majority
of franchised locations were added to Cole Vision's managed vision care
programs.

COLE GIFT

Cole Gift is comprised of personalization gift stores, operated by Things
Remembered and CGC, offering "while you shop" gift engraving, key duplicating,
glass etching and monogramming, as well as related merchandise. At May 3, 1997,
Things Remembered operated 793 locations consisting of 342 kiosks, 366 in-line
stores and 85 personalization superstores and CGC operated 498 departments in
host stores, primarily Sears. Things Remembered and CGC each offer a broad
assortment of both branded and private label gift

4
<PAGE> 5

categories and items at prices generally ranging from $10 to $75. Most locations
also offer soft goods that can be monogrammed and custom embroidered in the
store or at a central fulfillment facility.

The Company currently is exploring alternatives that may, if successful,
allow it to reduce the costs of its existing debt financing. There can be no
assurance that any of the approaches under review will be executed or, if
executed, will be successful in reducing the cost of the Company's debt
financing. See "Risk Factors -- Leverage."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.................. 2,250,000 shares (1)
Common Stock to be outstanding after the Offering.... 14,376,932 shares (2)
NYSE symbol.......................................... CNJ
</TABLE>

- ---------------

(1) Excludes up to 337,500 shares of Common Stock to be sold if the
Underwriters' over-allotment option granted by the Company is exercised in
full. See "Underwriting."

(2) Excludes 1,398,966 shares issuable upon the exercise of stock options and
81,574 shares issuable upon exercise of warrants held by various investors
outstanding as of July 17, 1997.

USE OF PROCEEDS

The Company intends to use the net proceeds from the Offering for general
corporate purposes, which may include reducing outstanding indebtedness. In
addition, the Company may use the net proceeds to finance future acquisitions.
Pending application of the net proceeds as described above, the Company may
invest the net proceeds in short-term interest bearing securities.

5
<PAGE> 6

SELECTED FINANCIAL DATA

Set forth below are selected financial data of the Company for fiscal years
1992 through 1996 which have been derived from the Company's audited
consolidated financial statements for those years. Also set forth below are
selected summary financial data of the Company for the 13 weeks ended May 4,
1996 and May 3, 1997, which have been derived from unaudited financial
statements for those periods. Results for interim periods are not necessarily
indicative of full year results. See "Risk Factors--Seasonality." The Company's
fiscal year ends on the Saturday closest to January 31. Fiscal years are
identified according to the calendar year in which they begin. For example, the
fiscal year ended February 1, 1997 is referred to as "fiscal 1996." Fiscal 1995
consisted of a 53-week period; all other fiscal years presented consisted of
52-week periods. The information presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED 13 WEEKS ENDED
---------------------------------------------------- -------------------
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, MAY 4, MAY 3,
1993 1994 1995 1996 1997(a) 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net revenue................................... $428,066 $472,888 $528,049 $577,091 $683,990 $142,890 $249,530
Gross profit.................................. 304,012 331,936 363,326 394,157 462,686 98,390 163,760
Operating expenses............................ 258,534 281,188 305,470 332,471 390,518 87,352 143,343
Depreciation and amortization................. 13,581 13,516 14,892 15,730 20,129 4,235 7,815
Business integration and other
non-recurring charges (b)................... -- -- -- -- 64,400 -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations................. 31,897 37,232 42,964 45,956 (12,361) 6,803 12,602
Interest expense, net......................... 22,262 21,799 23,216 21,388 22,031 5,052 8,231
Income tax provision (benefit)................ 4,165 2,361 (4,909) 10,810 (6,759) 771 1,923
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations...... $ 5,470 $ 13,072 $ 24,657 $ 13,758 $(27,633) $ 980 $ 2,448
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per share..................... $ 1.09 $ 2.47 $ 2.62 $ 1.32 $ (2.44) $ .09 $ .20
Weighted average shares outstanding (000's)... 5,004 5,283 9,395 10,415 11,333 10,435 12,019
Supplementary earnings (loss) per share (c)... $ .55 $ 1.28 $ 2.47 $ 1.32 $ (2.44) $ .09 $ .20
NUMBER OF UNITS (AT END OF PERIOD):
Cole Vision................................... 769 774 938 1,013 1,138 1,022 1,146
Pearle (d).................................... -- -- -- -- 686 -- 682
Things Remembered............................. 717 737 760 778 790 782 793
CGC........................................... 594 586 589 587 501 504 498
-------- -------- -------- -------- -------- -------- --------
Total......................................... 2,080 2,097 2,287 2,378 3,115 2,308 3,119
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.................................. $225,861 $257,944 $283,319 $300,781 $582,843 $290,672 $544,481
Long-term debt................................ 255,610 238,299 184,388 181,903 317,547 181,860 317,328
Stockholders' equity (deficit)................ (123,957) (75,070) 3,306 17,133 19,718 18,195 23,182
</TABLE>

- ---------------

(a) Includes results for Pearle from November 15, 1996 through February 1, 1997.
On a pro forma basis, if the Pearle acquisition had occurred at the
beginning of the period, the unaudited consolidated net revenue would have
been $933.8 million and the pro forma loss from continuing operations would
have improved by $1.8 million or $0.16 per share. See Note 2 to the Audited
Consolidated Financial Statements included elsewhere in this Prospectus.

(b) Represents a pretax charge for business integration and other non-recurring
items in 1996 primarily related to the acquisition of Pearle.

(c) Supplementary earnings per share have been calculated as if the offering in
fiscal 1993 of Senior Notes (defined below) and the initial public offering
in fiscal 1994 of the Common Stock had occurred on February 2, 1992. See the
consolidated financial statements and notes thereto included elsewhere in
this Prospectus.

(d) Includes Pearle franchised locations.

6
<PAGE> 7

RISK FACTORS

This Prospectus and certain of the documents incorporated herein by
reference contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of a variety of
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. Prospective investors should consider carefully the
following factors, in addition to the other information contained in this
Prospectus, prior to making an investment in the Common Stock.

LEVERAGE

The Company owns its operating businesses through Cole National Group, Inc.
("CNG"). Although the Company itself has no outstanding indebtedness (other than
capital leases), CNG remains highly leveraged and its debt service requirements
are substantial. As of May 3, 1997, the Company had consolidated long-term debt
of $318 million, comprised principally of $165.8 million of the 11.25% Senior
Notes due 2001 (the "Senior Notes") and $150 million of the 9 7/8% Senior
Subordinated Notes due 2006 (the "Notes"), and stockholders' equity of $23.2
million. The consequences of such leverage may negatively impact, without
limitation, the ability of the Company (i) to obtain additional financing on
favorable terms; (ii) to service existing debt; and (iii) to comply with
financial and other covenants and operating restrictions imposed by the terms of
the indentures governing its existing long-term indebtedness.

The Company currently expects that CNG and its subsidiaries will be able to
service the principal obligations on their indebtedness out of cash flow from
operations. The Company has no significant principal payment obligations under
any of its outstanding indebtedness until the Senior Notes mature in 2001. The
ability of CNG and its subsidiaries to satisfy their obligations will be
primarily dependent upon the future financial and operating performance of the
subsidiaries and upon the Company's and CNG's ability to renew or refinance
borrowings or to raise additional equity capital. Each of these alternatives is
dependent upon financial, business and other general economic factors affecting
the subsidiaries and the retailing business in particular, many of which are
beyond the control of the Company and its subsidiaries. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

Upon the occurrence of a "change of control" of the Company, each holder of
the Senior Notes and each holder of the Notes would have the right to require
the repurchase of all or any part of such holder's Senior Notes or Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereof. A "change of control" would occur if a
single purchaser or purchasers acting together as a "group" (as defined under
the Exchange Act) acquires (through individual market purchases, negotiated
transactions, or otherwise) 50% or more of the total voting power of the voting
stock of the Company on a fully diluted basis. If such an event does occur,
there can be no assurance that the Company would have the ability to finance the
repurchase of the Senior Notes or the Notes that are tendered to it.

The Company currently is reviewing alternatives that may allow it to reduce
the costs of its existing debt financing. There can be no assurance that any of
the approaches under review will be executed or, if executed, will be successful
in reducing the cost of the Company's debt financing.

To the extent the Company repurchases or redeems Senior Notes or Notes at a
premium to their current book value, such repurchases or redemptions would
result in a charge to earnings which, if material, would be accounted for as an
extraordinary charge. The earliest optional redemption date, for the Senior
Notes, is October 1, 1998 at a redemption price of 105.625%.

COMPETITION

The Company operates in highly competitive businesses. Cole Optical
competes with other optical companies, private ophthalmologists, optometrists
and opticians and a growing number of health maintenance organizations in a
highly fragmented marketplace. Pearle competes on the basis of its highly
recognized brand name, one-hour express service and by offering products which
appeal to the more affluent and fashion-

7
<PAGE> 8

conscious consumer. Cole Vision competes primarily on the basis of the service
it provides as well as price and product quality, and the reputation of its host
stores. Cole Gift competes with other gift store retailers on the basis of the
value-added point of sale services that it provides as well as price and product
quality. Some of the Company's competitors have greater financial resources than
the Company.

RELATIONSHIPS WITH MAJOR HOST STORES

All of the CGC and the vast majority of Cole Vision locations are operated
under the names of their respective host stores under leases or licenses, from
such host stores, that are terminable upon 60-90 days' notice. In addition, Cole
Vision operates its freestanding stores under the name "Sears Optical" pursuant
to a license agreement with Sears that is cancelable on 90 days notice. The
Company has enjoyed excellent relationships with its major host stores for over
40 years and has never had a lease terminated, other than in connection with a
store closing, relocation or major remodeling. However, there can be no
assurance that relationships with major host stores will remain stable in the
future or that any lease or license agreement between a host store and the
Company will not be terminated or adversely changed. There could be a material
adverse effect on the Company if the relationship with any major host store were
to terminate or change materially.

INTEGRATION OF PEARLE AND RISK OF FRANCHISING

The acquisition of Pearle has been the largest acquisition made by the
Company. Acquisitions of the magnitude of Pearle are inherently subject to
significant risk. There can be no assurance that the Company will be able to
integrate the acquired Pearle operations successfully. Although the integration
has commenced, further consolidation of Cole Vision's and Pearle's operating,
control and administrative systems is planned. These efforts will continue to
require substantial attention from and place substantial demands upon the senior
management of Cole Vision and/or the Company, as well as require the cooperation
of Pearle's employees and franchisees.

