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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- - EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1998, OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ______________.
COMMISSION FILE NUMBER 1-12814
COLE NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1453189
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5915 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 449-4100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. X YES NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 25, 1998 WAS APPROXIMATELY $536,426,000, BASED UPON
THE LAST PRICE REPORTED FOR SUCH DATE BY THE NEW YORK STOCK EXCHANGE.
AS OF MARCH 25, 1998, 14,754,604 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON JUNE 11, 1998 ARE INCORPORATED HEREIN BY
REFERENCE INTO PART III.
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PART I
ITEM 1. BUSINESS
GENERAL
Cole National Corporation ("CNC") was incorporated as a Delaware
corporation in 1984. CNC, primarily through the subsidiaries owned by its direct
subsidiary, Cole National Group, Inc. ("CNG"), is a leading provider of eyewear
products, optometric services and personalized gifts with over 2,800 retail
locations in 49 states, Canada and the Caribbean. References herein to the
"Company" include CNC, its direct and indirect subsidiaries, and its predecessor
companies, which have operated for more than 50 years, where applicable. 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) Things
Remembered Inc. ("Things Remembered"). The Company believes that, based on
industry data and after the acquisition of American Vision Centers, Inc. ("AVC")
in August 1997, Cole Optical is the largest optical retail company in North
America. Things Remembered operates the only nationwide chain of gift stores
offering "while you shop" gift personalization, key duplicating, and related
merchandise. The Company differentiates itself from other specialty retailers by
providing value-added services at the point of sale at all of its retail
locations.
In January, 1998, the Company announced the closing of its Cole Gift
Centers ("CGC") operations which included 445 key duplicating, greeting card and
gift departments on the premises of hosts' stores. The closings were completed
by February 28, 1998. CGC has been accounted for as a discontinued operation in
the accompanying financial statements.
COLE OPTICAL
Cole Optical contributed 77.4% of the Company's net revenue in fiscal
1997 with over 2,000 company-owned and franchised locations throughout the
United States, Canada and the Caribbean as of January 31, 1998. Cole Vision and
Pearle share management leadership, purchasing power and corporate support
functions. Cole Vision's managed vision care programs give participants access
to a network of company-owned, franchised and third-party optical locations.
COLE VISION
Cole Vision operates principally under the "Sears Optical", "Ward's
Optical" and "BJ's Optical Department" names. As of January 31, 1998, Cole
Vision operated 1,157 locations in 46 states and Canada, including 767
departments on the premises of Sears department stores, 192 departments in
Montgomery Ward stores, 79 departments in BJ's Wholesale Club stores, 11
departments in Target stores, 104 freestanding stores operated under the name
"Sears Optical" and four other locations. 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 locations are, in most cases, full-service retail eyecare
stores offering brand name and private label prescription eyeglasses, contact
lenses and accessories, with an on-premises doctor of optometry who performs
complete eye examinations and prescribes eyeglasses and contact lenses. Most
Cole Vision optical departments, which are typically 1,000 square feet in size,
operate with a doctor of optometry, a department manager, and from one to seven
opticians depending on store sales volume. A majority of the doctors of
optometry are independent, as is often required by state law, with the remainder
being employed by Cole Vision. The independent doctors sublease space and
equipment from Cole Vision where permitted by law, or from the host, and retain
their examination fees.
Each of Cole Vision's locations is computer linked to Cole Vision's
five centralized manufacturing laboratories, which grind, cut and fit lenses to
order and ship them to the stores. Cole Vision provides next day delivery on
most of the eyewear it offers when requested by its customers. Cole Vision
purchases all of the frames and lenses used in its eyeglasses from outside
suppliers, both in the United States and several foreign countries.
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Cole Vision conducts a variety of marketing and promotional efforts to
build and maintain its customer base. Cole Vision primarily uses newspaper,
direct mail, yellow pages and host advertising. Host advertising includes the
placement of promotional material within sales circulars or credit card billings
sent out by the host store to its customers. Cole Vision also promotes its next
day service as "Eyewear Express."
MANAGED VISION CARE
In the last several years, Cole Vision has expanded its managed vision
care program that provides low cost, comprehensive eyecare benefits marketed
directly to 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
locations within 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. Cole Vision added the Pearle company-owned and a majority of
franchised locations to its managed vision care programs in fiscal 1997.
PEARLE
At January 31, 1998, Pearle's operations, including AVC's locations,
consisted of 444 company-owned and 401 franchised stores located in 43 states,
Canada, and the Caribbean. 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 the main laboratory in
Dallas. The main laboratory generally is able to complete orders for next day
delivery if requested. At January 31, 1998, 325 of the company-owned stores and
128 of the franchised stores were Express, with the balance being Mainline. Most
of the AVC locations, which included 80 company-owned and 75 franchised stores
at January 31, 1998, have been integrated into the Pearle system.
The Express stores typically are located in high traffic freestanding,
strip center and mall locations with most stores averaging 3,000 square feet.
The Express stores are usually staffed with two managers and a support staff of
four to eight people. Mainline stores have an average size of 1,700 square feet
and are also located in freestanding buildings, or in smaller strip or regional
centers. Mainline stores generally carry a smaller assortment of inventory than
Express stores and are usually staffed with one manager and two to three
associates. Most Pearle stores have a doctor of optometry on site with
approximately 80% leasing space from Pearle on an independent basis and the
remaining being direct employees of Pearle.
Pearle's marketing strategy employs a wide range of media at both the
national and local levels. The franchised and company-owned stores each
contribute a percentage of revenues to Pearle's marketing budget with
approximately half of Pearle's marketing expenditures devoted to television.
Pearle's brand positioning of high quality eyecare products and services has
been reinforced by an advertising and promotions program, which includes
Pearle's advertising slogans, Nobody Cares for Eyes More Than Pearle and Put
your Pearle's on.
Pearle operates a warehouse facility in Dallas that inventories and
distributes a comprehensive product line, including frames, eyeglass lenses,
contact lenses, optical supplies and eyewear accessories to company-owned and
franchised locations.
In fiscal 1997 and early 1998, the Company increased its equity
interest in Pearle Europe B.V., which operates 490 owned and franchised retail
optical locations in the Netherlands, Belgium, Germany and Austria, to 24%.
FRANCHISE OPERATIONS
Pearle has maintained a franchise program since 1980. Most of the
franchised stores are single franchise operations, with no franchisee operating
more than eight stores. With the proper financial approvals, a franchise
purchase can be financed through Pearle. Currently, Pearle offers financing over
periods up to ten years at variable interest rates ranging from prime plus one
point to prime plus three points adjusted periodically.
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Each franchisee is required to enter into a Franchise Agreement
requiring payment of an initial franchise fee. The term of the typical franchise
agreement is equal to the earlier of ten years or the expiration or termination
of the underlying base lease. Royalty and advertising contributions typically
are based on a percentage of the franchisee's gross revenues from the retail
operation and/or non-surgical professional fee revenues. The total monthly
advertising contribution is distributed between Pearle's system-wide advertising
fund and the local co-op market advertising fund.
During 1997 Pearle modified its Franchise Agreement to reduce the
royalty and advertising fees the franchisees pay and, among other things,
provide for the franchisees' participation in Cole Vision's managed vision care
programs. Approximately 75% of existing franchisees have accepted the modified
agreement.
THINGS REMEMBERED
Things Remembered contributed 22.6% of the Company's net revenue in
fiscal 1997. As of January 31, 1998, Things Remembered operated 831 stores and
kiosks generally located in large, enclosed shopping malls located in 45 states.
Each location carries a wide assortment of engravable items and provides "while
you shop" personalization and engraving services for any occasion including
holiday, business and special occasion gift events. Things Remembered offers
engraving for items purchased at the store as well as for items purchased
elsewhere.
Merchandise sold at Things Remembered stores consists of a broad
assortment of gift categories and items at prices generally ranging from $10 to
$75. Things Remembered's offering of gifts includes writing instruments, clocks,
music boxes, picture frames and albums, executive desk sets and accessories, ID
bracelets, glassware, lighters, keys and key rings, door knockers and Christmas
ornaments. Things Remembered features brand name merchandise as well as higher
margin private label merchandise. At some locations, the Company utilizes
computer-controlled embroidery equipment for the personalization of merchandise
such as throws, sweaters, bathrobes, jackets, baseball caps, towels and baby
blankets. These softgoods were added to most of Things Remembered's other
locations in 1996 with personalization services provided from a central
fulfillment facility.
At January 31, 1998, Things Remembered locations consisted of 456
stores and 375 kiosks. The typical store consists of about 1,000 square feet,
while kiosks, which are units generally located in the center of the common mall
area, are typically 200 square feet in size.
Things Remembered locations are usually operated by one or two
employees during non-peak periods and up to 15 employees during the peak
Christmas season. Locations typically employ a store manager on a full-time
basis and a full or part-time assistant manager, while the balance of the
employees is part-time sales associates.
Nearly all locations are equipped with computerized gift engravers and
key duplicating machines. Many stores also have equipment for etching glassware
items. All locations are equipped with point-of-sale terminals.
The Company ships most of Things Remembered's store merchandise through
its centralized warehouse and distribution facility located near Youngstown,
Ohio. Completed in July 1997, this facility is expected to improve distribution
efficiencies. The warehouse utilizes a computerized carousel system to automate
the process of locating merchandise needed to fill a store order.
HOST RELATIONSHIPS
The Company believes it has developed excellent relationships with the
host stores in which Cole Vision operates. The Company has maintained its
relationships with Sears and Montgomery Ward over 35 years in the optical
business. Of the Sears and Montgomery Ward stores that offer optometric
services, the vast majority are operated by Cole Vision. Although leases with
major hosts are terminable by either party upon relatively short notice, Cole
Vision has never had a lease terminated other than in connection with a store
closing, relocation or major remodeling.
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PURCHASING
The merchandise, supplies and component parts required for the various
products sold by the Company are purchased from a large number of suppliers and
manufacturers and are generally readily available. In most cases, such purchases
are not made under long-term contracts. In fiscal 1997, no single supplier or
manufacturer accounted for as much as 10% of total purchases.
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 HMOs in a highly fragmented marketplace.
Pearle competes on the basis of its highly recognized brand name, one-hour
express service and by offering quality eyecare products. Cole Vision competes
primarily on the basis of the patient service it provides, as well as price and
product quality and the reputation of its host stores. The Company believes
that, based on industry data and after the acquisition of AVC in August 1997,
Cole Optical is the largest optical retail company in North America. Although
Things Remembered operates the only nation-wide chain of gift stores offering
"while you shop" gift engraving, key duplicating, glass etching and
monogramming, as well as related merchandise, it competes with many other
retailers that sell gift items. Things Remembered competes with such other
retailers primarily on the basis of the value-added point of sale services that
it provides, as well as price and product quality. Some of the Company's
competitors have greater financial resources than the Company.
EMPLOYEES
As of January 31, 1998, the Company and its subsidiaries had
approximately 9,200 full-time and 5,200 part-time employees. During October,
November and December, the Company employs additional full- and part-time
employees. In fiscal 1997, approximately 5,000 additional employees were
employed during such period. Approximately 190 employees at certain Pearle
locations are represented by labor unions. The Company considers its present
labor relations to be satisfactory.
ITEM 2. PROPERTIES
The Company owns an office in Highland Heights, Ohio that is subject to
a mortgage, leases another office in Highland Heights, Ohio and leases its
executive offices and an office in Cleveland, Ohio. All of Cole Vision's retail
locations are leased or operated under a license with the host store, and none
of the individual retail locations is material to the Company's operations.
Leases for departments operated in Sears stores and freestanding stores operated
under the name "Sears Optical" are generally for terms of 90 days and five
years, respectively. Leases for Things Remembered stores and kiosks are
generally for terms of ten and five years, respectively. The Company believes
that its relationships with its lessors are generally good. The Company leases
its five Cole Vision optical laboratories, located in Knoxville, Tennessee (two
labs); Memphis, Tennessee; Salt Lake City, Utah; and Richmond, Virginia,
pursuant to leases expiring (including renewals at the option of the Company) in
1999, 2005, 2002, 2006 and 2002, respectively.
Pearle and AVC have 401 stores based in 39 states. Pearle also has 18
stores in Canada and 25 stores in the Caribbean. Stores are located in malls,
strip centers and freestanding locations. Pearle and AVC lease most of their
retail stores under non-cancelable operating leases with terms generally ranging
from five to ten years and which generally contain renewal options for
additional periods. Pearle or AVC is the principal lessee on a majority of
stores operated by franchisees who sublease the facilities from Pearle or AVC.
Pearle owns its Dallas Support Center, which comprises approximately 88,721
square feet of office space and 147,336 square feet of laboratory and
distribution facilities. Pearle also owns a small headquarters and laboratory in
Puerto Rico. AVC leases its Flint laboratory and distribution facility pursuant
to a lease expiring in 2000.
In fiscal 1997, the Company completed construction of a 210,000
square foot warehouse and distribution facility for Things Remembered near
Youngstown, Ohio. The Company currently owns this facility but is evaluating
financing alternatives.
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ITEM 3. LEGAL PROCEEDINGS
The Company is subject to a variety of routine legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of security holders through
the solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended January 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
(a) The following persons are the executive officers of the Company who are
not members of the Company's Board of Directors, having been elected to
their respective offices by the Board of Directors of the Company to
serve until the election and qualification of their respective
successors:
NAME AGE OFFICE
--------------- --- ------------------------------
Leslie D. Dunn 52 Senior Vice President -
Business Development, General
Counsel and Secretary
Joseph Gaglioti 52 Vice President and Treasurer
Wayne L. Mosley 44 Vice President and Controller
(b) The following is a brief account of the positions held with the Company
during the past five years by each of the above named executive officers
of the Company:
Ms. Dunn has been Senior Vice President - Business Development,
General Counsel and Secretary of the Company since September 1997.
Prior to joining the Company, she was a partner in the law firm of
Jones Day Reavis & Pogue for more than five years.
Mr. Gaglioti has been Vice President of the Company since 1992
and Treasurer of the Company since 1991. Mr. Gaglioti joined the
Company in 1981.
Mr. Mosley has been Vice President and Controller, Assistant
Secretary and Assistant Treasurer of the Company since 1992. Mr. Mosley
joined the Company in 1986.
Information concerning Jeffrey A. Cole and Brian B. Smith, the
Company's executive officers who are also Directors, will be included
in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "Proxy Statement").
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
(NYSE) under the symbol "CNJ". The following table sets forth, for the
fiscal periods indicated, the high and low sales prices per share.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
------------------- ------------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
<S> <C> <C> <C> > <C>
First $35 1/8 $26 1/2 $17 5/8 $10 3/8
Second $48 1/4 $33 $21 5/8 $16 3/8
Third $46 $40 3/16 $25 1/4 $18 1/4
Fourth $43 1/2 $27 3/4 $28 5/8 $23 5/8
</TABLE>
The Company's dividend policy for the foreseeable future is to retain
earnings to support its growth strategy. The Company did not pay dividends on
its Common Stock during the last two fiscal years.
As of March 25, 1998, there were 194 shareholders of record.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been restated to
reflect continuing operations only and should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and other information
contained elsewhere in this report (dollars in thousands, except per share
amounts).
