<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999,
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM___________ TO____________.
COMMISSION FILE NUMBER 1-12814
COLE NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1453189
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5915 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO 44124
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(440) 449-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
X YES NO
--- ---
AS OF AUGUST 23, 1999, 14,855,843 SHARES OF THE REGISTRANT'S COMMON
STOCK WERE OUTSTANDING.
================================================================================
<PAGE> 2
- --------------------------------------------------------------------------------
COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JULY 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1999 AND JANUARY 30,
1999...................................................................... 1
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 13 AND 26 WEEKS ENDED
JULY 31, 1999 AND AUGUST 1, 1998.......................................... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 26 WEEKS ENDED JULY 31,
1999 AND AUGUST 1, 1998................................................... 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 4 - 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 7 - 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................ 11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 13
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
July 31, January 30,
1999 1999
--------- ---------
Assets
- ------
Current assets:
Cash and temporary cash investments $ 25,254 $ 51,057
Accounts receivable, less allowance for
doubtful accounts of $8,935 in 1999 and
$7,189 in 1998 46,573 45,561
Current portion of notes receivable 3,452 2,707
Refundable income taxes 9,556 9,556
Inventories 126,852 119,881
Prepaid expenses and other 8,529 8,582
Deferred income tax benefits 13,739 14,048
--------- ---------
Total current assets 233,955 251,392
Property and equipment, at cost 268,710 261,605
Less-accumulated depreciation and amortization (142,721) (135,731)
--------- ---------
Total property and equipment, net 125,989 125,874
Other assets:
Notes receivable, excluding current portion 30,892 32,039
Deferred income taxes and other assets 62,742 59,021
Intangible assets, net 157,160 159,698
--------- ---------
Total assets $ 610,738 $ 628,024
========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,623 $ 1,497
Accounts payable 56,873 73,065
Accrued interest 6,280 6,216
Accrued liabilities 89,986 101,791
Accrued income taxes 4,482 128
--------- ---------
Total current liabilities 159,244 182,697
Long-term debt, net of discount and current portion 285,222 276,013
Other long-term liabilities 14,490 23,954
Stockholders' equity 151,782 145,360
--------- ---------
Total liabilities and stockholders' equity $ 610,738 $ 628,024
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
-1-
<PAGE> 4
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13 Weeks Ended 26 Weeks Ended
-------------------- --------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
-------- -------- -------- --------
Net revenue $267,502 $267,611 $534,134 $539,439
Costs and expenses:
Cost of goods sold 90,205 89,132 177,503 179,421
Operating expenses 155,828 147,721 314,788 304,039
Depreciation and amortization 8,797 8,091 17,931 16,489
-------- -------- -------- --------
Total costs and expenses 254,830 244,944 510,222 499,949
-------- -------- -------- --------
Operating income 12,672 22,667 23,912 39,490
Interest and other (income)
expense, net 5,895 6,233 11,984 12,520
-------- -------- -------- --------
Income before income taxes 6,777 16,434 11,928 26,970
Income tax provision 2,779 6,634 4,891 11,058
-------- -------- -------- --------
Net income $ 3,998 $ 9,800 $ 7,037 $ 15,912
======== ======== ======== ========
Earnings per common share:
Basic- $ .27 $ .66 $ .47 $ 1.07
Diluted- $ .27 $ .64 $ .47 $ 1.04
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
-2-
<PAGE> 5
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
26 Weeks Ended
--------------------
July 31, August 1,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,037 $ 15,912
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 17,931 16,489
Amortization of restricted stock awards 271 --
Non-cash interest, net (854) (473)
Change in assets and liabilities:
Decrease (increase) in accounts and notes
receivable, prepaid expenses and other assets 319 (5,580)
Increase in inventories (6,971) (5,950)
Decrease in accounts payable, accrued liabilities
and other liabilities (25,697) (23,220)
Increase in accrued interest 64 207
Increase in accrued, refundable and deferred
income taxes 4,354 10,090
-------- --------
Net cash provided (used) by operating activities (3,546) 7,475
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (12,901) (22,563)
Systems development costs (6,500) (10,150)
Investment in Pearle Europe, net (1,360) (7,152)
Acquisitions of businesses, net -- (2,923)
Other, net (582) 402
-------- --------
Net cash used by investing activities (21,343) (42,386)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (710) (682)
Net proceeds from exercise of stock options and warrants 153 1,857
Common stock repurchased (564) --
Other, net 207 (165)
-------- --------
Net cash provided (used) by financing activities (914) 1,010
-------- --------
Cash and temporary cash investments:
Net decrease during the period (25,803) (33,901)
Balance, beginning of the period 51,057 68,053
-------- --------
Balance, end of the period $ 25,254 $ 34,152
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
-3-
<PAGE> 6
COLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Cole
National Corporation and its wholly owned subsidiaries, including Cole
National Group, Inc. and its wholly owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated
in consolidation.