As a result of the acquisition of Pearle, the Company's consolidated gross
margin will decline from its historical levels. Pearle has a lower gross margin
than the Company due to the higher costs of in-store laboratories and lower
margin wholesale sales to franchised stores.

In addition, the Company has never operated as a franchisor and will be
required to operate such business in accordance with applicable franchise laws
and regulations. The Company's plans for Pearle depend, in part, on the
Company's ability to continue Pearle's franchised operations, to improve
Pearle's relationships with its franchisees, and to attract new franchisees.
While franchisees representing over 70% of the franchised locations have agreed
to enter into new franchising arrangements with the Company, the Company's
flexibility in making changes to Pearle's franchised operations is limited by
laws and regulations governing the relationship with the franchisees and certain
other obligations.

SEASONALITY

The Company's business historically has been seasonal with, on average,
approximately 30% of the Company's net revenue and approximately 50% of its
income from operations occurring in the fourth fiscal quarter because of the
importance of gift sales during the Christmas retailing season. Although the
acquisition of Pearle will moderate the seasonality of the Company due to
relatively lower levels of optical sales during the Christmas holiday season,
the Company's business will remain seasonal.

RISKS ASSOCIATED WITH FUTURE EXPANSION

From time to time the Company engages in discussions regarding future
acquisitions. Acquisitions can result in unforeseen difficulties and can divert
a disproportionate amount of management time and attention. There can be no
assurance that future acquisitions will be completed or integrated successfully.

8
<PAGE> 9

DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS

The Company currently intends to retain earnings to support its growth
strategy and does not anticipate paying dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. The operations of the Company are and are
expected to be conducted through its direct and indirect subsidiaries. The
covenants in certain debt instruments to which CNG or its subsidiaries are a
party restrict the ability of CNG and its subsidiaries to make distributions to
the Company to enable the Company to pay dividends. The amount of dividends that
may be paid under each of these agreements is based in part on the operating
results of the Company's subsidiaries, and there can be no assurance as to the
amount or frequency of dividends that can be paid to the Company in future
years. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Liquidity and Capital Resources."

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation (the
"Certificate") and By-Laws and of the Delaware General Corporation Law could
have the effect of deterring hostile takeovers or delaying or preventing changes
in control or management of the Company. In addition, the Company has adopted a
stockholders' rights plan that includes certain provisions which could have
similar anti-takeover effects. Any one of, or a combination of, the above
anti-takeover provisions could discourage a third party from attempting to
acquire control of the Company.

SHARES ELIGIBLE FOR FUTURE SALE

The shares of Common Stock offered hereby will be freely transferable by
persons who are not affiliates of the Company without restriction or further
registration under the Securities Act. Virtually all of the Common Stock, other
than shares held by affiliates of the Company, are freely tradable. Shares of
Common Stock held by affiliates of the Company are subject to limitations on the
volume that may be sold other than sales pursuant to a registration statement
under the Securities Act or an applicable exemption from registration
thereunder, including sales pursuant to Rule 144 promulgated thereunder. The
Company and the executive officers and Directors of the Company have agreed
that, for a period of 120 days after the execution of the Underwriting
Agreement, they will not, without the prior written consent of McDonald &
Company Securities, Inc., offer, sell, contract to sell or otherwise dispose of
any unrestricted shares of Common Stock, other equity securities of the Company
or other securities convertible into or exercisable or exchangeable for any
shares of Common Stock or grant options to purchase any shares of Common Stock,
except in certain limited circumstances. The sale or issuance or the potential
for sale or issuance of such shares could have an adverse impact on the market
price of the Common Stock.

POSSIBLE VOLATILITY OF STOCK PRICE

The public offering price per share of Common Stock has been determined by
negotiations among the Company and representatives of the Underwriters based in
part on the trading price of the Common Stock on the New York Stock Exchange and
may not be indicative of the price at which the Common Stock will trade after
completion of the Offering. In addition, the stock market has from time to time
experienced extreme price and volume volatility. These fluctuations may be
unrelated to the operating performance of particular companies whose shares are
traded and may adversely affect the market price of the Common Stock. The market
price of the Common Stock could also be subject to significant fluctuations in
response to the Company's operating results and other factors. There can be no
assurance that the market price of the Common Stock will not decline below the
price at which the shares of Common Stock are sold. See "Underwriting."

9
<PAGE> 10

OTHER FACTORS AFFECTING FUTURE PERFORMANCE

The Company's future liquidity, financial condition and operating results
may be materially affected by a variety of factors, some of which may be beyond
the control of the Company, including the Company's ability to select and stock
merchandise attractive to customers, general economic cycles affecting consumer
spending, weather factors affecting retail operations, its quality controls in
optical manufacturing and engraving, operating factors affecting customer
satisfaction, the mix of goods sold, pricing and other competitive factors, and
the seasonality of the Company's businesses.

10
<PAGE> 11

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they begin.
For example, the fiscal year ended February 1, 1997 is referred to as "fiscal
1996." Fiscal 1996 consisted of a 52-week period. Fiscal 1995 and fiscal 1994
consisted of 53- and 52-week periods, respectively.

The following is a discussion of the results of the Company's operations
for the three fiscal years ended February 1, 1997 and for the 13 week periods
ended May 3, 1997 and May 4, 1996.

13 WEEKS ENDED MAY 3, 1997 COMPARED TO 13 WEEKS ENDED MAY 4, 1996

Net revenue for the first quarter of fiscal 1997 increased 75% to $249.5
million from $142.9 million for the same period in fiscal 1996. The increase was
primarily attributable to the acquisitions of Pearle and Sears Optical of Canada
in November 1996, which accounted for $85.5 million of the increase. For the
quarter, the Company's consolidated comparable store sales increased 5.4% in
fiscal 1997 and 7.6% in fiscal 1996. A strong comparable store sales increase of
10.9% at Cole Vision was primarily a result of successful eyewear promotions and
growth in managed vision care sales. Comparable store sales decreased 3.7% at
Cole Gift which was negatively impacted by the lower levels of mall traffic and
unseasonably bad weather in the early spring. In the first quarter of fiscal
1997, the Company began classifying capitation and other fees associated with
its growing managed vision care business as revenue, which previously had been
netted with operating expenses. The opening of additional Cole Gift and Cole
Vision units also contributed to the first quarter revenue increase. At May 3,
1997, the Company had 3,119 specialty service retail locations, including 327
franchised locations, compared to 2,308 at May 4, 1996.

Gross profit increased to $163.8 million in the first quarter of fiscal
1997 from $98.4 million in the same period last year. The gross profit increase
was primarily attributable to the addition of Pearle, increased revenue at Cole
Vision and the classification of managed vision care fees as revenue. Gross
margins for the first quarter of fiscal 1997 and fiscal 1996 were 65.6% and
68.9%, respectively. The lower gross margin percentage resulted primarily from
the addition of Pearle which has a lower gross margin than the Company has
historically experienced due to the higher costs of in-store laboratories and
lower margin wholesale sales to franchised stores. This was partially offset by
revenue generated by Pearle's franchise royalties and fees, interest income on
Pearle's franchise notes receivable and the managed vision care fees, each of
which has no corresponding cost of goods sold.

Operating expenses increased 64.1% to $143.3 million in the first quarter
of fiscal 1997 from $87.4 million in fiscal 1996, but as a percentage of
revenue, operating expenses decreased to 57.4% in fiscal 1997 from 61.1% 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. Fiscal 1997 depreciation and amortization
expense of $7.8 million was $3.6 million more than fiscal 1996 reflecting the
addition of Pearle and an increase in capital expenditures.

Income from operations increased 85.2% to $12.6 million for the first
quarter of fiscal 1997 from $6.8 million for the same period a year ago,
primarily the result of the Pearle acquisition and strong sales growth at Cole
Vision, offset in part by softer sales performance at Cole Gift.

Net interest expense increased $3.2 million over the first quarter of
fiscal 1996 to $8.2 million. The increase was primarily attributable to the
additional interest on $150.0 million of Notes issued in connection with
financing the Pearle acquisition, partially offset by a decrease in interest
expense due to the purchase and subsequent retirement of $15.1 million of Senior
Notes in the second quarter of fiscal 1996.

An income tax provision was recorded in the first quarter of both fiscal
1997 and fiscal 1996 using the Company's estimated annual effective tax rate of
44%.

11
<PAGE> 12

Net income increased to $2.4 million for the first quarter of fiscal 1997
from $1.0 million for the first quarter of fiscal 1996. The increase was due to
improvement in income from operations offset, in part, by the increase in net
interest expense.

The Company's business historically has been seasonal with approximately
30% of its net revenue and approximately 50% of its income from operations
occurring in the fourth fiscal quarter because of the importance of gift sales
during the Christmas retailing season. Although the acquisition of Pearle will
moderate the seasonality of the Company due to relatively lower levels of
optical product sales during the Christmas holiday season, the Company's
business will remain seasonal. Therefore, results of operations for interim
periods are not necessarily indicative of full year results.

FISCAL 1996 COMPARED TO FISCAL 1995

On November 15, 1996, the Company acquired certain assets and all of the
issued and outstanding common stock of Pearle. Immediately following the
acquisition, the Company sold Pearle Holdings B.V., Pearle's European
operations, to Pearle Trust B.V. The Company has a 20% common equity interest in
Pearle Trust B.V. which operates 193 stores in the Netherlands and Belgium. A
significant portion of the purchase price was financed by CNG, by the issuance
of the Notes. The acquisition of Pearle has been accounted for under the
purchase method of accounting. Accordingly, Pearle's results of operations have
been included in the Company's consolidated statement of operations since the
date of acquisition. For the eleven-week period, Pearle operated at
approximately a break-even level with net revenue of $58.3 million reflecting
the relatively lower level of optical retail sales during the holiday season. At
February 1, 1997, the Pearle system included 348 company-operated optical stores
and 338 franchised locations in the United States, Canada and the Caribbean. See
Notes 2 and 3 of the Notes to Audited Consolidated Financial Statements for
further discussion of the Pearle acquisition. Except as otherwise indicated, the
following discussion of net revenue, gross profit and operating expenses relates
to the Company on an historical basis without giving effect to the Pearle
acquisition.