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue $1,000,198 $628,496 $515,892 $464,821 $413,797
Operating income (loss)(1) $ 62,864 $(11,486) $ 43,651 $ 38,096 $ 31,515
Income (loss) from continuing operations(1) $ 19,933 $(24,698) $ 13,798 $ 23,331 $ 11,136
Income (loss) from continuing operations
per common share (1)
Basic $1.48 $ (2.18) $ 1.32 $ 2.48 $ 2.11
Diluted $1.43 $ (2.18) $ 1.31 $ 2.44 $ 2.09
Weighted average number of shares
outstanding (000's)
Basic 13,481 11,333 10,415 9,395 5,283
Diluted 13,981 11,333 10,565 9,571 5,331
Total assets $ 651,384 $578,456 $296,669 $280,298 $253,208
Working capital $ 73,175 $ 56,404 $ 61,275 $ 56,628 $ 38,651
Stockholders' equity (deficit) at year end $ 132,015 $ 19,718 $ 17,133 $ 3,306 $(75,070)
Current ratio 1.35 1.26 1.68 1.64 1.43
Long-term obligations and redeemable
preferred stock $ 277,401 $317,547 $181,903 $184,388 $238,299
Number of stores at year end(2) 2,833 2,657 1,834 1,741 1,554
Comparable store sales growth 3.6% 7.2% 4.5% 5.4% 6.5%
<FN>
(1) Includes an $8,000 pretax charge for business integration in 1997 related
to the acquisition of AVC and a $61,091 pre-tax charge for business
integration and other non-recurring items in 1996 primarily related to the
acquisition of Pearle.
(2)Includes Pearle and AVC franchise locations.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 January 31, 1998 is referred to as "fiscal
1997." Fiscal 1997 and 1996 consisted of 52-week periods while fiscal 1995
consisted of a 53-week period.
RESULTS OF OPERATIONS
On January 13, 1998, the Company announced the closing of its Cole Gift
Centers ("CGC") business which included 445 key duplicating, greeting card and
gift departments on the premises of hosts' stores. CGC has been accounted for as
a discontinued operation in the accompanying financial statements. Accordingly,
the results of operations and loss on disposition of CGC have been excluded from
the results of continuing operations.
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The following is a discussion of the results of the Company's
continuing operations for the three fiscal years ended January 31, 1998.
FISCAL 1997 COMPARED TO FISCAL 1996
On August 5, 1997, the Company acquired all of the issued and
outstanding common stock of American Vision Centers, Inc. ("AVC") for
approximately $28.9 million in cash, including debt assumed. The acquisition was
accounted for using the purchase method of accounting. Accordingly, AVC's
results of operations, which included 80 company-owned optical stores and 75
franchised locations at January 31, 1998, have been included in the Company's
consolidated statement of income for fiscal 1997 since the date of acquisition.
For the six-month period, AVC's net revenue was approximately $25.0 million.
Net revenue increased 59.1% to $1.0 billion in fiscal 1997 from $628.5
million in fiscal 1996. The increase in revenue was primarily attributable to
the acquisitions of Pearle, Inc. ("Pearle") and AOCO Limited ("Sears Optical of
Canada") in November 1996 and AVC in August 1997 (collectively "the Acquired
Companies"), which accounted for $290.7 million of the increase for the fiscal
year. See Notes 2 and 3 of the Notes to Consolidated Financial Statements for
further discussion of the Acquired Companies. The Company's consolidated
comparable store sales increased 3.6% in fiscal 1997 with a 5.9% comparable
store growth at Cole Optical and a 0.5% comparable store sales decline at Things
Remembered. The increase at Cole Optical was primarily a result of successful
eyewear promotions and growth in managed vision care sales. The net revenue
increase was also attributable to the Company's classification of capitation and
other fees associated with its growing managed vision care business as revenue.
Until the first quarter of fiscal 1997, such fees were netted with operating
expenses in the Company's financial statements. For fiscal 1997, these fees were
approximately $44.7 million. The opening of additional Cole Optical and Things
Remembered units also contributed to the revenue increase. At January 31, 1998,
the Company had 2,833 specialty service retail locations, including 401
franchised locations, compared to 2,657 at February 1, 1997.
Gross profit increased to $659.3 million in fiscal 1997 from $427.3
million in fiscal 1996. The gross profit increase was primarily attributable to
the Acquired Companies and classification of managed vision care fees as
revenue. Gross margins for fiscal 1997 and fiscal 1996 were 65.9% and 68.0%,
respectively. The lower gross margin percentage in fiscal 1997 resulted
primarily from the addition of Pearle which operates at a lower gross margin
than the Company has historically experienced due to the higher costs of
in-store laboratories and lower margin wholesale sales to franchised stores.
This was partially offset by revenue generated by Pearle's franchise royalties
and fees, interest income on Pearle's franchise notes receivable and the managed
vision care fees, each of which has no corresponding cost of goods sold.
Operating expenses increased 55.5% to $558.5 million in fiscal 1997
from $359.1 million in fiscal 1996. As a percentage of revenue, operating
expenses decreased to 55.8% in fiscal 1997 from 57.1% in fiscal 1996. The
leverage improvement was primarily a result of the addition of Pearle, which has
lower operating expenses as a percentage of revenue than the rest of the
Company, along with leverage gains achieved by Cole Optical's comparable store
sales increase. This was offset in part by leverage losses at Things Remembered
resulting from the decline in comparable store sales. Operating expenses
increased primarily because of the Acquired Companies and the classification of
capitation and other fees as revenue. The expense increase reflected higher
advertising expenditures, payroll costs, and store occupancy expenses, as well
as expenses related to the growth of managed vision care. Advertising
expenditures at Cole Optical were increased for optical promotions and Pearle
name awareness. Payroll costs increased because of more higher-volume retail
units open in 1997 and additional payroll to support increased sales. Store
occupancy expenses increased primarily as a result of more locations and higher
percentage rents caused by increased comparable store sales. Fiscal 1997
depreciation and amortization expense of $30.0 million was $11.4 million more
than fiscal 1996 reflecting the addition of the Acquired Companies and an
increase in capital expenditures.
The third and fourth quarter of fiscal 1997 included a total of $8.0
million of charges for non-recurring items related to integration of AVC into
the Company's operations. In the fourth quarter of fiscal 1996, the Company
recorded a $61.1 million pre-tax charge for certain unusual non-recurring items
primarily related to the integration
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and consolidation of Pearle. See Note 3 of the Notes to Consolidated Financial
Statements for further discussion of the Business Integration and Other
Non-Recurring Charges.
Operating income, excluding charges for business integration and other
non-recurring items from each year, increased 42.9% to $70.9 million in fiscal
1997 from $49.6 million the prior year, primarily the result of the Acquired
Companies and comparable store sales growth at Cole Optical, offset in part by
soft sales performance at Things Remembered.
Net interest expense for fiscal 1997 of $27.9 million increased $7.7
million compared to fiscal 1996. The increase was primarily attributable to the
additional interest on $150.0 million of 9-7/8% Senior Subordinated Notes due
2006 (the "9-7/8% Notes") issued in connection with financing the Pearle
acquisition and $125.0 million of 8-5/8% Senior Subordinated Notes due 2007 (the
"8-5/8% Notes") issued in August 1997. This was partially offset by a decrease
in interest expense due to the purchase and subsequent retirement of $15.1
million of 11-1/4% Senior Notes due 2001 (the "Senior Notes") in the second
quarter of fiscal 1996 and the purchase and retirement of $150.9 million of
Senior Notes in conjunction with a tender offer in September 1997. The issuance
of the 8-5/8% Notes, combined with the redemption of the Senior Notes, is
expected to reduce fiscal 1998 interest expense by more than $3.0 million
compared to fiscal 1997.
The income tax provisions for fiscal 1997 and 1996 include $3.4 million
and $20.0 million, respectively, of income tax benefits related to the charges
for business integration and other non-recurring items. The effective tax rate
on income excluding the charge for business integration and other non-recurring
items was 43.0% in fiscal 1997 and 44.3% in fiscal 1996. This rate reflects the
significant impact of non-deductible amortization of goodwill in both years. A
more complete discussion of income taxes is included in Note 10 of Notes to
Consolidated Financial Statements.
The net loss in fiscal 1997 of $6.2 million included a $14.0 million
loss, net of an income tax benefit of $8.5 million, related to the operations
and closing of CGC and a $12.2 million extraordinary loss, net of an income tax
benefit of $7.5 million, recorded in the third quarter of fiscal 1997 in
connection with the early extinguishment of debt. The loss represented the
tender premium, write-off of related unamortized debt discount and other costs
associated with redemption of the Senior Notes. A similar charge for $0.7
million, net of an income tax benefit of $0.5 million, was recorded in the
second quarter of fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
On November 15, 1996, the Company acquired the North American and
Caribbean operations of Pearle and a 20% interest in Pearle Trust B.V., a
company formed to purchase Pearle's European business. The acquisition of Pearle
has been accounted for under the purchase method of accounting. Accordingly,
Pearle's results of operations since the date of acquisition have been included
in the Company's consolidated statement of income for fiscal 1996. 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. 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 9.8% to $566.3 million in fiscal 1996 from $515.9
million in fiscal 1995. The increase in consolidated revenue was due to a
comparable store sales increase of 7.2% and to the opening of additional Things
Remembered and Cole Vision units including 75 optical locations in Canada as a
result of the acquisition of Sears Optical of Canada in November 1996. This was
partially offset by one less week of revenue in fiscal 1996 compared to fiscal
1995. 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 2.3% at Things Remembered benefiting
from the roll-out of monogrammed softgoods and the introduction of new
merchandise. At February 1, 1997, the Company operated 1,971 specialty service
retail locations, excluding the Pearle system, versus 1,834 at the end of the
prior year.
9
<PAGE> 11
Gross profit increased to $391.4 million in fiscal 1996 from $354.2
million in fiscal 1995. Gross margins for fiscal 1996 and fiscal 1995 were 69.1%
and 68.7%, 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.
Operating expenses increased 10.1% to $326.0 million in fiscal 1996
from $296.0 million the prior year. As a percentage of revenue, operating
expenses increased slightly to 57.6% in fiscal 1996 from 57.4% 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. 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 $16.0 million was $1.4 million more than fiscal 1995 reflecting an
increase in capital expenditures.
In the fourth quarter of fiscal 1996, the Company recorded a $61.1
million pre-tax charge for certain unusual 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. See Note 3 of the
Notes to Consolidated Financial Statements for further discussion of the
Business Integration and Other Non-recurring Charges.
Operating income, excluding the charge for non-recurring items,
increased 13.2% to $49.4 million in fiscal 1996 from $43.7 million the prior
year. The increase was primarily attributable to increased revenue and improved
gross margin.
Net interest expense for fiscal 1996 of $20.2 million was $1.0 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 $6.9 million for fiscal 1996 includes a $20.0
million income tax benefit related to the charge for integration and other
non-recurring items. The effective income tax rate on income excluding the
charge for integration and other non-recurring items was 44.3% in fiscal 1996
and 43.7% in fiscal 1995. This rate reflects the significant impact of
non-deductible amortization of goodwill in both years.
The net loss in fiscal 1996 of $28.3 million included a $2.9 million
loss, net of an income tax provision of $0.2 million, from CGC's discontinued
operations, which included a write-off of CGC's goodwill of $3.3 million, and 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. The extraordinary loss represented the payment of premiums, the write-off
of unamortized discount and other costs associated with purchasing the debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is funds provided from
operations of its operating subsidiaries. In addition, the Company's
wholly-owned subsidiary, Cole National Group, Inc. (CNG) and its operating
subsidiaries have available to them working capital commitments of $75.0
million, reduced by commitments under letters of credit, under a credit facility
put in place at the time of the Pearle acquisition (the "Credit Facility").
There were no working capital borrowings outstanding during fiscal 1997
and 1996.
10
<PAGE> 12
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, the 9-7/8% Notes and the
8-5/8% Notes when due.
During the second quarter of fiscal 1997, the Company completed a
public offering of 2,587,500 shares of its Common Stock at an offering price of
$47.00 per share. The net proceeds of approximately $116.0 million were used for
general corporate purposes including reducing outstanding indebtedness and
financing acquisitions, including the purchase of AVC.
In August 1997, CNG issued $125.0 million of 8-5/8% Notes. The net
proceeds of the issuance were $121.8 million. CNG also commenced a tender offer
which expired on September 12, 1997, to purchase up to all of its $165.8 million
outstanding Senior Notes at $1,105.61 per $1,000 principal amount, plus accrued
interest thereon, using the net proceeds of the 8-5/8% Notes issuance and cash
on hand. A total of $151.3 million of Senior Notes was tendered resulting in the
extraordinary charge discussed above. The Company plans to redeem the remaining
$14.5 million of Senior Notes in October 1998, the first call date, and
accordingly, has reflected them as current liabilities in the accompanying
consolidated balance sheet.
In November 1997, the Company's Board of Directors authorized the
repurchase from time to time of up to 500,000 shares of common stock, or
approximately 3.5% of the Company's outstanding shares, through open market or
block transactions. It is expected that the shares will be purchased using
internally generated funds and will be used in part to offset dilution from
stock options and in connection with other benefit plans. As of January 31,
1998, a total of 20,000 shares had been purchased.
At year end, the Company had outstanding $14.5 million of Senior Notes,
$150.0 million of 9-7/8% Notes and $125.0 million of 8-5/8% Notes. The Senior
Notes, the 9-7/8% Notes and the 8-5/8% Notes are unsecured and mature October 1,
2001, December 31, 2006 and August 15, 2007, respectively, with no earlier
scheduled redemption or sinking fund payment. The Senior Notes bear interest at
a rate of 11-1/4% per annum, payable semi-annually on each April 1 and October
1. The 9-7/8% Notes interest is payable semi-annually on each June 30 and
December 31, while the 8-5/8% Notes interest is payable semi-annually on each
February 15 and August 15. The indentures pursuant to which the Senior Notes,
the 9/7/8% Notes and the 8-5/8% Notes were issued contain certain optional and
mandatory redemption features and other financial covenants, including
restrictions on the ability of 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 .25% of net sales. See Note 6 of Notes to Consolidated
Financial Statements.
The Company plans to redeem the remaining Senior Notes in 1998. As a
result, the Company will have no significant principal payment obligations under
its outstanding indebtedness until the 9-7/8% Notes mature in 2006. The ability
of the Company and its subsidiaries to satisfy these obligations 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 year end were $68.1 million compared to $73.1 million
at February 1, 1997. Operations generated net cash of $8.0 million in fiscal
1997, $82.8 million in fiscal 1996 and $34.8 million in fiscal 1995. The $74.8
million decrease in cash provided by operations in fiscal 1997 compared to
fiscal 1996 was primarily attributable to a decrease in accounts payable and
accrued liabilities of $11.8 million due in part to the payment of non-recurring
charges, an increase in inventories of $11.2 million versus $3.9 million in
fiscal 1996, and a decrease in accrued and deferred income taxes of $25.8
million versus an increase of $16.3 million in fiscal 1996. These cashflow
decreases were partly offset by a $15.9 million decrease in the net assets of
discontinued operations, increased income from operations of $13.5 million,
excluding the charge for integration and other non-recurring items, and
increased depreciation and amortization expense of $11.4 million. The $48.0
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
11
<PAGE> 13
liabilities of $34.9 million, excluding amounts related to integration
and other non-recurring items, increased accrued income taxes of $14.9 million
primarily related to the sale of Pearle's European business for which the
Company was reimbursed, increased income from operations of $5.0 million
excluding the charge for integration and other non-recurring items, and
increased depreciation and amortization expense of $4.0 million. These cash flow
increases were partly offset by an increase in inventories of $3.9 million
versus a $2.4 million reduction in fiscal 1995.
In fiscal 1997 and fiscal 1996, the Company recorded $8.0 and $61.1
million, respectively, of pre-tax charges for business integration and other
non-recurring items. The total cash outlay related to these charges is expected
to be approximately $48.6 million, of which $23.1 million has been paid as of
January 31, 1998. The remaining amount is expected to be incurred within the
next 12 to 18 months, except for lease obligations which may be incurred over
the life of the leases.
Net capital additions were $32.6 million, $25.1 million, and $18.1
million in fiscal 1997, 1996 and 1995, respectively. The majority of the capital
additions was for store fixtures, equipment and leasehold improvements for new
stores and the remodeling of existing stores. The Company also acquired land and
constructed a new warehouse and distribution facility for Things Remembered at a
cost of approximately $9.3 million (of which $6.6 million is included in capital
expenditures in fiscal 1997) to improve distribution efficiencies. In addition,
the Company used $27.8 million for the purchase of AVC and $2.8 million for
additional investment in Pearle Europe in fiscal 1997, $157.4 million for the
purchases of Pearle and AOCO Limited and $6.1 million for the investment in
Pearle Europe in fiscal 1996, and $0.8 million for the purchase of the BJ's
Wholesale Club optical departments in fiscal 1995.