The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although
management believes that the disclosures herein are adequate to make the
information not misleading. Results for interim periods are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with Cole National Corporation's consolidated
financial statements for the fiscal year ended January 30, 1999.
In the opinion of management, the accompanying financial statements
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly its financial position as of July 31, 1999 and
the results of operations and cash flows for the 26 weeks ended July 31,
1999 and August 1, 1998.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories.
Cash Flows
Net cash flows from operating activities reflect cash payments for
income taxes and interest of $283,000 and $13,331,000, respectively, for the
26 weeks ended July 31, 1999, and $912,000 and $13,471,000, respectively,
for the 26 weeks ended August 1, 1998.
Earnings Per Share
Earnings per share for the 13 and 26 weeks ended July 31, 1999 and
August 1, 1998 have been calculated based on the following weighted average
number of common shares and equivalents outstanding:
13 Weeks 26 Weeks
-------------------------- -------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Basic 14,855,657 14,881,801 14,862,827 14,818,344
Diluted 14,874,604 15,344,539 14,971,526 15,310,805
-4-
<PAGE> 7
(2) RESTRUCTURING CHARGE
In the fourth quarter of fiscal 1998, the Company recorded a
restructuring charge related to Pearle's operations. The Company's
restructuring plan, which included the closing of certain unprofitable
stores during fiscal 1999 and removing surfacing equipment from certain
in-store full service labs through the second quarter of 2000, is
proceeding. The estimated costs of the restructuring are expected to
approximate original estimates. During the first half of fiscal 1999, the
Company closed a total of 17 Pearle stores and no in-store labs. The
restructuring reserves remaining at January 30, 1999 were $7.1 million, of
which approximately $4.9 million were paid in the first six months of fiscal
1999. The remaining reserve at July 31, 1999 of $2.2 million is expected to
be paid through the fourth quarter of fiscal 1999.
(3) LONG TERM DEBT
In the fourth quarter of fiscal 1998, the Company entered into an
irrevocable commitment to contribute $10,000,000 to a leading medical
institution, supporting the development of a premier eye care research and
surgical facility.
On April 23, 1999, the Company issued a $10,000,000 promissory note
bearing interest at 5% per annum in recognition of the commitment. Prior to
this, the obligation was classified with other long-term liabilities in the
consolidated balance sheet. The note requires a $5,000,000 principal payment
to be made on April 23, 2004, and principal payments in the amount of
$1,000,000 to be made on the anniversary date of the note each successive
year through 2009. Interest will be paid at the end of each year for the
first 5 years, and thereafter with each payment of principal.
(4) CREDIT FACILITY
In August 1999, the Company's credit facility was amended and
extended until January 31, 2003. Borrowings under the credit facility
initially bear interest based on leverage ratios at a rate equal to, at the
option of the principal operating subsidiaries of Cole National Group,
either (a) the Eurodollar Rate plus 2% or (b) 1% 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 .5%. Cole National Group pays a commitment fee of between .375%
and .75% per annum on the total unused portion of the facility based on the
percentage of revolving credit commitments used.
-5-
<PAGE> 8
(5) SEGMENT INFORMATION
Information on the Company's reportable segments is as follows (000's
omitted):
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
---------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue:
Cole Vision $ 198,634 $ 203,368 $ 416,865 $ 429,468
Things Remembered 68,868 64,243 117,269 109,971
--------- --------- --------- ---------
Consolidated net revenue $ 267,502 $ 267,611 $ 534,134 $ 539,439
========= ========= ========= =========
Income or loss:
Cole Vision $ 4,077 $ 15,102 $ 18,404 $ 35,958
Things Remembered 10,479 8,969 9,138 6,342
--------- --------- --------- ---------
Total segment profit 14,556 24,071 27,542 42,300
Unallocated amounts:
Corporate expenses (1,884) (1,404) (3,630) (2,810)
--------- --------- --------- ---------
Consolidated operating income 12,672 22,667 23,912 39,490
Interest and other expense, net (5,895) (6,233) (11,984) (12,520)
--------- --------- --------- ---------
Income before income taxes $ 6,777 $ 16,434 $ 11,928 $ 26,970
========= ========= ========= =========
</TABLE>
(6) RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform with the 1999
presentation.