Net revenue increased 8.4% to $625.7 million in fiscal 1996 from $577.1
million in fiscal 1995. The increase in consolidated revenue was due to a
comparable store sales increase of 6.3% and to the opening of additional Cole
Gift and Cole Vision units including 75 optical locations in Canada as a result
of the acquisition of AOCO Limited in November 1996. This was partially offset
by one less week of sales in fiscal 1996 compared to fiscal 1995 and the closing
of 95 low-volume Cole Gift departments. Comparable store sales increased 10.7%
at Cole Vision primarily as a result of successful eyewear promotions and growth
in the managed vision care program. Comparable store sales increased 1.4% at
Cole Gift benefiting from the roll-out of monogrammed soft goods and the
introduction of new merchandise. At February 1, 1997, the Company had 3,115
specialty service retail locations including the Pearle company-operated stores
and 338 franchised locations, versus 2,378 at the end of the prior year.

Gross profit increased to $429.4 million in fiscal 1996 from $394.2 million
in fiscal 1995. Gross margins for fiscal 1996 and fiscal 1995 were 68.6% and
68.3%, respectively. The increase in gross margin percentage was the result of
lower product costs, improved optical lab productivity and a higher level of
personalization in the sales mix at Things Remembered. In fiscal 1997, the
Company's consolidated gross margin is expected to decline from its historical
levels as Pearle has a lower gross margin than the Company due to the higher
costs of in-store laboratories and lower margin wholesale sales to franchised
stores partially offset by franchise royalties, fees and interest income on
franchise notes receivable which have no corresponding cost of goods sold.

Operating expenses increased 8.2% to $359.8 million in fiscal 1996 from
$332.5 million the prior year. As a percentage of revenue, operating expenses
decreased to 57.5% in fiscal 1996 from 57.6% in fiscal 1995. Operating expenses
increased primarily due to higher advertising expenditures, payroll costs and
store occupancy expenses, partly offset by one less week in fiscal 1996.
Advertising expenditures at Cole Vision were increased for optical promotions to
encourage continued sales growth above last year's successful promotions.
Payroll costs increased because of more higher-volume retail units open in 1996,
including an increased number of Things Remembered personalization superstores,
and additional payroll to support increased sales.

12
<PAGE> 13

Store occupancy expenses increased primarily as a result of the increased number
of Things Remembered personalization superstores and higher percentage rents
caused by increased comparable store sales. Fiscal 1996 depreciation and
amortization expense of $17.6 million was $1.9 million more than fiscal 1995
reflecting an increase in capital expenditures.

Income from operations excluding the charge for non-recurring items
increased 13.2% to $52.0 million in fiscal 1996 from $46.0 million the prior
year. The increase was primarily attributable to increased revenue, higher gross
margin and improved leveraging of operating expenses.

Net interest expense for fiscal 1996 of $22.0 million was $0.6 million more
than that of the prior year. This increase was primarily due to $3.4 million of
additional interest expense related to the financing of the Pearle acquisition
offset by decreases in interest expense due to the retirement of $5.0 million of
the Senior Notes in November 1995, the purchase and subsequent retirement of
$15.1 million of Senior Notes in the second quarter of fiscal 1996, the
elimination of working capital borrowings and increased interest income from an
increase in temporary cash investments.

The income tax benefit of $6.8 million for fiscal 1996 includes a $20.0
million income tax benefit related to the charge for business integration and
other non-recurring items. The effective income tax rate on income excluding the
charge for business integration and other non-recurring items was 44.0% in
fiscal 1996 and 1995. 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 9 of the Notes to Audited
Consolidated Financial Statements.

The net loss in fiscal 1996 of $28.3 million included a $0.7 million
extraordinary loss, net of an income tax benefit of $0.5 million, recorded in
the second quarter in connection with the early extinguishment of debt
representing the payment of premiums, the write-off of unamortized discount and
other costs associated with purchasing the debt.

FISCAL 1995 COMPARED TO FISCAL 1994

Net revenue increased 9.3% to $577.1 million in fiscal 1995 from $528.0
million in fiscal 1994. The increase in consolidated revenue was due to a
comparable store sales increase of 3.4%, sales for the 53rd week of
approximately $9.3 million and additional Things Remembered and Cole Vision
units open in fiscal 1995. Comparable store sales increased primarily as a
result of successful eyewear promotions and growth in the managed vision care
program at Cole Vision and expanded gift and soft goods merchandise at Things
Remembered locations. Fourth quarter comparable store sales were even with last
year as the retail industry in general experienced a very difficult Christmas
season and severe weather conditions in many major markets. At February 3, 1996,
the Company operated 2,378 specialty service retail locations versus 2,287 at
the end of the prior year. The net increase in retail units includes the
acquisition by Cole Vision on May 21, 1995, of 59 optical departments located in
BJ's Wholesale Club stores and the sale of the Company's 39 Sunspot fashion
sunglass kiosks as of April 29, 1995.

Gross profit increased to $394.2 million in fiscal 1995 from $363.3 million
in fiscal 1994. Gross margins for fiscal 1995 and fiscal 1994 were 68.3% and
68.8%, respectively. The decrease in gross margin percentage was primarily due
to an increase in the sales of lower margin optical products, including
disposable contact lenses, and a lower mix of higher margin merchandise,
primarily keys, at CGC. Gross margin in the fourth quarter of fiscal 1995,
however, improved to 67.1% from 66.9% in fiscal 1994, benefiting from fiscal
1994 and 1995 investments aimed at increasing optical laboratory capacity and
production efficiency and from reduced material costs for spectacles.

13
<PAGE> 14

Operating expenses increased 8.8% to $332.5 million in fiscal 1995 from
$305.5 million the prior year. As a percentage of revenue, operating expenses
decreased to 57.6% in fiscal 1995 from 57.8% in fiscal 1994. Operating expenses
increased primarily because of higher payroll costs, store occupancy expenses
and advertising expense due, in part, to the 53rd week. The higher payroll costs
were also the result of more retail units in fiscal 1995 and additional payroll
to support the higher level of sales. Partially offsetting the payroll increases
were savings from outsourcing the Company's data processing operations in fiscal
1995. Store occupancy expense increased because of the increased number of
retail units and higher percentage rents due to increased comparable store
sales. Advertising costs increased primarily as a result of additional efforts
to support eyewear promotions. Also included in operating expense in fiscal 1995
was a $0.2 million provision for the closing of approximately 90 low volume
leased key and gift departments in the first quarter of fiscal 1996. Fiscal 1995
depreciation and amortization expense of $15.7 million was $0.8 million more
than fiscal 1994 reflecting an increase in capital expenditures that began in
the latter part of fiscal 1993.

Income from operations increased 7.0% to $46.0 million in fiscal 1995 from
$43.0 million the prior year. The increase was primarily attributable to the
increased revenue. The lower gross margin percentage was partially offset by
improved leveraging of operating expenses.

Net interest expense for fiscal 1995 of $21.4 million was $1.8 million less
than that of the prior year. This decrease was primarily due to retirement of
debt in connection with the Company's initial public offering of its common
stock (the "IPO") on April 18, 1994 and the retirement of $5.0 million of the
Senior Notes in November 1995 along with higher interest income.

The income tax provision of $10.8 million for fiscal 1995 represents an
effective tax rate of 44.0%. This rate reflects the significant impact of
non-deductible amortization of goodwill. The income tax benefit of $4.9 million
in fiscal 1994 included the effects of utilizing all of the Company's net
operating loss carryforwards and the reversal of a valuation allowance on net
deferred tax assets in the fourth quarter of fiscal 1994.

Net income in fiscal 1994 of $24.7 million included a loss on early
extinguishment of debt of $0.9 million to reflect the payment of premiums, the
write-off of unamortized debt discount and other costs associated with retiring
the debt in connection with the IPO.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity is funds provided from operations
of its wholly owned subsidiaries. In addition, CNG's 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 (the "Credit Facility"). The Credit Facility
replaced a $50.0 million revolving credit facility. There were no working
capital borrowings outstanding during the first quarter of fiscal 1997 or at any
time during fiscal 1996.

The Credit Facility contains covenants restricting the ability of the
Company's operating subsidiaries to, among other things, pay dividends or make
other restricted payments to the Company or CNG. The Credit Facility permits
CNG's subsidiaries to pay dividends to CNG to the extent necessary to permit CNG
to pay all interest and principal on the Senior Notes and the Notes when due.

During the second quarter of fiscal 1996, the Company completed a public
offering of 1,437,500 shares of its common stock at an offering price of $19.25
per share. The net proceeds from the offering were $26.2 million. A portion of
the net proceeds was used to purchase in the open market $15.1 million of Senior
Notes plus accrued interest thereon.

During the fourth quarter of fiscal 1996, in connection with the
acquisition of Pearle, CNG issued the Notes in the aggregate amount of $150.0
million. Issuance of the Notes and the retirement of $15.1 million of Senior
Notes will result in a net increase in annual interest expense in fiscal 1997
compared to fiscal 1996 of approximately $11.0 million including amortization of
the discount on the Notes and related deferred financing costs.

14
<PAGE> 15

As of May 3, 1997, the Company had outstanding $165.8 million of Senior
Notes and $150.0 million of Notes. The Senior Notes and the Notes are unsecured
and mature October 1, 2001 and December 31, 2006, respectively, with no earlier
scheduled redemption or sinking fund payment. The Senior Notes bear interest at
a rate of 11.25% per annum, payable semi-annually on each April 1 and October 1.
The Notes bear interest at a rate of 9.875% per annum, payable semi-annually on
each June 30 and December 31, commencing June 30, 1997. The indentures pursuant
to which the Senior Notes and the Notes were issued contain certain optional and
mandatory redemption features and other financial covenants, including
restrictions on the ability of CNG to pay dividends or make other restricted
payments to the Company. The indentures permit dividend payments to the Company
of one-half of CNG's consolidated net income, provided that no default or event
of default has occurred under the indentures and that CNG has met a specified
fixed charge coverage ratio test. The indentures also permit payments to the
Company for certain tax obligations and for administrative expenses of the
Company not to exceed 0.25% of net revenue. See Note 5 of the Notes to Audited
Consolidated Financial Statements.

The Company has no significant principal payment obligations under any of
its outstanding indebtedness until the Senior Notes mature in 2001. The ability
of the Company and its subsidiaries to satisfy that obligation will be primarily
dependent upon future financial and operating performance of the subsidiaries
and upon the Company's ability to renew or refinance borrowings or to raise
additional equity capital.