For fiscal 1998, the Company plans to expand the number of stores as
well as remodel and relocate stores. The Company currently estimates that
capital expenditures in fiscal 1998 will be approximately $35.0 million,
excluding acquisitions. In February 1998, the Company increased its investment
in Pearle Europe by $10.4 million in connection with Pearle Europe's acquisition
of two of the largest optical retailers in Germany and Austria.
The Company paid approximately $17.9 million for systems development
costs in 1997. Such costs have been capitalized and are being amortized over
their estimated useful lives. The Company estimates that it will incur an
additional $15 to $20 million of systems development costs in 1998 that will
also be capitalized and amortized.
The Company believes that funds provided from operations along with
funds available under the Revolving Credit Facility will provide adequate
sources of liquidity to allow the Company's operating subsidiaries to continue
to expand the number of stores and to fund capital expenditures and systems
development costs.
YEAR 2000
In connection with the significant investment in the development of new
data processing systems, the Company has begun to evaluate the impact of issues
regarding the year 2000. The Company is developing an action plan, including
identifying required resources, to modify any computer systems and software
applications not already modified, to be year 2000 compliant. At the present
time, the Company anticipates completion of any modifications to critical
systems by the end of fiscal 1998. However, there can be no assurance that such
schedule will be met or that any similar failure to convert by the Company's
vendors and suppliers or consumer credit providers such as banks or credit card
companies would not have an adverse effect on the Company's business. Although
the Company does not anticipate the cost of any modifications, which will be
expensed, to have a material effect on its results of operations, financial
position or cash flows, the ultimate impact is unknown at this time.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1998, the Company will adopt Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" and No. 131
"Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 130 establishes standards for reporting comprehensive income
and its components in a full set of financial statements. Comprehensive income
is defined as "the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources".
Comprehensive income is the
12
<PAGE> 14
total of net income and all other non-owner changes in equity. SFAS No. 130 will
require the Company to report comprehensive income in a financial statement that
is displayed with the same prominence as other financial statements.
SFAS No. 131 requires that the Company report certain information about
operating segments in its financial statements. Operating segments are
components of an enterprise whose results are regularly reviewed by the
Company's chief operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance, and for which discrete
financial information is available. The Company is currently evaluating which
parts of its business meet the definition of an operating segment.
Adoption of the aforementioned standards is not expected to have a
material impact on the Company's results of operations, financial position or
cash flows.
FORWARD-LOOKING INFORMATION
Certain sections of this report contain forward-looking statements.
Forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the Company. All forward-looking
statements involve risk and uncertainty.
The Company operates in a highly competitive environment, and its
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 risks associated with the integration of Pearle and AVC, the
Company's ability to select and stock merchandise attractive to customers,
economic and weather factors affecting consumer spending, operating factors,
including manufacturing quality of optical and engraved goods, affecting
customer satisfaction, the Company's relationships with host stores, the mix of
goods sold, pricing and other competitive factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item appears on pages F-1 through F-21 of
this Form 10-K and is incorporated herein by reference. Other financial
statements and schedules are filed herewith as "Financial Statement Schedules"
pursuant to Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to Directors will be included
in the Company's Proxy Statement under the caption "Election of Directors" and
is incorporated herein by reference. The information required by this item as to
executive officers who are not Directors is included in Item 4A in Part I of
this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's
Proxy Statement under the caption "Compensation of Executive Officers" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's
Proxy Statement under the caption "Security Ownership of Management and Certain
Beneficial Owners" and is incorporated herein by reference.
13
<PAGE> 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's
Proxy Statement under the caption "Compensation Committee Interlocks, Insider
Participation and Certain Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The consolidated financial statements and the related financial
statement schedules filed as part of this Form 10-K are located as set forth in
the index on page F-1 of this report.
(a)(3) EXHIBITS
See Exhibit Index on pages X-1 through X-6.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year ended January 31, 1998.
14
<PAGE> 16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
COLE NATIONAL CORPORATION
April 30, 1998 By: /s/ Wayne L. Mosley
---------------------------------
Wayne L. Mosley
Vice President and Controller
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
* Chairman and Chief April 30, 1998
- ------------------------ Executive Officer and
Jeffrey A. Cole Director (Principal Executive Officer
and Principal Financial Officer)
* President and Director April 30, 1998
- ------------------------
Brian B. Smith
/s/ Wayne L. Mosley Vice President and Controller April 30, 1998
- ------------------------ (Principal Accounting Officer)
Wayne L. Mosley
* Director April 30, 1998
- ----------------------
Timothy F. Finley
* Director April 30, 1998
- ----------------------
Irwin N. Gold
* Director April 30, 1998
- ----------------------
Peter V. Handal
* Director April 30, 1998
- ----------------------
Charles A. Ratner
* Director April 30, 1998
- ----------------------
Walter J. Salmon
* The undersigned, by signing his name hereto, does sign and execute this
report on Form 10-K pursuant to the Powers of Attorney executed by the
above-named officers and directors of the Company and which are being filed
herewith with the Securities and Exchange Commission on behalf of such
officers and directors.
/s/ Wayne L. Mosley
- ---------------------------------
Wayne L. Mosley, Attorney-in-Fact
15
<PAGE> 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Report of Independent Public Accountants F - 2
Consolidated Balance Sheets as of January 31, 1998 and February
1, 1997 F - 3
Consolidated Statements of Operations for the 52 weeks ended
January 31, 1998, the 52 weeks ended February 1, 1997 and the 53
weeks ended February 3, 1996 F - 4
Consolidated Statements of Cash Flows for the 52 weeks ended
January 31, 1998, the 52 weeks ended February 1, 1997 and the 53
weeks ended February 3, 1996 F - 5
Consolidated Statements of Stockholders' Equity for the 52 weeks
ended January 31, 1998, the 52 weeks ended February 1, 1997 and
the 53 weeks ended February 3, 1996 F - 6
Notes to Consolidated Financial Statements F - 7
Schedules included herein:
Report of Independent Public Accountants on the Financial
Statement Schedule F - 22
Schedule I - Condensed Financial Information of Registrant F - 23
All financial statement schedules not included have been omitted because they
are not applicable or because the required information is otherwise furnished.
F-1
<PAGE> 18
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 January 31, 1998 and February 1, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended January 31, 1998. 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 January 31, 1998 and February 1,
1997 and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 18, 1998.
F-2
<PAGE> 19
COLE NATIONAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(DOLLARS IN THOUSANDS)
----------------------
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 68,053 $ 73,141
Accounts receivable, less allowance for doubtful accounts
of $4,334 in 1997 and $3,068 in 1996 52,030 38,434
Current portion of notes receivable 4,177 6,060
Refundable income taxes 9,520 -
Inventories 119,970 104,360
Prepaid expenses and other 9,195 7,201
Deferred income tax benefits 21,534 24,948
Net assets of discontinued operations - 16,451
--------- ---------
Total current assets 284,479 270,595
Property and equipment, at cost 242,966 209,146
Less - accumulated depreciation and amortization (115,162) (94,679)
--------- ---------
Total property and equipment, net 127,804 114,467
Other assets:
Notes receivable, excluding current portion 25,783 27,951
Deferred income taxes and other 54,241 26,135
Intangible assets, net 159,077 139,308
--------- ---------
Total assets $ 651,384 $ 578,456
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 16,027 $ 1,336
Accounts payable 71,867 61,060
Accrued interest 6,615 9,630
Net liabilities of discontinued operations 3,475 -
Accrued liabilities 112,363 120,195
Accrued income taxes 957 21,970
--------- ---------
Total current liabilities 211,304 214,191
Long-term debt, net of discount and current portion 277,401 317,547
Other long-term liabilities 30,664 27,000
Stockholders' equity:
Preferred stock - -
Common stock 15 12
Paid-in capital 251,405 131,238
Foreign currency translation adjustment (1,749) (606)
Notes receivable-stock option exercise (926) (1,024)
Accumulated deficit (116,119) (109,902)
Treasury stock at cost (611) -
--------- ---------
Total stockholders' equity 132,015 19,718
--------- ---------
Total liabilities and stockholders' equity $ 651,384 $ 578,456
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
F-3
<PAGE> 20
COLE NATIONAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue $ 1,000,198 $ 628,496 $ 515,892
Costs and expenses:
Cost of goods sold 340,849 201,229 161,671
Operating expenses 558,531 359,085 296,040
Depreciation and amortization 29,954 18,577 14,530
Business integration and other non-recurring charges 8,000 61,091 -
----------- ----------- -----------
Total costs and expenses 937,334 639,982 472,241
----------- ----------- -----------
Operating income (loss) 62,864 (11,486) 43,651
Interest expense (30,365) (21,855) (19,922)
Interest income 2,472 1,704 761
----------- ----------- -----------
Income (loss) from continuing operations before income taxes 34,971 (31,637) 24,490
Income tax provision (benefit) 15,038 (6,939) 10,692
----------- ----------- -----------
Income (loss) from continuing operations 19,933 (24,698) 13,798
----------- ----------- -----------
Discontinued operations:
Operating loss, net of income tax provision (benefit) of
$(39), $180 and $118, respectively (67) (2,935) (40)
Loss on disposal, net of income tax benefit of $8,500 (13,900) - -
----------- ----------- -----------
Loss from discontinued operations (13,967) (2,935) (40)
----------- ----------- -----------
Income (loss) before extraordinary item 5,966 (27,633) 13,758
Extraordinary loss on early extinguishment of debt, net of
income tax benefit of $7,467 and $494, respectively (12,183) (682) -
----------- ----------- -----------
Net income (loss) $ (6,217) $ (28,315) $ 13,758
=========== =========== ===========
Earnings (loss) per common share:
Basic -
Income (loss) from continuing operations $ 1.48 $ (2.18) $ 1.32
Loss from discontinued operations (1.04) (.26) -
Extraordinary loss (.90) (.06) -
----------- ----------- -----------
Net income (loss) $ (.46) $ (2.50) $ 1.32
=========== =========== ===========
Diluted -
Income (loss) from continuing operations $ 1.43 $ (2.18) $ 1.31
Loss from discontinued operations (1.00) (.26) -
Extraordinary loss (.87) (.06) -
----------- ----------- -----------
Net income (loss) $ (.44) $ (2.50) $ 1.31
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-4
<PAGE> 21
COLE NATIONAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(DOLLARS IN THOUSANDS)
----------------------
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,217) $ (28,315) $ 13,758
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary loss on early extinguishment of debt 12,183 682 -
Non-recurring charges 546 19,983 -
Depreciation and amortization 29,954 18,577 14,530
Non-cash interest 142 440 454
Deferred income tax provision (benefit) 12,823 (16,194) 4,495
Change in assets and liabilities net of effects from acquisitions:
Increase in accounts and notes receivable, prepaid expenses
and other assets (9,513) (4,374) (4,763)
Decrease (increase) in inventories (11,222) (3,935) 2,377
Decrease in net assets of discontinued operations 19,926 4,002 530
Increase (decrease) in accounts payable, accrued liabilities
and other liabilities (11,812) 73,107 2,004
Increase (decrease) in accrued interest (3,015) 2,580 115
Increase (decrease) in accrued and deferred income taxes (25,826) 16,256 1,332
--------- --------- ---------
Net cash provided by operating activities 7,969 82,809 34,832
--------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt (170,705) (17,105) (5,406)
Payment of deferred financing fees (3,191) (6,066) -
Common stock repurchased (611) - -
Net proceeds from public stock offering 115,878 26,202 -
Net proceeds from long-term debt 125,000 148,875 -
Net proceeds from exercise of stock options and warrants 2,903 546 69
Other (323) 118 -
--------- --------- ---------
Net cash provided (used) by financing activities 68,951 152,570 (5,337)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net (32,645) (25,148) (18,138)
Acquisitions of businesses, net of cash acquired (27,926) (157,426) (800)
Investment in Pearle Europe (2,819) (6,102) -
Systems development costs (17,922) (2,933) (755)
Other, net (696) 111 (272)
--------- --------- ---------
Net cash used by investing activities (82,008) (191,498) (19,965)
--------- --------- ---------
Cash and temporary cash investments:
Net increase (decrease) during the period (5,088) 43,881 9,530
Balance, beginning of the period 73,141 29,260 19,730
--------- --------- ---------
Balance, end of the period $ 68,053 $ 73,141 $ 29,260
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-5
<PAGE> 22
COLE NATIONAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(DOLLARS IN THOUSANDS)
----------------------
<TABLE>
<CAPTION>
Foreign
Currency Notes
Trans- Receivable Total
lation Stock Accum- Stock-
Common Paid-In Adjust- Option ulated Treasury holders'
Stock Capital ment Exercise Deficit Stock Equity
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
--------- --------- --------- --------- --------- --------- ---------
Net loss - - - - (6,217) - (6,217)
Net proceeds from sale of common stock 3 115,875 - - - - 115,878
Stock compensation - 635 - - - - 635
Common stock repurchased - - - - - (611) (611)
Exercise of stock options and warrants - 3,657 - - - - 3,657
Repayment of notes receivable - - - 98 - - 98
Effect of foreign currency translation - - (1,143) - - - (1,143)
--------- --------- --------- --------- --------- --------- ---------
Balance, January 31, 1998 $ 15 $ 251,405 $ (1,749) $ (926) $(116,119) $ (611) $ 132,015
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-6
<PAGE> 23
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 represented approximately 77.4%, 64.8% and 59.3%
of consolidated net revenue in 1997, 1996, and 1995, respectively.
The Company sells its products through over 2,400 company-owned
retail locations and 400 franchised locations in 49 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 1997 and 1996 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 over its useful life or lease term.
The estimated useful lives for depreciation purposes are:
Buildings and improvements 5 to 40 years
Equipment 3 to 10 years
Furniture and fixtures 2 to 10 years
Leasehold improvements 2 to 20 years
F-7
<PAGE> 24
Property and equipment, at cost, consist of the following as of
January 31, 1998 and February 1, 1997 (000's omitted):
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Land and buildings $ 22,782 $ 17,990
Furniture, fixtures and equipment 149,795 132,865
Leasehold improvements 70,389 58,291
---------- ---------
Total property and equipment $ 242,966 $ 209,146
========== =========
</TABLE>
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 January 31,
1998 and February 1, 1997 (000's omitted):
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Tradenames $ 47,962 $ 49,198
Goodwill 111,115 90,110
--------- ---------
$ 159,077 $ 139,308
========= =========
</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 $1,498,500 and $262,000 at
January 31, 1998 and February 1, 1997, respectively.
Goodwill is being amortized on a straight-line basis over 40
years and is presented net of accumulated amortization of $34,008,000
and $30,609,000 at January 31, 1998 and February 1, 1997, 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 January 31, 1998,
the asset is realizable and the amortization period is still
appropriate.
INVESTMENT IN PEARLE EUROPE B.V. -
Included in other assets is the Company's investment in Pearle
Europe B.V. (Pearle Europe), which conducts Pearle's European
operations and is the parent company of Pearle Trust B.V. The Company's
common equity investment of $2.2 million at January 31, 1998,
(representing an approximate 24% ownership interest) is accounted for
using the equity method.
Included in notes receivable is $6.2 million and $3.6 million of
net shareholder loans receivable from Pearle Europe and its
subsidiaries at January 31, 1998 and February 1, 1997, respectively.
The shareholder loans provide for interest at rates ranging from 10% to
12.7%. In February 1998, the Company repaid a $3.2 million note payable
to a subsidiary of Pearle Europe and invested an additional $7.2
million in the form of 8% shareholder loans to Pearle Europe in
connection with Pearle Europe's acquisition of optical operations in
Germany and Austria.