-6-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of certain factors affecting Cole
National Corporation's results of operations for the 13 and 26 week periods
ended July 31, 1999 and August 1, 1998 (the Company's second quarter and
first six months) and its liquidity and capital resources. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this filing and the audited financial
statements for the fiscal year ended January 30, 1999 included in the annual
report on Form 10-K.
Fiscal years end on the Saturday closest to January 31 and are
identified according to the calendar year in which they begin. For example,
the fiscal year ended January 30, 1999 is referred to as "fiscal 1998." The
current fiscal year, which will end January 29, 2000, is referred to as
"fiscal 1999."
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
second quarter and first six months of fiscal 1999 and fiscal 1998 (dollars
in millions):
<TABLE>
<CAPTION>
Second Quarter First Six Months
--------------------------- ---------------------------
Fiscal Fiscal Fiscal Fiscal
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
Net Revenue-
<S> <C> <C> <C> <C> <C> <C>
Cole Vision $ 198.6 $ 203.4 (2.3%) $ 416.8 $ 429.4 (2.9%)
Things Remembered 68.9 64.2 7.2% 117.3 110.0 6.6%
-------- -------- -------- --------
Total net revenue $ 267.5 $ 267.6 0.0% $ 534.1 $ 539.4 (1.0%)
Gross profit $ 177.3 $ 178.5 (0.7%) $ 356.6 $ 360.0 (0.9%)
Operating expenses 155.8 147.7 5.5% 314.8 304.0 3.5%
Depreciation & amortization 8.8 8.1 8.7% 17.9 16.5 8.7%
-------- -------- -------- --------
Operating income $ 12.7 $ 22.7 (44.1%) $ 23.9 $ 39.5 (39.4%)
======== ======== ======== ========
Percentage of Net Revenue-
Gross margin 66.3% 66.7% (0.4) 66.8% 66.7% 0.1
Operating expenses 58.3 55.2 3.1 58.9 56.4 2.5
Depreciation & amortization 3.3 3.0 0.3 3.4 3.0 0.4
-------- -------- -------- --------
Operating income 4.7% 8.5% (3.8) 4.5% 7.3% (2.8)
======== ======== ======== ========
Number of Retail Locations
at the End of the Period-
Cole Licensed Brands 1,176 1,161
Pearle company-owned 462 461
Pearle franchised 418 403
-------- --------
Total Cole Vision 2,056 2,025
Things Remembered 810 823
-------- --------
Total Cole National 2,866 2,848
======== ========
</TABLE>
-7-
<PAGE> 10
The softness in net revenue for the second quarter and first six
months of fiscal 1999 was primarily attributable to decreases in
consolidated comparable store sales, partially offset by growth in the
number of locations since last year. Changes in comparable store sales by
business were:
Second Quarter First Six Months
-------------- ----------------
Cole Licensed Brands (U.S.) (4.5%) (4.7%)
Pearle company-owned (U.S.) (4.0%) (5.9%)
Total Cole Vision (4.0%) (4.8%)
Things Remembered 6.9% 7.0%
Total Cole National (1.0%) (2.0%)
Sales at Cole Licensed Brands were negatively impacted by a competitive
promotional environment to which Cole began responding at the end of the
second quarter. This response produced an improvement in the sales trend
during the last two weeks of the quarter. Sales at Pearle were impacted by
the competitive promotional environment and Pearle's focus on long-term,
brand-building in its advertising campaign, as well as operating issues the
company is actively addressing. During the second quarter, Pearle refocused
its marketing efforts to become more promotional, resulting in an improved
trend in comparable store sales as compared to the first quarter. The second
quarter sales decrease at Cole Vision reflected a decline in the number of
spectacles sold as well as a lower average selling price for contact lenses
at Cole Licensed Brands and a reduction in the average transaction amount at
Pearle due to a change in promotions between years. At Things Remembered,
the comparable store sales increase reflected increased sales of additional
personalization and new merchandise at higher average unit retails, along
with the benefits from marketing directly to its existing customer base. The
number of transactions at Things Remembered in the second quarter was
essentially flat compared to a year ago. During the first six months of
fiscal 1999, Cole National Corporation opened 52 new locations and closed 70
locations.
The gross profit decreases for the second quarter and first six
months of fiscal 1999 compared to those same periods in fiscal 1998 were
primarily attributable to the lower revenue at Cole Vision, partially offset
by the revenue increase at Things Remembered. Gross margin at Cole Vision
declined 0.9 and 0.4 percentage points in the second quarter and first six
months of fiscal 1999, respectively, compared to the same periods last year.
The lower gross margin at Cole Vision was due in part to the impact of lower
contact lens margins in the second quarter. Gross margin at Things
Remembered improved 0.7 and 1.3 percentage points in the second quarter and
first six months of fiscal 1999, respectively, reflecting increased sales of
additional personalization and higher margins from new products.