Cash balances at February 1, 1997 were $73.1 million compared to $29.3
million at February 3, 1996. Operations generated net cash of $84.7 million in
fiscal 1996, $36.5 million in fiscal 1995, $15.6 million in fiscal 1994, and
used cash of $39.0 million in the first quarter of 1997 compared to $12.6
million in the first quarter of fiscal 1996. The $26.4 million increase in cash
used by operations in the first quarter of fiscal 1997 as compared to the first
quarter of fiscal 1996 was primarily attributable to the payment of $15.0
million of taxes due on the sale of Pearle's European operation, increased
payments related to inventory disbursements, and payment of certain business
integration and other non-recurring charges accrued in fiscal 1996, partially
offset by an increase in net income and higher depreciation and amortization
expense. The $48.2 million increase in cash provided by operations in fiscal
1996 compared to fiscal 1995 was primarily attributable to an increase in
accounts payable and accrued liabilities of $35.2 million excluding amounts
related to the non-recurring charge, increased income from operations of $6.1
million excluding the non-recurring charge, increased depreciation and
amortization expense of $4.4 million and increased accrued income taxes. Accrued
income taxes at February 1, 1997 includes $15.0 million of taxes due on the sale
of Pearle's European business that were reimbursed to the Company by the seller
in connection with the Pearle acquisition. These cash flow increases were partly
offset by an increase in inventories of $3.6 million versus a $2.5 million
reduction in fiscal 1995. The $64.4 million charge for business integration and
other non-recurring items recorded in fiscal 1996 had little effect on the
change in cash flow for fiscal 1996 since most of the items were either non-cash
or were accrued at year end. The total cash outlay related to this charge is
expected to be approximately $41.1 million ($21.1 million after tax), of which
$2.9 million has been paid as of February 1, 1997. The remaining amount is
expected to be incurred within the next 12 to 18 months, except for certain
lease costs which may be incurred over the remaining life of the leases.

The $20.9 million increase in cash provided by operations in fiscal 1995
compared to fiscal 1994 was primarily due to a $2.5 million reduction in
inventory, despite a 9.3% increase in revenue, compared to an $8.7 million
increase in inventory the prior year. Also, income from operations in fiscal
1995 was higher by $3.0 million and interest expense was lower by $1.8 million
than in fiscal 1994.

Net capital additions were $23.5 million, $19.8 million and $18.5 million
in fiscal 1996, 1995 and 1994, respectively, and $7.0 million and $3.4 million
in the first quarter of fiscal 1997 and fiscal 1996, respectively. In addition,
the Company used $157.4 million for the purchases of Pearle and AOCO Limited and
$6.1 million for the investment in Pearle Trust B.V. in fiscal 1996, $0.8
million for the purchase of the BJ's Wholesale Club optical departments in
fiscal 1995 and $4.7 million for the purchase of 107 Montgomery Ward optical
departments in fiscal 1994. The majority of the capital additions were for store
fixtures, equipment and leasehold improvements for new stores and the remodeling
of existing stores. For fiscal 1997, the Company expects to continue to expand
the number of stores as well as remodel and relocate stores. The Company
currently estimates capital expenditures in fiscal 1997 will exceed $30.0
million including Pearle.

15
<PAGE> 16

The Company has acquired land and is constructing a new warehouse and
distribution facility for Cole Gift that is expected to improve distribution
efficiencies. The facility, which the Company expects will be completed in the
second quarter of fiscal 1997, is expected to be financed through a sale and
lease-back transaction or through conventional secured real estate financing.
The Company estimates the cost of this facility to be approximately $10 million.

The Company believes that funds provided from operations along with funds
available under the Credit Facility will provide adequate sources of long-term
liquidity to allow the Company's operating subsidiaries to continue to expand
the number of stores.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth certain information regarding the Company's
directors and executive officers, who also hold comparable positions at CNG.

<TABLE>
<CAPTION>
YEARS OF
SERVICE
NAME AGE WITH COMPANY POSITION
- ------------------ --- ---------------- -----------------------------------------
<S> <C> <C> <C>
Jeffrey A. Cole 56 28 Chairman, Chief Executive Officer, Chief
Financial Officer and Director
Brian B. Smith 44 15 President, Chief Operating Officer and
Director
Joseph Gaglioti 51 16 Vice President and Treasurer
Wayne L. Mosley 43 11 Vice President and Controller
Timothy F. Finley 53 5 Director
Irwin N. Gold 40 5 Director
Peter V. Handal 54 5 Director
Charles A. Ratner 55 2 Director
Walter J. Salmon 66 -- Director
</TABLE>

Mr. Finley is Chief Executive Officer of Jos. A. Bank Clothiers, Inc. and
Chairman and President of The Finley Group. Mr. Gold is a Managing Partner of
Houlihan Lokey Howard & Zukin. Mr. Handal is President of COWI International
Group, President of J4P Associates and President of Fillmore Leasing Company.
Mr. Ratner is President and Chief Executive Officer of Forest City Enterprises,
Inc. and Chairman of Forest City Rental Properties Corporation. Mr. Salmon was
elected Director in June 1997 and is the Stanley Roth, Sr., Professor of
Retailing at the Harvard University Graduate School of Business Administration.

16
<PAGE> 17

UNDERWRITING

In the Underwriting Agreement, the Underwriters, represented by Smith
Barney Inc. and McDonald & Company Securities, Inc., as joint lead managers and
joint bookrunners, and Deutsche Morgan Grenfell Inc. (the "Representatives"),
have agreed, severally, subject to the terms and conditions therein set forth,
to purchase from the Company, and the Company has agreed to sell to them, the
number of shares of Common Stock totalling 2,250,000 shares, set forth opposite
their respective names below. The Underwriters are committed to take and pay for
all shares if any shares are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------ ---------
<S> <C>
Smith Barney Inc.................................................. 900,000
McDonald & Company Securities, Inc................................ 900,000
Deutsche Morgan Grenfell Inc...................................... 450,000
---------
Total........................................................ 2,250,000
=========
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus. The Underwriters may allow
to certain selected dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") a discount not exceeding $1.16 per share,
and the Underwriters may allow, and such selected dealers may re-allow, a
discount not exceeding $0.10 per share to other dealers who are members of the
NASD. After this Offering, the public offering price and the discount to dealers
may be changed by the Representatives.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 337,500 shares of Common Stock at the public offering price, less the
underwriting discount, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the Common Stock that the Underwriters have agreed to purchase. To the extent
that the Underwriters exercise such option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase the same percentage
of the option shares as the number of shares to be purchased and offered by that
Underwriter in the table above bears to the total.

The Company has agreed to indemnify the Underwriters against certain
liabilities which may be incurred in connection with the Offering, including
liabilities under the Securities Act or to contribute to payments that the
Underwriters may be required to make.

The Company and its directors and executive officers have agreed not to
sell, transfer or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for shares of Common
Stock without the consent of McDonald & Company Securities, Inc. for a period of
120 days from the date of this Prospectus, except for awards of management stock
options or issuances of shares upon the exercise of outstanding warrants or
stock options or pursuant to other employee benefit plans.

The Representatives have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the Offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
a purchase of the Common Stock on behalf of the Underwriters for the purpose of
fixing or maintaining the price of the Common Stock. A "syndicate covering
transaction" is a bid for or a purchase of the Common Stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with the Offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the Offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Representatives in a syndicate covering transaction and has therefore not
been effectively placed by such Underwriter or syndicate member. The
Representatives have advised the Company

17
<PAGE> 18

that such transactions may be effected on The New York Stock Exchange or
otherwise and, if commenced, may be discontinued at any time.

Smith Barney Inc. and McDonald & Company Securities, Inc. have from time to
time performed various investment banking services for the Company. In 1996,
Smith Barney Inc. and McDonald & Company Securities, Inc. provided financial
advisory services to the Company and received customary fees in respect of such
services.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Certain legal matters
will be passed upon for the Underwriters by Calfee, Halter & Griswold LLP,
Cleveland, Ohio.

EXPERTS

The audited consolidated financial statements and financial statement
schedule included and incorporated by reference in this Prospectus and elsewhere
in the Registration Statement to the extent and for the periods indicated in
their reports have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.

The consolidated financial statements of Pearle, Inc. and subsidiaries as
of September 30, 1996 and 1995 and for each of the years in the three-year
period ended September 30, 1996 have been incorporated by reference herein and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference herein
and upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP covering the September 30, 1996 consolidated
financial statements refers to a change in accounting for income taxes.

18
<PAGE> 19

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at May 3, 1997 and February 1, 1997..................... F-2
Consolidated Statements of Operations for the 13 weeks ended May 3, 1997 and May 4,
1996............................................................................. F-3
Consolidated Statements of Cash Flows for the 13 weeks ended May 3, 1997 and May 4,
1996............................................................................. F-4
Notes to Consolidated Financial Statements.......................................... F-5

AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants............................................ F-6
Consolidated Balance Sheets at February 1, 1997 and February 3, 1996................ F-7
Consolidated Statements of Operations for the 52 weeks ended February 1, 1997, the
53 weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995.......... F-8
Consolidated Statements of Stockholders' Equity for the 52 weeks ended February 1,
1997, the 53 weeks ended February 3, 1996 and the 52 weeks ended January 28,
1995............................................................................. F-9
Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 1997, the
53 weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995.......... F-10
Notes to Consolidated Financial Statements.......................................... F-11
</TABLE>

F-1
<PAGE> 20

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
MAY 3, FEBRUARY 1,
1997 1997
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments............................ $ 20,205 $ 73,141
Accounts receivable, less allowance for doubtful accounts of
$1,632 in 1997 and $3,068 in 1996........................... 41,845 39,660
Current portion of notes receivable............................ 5,106 6,060
Inventories.................................................... 127,456 119,236
Prepaid expenses and other..................................... 8,658 7,378
Deferred income tax benefits................................... 24,948 24,948
--------- ----------
Total current assets................................... 228,218 270,423
Property and equipment, at cost.................................. 223,596 216,575
Less -- accumulated depreciation and amortization.............. (107,611) (100,918)
--------- ----------
Total property and equipment, net...................... 115,985 115,657
Other assets:
Notes receivable, excluding current portion.................... 25,507 27,951
Deferred income taxes and other................................ 36,534 29,504
Intangible assets, net......................................... 138,237 139,308
--------- ----------
Total assets........................................... $ 544,481 $ 582,843
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................. $ 1,330 $ 1,336
Accounts payable............................................... 44,791 62,379
Accrued interest............................................... 8,706 9,630
Accrued liabilities............................................ 116,095 123,263
Accrued income taxes........................................... 6,093 21,970
--------- ----------
Total current liabilities.............................. 177,015 218,578
Long-term debt, net of discount and current portion.............. 317,328 317,547
Other long-term liabilities...................................... 26,956 27,000
Stockholders' equity:
Common stock................................................... 12 12
Paid-in capital................................................ 132,714 131,238
Foreign currency translation adjustment........................ (1,066) (606)
Notes receivable-stock option exercise......................... (1,024) (1,024)
Accumulated deficit............................................ (107,454) (109,902)
--------- ----------
Total stockholders' equity............................. 23,182 19,718
--------- ----------
Total liabilities and stockholders' equity............. $ 544,481 $ 582,843
========= ==========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.