F-8
<PAGE> 25
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.
In March 1998 the Accounting Standards Executive Committee
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP,
which was issued as an exposure draft in December 1996, provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 provides that direct costs to
develop or obtain internal use software, including internal costs,
should be capitalized and amortized over the estimated useful life of
the software.
Such costs incurred by the Company have been capitalized and are
included in other assets. These costs are being amortized on a
straight-line basis over periods ranging from two to seven years,
beginning when the software is placed in service. At January 31, 1998
and February 1, 1997, these costs, net of accumulated amortization,
were $23,963,000 and $3,102,000, respectively.
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>
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
Income taxes $ 19,889 $ 5,300 $ 4,265
Interest $ 33,682 $ 20,834 $ 21,580
</TABLE>
During 1997, 1996 and 1995, non-cash financing activities
included incurring $799,000, $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 $19.8 million and $4.0 million in fiscal 1997 and 1996,
respectively.
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.
In fiscal 1997, the Company began classifying capitation and
other fees associated with its growing managed vision care business,
totaling $44.7 million for fiscal 1997, as revenues, which in prior
years has been netted with operating expenses.
F-9
<PAGE> 26
ADVERTISING -
The Company expenses advertising production costs and
advertising costs as incurred and is reimbursed by franchisees for
certain advertising expenses based on a percentage of sales.
Advertising expense is summarized as follows (000's omitted):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Gross advertising expense $74,553 $37,427 $23,238
Less: Franchisee contribution 19,656 4,230 -
------- ------- -------
Net advertising expense $54,897 $33,197 $23,238
======= ======= =======
</TABLE>
FOREIGN CURRENCY TRANSLATION -
The assets and liabilities of the Company's foreign subsidiaries
and its investment in Pearle Europe are translated to United States
dollars at the rates of exchange on the balance sheet date. Income and
expense items are translated at average monthly rates of exchange.
Translation gains or losses are included in the foreign currency
translation adjustment component of stockholders' equity.
CAPITAL STOCK -
At January 31, 1998 and February 1, 1997, there were 14,727,325
and 11,965,473, respectively, shares of common stock, par value $.001
per share (the Common Stock), outstanding. At January 31, 1998, there
were 40,000,000 and 5,000,000 authorized shares of Common Stock and
undesignated preferred stock, respectively.
EARNINGS PER SHARE -
In the fourth quarter of fiscal 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share," and accordingly, has restated all prior period data
presented.
SFAS No. 128 requires that earnings per share be presented as
two calculations: basic and diluted. Basic earnings per share for 1997,
1996 and 1995 have been based on 13,480,792; 11,333,453 and 10,415,047,
respectively, weighted average number of common shares outstanding. The
Company has stock options and warrants outstanding which are considered
to be potentially dilutive common stock. Diluted earnings per share for
1997, 1996 and 1995, have been based on 13,980,727; 11,333,453 and
10,565,068, respectively, weighted average number of common shares
outstanding after consideration of the dilutive effect, if any, for
these common share equivalents.
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 for the fiscal year-ended February 1, 1997.
Management regularly evaluates its long-lived assets for impairment
considering primarily such factors as store level profitability and
cash flows. The Company believes that, at January 31, 1998, no asset
impairment exists.
NEW ACCOUNTING PRONOUNCEMENTS -
In fiscal 1998, the Company will adopt Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income"
and No. 131 "Disclosures about Segments of an Enterprise and Related
Information".
SFAS No. 130 establishes standards for reporting comprehensive
income and its components in a full set of financial statements.
Comprehensive income is defined as "the change in equity of a business
enterprise
F-10
<PAGE> 27
during a period from transactions and other events and circumstances
from non-owner sources". Comprehensive income is the total of net
income and all other non-owner changes in equity. SFAS No. 130 will
require the Company to report comprehensive income in a financial
statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131 requires that the Company report certain
information about operating segments in its financial statements.
Operating segments are components of an enterprise whose results are
regularly reviewed by the Company's chief operating decision maker to
make decisions about resources to be allocated to the segment and
assess its performance, and for which discrete financial information is
available. The Company is currently evaluating which parts of its
business meet the definition of an operating segment.
Adoption of the aforementioned standards is not expected to have
a material impact on the Company's results of operations, financial
position or cash flows.
RECLASSIFICATIONS -
Certain 1996 and 1995 amounts have been reclassified to conform
with the 1997 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. Immediately following the
acquisition, the Company sold Pearle Holdings B.V., Pearle's European
operations, to Pearle Trust B.V. for approximately $62 million. No gain
or loss was recorded on this transaction. As more fully described in
Note 1, the Company has retained an ownership interest in Pearle
Europe, the parent company of Pearle Trust B.V.
The Pearle acquisition was accounted for under the purchase
method of accounting. The results of operations of Pearle have been
included in the consolidated financial statements since the date of
acquisition. The purchase price was allocated to the assets acquired
and liabilities assumed based upon their relative fair values as of the
closing date. This resulted in an excess of purchase price over net
assets acquired of $24.5 million, including final adjustments of $4.3
million. The relative fair values of the assets acquired and
liabilities assumed were based upon valuations and other studies and
included tradenames of $49.5 million, unfavorable leasehold interests
of $7.5 million, accruals for involuntary severance and termination
benefits of $4.4 million and deferred tax assets of $16.7 million.
On a pro forma basis, if the Pearle acquisition had taken place
at the beginning of the respective periods, the unaudited consolidated
net revenues would have been $878.3 million for fiscal 1996 and $812.5
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
$1.7 million or $0.15 per share and pro forma net income in 1995 would
have decreased by $11.7 million or $1.10 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. On
August 5, 1997, the Company acquired all of the issued and outstanding
F-11
<PAGE> 28
common stock of American Vision Centers, Inc. (AVC), whose operations
consisted of 79 company-owned and 85 franchised optical stores, for an
aggregate purchase price of approximately $28.9 million, including debt
assumed. The purchase price was allocated to the assets acquired and
liabilities assumed based upon their relative fair values as of the
closing date. This resulted in an excess of purchase price over net
assets acquired of $20.0 million. The relative fair values of the
assets acquired and liabilities assumed included unfavorable leasehold
interests of $3.4 million, accruals for involuntary severance and
termination benefits of $0.5 million, write-off of deferred assets of
$1.4 million and deferred tax assets of $7.5 million. The purchase
price allocation for AVC 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.
In November 1996, the Company acquired all of the issued and
outstanding stock of AOCO Limited, which operated 73 Sears Optical
Departments and two freestanding Vision Club stores in Canada, for a
purchase price of $2.6 million. 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. Pro forma financial results have not
been presented for these acquisitions, including AVC, as they did not
have a material effect on the Company's results of operations.
(3) BUSINESS INTEGRATION AND OTHER NON-RECURRING CHARGES
During fiscal 1997, the Company recorded an $8.0 million pre-tax
business integration charge associated with the AVC acquisition. Such
charge included costs incurred related to the integration and
consolidation of AVC into the Company's operations, including costs of
store and other facility closings, transitional costs incurred to
change the brand identity to Pearle and duplicate costs incurred
through fiscal year end in connection with the consolidation of the AVC
home office functions. The total pretax cash outlay for these charges
is estimated to be $7.5 million, with approximately $3.1 million having
been paid as of January 31, 1998. The remaining amount is expected to
be incurred over the next 12 to 18 months, except for certain lease
costs which may be incurred over the remaining life of the leases.
In the fourth quarter of fiscal 1996, the Company recorded a
$61.1 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, $6.1 million for asset impairment and $15.8 million
of other charges. The total pretax cash outlay related to these charges
is expected to be approximately $41.1 million, of which approximately
$20.0 million has been paid as of January 31, 1998. 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.
Subsequent to the effective date of the Pearle acquisition, the
Company identified certain unprofitable Pearle stores which it intends
to close. The Company also identified certain other on-going retail
locations at which it intends 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 in
fiscal 1996 for store and other facility closings consists primarily of
the remaining noncancellable term of operating leases and other
obligations remaining on these facilities subsequent to their estimated
date of closing along with the loss on fixed assets.
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 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 settlement cost of terminating the outsourcing
agreement, as well as other related costs, were accrued as of February
1, 1997.
F-12
<PAGE> 29
Following the Pearle acquisition and in light of operating
results in fiscal 1996, 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 optical
business 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 in fiscal 1996 include costs related to
employee matters, including duplicate costs incurred through the end of
fiscal 1996 and costs related to hiring employees in connection with
the consolidation of the Pearle home office functions, and other costs
of management realignment. In addition, the other charges include
incremental travel and professional fees incurred in connection with
the integration of Pearle, along with costs of developing and
implementing a new franchise agreement. Also, in February 1996, the
Board of Directors granted stock options to executive officers at a
share price equal to the market price of the common stock on the date
of grant, which were subject to stockholder approval. The increase in
the price of the common stock between the grant date and the date of
stockholder approval resulted in $4.2 million of compensation expense.
The options as approved contained accelerated vesting provisions if the
common stock price rose to certain 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) DISCONTINUED OPERATIONS
On January 13, 1998 the Company announced the closing of its
Cole Gift Centers ("CGC") chain of personalized gift and greeting card
departments located in host stores. For financial statement purposes,
the assets, liabilities, results of operations and cash flows of CGC
are included in the Company's consolidated financial statements as
discontinued operations. Prior year financial statements have been
restated to reflect discontinued operations. The estimated loss on
disposal of $13.9 million (net of an applicable income tax benefit of
$8.5 million) includes provisions for severance and other closing
costs, inventory and other asset write-offs and estimated operating
losses for the period from January 13, 1998 through February 1998 when
all locations were closed.
CGC's net revenue was $50.9, $55.5 and $61.2 million in 1997,
1996 and 1995, respectively. The Company's consolidated interest
expense that was not directly attributable to other operations of the
Company was allocated to discontinued operations based on the ratio of
the net assets of discontinued operations to total net assets of the
Company plus consolidated debt of the Company not directly attributable
to other operations. As a result, the operating loss from discontinued
operations includes allocated interest expense of $1.3 million, $1.9
million and $2.2 million in fiscal 1997, 1996 and 1995, respectively.
The net loss of discontinued operations also includes a non-recurring
charge of $3.3 million in fiscal 1996, primarily related to the
write-off of goodwill at CGC, in accordance with FAS No. 121.
The net assets (liabilities) of discontinued operations, after
recognition of the estimated loss on disposal included in the
accompanying consolidated balance sheets consist of the following
(000's omitted):
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Accounts receivable $ 4,827 $ 1,226
Inventories 11,723 14,876
Property, equipment and other assets, net 6,629 4,736
Current liabilities (26,654) (4,387)
------- -------
Net assets (liabilities) of discontinued operations $(3,475) $16,451
======= =======
</TABLE>
(5) PUBLIC OFFERINGS
On July 18, 1997, the Company completed a public offering of
2,587,500 shares of its Common Stock at a price of $47.00 per share.
Net proceeds from the offering were approximately $116 million. A
portion of the net proceeds from the offering were used for the
purchase of AVC and CNG's tender offer to purchase up to all of its
$165.8 million outstanding 11-1/4% Senior Notes due 2001 (the Senior
Notes) (see Note 6). The Company intends to use the remaining net
proceeds from the offering for general corporate purposes, including
reducing outstanding indebtedness and financing possible future
acquisitions.
F-13
<PAGE> 30
In 1996, the Company completed a public offering of 1,437,500
shares of Common Stock at a price of $19.25 per share. The net proceeds
from the offering were $26.2 million. A portion of the proceeds was
used to purchase $15.1 million of the Senior Notes, plus accrued
interest thereon (see Note 6).
(6) LONG-TERM DEBT
Long-term debt at January 31, 1998 and February 1, 1997 is
summarized as follows (000's omitted):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
7-1/2% Obligation in connection with Industrial
Revenue Bonds $ 168 $ 338
11-1/4% Senior Notes:
Face value 14,476 165,838
Unamortized discount - (1,455)
--------- ---------
Total 11-1/4% Senior Notes 14,476 164,383
9-7/8% Senior Subordinated Notes:
Face value 150,000 150,000
Unamortized discount (1,041) (1,111)
--------- ---------
Total 9-7/8% Senior Subordinated Notes 148,959 148,889
8-5/8% Senior Subordinated Notes 125,000 -
Capital lease obligations (see Note 12) 4,825 5,273
--------- ---------
293,428 318,883
Less current portion (16,027) (1,336)
--------- ---------
Net long-term debt $ 277,401 $ 317,547
========= =========
</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 April 1 and October 1.
On August 15, 1997, CNG announced a tender offer to purchase up
to all of its Senior Notes at a price of $1,105.61 per $1,000 of
principal, plus accrued interest. The tender offer expired on September
12, 1997, at which time a total of $151.3 million principal amount of
the Senior Notes were tendered, leaving $14.5 million outstanding. The
Company plans to call the remaining Senior Notes in October 1998, the
first call date, and accordingly, has reflected them as current
liabilities in the accompanying consolidated balance sheet. As a result
of the tender offer, in the third quarter of fiscal 1997 the Company
recorded an extraordinary charge of $12.2 million, net of an income tax
benefit of $7.5 million, representing the tender premium, the write-off
of the related unamortized debt discount and other costs associated
with redeeming the debt.
On August 22, 1997, CNG issued $125.0 million of 8-5/8% Senior
Subordinated Notes (the 8-5/8% Notes) that mature in 2007 with no
earlier scheduled redemption or sinking fund payments. Proceeds from
this debt issuance of approximately $121.8 million, along with cash on
hand, were used to fund the above-described tender offer. Interest on
the 8-5/8% Notes is payable semi-annually on February 15 and August 15.
On November 15, 1996, CNG issued $150 million of 9-7/8% Senior
Subordinated Notes (the 9-7/8% Notes) that mature in 2006 with no
earlier scheduled redemption or sinking fund payments. The Notes were
used by the Company to finance a portion of the Pearle acquisition (see
Note 2). Interest on the 9-7/8% Notes is payable semi-annually on June
30 and December 31.
The Senior Notes, the 8-5/8% Notes and the 9-7/8% 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.
F-14
<PAGE> 31
The indentures pursuant to which the Senior Notes, the 8-5/8%
Notes and the 9-7/8% 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 January 31, 1998.
The Company recorded an extraordinary loss of $0.7 million in
1996, net of an income tax benefit of $0.5 million, representing the
payment of premiums, the write-off of unamortized discount and other
costs associated with retiring $15.1 million of the Senior Notes.
The agreement in connection with the Industrial Revenue Bonds
provides for repayment of the final annual installment of $168,750 in
1998. The Industrial Revenue Bonds are secured by an office facility
with a net book value of $1,516,000 at January 31, 1998.
The Company plans to redeem the remaining Senior Notes in 1998.
As a result, the Company will have no significant principal payment
obligations under its outstanding indebtedness until the 9-7/8% Notes
mature in 2006.
At January 31, 1998, the fair value of the Company's long-term
debt was approximately $307.3 million compared to a carrying value of
$293.4 million. The fair value was estimated primarily by using quoted
market prices.
(7) CREDIT FACILITY
Concurrent with the Pearle acquisition, the principal operating
subsidiaries of CNG (the Borrowers) entered into a Credit Facility. The
Credit Facility replaced 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 January 31, 1998.
The Credit Facility restricts dividend payments to CNG to
amounts needed to pay interest on the Senior Notes, the 9-7/8% Notes
and the 8-5/8% Notes, and certain amounts related to taxes, along with
up to $8.0 million plus 0.25% of the CNG's consolidated 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, the 8-5/8% Notes and/or the 9-7/8% Notes.
No borrowings under the Credit Facility were outstanding as of
January 31, 1998 or February 1, 1997 or at any time during fiscal 1997
or 1996.