The unfavorable leverage in operating expenses in the second quarter
was primarily attributable to a 1.2 percentage point increase in payroll
costs, a 1.4 percentage point increase in net advertising expenditures and a
0.7 percentage point increase in managed vision care expenses. The
unfavorable leverage for the first six months was primarily attributable to
a 1.2 percentage point increase in payroll costs, a 0.4 percentage point
increase in net advertising expenditures and a 0.6 percentage point increase
in managed vision care expenses. The unfavorable payroll leverages were due
to the comparable store sales decreases at Cole Vision and to staffing
increases in managed vision care and information systems, partly offset by
payroll leverage gains on the sales increases at Things Remembered. The
-8-
<PAGE> 11
unfavorable advertising leverage was largely due to increased advertising at
Cole Vision in the second quarter of fiscal 1999 in response to the
competitive pricing environment. The increases in managed vision care
expenses were primarily attributable to growth in call and claims volumes
associated with increases in sponsor-funded programs. The depreciation and
amortization expense increases were primarily attributable to the increases
in amortization of systems development and software costs.
See the notes to consolidated financial statements for information on
the status of the Company's restructuring charge recorded in the fourth
quarter of fiscal 1998.
The decreases in income from operations were primarily the result of
the decreases in net revenue and gross profit, and the increases in
operating expenses and depreciation and amortization. Net interest and other
expense in fiscal 1999 decreased slightly from the second quarter and first
six months of fiscal 1998. An income tax provision was recorded in the first
six months of fiscal 1999 and fiscal 1998 using the Company's estimated
annual effective tax rate of 41% in both years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is funds provided from
operations of its operating subsidiaries. In addition, its wholly-owned
subsidiary, Cole National Group, Inc., and its operating subsidiaries have
available to them working capital commitments of $75.0 million, reduced by
commitments under letters of credit, under a credit facility that was
recently extended through January 2003. There were no working capital
borrowings outstanding at any time during the first six months of fiscal
1999 and 1998. As of July 31, 1999, availability under the credit facility
totaled $59.8 million, after reduction for commitments under outstanding
letters of credit.
Operations for the first six months used $3.5 million of cash in
fiscal 1999 compared to cash provided of $7.5 million in fiscal 1998. The
primary reason for the additional $11.0 million in cash used by operations
was the decrease in operating income in fiscal 1999, partially offset by not
having the increase in accounts and notes receivable, prepaid expenses and
other assets that was experienced in fiscal 1998.
Cash used by investing activities included capital additions of $12.9
million and $22.6 million for the first six months of fiscal 1999 and fiscal
1998, respectively. The majority of capital expenditures were for store
fixtures, equipment and leasehold improvements for new stores and the
remodeling of existing stores. Capital expenditures in fiscal 1998 also
included $9.5 million to purchase the office building now occupied by Cole
Vision. Investments in systems development costs totaled $6.5 million and
$10.2 million in the first six months of fiscal 1999 and fiscal 1998,
respectively. In July 1999, the Company invested an additional $1.2 million
in the form of 9% shareholder loans to Pearle Europe B.V. (Pearle Europe)
and $0.2 million in additional equity in connection with Pearle Europe's
acquisition of a retail optical chain in Italy. 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.
-9-
<PAGE> 12
The Company believes that funds provided from operations, along with
funds available under the credit facility, will provide adequate sources of
liquidity to allow its operating subsidiaries to continue to expand the
number of stores and to fund capital expenditures and systems development
costs.
YEAR 2000
The Company is proceeding with the implementation of its Year 2000
Readiness Program, including ascertaining Year 2000 readiness of critical
third parties. Management continues to believe that all critical programs
and hardware will be Year 2000 ready, including testing, by the end of the
third quarter of fiscal 1999 and expects that any necessary contingency
plans will be completed at that time.
Management estimates the total cost of the Year 2000 Readiness
Program will be approximately $3.6 million, including $0.3 million of new
hardware and software that has been capitalized. The remaining $3.3 million
is being expensed as incurred (approximately $2.4 million in fiscal 1998 and
$0.9 million in fiscal 1999, including $0.5 million during the first six
months). These costs include only external costs as internal costs, which
consist primarily of payroll-related costs of employees, are not tracked
separately for the Year 2000 Readiness Program. The estimate of external
costs does not include costs associated with addressing and resolving issues
as a result of the failure of third parties to become Year 2000 ready. See
the Company's Annual Report on Form 10-K for the fiscal year ended January
30, 1999 for further discussion of Year 2000.