F-2
<PAGE> 21

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
13 WEEKS ENDED
-----------------------
MAY 3, MAY 4,
1997 1996
-------- --------
<S> <C> <C>
Net revenue........................................................ $249,530 $142,890
Costs and expenses:
Cost of goods sold............................................... 85,770 44,500
Operating expenses............................................... 143,343 87,352
Depreciation and amortization.................................... 7,815 4,235
-------- --------
Total costs and expenses................................. 236,928 136,087
-------- --------
Income from operations............................................. 12,602 6,803
Interest expense, net.............................................. 8,231 5,052
-------- --------
Income before income taxes......................................... 4,371 1,751
Income tax provision............................................... 1,923 771
-------- --------
Net income......................................................... $ 2,448 $ 980
======== ========
Earnings per share................................................. $ .20 $ .09
======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

F-3
<PAGE> 22

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
13 WEEKS ENDED
-----------------------
MAY 3, MAY 4,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 2,448 $ 980
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization................................. 7,815 4,235
Non-cash interest............................................. 96 106
Change in assets and liabilities:
Increase in accounts and notes receivable, prepaid expenses
and other assets........................................... (1,564) (2,079)
Increase in inventories..................................... (8,220) (3,610)
Decrease in accounts payable, accrued liabilities and other
liabilities................................................ (22,767) (3,842)
Decrease in accrued interest................................ (924) (5,107)
Decrease in accrued income taxes............................ (15,877) (3,278)
-------- --------
Net cash used by operating activities.................... (38,993) (12,595)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt...................................... (296) (221)
Proceeds from exercise of stock options and warrants............. 841 82
Other............................................................ (152) --
-------- --------
Net cash provided (used) by financing activities......... 393 (139)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net......................... (7,048) (3,406)
Systems development costs........................................ (2,543) (349)
Other, net....................................................... (4,745) (145)
-------- --------
Net cash used by investing activities.................... (14,336) (3,900)
-------- --------
Cash and temporary cash investments:
Net decrease during the period................................... (52,936) (16,634)
Balance, beginning of the period................................. 73,141 29,260
-------- --------
Balance, end of the period....................................... $ 20,205 $ 12,626
======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

F-4
<PAGE> 23

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The Consolidated financial statements include the accounts of Cole National
Corporation (CNC), its wholly owned subsidiaries, including Cole National Group,
Inc. (CNG), and CNG's wholly owned subsidiaries (collectively, the "Company").
All significant intercompany transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes that the disclosures herein are adequate to make the information not
misleading. These statements should be read in conjunction with the Company's
consolidated financial statements for the fiscal year ended February 1, 1997.

In the opinion of management, the accompanying financial statements contain
all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the Company's financial position as of May 3, 1997 and the
results of operations and cash flows for the 13 weeks ended May 3, 1997 and May
4, 1996.

Inventories

The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at May 3, 1997 and May 4,
1996 were valued at the lower of first-in, first-out (FIFO) cost or market.

Cash Flows

Net cash flows from operating activities reflect cash payments for income
taxes and interest of $17,967,126 and $9,553,000, respectively, for the 13 weeks
ended May 3, 1997, and $4,095,000 and $10,323,000, respectively, for the 13
weeks ended May 4, 1996.

Earnings Per Share

Earnings per share for the 13 weeks ended May 3, 1997 and May 4, 1996 have
been calculated based on 12,019,488 and 10,435,423, respectively, weighted
average number of common shares outstanding. The impact of common stock
equivalents is not material to first quarter results.

In the fourth quarter of fiscal 1997 the Company will adopt Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Under SFAS
128, the Company's basic earnings per share and fully diluted earnings per share
will be presented on the face of the income statement. The basic earnings per
share will be determined using only the weighted average number of outstanding
shares during the period. The computation for fully diluted earnings per share
will include common stock equivalents and will not differ materially from
current accounting requirements. For the quarter ended May 3, 1997, the number
of shares used to compute basic earnings per share is the same as the weighted
average number of shares used to compute primary earnings per share (shown
above).

(2) SEASONALITY

(3) RECLASSIFICATIONS

Certain 1996 amounts have been reclassified to conform with the 1997
presentation.

F-5
<PAGE> 24

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 (the Company) as
of February 1, 1997 and February 3, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended February 1, 1997. These financial statements are
the responsibility of the Company'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 February 1, 1997 and February 3,
1996 and the results of their operations and their cash flows for each of the
three years in the period ended February 1, 1997 in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Cleveland, Ohio,
March 19, 1997.

F-6
<PAGE> 25

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments............................ $ 73,141 $ 29,260
Accounts receivable, less allowance for doubtful accounts of
$3,068 in 1996 and $0 in 1995............................... 39,660 18,589
Current portion of notes receivable............................ 6,060 --
Inventories.................................................... 119,236 84,794
Prepaid expenses and other..................................... 7,378 5,892
Deferred income tax benefits................................... 24,948 9,872
---------- ---------
Total current assets................................... 270,423 148,407
Property and equipment, at cost.................................. 216,575 157,050
Less -- accumulated depreciation and amortization.............. (100,918) (90,909)
---------- ---------
Total property and equipment, net...................... 115,657 66,141
Other assets:
Notes receivable, excluding current portion.................... 27,951 --
Deferred income taxes and other................................ 29,504 5,070
Intangible assets, net......................................... 139,308 81,163
---------- ---------
Total assets........................................... $ 582,843 $ 300,781
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................. $ 1,336 $ 705
Accounts payable............................................... 62,379 29,273
Accrued interest............................................... 9,630 7,050
Accrued liabilities............................................ 123,263 51,638
Accrued income taxes........................................... 21,970 5,976
---------- ---------
Total current liabilities.............................. 218,578 94,642
Long-term debt, net of discount and current portion.............. 317,547 181,903
Other long-term liabilities...................................... 27,000 7,103
Stockholders' equity:
Preferred stock................................................ -- --
Common stock................................................... 12 10
Paid-in capital................................................ 131,238 99,827
Foreign currency translation adjustment........................ (606) --
Notes receivable-stock option exercise......................... (1,024) (1,117)
Accumulated deficit............................................ (109,902) (81,587)
---------- ---------
Total stockholders' equity............................. 19,718 17,133
---------- ---------
Total liabilities and stockholders' equity............. $ 582,843 $ 300,781
========== =========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.

F-7
<PAGE> 26

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue......................................... $ 683,990 $ 577,091 $ 528,049
Costs and expenses:
Cost of goods sold................................ 221,304 182,934 164,723
Operating expenses................................ 390,518 332,471 305,470
Depreciation and amortization..................... 20,129 15,730 14,892
Business integration and other non-recurring
charges........................................ 64,400 -- --
--------- --------- ---------
Total costs and expenses.................. 696,351 531,135 485,085
--------- --------- ---------
Income (loss) from operations....................... (12,361) 45,956 42,964
Interest expense.................................... (23,735) (22,149) (23,680)
Interest income..................................... 1,704 761 464
--------- --------- ---------
Income (loss) before income taxes and extraordinary
item.............................................. (34,392) 24,568 19,748
Income tax provision (benefit)...................... (6,759) 10,810 (4,909)
--------- --------- ---------
Income (loss) before extraordinary item............. (27,633) 13,758 24,657
Extraordinary loss on early extinguishment of
debt.............................................. (682) -- (917)
--------- --------- ---------
Net income (loss)................................... $ (28,315) $ 13,758 $ 23,740
========= ========= =========
Earnings (loss) per common share:
Income (loss) before extraordinary item........... $ (2.44) $ 1.32 $ 2.62
Extraordinary loss................................ (.06) -- (.10)
--------- --------- ---------
Net income (loss)................................. $ (2.50) $ 1.32 $ 2.52
========= ========= =========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

F-8
<PAGE> 27

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
NOTES
FOREIGN RECEIVABLE
CURRENCY STOCK TOTAL
COMMON PAID-IN TRANSLATION OPTION ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL ADJUSTMENT EXERCISE DEFICIT EQUITY
------ -------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 29, 1994... $ 5 $ 45,140 $ -- $ (1,130) $(119,085) $ (75,070)
---- -------- ------ -------- --------- ---------
Net income................ -- -- -- -- 23,740 23,740
Proceeds from initial
public offering........ 5 54,535 -- -- -- 54,540
Exercise of stock
options................ -- 74 -- -- -- 74
Repayment of notes
receivable............. -- -- -- 22 -- 22
---- -------- ------ -------- --------- ---------
Balance, January 28, 1995... 10 99,749 -- (1,108) (95,345) 3,306
---- -------- ------ -------- --------- ---------
Net income................ -- -- -- -- 13,758 13,758
Exercise of stock
options................ -- 78 -- (9) -- 69
---- -------- ------ -------- --------- ---------
Balance, February 3, 1996... 10 99,827 -- (1,117) (81,587) 17,133
---- -------- ------ -------- --------- ---------
Net loss.................. -- -- -- -- (28,315) (28,315)
Net proceeds from sale of
common stock........... 1 26,201 -- -- -- 26,202
Stock options granted..... -- 4,153 -- -- -- 4,153
Exercise of stock
options................ 1 1,057 -- (49) -- 1,009
Repayment of notes
receivable............. -- -- -- 142 -- 142
Effect of foreign currency
translation............ -- -- (606) -- -- (606)
---- -------- ------ -------- --------- ---------
Balance, February 1, 1997... $ 12 $131,238 $ (606) $ (1,024) $(109,902) $ 19,718
==== ======== ====== ======== ========= =========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

F-9
<PAGE> 28

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ (28,315) $ 13,758 $ 23,740
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of
debt........................................ 682 -- 917
Non-recurring charges......................... 23,292 -- --
Depreciation and amortization................. 20,129 15,730 14,892
Non-cash interest expense..................... 440 454 469
Deferred income taxes......................... (16,194) 4,495 (10,153)
Change in assets and liabilities net of
effects from acquisitions:
Increase in accounts and notes receivable,
prepaid expenses and other assets........ (3,967) (4,905) (4,610)
Decrease (increase) in inventories.......... (3,582) 2,452 (8,723)
Increase (decrease) in accounts payable,
accrued liabilities, and other
liabilities.............................. 73,382 3,095 (1,252)
Increase (decrease) in accrued interest..... 2,580 115 (2,451)
Increase in accrued income taxes............ 16,256 1,332 2,807
---------- --------- ---------
Net cash provided by operating
activities............................. 84,703 36,526 15,636
---------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt...................... (17,105) (5,406) (56,859)
Payment of deferred financing fees............... (6,066) -- (100)
Net proceeds from sale of common stock........... 26,202 -- 54,540
Proceeds from long-term debt, net................ 148,875 -- --
Other............................................ 664 69 96
---------- --------- ---------
Net cash provided (used) by financing
activities............................. 152,570 (5,337) (2,323)
---------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net......... (23,469) (19,832) (18,527)
Acquisitions of businesses, net of cash
acquired...................................... (157,426) (800) (4,675)
Investment in Pearle Trust B.V................... (6,102) -- --
Systems development costs........................ (3,820) (755) (1,295)
Other, net....................................... (2,575) (272) 10
---------- --------- ---------
Net cash used by investing activities.... (193,392) (21,659) (24,487)
---------- --------- ---------
Cash and temporary cash investments:
Net increase (decrease) during the period........ 43,881 9,530 (11,174)
Balance, beginning of the period................. 29,260 19,730 30,904
---------- --------- ---------
Balance, end of the period....................... $ 73,141 $ 29,260 $ 19,730
========== ========= =========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.