(8) STOCK OPTIONS AND WARRANTS
The Company had stock options outstanding at January 31, 1998
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
F-15
<PAGE> 32
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 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 the end of fiscal 1997, 1996 and 1995, and changes during each of
the fiscal years is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
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 1,443,788 $ 12.29 749,297 $ 9.76 668,554 $ 9.14
Granted 122,000 35.13 804,000 13.87 123,100 11.34
Exercised (80,856) 8.27 (97,787) 6.08 (25,066) 3.11
Canceled (13,026) 24.49 (11,722) 10.19 (17,291) 6.93
---------- ---------- -------
Outstanding at end of year 1,471,906 14.30 1,443,788 12.29 749,297 9.77
========== ========== =======
Exercisable at end of year 595,838 11.57 508,530 9.86 385,646 8.37
Weighted-average fair value
of options granted during
the year $ 15.81 $ 10.87 $ 5.11
</TABLE>
A summary of information about stock options outstanding at
January 31, 1998 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 64,599 4.7 years $ 3.00 64,599 $ 3.00
$ 9.75 to $12.63 1,154,182 7.1 11.14 493,114 11.42
$24.88 to $44.94 253,125 9.3 31.55 38,125 27.99
---------- ---------
$ 3.00 to $44.94 1,471,906 7.3 14.30 595,838 11.57
========== =========
</TABLE>
Payment for certain options exercised between 1993 and 1996 has
been made by executing promissory notes, of which $926,000 were
outstanding at January 31, 1998. The promissory notes are secured by
the shares of common stock acquired and are payable on various dates
through April 2001 at interest rates ranging from 5.33% to 6.37%.
At January 31, 1998, there were warrants outstanding to purchase
81,574 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 78,949 shares are exercisable at $49.40 per share and
expire on March 6, 1999. During 1997, warrants to purchase 90,389
shares at $24.70 per share were exercised and a warrant to purchase
1,715 shares at $24.70 per share was canceled.
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 1995 and fiscal 1997. Compensation cost that has been charged
against income for its stock-based plans in fiscal 1996 was $4.2
million as discussed in Note 3. Had compensation cost for 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 diluted loss per share would
have been increased to $6,731,000 and $.48 in fiscal 1997 and
$30,234,000 and $2.67 in fiscal 1996, respectively,
F-16
<PAGE> 33
and its net income and diluted earnings per share in fiscal
1995 would have been reduced to $13,617,000 and $1.29,
respectively.
The fair value of each option granted was estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rates of 5.7%, 6.2% and 6.4%
for grants in fiscal 1997, 1996 and 1995, respectively, volatility of
35% in fiscal 1997 and 33% in fiscal 1996 and 1995, and expected lives
of six years for options granted in all fiscal years. Because the SFAS
No. 123 method of accounting has not been applied to options granted
prior to January 29, 1995, the resulting pro forma expense may not be
representative of that to be expected in the future.
(9) 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
$180, subject to adjustment. The Rights are only exercisable if a
person or group buys or announces a tender offer for 15% or more of 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.
(10) INCOME TAXES
The income tax provision (benefit) for continuing operations
reflected in the accompanying consolidated statements of operations for
fiscal 1997, 1996 and 1995 is detailed below (000's omitted):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Currently payable -
Federal $ 346 $ 7,245 $ 4,567
State and local 1,870 2,010 1,630
-------- -------- --------
2,216 9,255 6,197
-------- -------- --------
Deferred -
Federal 12,822 (16,194) 3,361
Utilization of net operating loss carryforwards - - 1,134
-------- -------- --------
12,822 (16,194) 4,495
-------- -------- --------
Income tax provision (benefit) $ 15,038 $ (6,939) $ 10,692
======== ======== ========
</TABLE>
The income tax provision (benefit) for continuing operations
differs from the federal statutory rate as follows (000's omitted):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate $ 12,240 $(11,073) $ 8,572
Tax effect of -
State income taxes, net of federal
tax benefit 1,216 1,306 1,060
Amortization of goodwill 1,176 897 859
Non-recurring charges - 1,578 -
Other, net 406 353 201
-------- -------- --------
Tax provision (benefit) $ 15,038 $ (6,939) $ 10,692
======== ======== ========
</TABLE>
F-17
<PAGE> 34
The tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax assets and deferred
tax liabilities at January 31, 1998 and February 1, 1997 are as follows
(000's omitted):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Employee benefit accruals $ 3,836 $ 6,137
Business integration accruals 8,530 13,373
Other non-deductible accruals 26,152 15,066
State and local taxes 1,352 1,277
Net operating loss carryforwards 2,918 -
Intangibles 5,939 6,148
Other 10,013 8,569
-------- --------
Total deferred tax assets 58,740 50,570
Valuation allowance (1,141) -
-------- --------
Net deferred tax assets 57,599 50,570
-------- --------
Deferred tax liabilities:
Depreciation and amortization (9,323) (5,543)
Other (9,116) (5,535)
-------- --------
Total deferred tax liabilities (18,439) (11,078)
-------- --------
Net deferred taxes $ 39,160 $ 39,492
======== =========
</TABLE>
At January 31, 1998, the Company has approximately $8.3 million
of tax net operating loss (NOL) carryforwards acquired in connection
with the acquisition of AVC, which expire between 2005 and 2010. Due to
the change in ownership requirements of the Internal Revenue Code,
utilization of the AVC NOL is limited to approximately $338,000 per
year. A valuation allowance of $1.1 million has been established to
reduce the deferred tax asset related to the NOL to the amount that
will likely be realized.
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
in fiscal 1996 and paid by the Company in fiscal 1997.
(11) 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.
Pension expense for fiscal 1997, 1996 and 1995 includes the
following components (000's omitted):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 637 $ 646 $ 528
Interest cost on the projected benefit obligation 1,490 1,467 1,369
Less:
Return on plan assets -
Actual (2,424) (1,669) (1,138)
Deferred 893 477 11
------- ------- -------
(1,531) (1,192) (1,127)
Amortization of transition asset over 17.9 years (179) (179) (179)
------- ------- -------
Net pension expense $ 417 $ 742 $ 591
======= ======= =======
</TABLE>
F-18
<PAGE> 35
The following sets forth the funded status of the Retirement
Plan at December 31, 1997 and 1996 based upon the actuarial present
values of benefit obligations (000's omitted):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accumulated benefit obligations:
Vested $ 19,526 $ 17,605
Nonvested 415 238
-------- --------
Total $ 19,941 $ 17,843
======== ========
Projected benefit obligation for service rendered to date $ 21,272 $ 19,046
Fair value of plan assets, primarily money market and
equity mutual funds 19,751 16,774
-------- --------
Plan assets less than projected benefit obligation (1,521) (2,272)
Unrecognized prior service cost 111 140
Net unrecognized loss 1,204 1,252
Unamortized transition asset (1,236) (1,416)
-------- --------
Pension liability included in accrued liabilities $ (1,442) $ (2,296)
======== ========
</TABLE>
The weighted average discount rate used to measure the projected
benefit obligation was 7.5% in 1997 and 8.0% in 1996. 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 17% of their compensation to the plan. Prior to January 1, 1998,
there was no mandatory matching of employee contributions by the
Company, but discretionary matches of $374,000, $327,000, and $164,000
were recorded for 1997, 1996 and 1995, respectively. Effective January
1, 1998, the plan was amended to, among other things, provide for a
mandatory company match of 10% of employee contributions.
Prior to January 1, 1998, the Company had separate contributory
profit-sharing plans for Pearle and AVC employees meeting certain
service requirements as defined in the plans. The Company's
contribution to the Pearle plan consisted of a minimum matching
contribution of $861,000 in 1997 and $229,000 in 1996. There were no
Company contributions required or made in connection with the AVC plan
in 1997. Effective January 1, 1998, eligible employees of Pearle and
AVC became eligible to participate in the Company's defined
contribution plan. The Pearle and AVC plans will be merged into the
Company's plan.
The Company has two Supplemental Executive Retirement Plans that
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
receive an annual credit based on a percentage of base salary, subject
to vesting requirements. Expense for these plans for fiscal 1997, 1996
and 1995 was $541,000, $468,000, and $447,000, respectively.
(12) 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
F-19
<PAGE> 36
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 1997, 1996 and 1995 (000's
omitted):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Occupancy costs based on sales $52,300 $46,058 $40,692
All other rental expense 87,699 45,207 32,434
Sublease rental income (21,725) (5,936) (1,423)
-------- -------- -------
$118,274 $ 85,329 $71,703
======== ======== =======
</TABLE>
The Company has entered into leases for equipment which have
been accounted for as capital leases. At January 31, 1998 and February
1, 1997, property under capital leases consisted of $7,113,000 and
$5,696,000 in equipment with accumulated amortization of $1,610,000 and
$397,000, respectively.
At January 31,1998, 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> <C>
1998 $1,699 $ 71,639 $ 13,890
1999 1,708 62,164 10,750
2000 1,533 47,613 7,573
2001 445 35,713 5,067
2002 89 27,356 3,182
2003 and thereafter - 63,848 6,078
------- -------- ---------
Total future minimum lease payments 5,474 $308,333 $ 46,540
======== ==========
Amount representing interest (649)
----
Present value of future minimum lease payments $4,825
======
</TABLE>
F-20
<PAGE> 37
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly financial data for the
52 weeks ended January 31, 1998 and February 1, 1997. The third and
fourth quarters of fiscal 1997 include pre-tax charges of $1.1 million
and $6.9 million, respectively, for business integration charges
related to AVC. The fourth quarter of fiscal 1996 includes a $61.1
million pre-tax charge for business integration and other non-recurring
charges primarily related to Pearle.
FISCAL 1997
----------------------------------------------------------------------
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $239,686 $242,163 $252,744 $265,605
Gross margin 157,274 161,001 166,232 174,842
Income from continuing operations 3,354 7,228 3,535 5,816
Income (loss) from discontinued
operations, net (906) 130 (841) (12,350)
Extraordinary item, net - - (12,183) -
-------- -------- -------- --------
Net income (loss) $ 2,448 $ 7,358 $ (9,489) $ (6,534)
======== ======== ======== ========
Earnings (loss) per common share:
Basic -
Income from continuing operations $ .28 $ .58 $ .24 $ .40
Income (loss) from discontinued
operations, net (.08) .01 (.05) (.84)
Extraordinary item, net - - (.83) -
-------- -------- -------- --------
Net income (loss) $ .20 $ .59 $ (.64) $ (.44)
======== ======== ======== ========
Diluted -
Income from continuing operations $ .27 $ .56 $ .23 $ .38
Income (loss) from discontinued
operations, net (.07) .01 (.05) (.81)
Extraordinary item, net - - (.80) -
-------- -------- -------- --------
Net income (loss) $ .20 $ .57 $ (.62) $ (.43)
======== ======== ======== ========
</TABLE>
FISCAL 1996
----------------------------------------------------------------------
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $132,153 $140,036 $136,091 $220,216
Gross margin 91,686 97,096 94,494 143,991
Income (loss) from continuing operations
before extraordinary loss 1,985 4,975 1,682 (33,340)
Income (loss) from discontinued
operations, net (1,005) 202 (509) (1,623)
Extraordinary item, net - (682) -
-------- -------- -------- --------
Net income (loss) $ 980 $ 4,495 $ 1,173 $(34,963)
======== ======== ======== ========
Earnings (loss) per common share:
Basic -
Income (loss) from continuing
operations $ .19 $ .45 $ .14 $ (2.79)
Income (loss) from discontinued
operations, net (.10) .02 (.04) (.14)
Extraordinary item, net - (.06) - -
-------- -------- -------- --------
Net income (loss) $ .09 $ .41 $ .10 $ (2.93)
======== ======== ======== ========
Diluted -
Income (loss) from continuing
operations $ .19 $ .45 $ .14 $ (2.79)
Income (loss) from discontinued
operations, net (.10) .01 (.04) (.14)
Extraordinary item, net - (.06) - -
-------- -------- -------- --------
Net income (loss) $ .09 $ .40 $ .10 $ (2.93)
======== ======== ======== ========
</TABLE>
F-21
<PAGE> 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE
To Cole National Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in this Form 10-K and
have issued our report thereon dated March 18, 1998. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
financial statement schedule is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the consolidated financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the consolidated financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 18, 1998.
F-22
<PAGE> 39
SCHEDULE I
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COLE NATIONAL CORPORATION
CONDENSED BALANCE SHEETS
JANUARY 31, 1998 AND FEBRUARY 1, 1997
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Assets:
Receivable from subsidiaries $ 89.1 $ 65.3
Refundable income taxes 9.5 -
Investment in subsidiaries 27.7 (36.1)
Notes receivable and investment in Pearle Europe 7.8 5.4
Property and equipment, net 4.0 4.7
Other 1.4 .2
--------- ---------
Total assets $ 139.5 $ 39.5
========= =========
Liabilities and Stockholders' Equity:
Accounts payable and accrued expenses $ 3.9 $ 15.2
Long-term debt 3.3 4.1
Deferred income taxes .3 .5
Stockholders' equity 132.0 19.7
--------- ---------
Total liabilities and stockholders' equity $ 139.5 $ 39.5
========= =========
</TABLE>
F-23
<PAGE> 40
SCHEDULE I
(CONTINUED)
COLE NATIONAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS
52 WEEKS ENDED JANUARY 31, 1998,
52 WEEKS ENDED FEBRUARY 1, 1997 AND
53 WEEKS ENDED FEBRUARY 3, 1996
(Dollars in millions)
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
<S> <C> <C> <C>
Revenue:
Dividends from subsidiaries $ - $ 15.4 $ 13.5
Services to affiliates 1.8 .6 .3
-------- ------- -------
Total revenue 1.8 16.0 13.8
Operating expenses (1.8) (.8) (.3)
Interest income .3 .8 -
-------- ------- -------
Pre-tax income .3 16.0 13.5
Income tax expense (.2) (.3) -
-------- ------- -------
Income before equity in undistributed earnings (loss) of
subsidiaries and extraordinary item .1 15.7 13.5
Equity in undistributed earnings (loss) of subsidiaries (6.3) (43.4) .3
-------- ------- -------
Income (loss) before extraordinary item (6.2) (27.7) 13.8
Extraordinary loss - (.6) -
-------- ------- -------
Net income (loss) (6.2) (28.3) 13.8
-------- ------- -------
Adjustments to reconcile net income (loss) to cash
provided (used) by operations (18.8) 43.9 (13.2)
-------- ------- -------
Net cash provided (used) by operating activities (25.0) 15.6 .6
-------- ------- -------
Financing activities:
Repayment of long-term debt (1.0) (.3) (.3)
Proceeds from sale of common stock 115.9 26.2 -
Common stock repurchased (.6) - -
Cash contributed to subsidiaries - - (.3)
Proceeds from stock option exercises 2.9 .6 -
-------- ------- -------
Net cash provided (used) by financing activities 117.2 26.5 (.6)
-------- ------- -------
Investing activities:
Advances to affiliates (61.7) (35.0) -
Purchase of CNG Notes - (16.1) -
Acquisition of business (27.8) - -
Proceeds from sale of CNG Notes - 14.9 -
Investment in Pearle Europe (2.8) (6.0) -
Repayment of notes receivable .1 .1 -
-------- ------- -------
Net cash used by investing activities (92.2) (42.1) -
-------- ------- -------
Net change in cash - - -
Cash, beginning of period - - -
-------- ------- -------
Cash, end of period $ - $ - $ -
======== ======= ======
</TABLE>
F-24
<PAGE> 41
SCHEDULE I
(CONTINUED)
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The accompanying financial information of Cole National Corporation (CNC)
is as of January 31, 1998 and February 1, 1997 and for the 52 weeks ended
January 31, 1998, the 52 weeks ended February 1, 1997 and the 53 weeks ended
February 3, 1996. CNC is a holding company for its wholly-owned subsidiaries,
including Cole National Group, Inc. (CNG) and consisted of no other operations.
This financial information should be read in connection with the
Consolidated Financial Statements and notes thereto of Cole National Corporation
and Subsidiaries, contained on pages elsewhere in this Form 10-K.