F-10
<PAGE> 29

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 (CNC), its wholly owned Subsidiaries, including Cole National Group,
Inc. (CNG), and CNG's wholly owned subsidiaries (collectively, the Company).
CNG's subsidiaries include Pearle, Inc. (Pearle) which was acquired on November
15, 1996 (see Note 2). All significant intercompany transactions have been
eliminated in consolidation.

The Company is a specialty service retailer operating in both host and
non-host environments. The Company's primary lines of business are eyewear
products and services, and personalized gifts. Eyewear products and services and
personalized gifts represented approximately 60% and 40%, respectively, of sales
in 1996 and 50% of sales each in 1995 and 1994. With the acquisition of Pearle,
eyewear products and services are expected to comprise over 70% of the Company's
net revenue in 1997.

The Company sells its products through over 2,777 company-owned retail
locations and 338 franchised locations in all 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. The
Company considers its operations to be in one business segment.

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.

The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they begin.
Fiscal years 1996 and 1994 consisted of 52 weeks while fiscal year 1995
consisted of 53 weeks.

Inventories

The Company's inventories are valued at the lower of first-in, first-out
(FIFO) cost or market.

Property and Depreciation

The Company's policy is to provide depreciation using the straight-line
method over a period which is sufficient to amortize the cost of the asset
during its useful life or lease term, whichever is shorter.

Estimated useful lives for depreciation purposes are:

<TABLE>
<S> <C>
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
</TABLE>

Property and equipment, at cost, consist of the following as of February 1,
1997 and February 3, 1996 (000's omitted):

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and buildings.............................................. $ 10,604 $ 3,615
Furniture, fixtures and equipment............................... 148,116 116,968
Leasehold improvements.......................................... 57,855 36,467
-------- --------
Total property and equipment.................................. $216,575 $157,050
======== ========
</TABLE>

F-11
<PAGE> 30

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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.

Notes Receivable

The Company's notes receivable are primarily from Pearle's franchisees
throughout the U.S. and are collateralized by inventory, equipment, and
leasehold improvements at each location. The notes 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 February 1, 1997 and
February 3, 1996 (000's omitted):

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Tradenames...................................................... $ 49,198 $ --
Goodwill........................................................ 90,110 81,163
-------- --------
$139,308 $ 81,163
======== ========
</TABLE>

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 $262,000 at February 1, 1997.

Goodwill is being amortized on a straight-line basis over 40 years and is
presented net of accumulated amortization of $30,609,000 and $29,640,000 at
February 1, 1997 and February 3, 1996, respectively. Management regularly
evaluates its accounting for goodwill considering primarily such factors as
historical profitability, current operating profits and cash flows. The Company
believes that, at February 1, 1997, 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.

Other Long-Term Liabilities

Other long-term liabilities consist primarily of certain employee benefit
obligations, deferred lease credits and other lease-related obligations not
expected to be paid within 12 months and deferred income taxes. Deferred lease
credits are amortized on a straight-line basis over the life of the applicable
lease.

Cash Flows

For purposes of reporting cash flows, the Company considers all temporary
cash investments, which have original maturities of three months or less, 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):

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income taxes......................................... $ 5,300 $ 4,265 $ 2,249
Interest............................................. $20,834 $21,580 $24,662
</TABLE>

F-12
<PAGE> 31

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

During 1996 and 1995, non-cash financing activities included incurring
$2,504,000 and $3,192,000, respectively, in capital lease obligations.

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, and other revenues from franchisees such as royalties based
on sales, interest income on notes receivable and initial franchise fees. Other
revenues from franchisees totaled $4.0 million in fiscal 1996.

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 the Company and when the related store begins
operations.

Advertising

The Company expenses advertising production costs and advertising costs as
incurred. Advertising expense was approximately $33,630,000; $23,560,000 and
$20,370,000 for 1996, 1995 and 1994, respectively. The Company has certain
commitments to purchase advertising in fiscal 1997 approximating $8,000,000.

Foreign Currency Translation

The assets and liabilities of the Company's foreign subsidiaries and its
investment in Pearle Trust B.V. 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 gains or losses are
included in the foreign currency translation adjustment component of
stockholders' equity.

Capital Stock

At February 1, 1997 and February 3, 1996, there were 11,965,473 and
10,430,185, respectively, shares of common stock, par value $.001 per share (the
Common Stock), outstanding. At February 1, 1997, there were 24,000,000 and
1,000,000 authorized shares of Common Stock and undesignated preferred stock,
respectively.

Earnings Per Share

Earnings per share for 1996, 1995 and 1994 have been calculated based on
11,333,453; 10,415,047 and 9,395,319, respectively, weighted average number of
common shares outstanding. The impact of stock options and warrants has not been
included in the calculation of earnings per share as the effect of their
exercise is not material or is antidilutive.

In fiscal 1997 the Company will adopt Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share". This statement simplifies the
standards for computing earnings per share and makes them comparable to
international earnings per share. The adoption of this standard will not impact
the Company's results of operations, financial position or cash flows.

Asset Impairment

In the first quarter of 1996 the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Adoption of this standard did not have a material impact on the Company's
results of operations, financial position or cash flows. During the fourth
quarter of 1996, due to the Pearle acquisition and operating results, the
Company recorded a provision for impairment (see Note 3).

F-13
<PAGE> 32

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Reclassifications

Certain 1995 and 1994 amounts have been reclassified to conform with the
1996 presentation.

(2) ACQUISITIONS OF BUSINESSES

On November 15, 1996, the Company 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. For its most recent fiscal year ended September 30, 1996, Pearle
reported annual net revenue of $366.0 million including $63.8 million from its
European operations.

Immediately following the acquisition, the Company sold Pearle Holdings
B.V., Pearle's European operations, to Pearle Trust B.V. (Pearle B.V.) for
approximately $62 million. No gain or loss was recorded on this transaction. The
Company has a 20% common equity interest in Pearle B.V., 12.5% redeemable
preferred stock of $1.8 million and a 10% shareholder loan receivable of $3.9
million. The Company's investment in Pearle B.V. is being accounted for under
the equity method of accounting.

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 $20.2 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 other purchase price adjustments. As of
February 1, 1997, approximately $175,000 of severance and termination benefits
were paid and charged against these liabilities.

The purchase price allocation is substantially complete but is subject to
adjustment, should actual costs differ from the recorded amounts. Such
adjustments, if made within one year from the date of acquisition, will be
recorded as adjustments to goodwill. Thereafter, any cost incurred in excess of
the liability recorded will be included in the determination of net income.

On a pro forma basis, if the Pearle acquisition had taken place at the
beginning of the respective periods, the unaudited consolidated net revenues
would have been $933.8 million for fiscal 1996 and $873.7 million for fiscal
1995. 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 $1.8 million or $0.16 per share and pro forma net income in
1995 would have decreased by $11.6 million or $1.11 per share from the amounts
reported. Anticipated efficiencies from the consolidation of the Company and
Pearle have not been reflected in these amounts because their realization cannot
be assured.

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 the periods indicated, and do not purport to be indicative of
results of operations which may occur in the future.

The Company also made the following acquisitions, each of which has been
accounted for under the purchase method of accounting. In November 1996, the
Company acquired all of the issued and outstanding stock of AOCO Limited, which
operates 73 Sears Optical Departments and two freestanding Vision Club

F-14
<PAGE> 33

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

stores in Canada, for a purchase price of $2.6 million. In May 1995, the Company
acquired the assets of 59 optical departments located in BJ's Wholesale Clubs
for a purchase price of $1.1 million. In January 1994, the Company acquired the
assets of 107 leased optical departments within Montgomery Ward stores for a
purchase price of $4.7 million. Pro forma financial results have not been
presented for these acquisitions as they did not have a material effect on the
Company's results of operations.

(3) BUSINESS INTEGRATION AND OTHER NON-RECURRING CHARGES

In the fourth quarter of fiscal 1996, the Company recorded a $64.4 million
pre-tax charge for certain unusual and non-recurring items. Such charge was
primarily related to the acquisition of Pearle and included costs incurred
related to the integration and consolidation of Pearle into the Company's
operations, as well as certain other non-recurring charges. The charge included
$17.6 million for store and other facility closings, $21.6 million related to
computer systems, $9.4 million for asset impairment and $15.8 million of other
charges. Total cash outlay related to these charges is approximately $41.1
million, of which $2.9 million has been paid as of February 1, 1997. The
remaining amount is expected to be incurred within the next 12 to 18 months,
except for certain lease costs which may be incurred over the remaining life of
the leases. Although the Company currently does not anticipate that there will
be additional non-recurring charges in the future, as the integration and
consolidation of Pearle is completed, additional costs may be incurred that will
be charged against operating income at that time.

Subsequent to the effective date of the Pearle acquisition, the Company
identified certain unprofitable Pearle stores which it intends to close in
fiscal 1997. At certain other on-going retail locations, a decision was made to
close the in-store labs and supply these locations from other facilities. In
addition, the Company decided to retain Pearle's distribution and central lab
facilities, but to close Pearle's home office facility in Dallas, Texas. The
charge for store and other facilities 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.

In fiscal 1995, the Company entered into a ten-year agreement to outsource
its systems integration needs and data processing operations. Due to the Pearle
acquisition, the Company has reassessed its system requirements and decided to
terminate its outsourcing agreement and install new systems utilizing the
resources of internal and external systems integrators. The Company and the
outsourcing entity have agreed in principle to the terms of the termination
arrangement. The settlement cost of terminating the outsourcing agreement, as
well as other related costs, have been accrued as of February 1, 1997. Hardware
and software costs directly related to the development and installation of new
systems which will benefit future operations have been and will be capitalized
as incurred.

Following the Pearle acquisition and in light of current year operating
results, the Company reviewed the strategic direction of certain other
operations. In accordance with SFAS No. 121, the Company determined that the
goodwill associated with portions of its gift and optical businesses would not
be recoverable as the carrying values of these businesses exceeded fair value,
as measured by projected future discounted cash flows.

The other charges include costs related to employee matters, including
duplicate costs incurred through fiscal year end 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 options as approved contained accelerated vesting
provisions if the common stock price rose to certain

F-15
<PAGE> 34

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

levels, which were reached in the fourth quarter of fiscal 1996. Because future
periods will not benefit by this plan, the Company recognized the full costs of
the plan as expense.

(4) PUBLIC OFFERINGS

On April 18, 1994, the Company completed an initial public offering (IPO)
of five million shares of Common Stock at a price to the public of $12.00 per
share. Net proceeds from the IPO were $54.5 million and were used to retire
outstanding debt (see Note 5).

In 1996, the Company completed a public offering of 1,437,500 shares of
Common Stock at a price to the public of $19.25 per share. The net proceeds from
the offering were $26.2 million. A portion of the proceeds were used to purchase
$15.1 million of 11.25% Senior Notes (the Senior Notes), plus accrued interest
thereon (see Note 5).

(5) LONG-TERM DEBT

Long-term debt at February 1, 1997 and February 3, 1996 is summarized as
follows (000's omitted):

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
7.5% Obligation in connection with Industrial Revenue
Bonds...................................................... $ 338 $ 506
11.25% Senior Notes:
Face value................................................. 165,838 181,000
Unamortized discount....................................... (1,455) (1,834)
-------- --------
Total 11.25% Senior Notes.......................... 164,383 179,166
9.875% Senior Subordinated Notes:
Face value................................................. 150,000 --
Unamortized discount....................................... (1,111) --
-------- --------
Total 9.875% Senior Subordinated Notes............. 148,889 --
Capital lease obligations (see Note 11)...................... 5,273 2,936
-------- --------
318,883 182,608
Less current portion......................................... (1,336) (705)
-------- --------
Net long-term debt................................. $317,547 $181,903
======== ========
</TABLE>

The Senior Notes mature October 1, 2001 with no earlier scheduled
redemption or sinking fund payments. Interest on the Senior Notes is payable
semi-annually on each April 1 and October 1.

On November 15, 1996, CNG issued $150 million of 9.875% Senior Subordinated
Notes (the Notes) due in 2006. The Notes were used by the Company to finance a
portion of the Pearle acquisition (see Note 2). Interest on the Notes is payable
semi-annually in arrears on December 31 and June 30 commencing June 30, 1997.

The Senior Notes and the Notes are general unsecured obligations of CNG,
subordinated in right of payment to senior indebtedness of CNG and senior in
right of payment to any current or future subordinated indebtedness of CNG.

The indentures pursuant to which the Senior Notes and the Notes were issued
restrict dividend payments to the Company to 50% of CNG's net income after
October 31, 1993, plus amounts due to the Company under a tax sharing agreement
and for administrative expenses of the Company not to exceed 0.25% of CNG's net
revenue. The indentures also contain certain optional and mandatory redemption
features and other financial covenants. The Company was in compliance with these
covenants at February 1, 1997.

F-16
<PAGE> 35

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Proceeds from the IPO were used to retire $4.0 million of the Senior Notes
and $50.0 million of other notes during the first quarter of fiscal 1994. The
Company recorded an extraordinary loss of $0.9 million, 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 this debt.

A portion of the proceeds from the Company's 1996 stock offering was used
to purchase $15.1 million of the Senior Notes. The Company recorded an
extraordinary loss of $0.7 million, 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 this debt.

The agreement in connection with the Industrial Revenue Bonds provides for
repayment of the obligation in annual installments of $168,750 through 1998. The
Industrial Revenue Bonds are secured by office and distribution facilities with
a net book value of $1,646,000 at February 1, 1997.

At February 1, 1997, the fair value of the Company's long-term debt was
approximately $346.7 million compared to a carrying value of $318.9 million. The
fair value was estimated primarily by using quoted market prices.

(6) CREDIT FACILITY

Concurrent with the Pearle acquisition, the principal operating
subsidiaries of CNG (the Borrowers) entered into a Credit Facility. The Credit
Facility replaced, concurrent with the issuance of the Notes, the existing
revolving credit facility.

The Credit Facility provides the Borrowers 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 Borrowers, 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%. The Company pays a
commitment fee of 0.375% per annum on the total unused portion of the facility.
Additionally, the Credit Facility requires the Borrowers to comply with various
operating covenants that restrict corporate activities, including covenants
restricting the Borrowers' ability to incur additional indebtedness, pay
dividends, prepay subordinated indebtedness, dispose of certain investments or
make acquisitions. The Credit Facility also requires the Borrowers to comply
with certain financial covenants, including covenants regarding minimum interest
coverage, maximum leverage and consolidated net worth. The Borrowers were in
compliance with these covenants at February 1, 1997.

The Credit Facility restricts dividend payments to CNG to amounts needed to
pay interest on the Senior Notes and the Notes, and certain amounts related to
taxes, along with up to $8.0 million plus 0.25% of the Company's net revenue
annually for other direct expenses of CNC or CNG. In addition, dividends of up
to $20.0 million are permitted to repurchase the Senior Notes and/or the Notes.

The maximum amount of short-term borrowings outstanding during 1995 was
$3.5 million. No amounts were outstanding as of February 1, 1997 or February 3,
1996, or at any time during fiscal 1996.

(7) STOCK OPTIONS AND WARRANTS

The Company had stock options outstanding at February 1, 1997 under the
1992, the 1993 and the 1996 Management Stock Option Plans (the 1992, 1993 and
1996 Plans), the 1993 Option Agreements granting options to non-employee
Directors (the 1993 Option Agreements) and the 1994 non-qualified Stock Option
Plan for non-employee Directors (the 1994 Plan). The Company is authorized to
issue to key employees up to 555,556; 600,000 and 884,000 shares of Common Stock
under the 1992, 1993 and 1996 Plans, respectively. The Company is also
authorized to issue to non-employee Directors of the Company up to 22,500 and
100,000

F-17
<PAGE> 36

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

shares of Common Stock under the 1993 Option Agreements and the 1994 Plan,
respectively. Options generally become exercisable over a three-, four- or
five-year period from the date of grant and expire ten years from the date of
grant.

A summary of the status of the Company's stock option plans as of January
28, 1995, February 3, 1996 and February 1, 1997, and changes during each of the
fiscal years is presented below:

<TABLE>
<CAPTION>
1994 1995 1996
--------------------- -------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- ---------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 813,922 $13.88 668,554 $ 9.14 749,297 $ 9.76
Granted............................ 5,000 12.63 123,100 11.34 804,000 13.87
Exercised.......................... (24,775) 3.00 (25,066) 3.11 (97,787) 6.08
Canceled........................... (125,593) 18.31 (17,291) 6.93 (11,722) 10.19
-------- ------- ---------
Outstanding at end of year......... 668,554 9.14 749,297 9.77 1,443,788 12.29
======== ======= =========
Exercisable at end of year......... 273,772 6.73 385,646 8.37 508,530 9.86
Weighted-average fair value of
options granted during the
year............................. $5.11 $10.87
</TABLE>

A summary of information about stock options outstanding at February 1,
1997, is presented below:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ----------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OF CONTRACTUAL EXERCISE OF EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ----------------- --------- ----------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
$3.00 93,848 5.6 years $ 3.00 93,848 $ 3.00
$ 9.75 to $13.69 1,208,940 8.1 11.15 414,682 11.41
$24.88 to $28.63 141,000 10.0 28.25 -- --
--------- -------
$ 3.00 to $28.63 1,443,788 8.1 12.29 508,530 9.86
========= =======
</TABLE>

At February 1, 1997, there were 115,006 shares available for future grant
under the 1992, 1993 and 1996 Plans and 92,500 shares available for future grant
under the 1994 Plan.

During 1994, the Company offered holders of options under the 1993 Plan the
opportunity to exchange a portion of their existing vested and unvested stock
options for a reduced number of new options under the 1993 Plan with adjusted
exercise prices and vesting schedules. The result was to reduce the aggregate
number of options outstanding under the 1993 Plan, to extend the vesting
schedule for the repriced options from four to five years and to reduce the
maximum exercise price from $27.00 per share to $12.25 per share.

Payment for certain options exercised between 1993 and 1996 has been made
by executing promissory notes, of which $1,024,000 were outstanding at February
1, 1997. The promissory notes are secured by the shares of common stock acquired
and payable five years from the date of exercise at interest rates ranging from
5.33% to 6.37%.

At February 1, 1997, there were warrants outstanding to purchase 173,678
shares of common stock. Of these, warrants to purchase 2,625 shares are
exercisable at $1.00 per share and expire in 2000. Warrants to purchase 92,104
shares are exercisable at $24.70 per share and expire on May 7, 1997. Warrants
to purchase 78,949 shares are exercisable at $49.40 per share and expire on
March 6, 1999.

F-18
<PAGE> 37

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized for its stock option plans in fiscal 1994 and fiscal
1995. 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 the Company's stock-based compensation plans been determined based on
the fair value at the dates of awards under those plans consistent with the
method of SFAS No. 123, the Company's net loss and loss per share in fiscal 1996
would have been increased to $30,234,000 and $2.67, respectively, and its net
income and earnings per share in fiscal 1995 would have been reduced to
$13,617,000 and $1.31, respectively.

The fair value of each option grant in fiscal 1995 and 1996 was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rates of 6.4% and 6.2% for grants in
fiscal 1995 and 1996, respectively, and expected lives of six years and
volatility of 33% for options granted in both fiscal years. Because the SFAS No.
123 method of accounting has not been applied to options prior to January 29,
1995, the resulting pro forma expense may not be representative of that to be
expected in the future.