F-25
<PAGE> 42
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1(i) Restated Certificate of Incorporation of the Company,
incorporated by reference to Exhibit 3.1 (i) of Cole National
Corporation's Annual Report on Form 10-K for the year ended
February 3, 1996 (File No. 1-12814).
3.1(ii) Certificate of Amendment of the Restated Certificate of
Incorporation.
3.2(ii) Amended and Restated By-Laws of the Company, incorporated by
reference to Exhibit 3.2(ii) of Cole National Corporation's
Annual Report on Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
3.3 Certificate of Designations of Series A Junior Participating
Preferred Stock, incorporated by reference to Exhibit 3.3 of
Cole National Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
4.1 Indenture dated as of September 30, 1993 between CNG and Norwest
Bank Minnesota, N.A., as trustee, relating to the 11 1/4% Senior
Notes due 2001 (the form of which Senior Note is included in
such Indenture), incorporated by reference to Exhibit 4.1 of
Cole National Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
4.2 First Supplemental Indenture, dated August 14, 1997, between
Cole National Group, Inc. and Norwest Bank Minnesota, National
Association, as Trustee, relating to the 11-1/4% Senior Notes
Due 2001, incorporated by reference to Exhibit 4.6 of Cole
National Group, Inc.'s Registration Statement on Form S-1
(Registration No. 333-34963).
4.3 Second Supplemental Indenture dated September 15, 1997, between
Cole National Group, Inc. and Norwest Bank Minnesota, National
Association, as Trustee, relating to the 11-1/4% Senior Notes
Due 2001, incorporated by reference to Exhibit 4.7 of Cole
National Group, Inc.'s Registration Statement on Form S-1,
Amendment No. 3, filed with the Commission on December 5, 1997
(Registration No. 333-34963).
4.4 Indenture dated November 15, 1996, by and among Cole National
Group, Inc. and Norwest Bank Minnesota, National Association, as
trustee, relating to the 9 7/8% Senior Subordinated Notes due
2006 (the form of which Senior Subordinated Note is included in
such Indenture), incorporated by reference to Exhibit 4.1 of
Cole National Corporation's Report on Form 8-K, filed with the
Commission on December 2, 1996 (File No. 1-12814).
4.5 Indenture, dated August 22, 1997, between Cole National Group,
Inc. and Norwest Bank Minnesota, National Association, as
Trustee, relating to the 8-5/8% Senior Subordinated Notes Due
2007, incorporated by reference to Exhibit 4.4 of Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 333-34963).
4.6 Rights Agreement dated as of August 22, 1995 by and between the
Company and National City Bank as Rights Agent, incorporated by
reference to Exhibit 4.3 of Cole National Corporation's Annual
Report on Form 10-K for the year ended February 3, 1996 (File
No. 1-12814).
X-1
<PAGE> 43
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
4.7 Amendment No. 1, dated as of August 21, 1997, to the Rights
Agreement, dated as of August 22, 1995, between the Company and
National City Bank, as Rights Agent, incorporated by reference
to Exhibit 4.1 of the Company's current report on Form 8-K,
filed with the Securities and Exchange Commission on August 22,
1997 (File No.
1-12814).
4.8 The Company by this filing agrees, upon request, to file with
the Commission the instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries where the
total amount of securities authorized thereunder does not exceed
10% of the total assets of the Company and its subsidiaries on a
consolidated basis.
10.1* Employment Agreement entered into as of April 1, 1996 by and
among the Company, Cole National Group, Inc., Cole Gift Centers,
Inc., Cole Vision Corporation, Things Remembered, Inc. and
Jeffrey A. Cole, incorporated by reference to Exhibit 10.1 of
Cole National Corporation's Annual Report on Form 10-K for the
year ended February
3, 1996 (File No. 1-12814).
10.2* Employment Agreement entered into as of April 1, 1996 by and
among the Company, Cole National Group, Cole Gift Centers, Inc.,
Cole Vision Corporation, Things Remembered, Inc. and Brian B.
Smith, incorporated by reference to Exhibit 10.2 of Cole
National Corporation's Annual Report on Form 10-K for the year
ended February 3, 1996 (File No. 1-12814).
10.3* Agreement dated March 27, 1993 between the Company and Joseph
Gaglioti regarding termination of employment, incorporated by
reference to Exhibit 10.8 to CNG's Registration Statement on
Form S-1 (Registration No. 33-66342).
10.4* Agreement dated April 9, 1993 between the Company and Wayne L.
Mosley regarding termination of employment, incorporated by
reference to Exhibit 10.9 to CNG's Registration Statement on
Form S-1 (Registration No. 33-66342).
10.5* 1992 Management Stock Option Plan, including forms of
Nonqualified Stock Option Agreement (Time Vesting) and
Nonqualified Stock Option Agreement (Performance Option), as
amended, and forms of promissory notes and pledge agreements,
incorporated by reference to Exhibit 10.11 to CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.6* Cole National Corporation 1993 Management Stock Option Plan,
including forms of Nonqualified Stock Option Agreement (1993
Time Vesting) and form of secured promissory notes and stock
pledge agreement, incorporated by reference to Exhibit 10.29 to
CNG's Registration Statement on Form S-1 (Registration No.
33-66342).
10.7* Form of Option Agreement for Directors of the Company,
incorporated by reference to Exhibit 10.41 to the Company's
Registration Statement on Form S-1 (Registration No. 33-74228).
X-2
<PAGE> 44
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.8* Amended and Restated Nonqualified Stock Option Plan for
Non-employee Directors, incorporated by reference to Exhibit A
to the Company's Proxy Statement for the 1997 Annual Meeting
(File No. 1-12814).
10.9* Form of Nonqualified Stock Option Agreement for Non-employee
Directors, incorporated by reference to Exhibit 10.9 of Cole
National Corporation's Annual Report on Form 10-K for the year
ended February 3, 1996 (File No. 1-12814).
10.10* Cole National Corporation 1996 Management Stock Option Plan,
including forms of Nonqualified Stock Option Agreement (1996
Time Vesting), incorporated by reference to Exhibit 10.10 of
Cole National Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
10.11* Management Incentive Bonus Program.
10.12* Form of Nonqualified Stock Option Agreement (1997 Time Vesting).
10.21* Executive Life Insurance Plan of the Company, incorporated by
reference to Exhibit 10.12 to CNG's Registration Statement on
Form S-1 (Registration No. 33-66342).
10.22* Medical Expense Reimbursement Plan of the Company effective as
of February 1, 1992, incorporated by reference to Exhibit 10.13
to CNG's Registration Statement on Form S-1 (Registration No.
33-66342).
10.23 Agreement for the Allocation of Federal Income Tax Liability and
Benefits among Members of the Parent Group dated August 23,
1985, as amended, incorporated by reference to Exhibit 10.26 to
CNG's Registration Statement on Form S-1 (Registration No.
33-66342).
10.24 Assignment and Assumption Agreement dated as of September 30,
1993 between the Company and CNG, incorporated by reference to
Exhibit 10.24 of Cole National Corporation's Annual Report on
Form 10-K for the year ended February 3, 1996 (File No.
1-12814).
10.25 Lease Agreement (Knoxville) dated as of November 28, 1979 by and
between Tommy Hensley, as agent for the real property of Mrs.
Don Siegel and Cole Vision Corporation, as amended and
supplemented, incorporated by reference to Exhibit 10.15 to
CNG's Registration Statement on Form S-1 (Registration No.
33-66342).
10.26 Lease Agreement (Memphis) dated as of October 2, 1991 by and
between Shelby Distribution Park and Cole Vision Corporation,
incorporated by reference to Exhibit 10.16 to CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.27 Lease Agreement (Richmond) dated as of April 23, 1982 by and
between Daniel, Daniel & Daniel and Cole Vision Corporation, as
amended and supplemented, incorporated by reference to Exhibit
10.17 to CNG's Registration Statement on Form S-1 (Registration
No. 33-66342).
X-3
<PAGE> 45
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.28 Lease for Multi-Tenancy Space (Salt Lake) dated as of October
30, 1981 by and between East Centennial Joint Venture and Cole
Vision Corporation, as amended and supplemented, incorporated by
reference to Exhibit 10.18 to CNG's Registration Statement on
Form S-1 (Registration No. 33-66342).
10.29 Lease Agreement (Knoxville) dated as of April 11, 1995 by and
between Richard T. Fox and Cole Vision Corporation, incorporated
by reference to Exhibit 10.29 of Cole National Corporation's
Annual Report on Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
10.30 Form of Lease Agreement Finite 19518 dated as of December 29,
1988 between Sears, Roebuck and Co. and Cole Vision Corporation,
incorporated by reference to Exhibit 10.23 to CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.31 Master License Agreement dated as of October 2, 1986, between
Montgomery Ward & Co., Incorporated and Cole Vision Corporation,
as amended, incorporated by reference to Exhibit 10.21 to CNG's
Registration Statement on Form S-1 (Registration No. 33-66342).
10.32 Master License Agreement dated as of June 12, 1986, between
Montgomery Ward & Co., Incorporated and Bay Cities Optical
Company, as amended, incorporated by reference to Exhibit 10.22
to CNG's Registration Statement on Form S-1 (Registration No.
33-66342).
10.33 Form of License Agreement (Optical), incorporated by reference
to Exhibit 10.24 to CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.34 Form of License/Lease Agreement (Optical), incorporated by
reference to Exhibit 10.25 to CNG's Registration Statement on
Form S-1 (Registration No. 33-66342).
10.37 Form of Indemnification Agreement for Directors of the Company,
incorporated by reference to Exhibit 10.19 to CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.38 Form of Indemnification Agreement for Officers of the Company,
incorporated by reference to Exhibit 10.20 to CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.39* Supplemental Retirement Benefit Plan of the Company,
incorporated by reference to Exhibit 10.38 to the Company's
Registration Statement on Form S-1 (Registration No. 33-74228).
X-4
<PAGE> 46
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.40* Supplemental Pension Plan of the Company, incorporated by
reference to Exhibit 10.48 to the Company's Registration
Statement on Form S-1 (Registration No.
33-74228).
10.41 Warrant Agreement dated as of March 6, 1992 between the Company
and the purchasers named therein, incorporated by reference to
Exhibit 10.35 to the Company's Registration Statement on Form
S-1 (Registration No. 33-74228).
10.42 Warrant Agreement dated as of September 25, 1990 between the
Company and the purchasers named therein, incorporated by
reference to Exhibit 10.36 to the Company's Registration
Statement on Form S-1 (Registration No. 33-74228).
10.45 Lease agreement (Salt Lake) dated as of November 1, 1996 by and
between Gibbons Realty Company and Cole Vision Corporation,
incorporated by reference to Exhibit 10.01 of Cole National
Corporations Quarterly Report on Form 10-Q for the period ended
November 2, 1996 (File No. 1-12814).
10.46 Credit Agreement, dated as of November 15, 1996, among Cole
Vision Corporation, Things Remembered, Inc., Cole Gift Centers,
Inc., Pearle, Inc. and Pearle Service Corporation and Canadian
Imperial Bank of Commerce, incorporated by reference to Exhibit
99.1 of Cole National Corporation's Report on Form 8-K, filed
with the Commission on December 2, 1996 (File No. 1-12814).
10.47 First Amendment to the Credit Agreement, dated as of January 13,
1997, among Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc., and Pearle Service
Corporation and Canadian Imperial Bank of Commerce, incorporated
by reference to Exhibit 10.33 of Cole National Group, Inc.'s
Registration Statement on Form S-1 (Registration No. 333-34963).
10.48 Second Amendment to Credit Agreement, dated as of August 8,
1997, among Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service
Corporation and Canadian Imperial Bank of Commerce, incorporated
by reference to Exhibit 10.34 of the Cole National Group, Inc.'s
Registration Statement on Form S-1 (Registration No. 333-34963).
10.49 CNG Guarantee and Cash Collateral Agreement, dated as of
November 15, 1996, by the Company and Cole National Corporation,
incorporated by reference to Exhibit 99.3 of Cole National
Corporation's Report on Form 8-K, filed with the Commission on
December 2, 1996 (File No. 1-12814).
10.50 Guarantee and Collateral Agreement dated as of November 15,
1996, by Cole Vision Corporation, Things Remembered, Inc., Cole
Gift Centers, Inc., Pearle, Inc. and Pearle Service Corporation
and Canadian Imperial Bank of Commerce, Incorporated by
reference to Exhibit 99.4 of Cole National Corporation's Report
on Form 8-K, filed with the Commission on December 2, 1996 (File
No. 1-12814).
X-5
<PAGE> 47
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.51 Form of Cole National Corporation 401(k) Savings Plan,
incorporated by reference to Exhibit 4.1 of Cole National
Corporation's Registration Statement on Form S-8, filed with the
Commission on November 20, 1997 (Registration No. 333-40609).
10.52* Agreement, dated August 4, 1997, between the Company and Leslie
D. Dunn regarding termination of employment, incorporated by
reference to Exhibit 10.37 of Cole National Group, Inc.'s
Registration Statement on Form S-1 (Registration No.
333-34963).
10.53* Form of Cole National Corporation Non Qualified Stock Option
Agreement (Non employee Directors), incorporated by reference to
Exhibit 10.5 of Cole National Corporation's Quarterly Report on
Form 10-Q for the period ended August 2, 1997 (File No.
1-12814).
10.54* Form of Cole National Corporation Non Employee Director Equity
and Deferred Compensation Plan, incorporated by reference to
Exhibit B to Cole National Corporation's definitive Proxy
Statement dated May 6, 1997 (File No. 1-12814).
10.55* Form of Cole National Corporation Non Employee Director Equity
and Deferred Compensation Plan Participation Agreement Plan Year
1997, incorporated by reference to Exhibit 10.7 of Cole National
Corporation's Quarterly Report on Form 10-Q for the period ended
August 2, 1997 (File No. 1-2814).
21 Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP.
24 Power(s) of Attorney.
27 Financial Data Schedule.
* Reflects management contract or other compensatory arrangement required
to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K.
X-6
<PAGE> 1
Exhibit 3.1(ii)
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
COLE NATIONAL CORPORATION
The undersigned, a Vice President of Cole National Corporation
(the "Corporation"), a corporation organized and existing under the General
Corporation Law of the State of Delaware, does hereby certify:
A. That, on March 20, 1997, the Board of Directors of the
Corporation adopted a resolution declaring the advisability of amending the
Restated Certificate of Incorporation of the Corporation as follows:
RESOLVED, that the Restated Certificate of
Incorporation of the Corporation be amended by deleting
Article FOURTH in its entirety and replacing it so as to read
as follows:
FOURTH: The total number of shares which the Company
shall have the authority to issue is 45,000,000 and the shares
shall be divided into classes as follows: (i) 5,000,000 shares
of Preferred Stock (the "Preferred Stock"), par value $.001
per share, which are not classified and (ii) 40,000,000 shares
of Common Stock, par value $.001 per share ("Common Stock").
PREFERRED STOCK
Shares of Preferred Stock of any class or of any
series of any class may be issued from time to time.
The Board of Directors is hereby authorized, within
the limitations and restrictions stated in the Article FOURTH,
to fix by resolution or resolutions the designation of each
class of Preferred Stock or series thereof and the powers,
preferences and relative, participating, optional or other
special rights, and qualifications, limitations or
restrictions thereof, including, without limiting the
generality of the foregoing, such provisions as may be desired
concerning voting, redemption, dividends, dissolution or the
distribution of assets, conversion or
<PAGE> 2
2
exchange, and such other subjects or matters as may be fixed
by resolution or resolutions of the Board of Directors under
the GCL.
B. That a meeting of the stockholders held in accordance with
the provisions of Section 222 of the General Corporation Law of the State of
Delaware, the holders of a majority of the outstanding shares of Common Stock of
the Corporation did vote to approve such Amendment of the Restated Certificate
of Incorporation.
C. That such amendment has been duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, the undersigned does make this Certificate
of Amendment, hereby declaring and certifying under penalties of perjury that
this is his act and deed and the facts stated herein are true, and accordingly
has hereunto set his hand this 12th day of June, 1997.
/s/ Joseph Gaglioti
--------------------------------
Joseph Gaglioti
Vice President
I, Tracy L. Burmeister, the Secretary of the Corporation, do
hereby attest that the foregoing Certificate of Amendment was duly adopted in
accordance with the provisions of Section 242 of the General Corporation Law of
the State of Delaware and, in witness whereof, I have hereunto set my hand this
12th day of June, 1997.
Attest: /s/ Tracy L. Burmeister
--------------------------------
Tracy L. Burmeister
Secretary
<PAGE> 1
Exhibit 10.11
COLE NATIONAL CORPORATION
MANAGEMENT INCENTIVE BONUS PROGRAM
ARTICLE I
The Program and Its Purpose
Section 1.1 ADOPTION OF PROGRAM. This Management Incentive Bonus
Program (herein referred to as the "Program") is hereby adopted, effective as of
March 17, 1996, to provide for the operation of the Program on and after such
date.
Section 1.2 PURPOSE. The purpose of the Program is (a) to provide an
annual incentive to senior managers of the Company to improve the Company's
operating results, (b) to offer opportunities for equity ownership in the
Company in order to promote retention of such senior managers and (c) to make
the Company's overall compensation program competitive with similar companies.
ARTICLE II
Definitions
Section 2.1 DEFINITIONS. For purposes of the Program, the following
terms shall be as set forth below.
"Award" means the payment earned by a Participant as such
payment is determined as set forth in Article VI.
"Base Salary" means, for any Fiscal Year, the Participant's
base salary as it has been approved as of the Performance Goals Date for such
Fiscal Year, or if the Participant's employment with the Company commences after
the Performance Goals Date but prior to November 1 of such Fiscal Year or if the
Participant is promoted into a position of substantially greater
responsibilities after the Performance Goals Date but prior to November 1 of
such Fiscal Year, the Participant's base salary at the commencement of such
employment or as effective upon such promotion.
"Board" means the Board of Directors of the Company as
it may be constituted from time to time.
"Change in Control" means the occurrence of any of the
following events:
<PAGE> 2
(a) the Company merges into itself, or is merged or
consolidated with, another corporation and as a
result of such merger or consolidation less than
51% of the voting power of the then-outstanding
voting securities of the surviving or resulting
corporation immediately after such transaction are
owned in the aggregate by the former stockholders
of the Company immediately prior to such
transaction;
(b) all or substantially all the assets accounted for
on the Consolidated Balance Sheet of the Company
are sold or transferred to one or more
corporations or persons, and as a result of such
sale or transfer less than 51% of the voting power
of the then-outstanding voting securities of such
corporation or person immediately after such sale
or transfer is held in the aggregate by the former
stockholders of the Company immediately prior to
such transaction or series of transactions;
(c) a person, within the meaning of Section 3(a)(9) or
13(d)(3) (as in effect on the date hereof) of the
Exchange Act, becomes the beneficial owner (as
defined in Rule 13d-3 of Securities and Exchange
Commission pursuant to the Exchange Act) of 15% or
more of the voting power of the then-outstanding
voting securities of the Company; provided,
however, that the foregoing does not apply to any
such acquisition that is made by (i) any
subsidiary of the Company; (ii) any employee
benefit plan of the Company or any subsidiary of
the Company; or (iii) any person or group of which
employees of the Company or of any subsidiary
control a greater than 25% interest unless the
Board determines that such person or group is
making a "hostile acquisition"; or
(d) a majority of the members of the Board are not
Continuing Directors.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
"Committee" means the Compensation Committee of the Board as
it may be constituted from time to time.
"Common Stock" means the Class A Common Stock, $.001 par value
per share, of the Company, or any other class of shares subsequently denominated
as common stock.
"Company" means Cole National Corporation, a Delaware
corporation, or any successor organization.
2
<PAGE> 3
"Continuing Director" means any member of the Board who (a)
was a member of the Board on March 17, 1996 or (b) was nominated for election or
elected to the Board with the affirmative vote of a majority of the Continuing
Directors who were members of Board at the time of such nomination or election.
"Covered Employee" means a Participant who is a "Covered
Employee" within the meaning of Section 162(m) of the Code.
"Disability" means a mental or physical condition which, in
the opinion of the Committee, renders a Participant unable or incompetent to
carry out the job responsibilities which such Participant held or the duties to
which such Participant was assigned at the time the disability was incurred, and
which is expected to be permanent or for an indefinite duration.
"Eligible Employee" has the meaning ascribed to such term in
Section 3.1 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fiscal Year" means a fiscal year of the Company.
"Participant" means an employee to whom an award is granted
pursuant to the Program.
"Performance Goals" has the meaning ascribed to such term in
Section 5.1 hereof.
"Performance Goals Date" means the date on which the Committee
establishes the Performance Goals for a Fiscal Year in accordance with Section
5.2.
"Program" means this Management Incentive Bonus Program.
"Retirement" means retirement from active employment with the
Company and each of its Subsidiaries under any retirement plan maintained by the
Company.
ARTICLE III
Eligibility and Participation
Section 3.1 ELIGIBILITY. All senior management employees of the Company
or any subsidiary thereof who are designated by the Committee as eligible
employees for the Program (an "Eligible Employee") are eligible to participate
in the Program.
3
<PAGE> 4
Section 3.2 PARTICIPATION.
--------------
(a) DESIGNATION. The Committee shall, in its sole discretion,
designate for a Fiscal Year which employees, if any, will participate in the
Program for such Fiscal Year. Each Eligible Employee approved for participation
will be notified of the selection as soon after approval as is practicable and
shall become a Participant upon acceptance by him or her of such selection.
(b) PARTICIPATION FOR EMPLOYEES HIRED AFTER COMMENCEMENT OF
FISCAL YEAR. An Eligible Employee whose employment with the Company commences
after the first day of a Fiscal Year but prior to November 1 of such Fiscal Year
and who remains actively employed through the end of the Fiscal Year may, at the
Committee's discretion, participate in the Program for the Fiscal Year on a pro
rata basis. An Eligible Employee whose employment with the Company commences
after October 31 of a particular year may not participate in the Program for the
Fiscal Year in which such employment commences.
(c) NO RIGHT TO PARTICIPATE. No Participant or Eligible
Employee has or at any time will have any right to be selected for current or
future participation in the Program.
ARTICLE IV
Plan Administration
Section 4.1 RESPONSIBILITY. The Committee has total and exclusive
responsibility to control, operate, manage and administer the Program in
accordance with its terms.
Section 4.2 AUTHORITY OF THE COMMITTEE. The Committee has and will have
all the authority that may be necessary or helpful to enable it to discharge its
responsibilities with respect to the Program. Without limiting the generality of
the foregoing, the Committee has the exclusive right to (a) interpret the
Program, (b) determine eligibility for participation in the Program, (c) decide
all questions concerning eligibility for and the amount of Awards payable under
the Program, (d) establish and administer the Performance Goals and certify
whether, and to what extent, they are attained, (e) construe any ambiguous
provision of the Program, (f) correct any default, (g) supply any omission, (h)
reconcile any inconsistency, (i) issue administrative guidelines as an aid to
administer the Program, (j) make regulations for carrying out the Program and to
make changes in such regulations as they from time to time deem proper, and (k)
decide any and all questions arising in the administration, interpretation and
application of the Program.
Section 4.3 DISCRETIONARY AUTHORITY. The Committee shall have full
discretionary authority in all matters related to the discharge of its
responsibilities and the exercise of its
4
<PAGE> 5
authority under the Program including, without limitation, its construction of
the terms of the Program and its determination of eligibility for participation
and Awards under the Program. It is the intent of the Company in establishing
the Program that the decisions of the Committee and its action with respect to
the Program will be final, binding and conclusive upon all persons having or
claiming to have any right or interest in or under the Program.
Section 4.4 SECTION 162(M) OF THE CODE. With regard to all Covered
Employees, the Program shall for all purposes be interpreted and construed in
accordance with Section 162(m) of the Code.
Section 4.5 DELEGATION OF AUTHORITY. Only the Committee may select and
grant Awards to Participants who are Covered Employees. Except for such
limitation and to the extent otherwise prohibited by law, the Committee may
delegate some or all of its authority under the Program to any person or persons
provided that any such delegation be in writing.
ARTICLE FIVE
Performance Measurement
Section 5.1 DEFINITION OF PERFORMANCE GOALS. The performance criteria
for a Fiscal Year (the "Performance Goals") will be based on objective,
quantifiable measures for the Company as a whole or the operating units of the
Company and may include, and will be limited to, earnings, operating income,
increases in revenues, return on assets, investment, sales or equity, total
stockholder return, or any combination thereof.
Section 5.2 ESTABLISHMENT OF PERFORMANCE GOALS. The Committee will. on
or before the 90th day of the Fiscal Year, establish (a) the Performance Goals
and (b) if more than one Performance Goal is established, the weighting of the
Performance Goals.
Section 5.3 ADJUSTMENTS TO PERFORMANCE GOALS. The Committee may at any
time during the first 90 days of a Fiscal Year, or, subject to the second
paragraph of this Section 5.3, at any time thereafter in its sole and absolute
discretion, adjust or modify the calculation of a Performance Goal for such
Fiscal Year in order to prevent the dilution or enlargement of the rights of
Participants (a) in the event or in anticipation of any unusual or extraordinary
corporate item, transaction, event or development; (b) in recognition or in
anticipation of any other unusual or nonrecurring events affecting the Company,
or the financial statements of the Company, or in response to or in anticipation
of changes in applicable laws, regulations, accounting principles or business
conditions; and (c) in view of the Committee's assessment of the business
strategy of the
5
<PAGE> 6
Company, performance of comparable organizations, economic and business
conditions, and any other circumstances deemed relevant.
Notwithstanding the foregoing, to the extent the exercise of such
authority after the first 90 days of a Fiscal Year would cause the Awards
granted to the Covered Employees for the Fiscal Year to fail to qualify as
"performance-based compensation" under Section 162(m) of the Code, then such
authority shall only be exercised with respect to those Participants who are not
Covered Employees.
ARTICLE SIX
Awards
Section 6.1 POTENTIAL. On or before the 90th day of each Fiscal Year
the Committee shall establish a written schedule of the amount of an Award that
will be payable to a Participant under the Program. The amount of an Award will
be expressed as a percentage of Base Salary, ranging from 0% to 100%, depending
upon the level of attainment of the Performance Goals for such Fiscal Year.
Section 6.2 CALCULATION AND APPROVAL. As soon as practicable after the
Company's financial results for the Fiscal Year have been approved by the Board,
the Committee will certify in writing the attainment of the Performance Goals
established for the Fiscal Year and will calculate the Award, if any, payable to
each Participant under the schedule established pursuant to Section 6.1 hereof.
If a Participant's Base Salary is adjusted after the Performance Goals Date for
the Fiscal Year, such Participant's Award shall be prorated as of the date of
adjustment.
Section 6.3 FORM. Awards may, at the Committee's sole discretion, be
paid in cash, Common Stock or a combination thereof, and be subject to such
terms, conditions, restrictions and limitations (including, but not limited to,
restrictions on transferability and vesting) as the Committee may determine,
provided that such terms, conditions, restrictions and limitations are not
inconsistent with the terms of the Program. For purposes of the Program, the
payment of an Award in shares of Common Stock will be based on the average of
the closing price of the Common Stock on the New York Stock Exchange for the 30
trading days prior to the last day of the Fiscal Year to which the Award
relates.
Section 6.4 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT, DISABILITY OR
DEATH. If (a) a Participant's employment is terminated during a Fiscal Year by
reason of Retirement, Disability or death, and (b) the Participant has been a
Participant in the Program for at least three months of such Fiscal Year, the
Participant will be eligible to receive a
6
<PAGE> 7
prorated Award for the Fiscal Year in which such termination of employment
occurs.
Section 6.5 OTHER TERMINATIONS OF EMPLOYMENT. Except as provided in
Sections 6.4 and 6.6 hereof, if a Participant's employment is terminated prior
to the end of a Fiscal Year, the Participant's participation in the Program
shall end, and the Participant shall not be entitled to any Award for such
Fiscal Year.
Section 6.6 CHANGE IN CONTROL. In the event of a Change in Control,
notwithstanding anything contained herein to the contrary, the Company shall pay
each Participant who is participating in the Program at the time of such Change
in Control a lump sum cash payment equal to the maximum Award that could be paid
hereunder to each Participant for the Fiscal Year in which the Change in Control
occurs. Further, all terms, conditions, restrictions and limitations in effect
on any outstanding Award shall immediately lapse on the date of such Change in
Control, and any unvested Award shall automatically become one hundred percent
(100%) immediately vested. For purposes of this Program, the Committee has and
will have the sole discretion to determine whether and the date on which a
Change in Control occurred.
Section 6.7 LIMITATIONS. Notwithstanding any provision herein to the
contrary:
(a) no Award will be paid for a Fiscal Year in which
performance fails to attain or exceed the minimum
level for any of the Performance Goals; and
(b) no Award for a Fiscal Year shall exceed $1,500,000.
Section 6.8 PAYMENT OF AWARDS BY PARTICIPANT'S EMPLOYER. The payment of
any Awards under this Program may be made to a Participant by the subsidiary of
the Company that employs the Participant or by the Company.
ARTICLE VII
Miscellaneous
Section 7.1 EMPLOYMENT. Nothing in this Program will interfere with or
limit in any way the right of the Company to terminate a Participant's
employment at any time, nor confer upon any Participant any right to continue in
the employ of the Company or a subsidiary thereof.
Section 7.2 NONASSIGNABILITY. No Award under this Program may be
subject in any manner to alienation, anticipation, sale, transfer (except by
will or the laws of descent and distribution), assignment, pledge or
encumbrance, nor may any
7
<PAGE> 8
Award be payable to anyone other than the Participant to whom it was granted
(other than by will or the laws of descent and distribution).
Section 7.3 LAWS GOVERNING. This Program is to be construed in
accordance with and governed by the laws of the State of Ohio.
Section 7.4 WITHHOLDING TAXES. The Company may deduct from all payments
under this Program any federal, state or other taxes required by law to be
withheld with respect to such payments.
Section 7.5 PROGRAM BINDING ON COMPANY AND SUCCESSORS. This Program
will be binding upon and inure to the benefit of the Company, its successors and
assigns and each Participant and his or her beneficiaries, heirs, executors,
administrators and legal representatives.
Section 7.6 AMENDMENT AND TERMINATION. The Committee may suspend or
terminate this Program at any time with or without prior notice. In addition,
the Committee may, from time to time and with or without prior notice, amend
this Program in any manner but may not without stockholder approval adopt any
amendment that would require the vote of the stockholders of the Company
pursuant to Section 16 of the Exchange Act or Section 162(m) of the Code.
Section 7.7 REGULATORY APPROVALS AND LISTINGS. Notwithstanding anything
contained herein to the contrary, the Company will have no obligation to issue
or deliver certificates of Common Stock evidencing Awards or any other Award
resulting in the payment of Common Stock prior to (a) the obtaining of any
approval from any governmental agency that the Company, in its sole discretion,
determines to be necessary or advisable, (b) the admission, if required, of such
shares to listing on the stock exchange on which the Common Stock may be listed
and (c) the completion of any registration or other qualification of said shares
under any state or federal law or ruling of any governmental body which the
Company, in its sole discretion, deems necessary or advisable.
Section 7.8 COMPLIANCE WITH SECTION 162(M). If any provision of the
Program would cause the Awards granted to a Covered Employee not to constitute
qualified "performance-based compensation" under Section 162(m) of the Code,
that provision, insofar as it pertains to the Covered Employee, shall be severed
from, and shall be deemed not to be a part of this Program, but the other
provisions hereof shall remain in full force and effect.