(8) STOCKHOLDERS' EQUITY

In August 1995, the Company's Board of Directors approved a Stockholders'
Rights Plan. The Rights Plan provides for the distribution of one Right for each
outstanding share of the Company'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 the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, without par value, at a price of $40.00, subject
to adjustment. The Rights are only exercisable if a person or group buys or
announces a tender offer for 15% or more of the Company's Common Stock. In the
event such a transaction occurs, Rights that are beneficially owned by all other
persons would be adjusted and such holders would thereafter have the right to
receive, upon exercise thereof at the then current exercise price of the Right,
that number of shares of Common Stock (or, under certain circumstances, an
economically equivalent security of the Company) having a market value of two
times the exercise price of the Right. The Rights will expire on August 31,
2005, unless extended or unless the Rights are earlier redeemed by the Company
in whole, but not in part, at a price of $0.01 per Right, or exchanged.

(9) INCOME TAXES

Income tax provision (benefit) for fiscal 1996, 1995 and 1994 is detailed
below (000's omitted):

<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Currently payable --
Federal....................................................... $ 7,408 $ 4,518 $ 3,228
State and local............................................... 2,027 1,797 2,016
-------- ------- --------
9,435 6,315 5,244
-------- ------- --------
Deferred --
Federal....................................................... (16,194) 3,361 (766)
Utilization of net operating loss carryforwards............... -- 1,134 4,859
Change in valuation allowance................................. -- -- (14,246)
-------- ------- --------
(16,194) 4,495 (10,153)
-------- ------- --------
Income tax provision (benefit)................................ $ (6,759) $10,810 $ (4,909)
======== ======= ========
</TABLE>

F-19
<PAGE> 38

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The income tax provision (benefit) reflected in the accompanying
consolidated statements of operations differs from the federal statutory rate as
follows (000's omitted):

<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate...................... $(12,038) $ 8,599 $ 6,912
Tax effect of --
State income taxes, net of federal tax benefit............... 1,318 1,168 1,310
Amortization of goodwill..................................... 936 900 901
Non-recurring charges........................................ 2,666 -- --
Change in valuation allowance................................ -- -- (14,246)
Other, net 359 143 214
-------- ------- --------
Tax provision (benefit).............................. $ (6,759) $10,810 $ (4,909)
======== ======= ========
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and deferred tax liabilities at
February 1, 1997 and February 3, 1996 are as follows (000's omitted):

<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Employee benefit accruals.............................................. $ 6,137 $ 3,375
Business integration accruals.......................................... 13,373 --
Other non-deductible accruals.......................................... 15,066 3,959
State and local taxes.................................................. 1,277 1,108
Tax credit and net operating loss carryforwards........................ -- 1,990
Intangibles............................................................ 6,148 --
Other.................................................................. 8,569 1,252
-------- -------
Total deferred tax assets........................................... 50,570 11,684
-------- -------
Deferred tax liabilities:
Depreciation and amortization.......................................... (5,543) (5,225)
Other.................................................................. (5,535) (836)
-------- -------
Total deferred tax liabilities...................................... (11,078) (6,061)
-------- -------
Net deferred taxes....................................................... $ 39,492 $ 5,623
======== =======
</TABLE>

Accrued income taxes at February 1, 1997 includes $15.0 million of taxes
due on the sale of Pearle Holdings B.V. that were reimbursed to the Company by
the seller in connection with the Pearle acquisition.

(10) RETIREMENT PLANS

The Company maintains a noncontributory defined benefit pension plan (the
Retirement Plan) that covers employees who have met eligibility service
requirements and are not members of certain collective bargaining units. The
Retirement Plan calls for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company and their
compensation levels near retirement.

The Company's policy is to fund amounts necessary to keep the Retirement
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.

F-20
<PAGE> 39

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Pension expense for fiscal 1996, 1995 and 1994 includes the following
components (000's omitted):

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost -- benefits earned during the period.................... $ 646 $ 528 $ 581
Interest cost on the projected benefit obligation.................... 1,467 1,369 1,292
Less:
Return on plan assets --
Actual.......................................................... (1,669) (1,138) 178
Deferred........................................................ 477 11 (1,294)
------ ------ ------
(1,192) (1,127) (1,116)
Amortization of transition asset over 17.9 years................... (179) (179) (179)
------ ------ ------
Net pension expense............................................. $ 742 $ 591 $ 578
====== ====== ======
</TABLE>

The following sets forth the funded status of the Retirement Plan at
December 31, 1996 and 1995 based upon the actuarial present values of benefit
obligations (000's omitted):

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accumulated benefit obligations:
Vested................................................................... $17,605 $17,147
Nonvested................................................................ 238 291
------- -------
Total................................................................. $17,843 $17,438
======= =======
Projected benefit obligation for service rendered to date.................. $19,046 $19,030
Fair value of plan assets, primarily money market and equity mutual
funds.................................................................... 16,774 13,849
------- -------
Plan assets less than projected benefit obligation......................... (2,272) (5,181)
Unrecognized prior service cost............................................ 140 168
Net unrecognized loss...................................................... 1,252 2,983
Unamortized transition asset............................................... (1,416) (1,595)
------- -------
Pension liability included in accrued liabilities........................ $(2,296) $(3,625)
======= =======
</TABLE>

The weighted average discount rate used to measure the projected benefit
obligation was 8.0% in 1996 and 7.75% in 1995. 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%.

The Company has a defined contribution plan, including features under
Section 401(k) of the Internal Revenue Code, which provides retirement benefits
to its employees. Eligible employees may contribute up to 15% of their
compensation to the plan. There is no mandatory matching of employee
contributions by the Company, but discretionary matches of $327,000, $164,000
and $164,000 were recorded for 1996, 1995 and 1994, respectively.

The Company also has a contributory profit-sharing plan for Pearle
employees meeting certain service requirements as defined in the plan. The
Company's contribution to the plan consists of a minimum matching contribution
plus an additional performance contribution. Profit sharing expense amounted to
$229,000 in 1996.

During fiscal 1994, the Company established two Supplemental Executive
Retirement Plans which will provide for the payment of retirement benefits to
participating executives supplementing amounts payable under the Company's
Retirement Plan. The first plan is an excess benefit plan designed to replace
benefits that would otherwise have been payable under the Retirement Plan but
that were limited as a result of certain tax law changes. The second plan is a
defined contribution plan under which participants will receive an annual credit
based on a percentage of base salary, subject to vesting requirements. Expense
for these plans for fiscal 1996, 1995 and 1994 was $468,000, $447,000 and
$413,000, respectively.

F-21
<PAGE> 40

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(11) COMMITMENTS

The Company 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, the Company operates departments in various host
stores paying occupancy costs solely as a percentage of sales under agreements
containing short-term cancellation clauses. Generally, the Company is required
to pay taxes and normal expenses of operating the premises for laboratory,
office, warehouse and retail store leases; the host stores pay these expenses
for departments operated on a percentage-of-sales basis. The following amounts
represent rental expense for fiscal 1996, 1995 and 1994 (000's omitted):

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Occupancy costs based on sales.................................... $53,152 $50,218 $47,198
All other rental expense.......................................... 45,365 32,697 30,003
Sublease rental income............................................ (5,935) (1,510) (1,455)
------- ------- -------
$92,582 $81,405 75,746
======= ======= =======
</TABLE>

During 1996 and 1995, the Company entered into leases for equipment which
have been accounted for as capital leases. At February 1, 1997 and February 3,
1996, property under capital leases consisted of $5,696,000 and $3,192,000 in
equipment with accumulated amortization of $397,000 and $37,000, respectively.

At February 1, 1997, 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):

<TABLE>
<CAPTION>
OPERATING LEASES
CAPITAL -------------------
LEASES PAYMENTS RECEIPTS
------- -------- --------
<S> <C> <C> <C>
1997.................................................... $ 1,497 $ 66,887 $ 13,528
1998.................................................... 1,494 58,641 11,503
1999.................................................... 1,499 50,277 9,202
2000.................................................... 1,295 37,386 6,655
2001.................................................... 353 26,797 4,112
2002 and thereafter..................................... -- 65,157 6,152
------- -------- -------
Total future minimum lease payments....................... 6,138 $305,145 $ 51,152
======== =======
Amount representing interest.............................. (865)
-------
Present value of future minimum lease payments............ $ 5,273
=======
</TABLE>

(12) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The Company's business is seasonal, with approximately 30% of its revenue
and approximately 50% of its income from operations generated in the fourth
fiscal quarter which contains the important Christmas selling season.

The following is a summary of quarterly financial data for the 52 weeks
ended February 1, 1997 and the 53 weeks ended February 3, 1996. The fourth
quarter of fiscal 1996 includes a $64.4 million pre-tax charge for

F-22
<PAGE> 41

COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

business integration and other non-recurring charges (see Note 3). The fourth
quarter of fiscal 1995 consisted of 14 weeks; all other quarters consisted of 13
weeks (000's omitted, except per share amounts):

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
MAY 4, AUG. 3, NOV. 2, FEB. 1,
1996 1996 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue....................................... $142,890 $153,465 $146,702 $240,933
Gross margin...................................... 98,390 106,065 101,929 156,302
Income (loss) before extraordinary loss........... 980 5,177 1,173 (34,963)
Net income (loss)................................. 980 4,495 1,173 (34,963)
Earnings (loss) per share:
Income (loss) before extraordinary loss........ .09 .47 .10 (2.93)
Net income (loss).............................. .09 .41 .10 (2.93)
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
APR. 29, JULY 29, OCT. 28, FEB. 3,
1995 1995 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue....................................... $125,254 $138,099 $138,646 $175,092
Gross margin...................................... 86,530 94,758 95,465 117,404
Net income (loss)................................. (27) 3,766 229 9,790
Earnings per share................................ .00 .36 .02 .94
</TABLE>

F-23
<PAGE> 42

[THIS PAGE LEFT INTENTIONALLY BLANK]
<PAGE> 43

[THIS PAGE LEFT INTENTIONALLY BLANK]
<PAGE> 44

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain
Documents by Reference.............. 2
The Company........................... 4
The Offering.......................... 5
Use of Proceeds....................... 5
Selected Financial Data............... 6
Risk Factors.......................... 7
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 11
Management............................ 16
Underwriting.......................... 17
Legal Matters......................... 18
Experts............................... 18
Index to Financial Statements......... F-1
</TABLE>

======================================================
======================================================

2,250,000 SHARES

COLE LOGO

COLE NATIONAL CORPORATION
CLASS A COMMON STOCK

------------
PROSPECTUS
------------

Joint Lead Managers
and Joint Bookrunners

SMITH BARNEY INC.

MCDONALD & COMPANY
SECURITIES, INC.
------------------------------------

DEUTSCHE MORGAN GRENFELL
======================================================