8
<PAGE> 1
Exhibit 10.12
COLE NATIONAL CORPORATION
Nonqualified Stock Option Agreement
(1997 Time Vesting)
This Nonqualified Stock Option Agreement (this "Agreement"),
dated as of _____________, 199_, is entered into between the individual optionee
named on the signature page hereof (the "Optionee") and Cole National
Corporation, a Delaware corporation (the "Company").
WHEREAS, the Optionee is employed by the corporation
identified as the employer on the signature page hereof in the position shown
thereon; and
WHEREAS, the execution of a Stock Option Agreement in the form
hereof has been duly authorized by a resolution of the Board of Directors of the
Company duly adopted as of the date shown on the signature page hereof; and
WHEREAS, the option granted by this Agreement is intended as a
nonqualified stock option and will not be treated as an "incentive stock option"
within the meaning of that term under Section 422 of the Internal Revenue Code
of 1986.
NOW, THEREFORE, the Company hereby grants to the Optionee an
option (the or this "Option") pursuant to the Company's 1996 Management Stock
Option Plan (the "Plan") to purchase the number of shares of Class A Common
Stock, par value $.001 per share, of the Company ("Common Stock") shown on the
signature page hereof and agrees to cause certificates for any shares purchased
hereunder to be delivered to the Optionee upon payment of the purchase price in
<PAGE> 2
2
full, all subject, however, to the terms and conditions of the Plan and the
terms and conditions hereinafter set forth. Certain terms used herein are
defined in Paragraph 8.
1. EXERCISE. (a) Except as otherwise provided herein,
this Option (until terminated as hereinafter provided) will become
exercisable on successive anniversaries of the date of this
Agreement as follows:
AMOUNT VESTED ANNIVERSARY DATE
------------- ----------------
1/4 of the then Unvested Shares First
1/3 of the then Unvested Shares Second
1/2 of the then Unvested Shares Third
All of the then Unvested Shares Fourth
To the extent exercisable, this Option may be exercised in whole or in part from
time to time.
(b) Upon the occurrence of a Sale Transaction prior to the
fourth anniversary of the date of this Agreement, this Option, in addition to
any vesting pursuant to the provisions of Paragraph 1.(a) above, will become
exercisable in full as to any then Unvested Shares immediately prior to the
consummation of such Sale Transaction.
(c) If a Termination Event occurs on a date other than an
anniversary of the date of this Agreement, this Option will, in addition to any
prior vesting pursuant to Paragraph 1.(a) above, immediately become exercisable
in full with respect to all Unvested Shares that would have vested in accordance
with Paragraph 1.(a) above at the next anniversary of the date of this Agreement
<PAGE> 3
3
if such Termination Event should not have occurred, and any remaining rights to
Unvested Shares shall immediately terminate.
(d) If the Optionee dies or becomes permanently disabled while
in the employ of the Company or any Subsidiary, or retires under a retirement
plan of the Company or any Subsidiary at or after the earliest voluntary
retirement age provided for in such retirement plan or should retire at an
earlier age with the consent of the Company's Board of Directors or the
Compensation Committee thereof (the "Compensation Committee"), this Option will,
in addition to any vesting pursuant to Paragraph 1.(a) above, immediately become
exercisable in full with respect to all Unvested Shares that would have vested
in accordance with Paragraph 1.(a) above at the next anniversary of the date of
this Agreement, and any remaining rights to Unvested Shares shall immediately
terminate.
(e) Any exercise of this Option will be made in writing by the
Optionee delivered to the Secretary of the Company.
2. EXERCISE PRICE AND PAYMENT. (a) This Option will be
exercisable for Vested Shares (whether such vesting occurs pursuant to Paragraph
1.(a), 1.(b), 1.(c) or 1.(d)) at the exercise price shown on the signature page
hereof.
(b) The exercise price for any shares may be paid
(i) in cash or by check, (ii) if approved by the Compensation Committee prior to
such exercise, by delivery to the Company of a promissory note or notes of the
Optionee; provided, however, that the principal amount of such notes for all
optionees outstanding at
<PAGE> 4
4
any one time pursuant to the Plan, the Company's 1993 Management Stock Option
Plan and the Company's 1992 Management Stock Option Plan shall not in the
aggregate exceed $3,000,000, (iii) by transfer to the Company of shares or
vested options (including options under this Agreement) for the purchase of
shares of Common Stock having a fair market value (net of the exercise price, in
the case of options) at the time of exercise equal to the portion of the option
price for which such transfer is made, or (iv) by a combination of such methods
of payment.
3. TERMINATION. This Option will terminate and all Unvested
and Vested Options then outstanding will be forfeited on the earliest of the
following dates:
(a) On the date on which the Optionee voluntarily
resigns (unless otherwise provided in a written agreement relating to
employment) or ceases to be an employee of the Company or a Subsidiary by reason
of termination of employment for Cause;
(b) Subject to possible extension pursuant to
Paragraph 3.(c) below, one year after either (i) the date on which the Optionee
ceases to be an employee of the Company or a Subsidiary by reason of retirement
under a retirement plan of the Company or a Subsidiary at or after the earliest
voluntary retirement age provided for in such retirement plan or retirement at
an earlier age with the consent of the Company's Board of Directors or the
Compensation Committee or (ii) the date of permanent disability of the Optionee
if the Optionee becomes
<PAGE> 5
5
permanently disabled while an employee of the Company or a Subsidiary;
(c) One year after the date of the death of the Optionee if
the Optionee dies while an employee of the Company or a Subsidiary or within the
one year period referred to in Paragraph 3.(b) above;
(d) One year after the date of a Termination Event;
or
(e) Ten years from the date on which this Option was granted.
4. TRANSFERABILITY. This Option is not transferable by the
Optionee otherwise than by will or the laws of descent and distribution, and if
exercised during the lifetime of the Optionee, is exercisable only by him or by
his guardian or legal representative.
5. SECURITIES LAWS. This Option is not exercisable if such
exercise would involve a violation of any applicable federal or state securities
law, and the Company hereby agrees to make reasonable efforts to comply with
such securities laws. This Option is not exercisable unless under said laws at
the time of exercise the shares of Common Stock or other securities purchasable
hereunder are exempt, are the subject matter of an exempt transaction, or are
registered in accordance with such laws.
6. ADJUSTMENTS. (a) The Board of Directors or the Compensation
Committee shall make such adjustment in the option price and in the number or
kind of shares of Common Stock or other
<PAGE> 6
6
securities covered by this Option as such Board or Committee may in good faith
determine is equitably required to prevent dilution or enlargement of the rights
of the Optionee that otherwise would result from (i) any increase or decrease in
the number or change in the kind of shares of capital stock of the Company by
reason of a stock dividend, stock split, reverse stock split, recapitalization,
spin-off or other such increase or decrease or change effected without the
receipt of consideration by the Company, or (ii) any consolidation or merger or
other reorganization, or (iii) any distribution of rights or warrants to
purchase stock to all holders of the Company's common stock, or (iv) any other
corporate transaction or event having an effect similar to any of the foregoing.
Moreover, in the event of any such transaction or event, the Board of Directors
or the Compensation Committee, in its discretion, may provide in substitution
for any or all outstanding awards under this Option such alternative
consideration as it, in good faith, may determine to be equitable in the
circumstances and may require in connection therewith the surrender of all
awards so replaced.
(b) In the event that any provision of this Agreement would
result in a calculation of a number of shares in amounts other than a whole
number, the number of shares so calculated will be reduced or increased to the
nearest whole number (rounding 0.50 up), with the effect of any such rounding
deemed to attach to the last group of shares to be so calculated (with
calculations to be conducted in alphabetical or numerical order, as applicable).
<PAGE> 7
7
7. WITHHOLDING. If the Company is required to withhold any
federal, state, local or foreign tax in connection with the exercise of this
Option, it will be a condition to such exercise that the Optionee pay or make
provision satisfactory to the Company for payment of all such taxes.
8. DEFINITIONS. The following capitalized terms have meanings
as set forth below.
"Cause" means gross neglect of duty, dishonesty, conviction of
a felony, disloyalty, intoxication, drug addiction, or other similar misconduct
adverse to the best interests of the Company; provided that if the Optionee is
party to an employment agreement which contains a more restrictive definition of
"Cause" or "for cause," such more restrictive definition will apply for purposes
of this Agreement.
"Person" means any corporation, partnership, association,
firm, entity or individual(s).
"Sale Transaction" means (a) the sale, transfer or other
disposition of all or substantially all of the assets of the Company, except a
sale, transfer or disposition (i) to a Subsidiary of the Company or (ii) that
results in the holders of the then-outstanding securities of the Company
generally eligible to vote in the election of directors of the Company
possessing, in the aggregate, a majority ownership interest in the Person
acquiring such assets, (b) any transaction resulting in a majority of the
then-outstanding securities of the Company generally eligible to vote in the
election of directors of the Company being held or
<PAGE> 8
8
owned beneficially by one Person or an affiliated group of Persons, (c) a merger
or consolidation of the Company with another Person, except a merger or
consolidation of the Company (i) with a Subsidiary of the Company (in which
event such Subsidiary, if the surviving corporation, will be deemed thereafter
to be the Company for purposes of this definition) or (ii) that results in the
holders of the then-outstanding securities of the Company generally eligible to
vote in the election of directors of the Company possessing, in the aggregate, a
majority ownership interest in the surviving Person, or (d) the voluntary
liquidation or dissolution of the Company.
"Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if each of the
corporations (or a group of corporations that themselves are Subsidiaries) other
than the last corporation in the unbroken chain owns stock possessing fifty
percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain. For purposes of this Agreement, the
continuous employ of the Optionee with the Company or a Subsidiary will not be
deemed interrupted, and the Optionee will not be deemed to have ceased to be an
employee of the Company or any Subsidiary, by reason of the transfer of his
employment among the Company and its Subsidiaries.
"Termination Event" means the Optionee's ceasing to be an
employee of the Company or a Subsidiary by reason of (i) termination of the
Optionee's employment without Cause or (ii) a
<PAGE> 9
9
sale or other disposition of the Company or the Subsidiary of which such
Optionee is employed.
"Unvested Shares" means, as of any given time, those shares of
Common Stock relating to this Option that are not, at the time in question,
otherwise permitted, under the terms of this Agreement, to be acquired pursuant
to the exercise of this Option.
"Vested Shares" means, as of any given time, those shares of
Common Stock relating to this Option that are, at the time in question,
otherwise permitted, under the terms of this Agreement, to be acquired pursuant
to the exercise of this Option.
9. ACKNOWLEDGMENT. The undersigned Optionee hereby
acknowledges receipt of an executed original of this Agreement and accepts the
Option granted hereunder.
<PAGE> 10
10
Nonqualified Stock Option
Agreement (1997 Time Vesting)
-----------------------------
EXECUTED at Cleveland, Ohio as of the date first set forth
above.
COLE NATIONAL CORPORATION
By
--------------------------------
Title
----------------------------
----------------------------------
OPTIONEE
Name of Optionee:
---------------------------------------------------------
Name of Employer:
---------------------------------------------------------
Position:
------------------------------------------------------------------
Number of Option Shares:
---------------------------------------------------
Date of Board Resolution:
---------------------------
Exercise Price per Share:
-------------------------------------------------
<PAGE> 1
EXHIBIT 21
----------
LIST OF SUBSIDIARIES OF COLE NATIONAL CORPORATION
<TABLE>
<CAPTION>
State of Names Subsidiaries
Corporation Name Incorporation Do Business Under
- ---------------- ------------- -----------------
<S> <C> <C>
Cole National Group, Inc. Delaware
Cole Managed Vision, Inc. Delaware
Bay Cities Optical Company California Ward's Optical
Cole Lens Supply, Inc. Delaware Contact Lens Supply
Contact Lens Supply Co.
Cole Vision Corporation Delaware Sears Optical
Ward's Optical
BJ's Optical Department
Target Optical
Optical Factory Outlet
Cole Vision Canada, Inc. New Brunswick, Canada Sears Optical Vision Club
Cole Vision Services, Inc. Delaware
Western States Optical, Inc. WashingtonSears Optical
Things Remembered, Inc. Delaware Things Remembered
Things Remembered Engraved Gifts
Things Engraved
HQ Gifts
Gifts Remembered
Cole Management Services, Inc. Delaware
</TABLE>
<PAGE> 2
(Continued) EXHIBIT 21
----------
LIST OF SUBSIDIARIES OF COLE NATIONAL CORPORATION
<TABLE>
<CAPTION>
State of Names Subsidiaries
Corporation Name Incorporation Do Business Under
- ---------------- ------------- -----------------
<S> <C> <C>
Pearle, Inc. Delaware
Pearle Service Corporation Delaware
Pearle VisionCare, Inc. California Pearle Vision (HMO)
Pearle Vision Center of Commonwealth of Puerto Rico Pearle Vision Center
Puerto Rico, Inc. Pearle Vision Express
Pearle Express
Pearle Vision Center Canada Limited Ontario, Canada Pearle Vision Center
Pearle Vision, Inc. Delaware Pearle Vision
Pearle Vision Center
Pearle Vision Express
Pearle Eyelab Express
Pearle Eye-Tech Express
Pearle Express
Pearle Vision Managed Care
HMO of Texas, Inc. Texas
American Vision Centers, Inc. Delaware American Vision Centers
Eyes First
NuVision, Inc. Michigan Pearle Vision
Vision Maintenance Organization, Inc. Michigan
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed registration Statements on Form S-8 Registration Statement No.
33-99552, Form S-8 Registration Statement No. 333-18765, Form S-8 Registration
Statement No. 333-19419, Form S-8 Registration No. 333-40609, Form S-8
Registration Statement No. 333-40607 and Form S-8 Registration Statement No.
333-40605.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 18, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
COLE NATIONAL CORPORATION
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Cole National Corporation, a Delaware corporation, hereby constitutes
and appoints Jeffrey A. Cole, Wayne L. Mosley and Joseph Gaglioti, and each of
them, as the true and lawful attorney or attorneys-in-fact, with full power of
substitution and revocation, for the undersigned and in the name, place and
stead of the undersigned, to sign on behalf of the undersigned an Annual Report
on Form 10-K for the fiscal year ended January 31, 1998, pursuant to Section 13
of the Securities Exchange Act of 1934 and to sign any and all amendments to
such Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting to said attorney or attorneys-in-fact, and each of them, full power and
authority to do so and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorney or attorneys-in-fact or any of them or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Executed as of the 9th day of April, 1998.
/s/ Timothy F. Finley
--------------------------------
Timothy F. Finley
Director
/s/ Irwin N. Gold
--------------------------------
Irwin N. Gold
Director
/s/ Peter V. Handal
--------------------------------
Peter V. Handal
Director
/s/ Brian B. Smith
--------------------------------
Brian B. Smith
President and Director
/s/ Charles A. Ratner
--------------------------------
Charles A. Ratner
Director
/s/ Walter J. Salmon
--------------------------------
Walter J. Salmon
Director
/s/ Jeffrey A. Cole
--------------------------------
Jeffrey A. Cole
Chairman and Chief Executive
Officer and Director
(Principal Executive Officer and
Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 68,053
<SECURITIES> 0
<RECEIVABLES> 60,541
<ALLOWANCES> 4,334
<INVENTORY> 119,970
<CURRENT-ASSETS> 284,479
<PP&E> 242,966
<DEPRECIATION> 115,162
<TOTAL-ASSETS> 651,384
<CURRENT-LIABILITIES> 211,304
<BONDS> 277,401
15
0
<COMMON> 0
<OTHER-SE> 132,000
<TOTAL-LIABILITY-AND-EQUITY> 651,384
<SALES> 1,000,198
<TOTAL-REVENUES> 1,000,198
<CGS> 340,849
<TOTAL-COSTS> 937,334
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,365
<INCOME-PRETAX> 34,971
<INCOME-TAX> 15,038
<INCOME-CONTINUING> 19,933
<DISCONTINUED> (13,967)
<EXTRAORDINARY> (12,183)
<CHANGES> 0
<NET-INCOME> (6,217)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.44)
</TABLE>