RECENT DEVELOPMENTS AND FORWARD-LOOKING INFORMATION
In the second half of fiscal 1999, the Company will continue to
respond to the competitive pricing environment that exists in the retail
optical market with the development and implementation of promotional
messages in order to attract customers and improve comparable store sales.
These actions may cause a negative impact on gross margin and may not
significantly improve the recent trend in sales for the remainder of the
year. Operating income for the second half of fiscal 1999 is expected to be
below the same period of the prior year.
Certain sections of this Form 10-Q, including this Management's
Discussion and Analysis, contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from those forecast due to a variety of
factors that can adversely affect operating results, liquidity and financial
condition such as risks associated with the timing and achievement of the
continuing restructuring and improvements in the operations of the optical
business, the ability of Cole National Corporation and its suppliers, host
stores, and managed vision care organization partners to achieve Year 2000
readiness, the integration of acquired operations, the ability to select,
stock and price merchandise attractive to customers, the implementation of
its store acquisition program, economic and weather factors affecting
consumer spending, operating factors affecting customer satisfaction,
including manufacturing quality of optical and engraved goods, the
relationships with host stores and franchisees, the mix of goods sold,
pricing and other competitive factors, and the seasonality of the business.
Forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting Cole National Corporation. All
forward-looking statements involve risk and uncertainty.
-10-
<PAGE> 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign
currency exchange rates, which could impact its results of operations and
financial condition. Foreign exchange risk arises from the Company's
exposure in fluctuations in foreign currency exchange rates because The
Company's reporting currency is the United States dollar. Management seeks
to minimize the exposure to foreign currency fluctuations through natural
internal offsets to the fullest extent possible.
-11-
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 10, 1999, the Company held its annual meeting of
stockholders. At that meeting, the stockholders elected seven directors to
serve until the next annual meeting of stockholders, approved the 1999
Employee Stock Purchase Plan, approved the amended 1998 Equity and
Performance Incentive Plan ("Omnibus Plan"), and confirmed the appointment
of Arthur Andersen LLP as independent auditors of the Company for the fiscal
year ending January 29, 2000.
Of the total eligible votes of 14,879,243, stockholders cast votes of
13,813,321 or 92.84% of the total eligible votes. The votes cast for the
aforementioned matters were as follows:
1) Election of Directors
<TABLE>
<CAPTION>
Abstentions
and/or Broker
For Withheld non-votes
---------- -------- ---------
<S> <C> <C> <C>
Jeffrey A. Cole 13,243,549 569,772 0
Timothy F. Finley 13,248,647 564,674 0
Irwin W. Gold 13,250,382 562,939 0
Peter V. Handal 13,248,832 564,489 0
Charles A. Ratner 13,249,972 563,349 0
Walter J. Salmon 13,249,882 563,439 0
Brian B. Smith 13,244,559 568,762 0
2) 1999 Employee Stock Purchase Plan
Abstentions
and/or Broker
For Withheld non-votes
---------- -------- ---------
Approval of Plan 13,449,128 359,054 5,139
3) Amendments to the 1998 Equity and Performance Incentive Plan ("Omnibus Plan")
Abstentions
and/or Broker
For Withheld non-votes
---------- -------- ---------
Approval of Plan 12,176,185 1,632,283 4,853
4) Confirmation of Independent Auditors
Abstentions
and/or Broker
For Withheld non-votes
---------- -------- ---------
Arthur Andersen LLP 13,560,912 250,310 2,099
</TABLE>
-12-
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
27 Financial Data Schedule
10.1 Fifth Amendment to the Credit Agreement, dated as of August
20, 1999, among Cole Vision Corporation, Things Remembered,
Inc., and Pearle Inc. and Canadian Imperial Bank of Commerce.
(b) Report on Form 8-K
The Company has not filed any reports on Form 8-K for the quarterly
period ended July 31, 1999.
-13-
<PAGE> 16
SIGNATURE
---------
Pursuant to the requirements 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
By: /s/ Wayne L. Mosley
----------------------------------------
Wayne L. Mosley
Vice President and Controller
(Duly Authorized Officer and Principal
Accounting Officer)
Date: September 14, 1999
-14-
<PAGE> 17
COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED JULY 31, 1999
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
10.1 Fifth Amendment to the Credit Agreement, dated as of August
20, 1999, among Cole Vision Corporation, Things Remembered,
Inc., and Pearle Inc. and Canadian Imperial Bank of Commerce.
-15-
<PAGE> 1
Exhibit 10.1
FIFTH AMENDMENT
FIFTH AMENDMENT, dated as of August 20, 1999 (this
"AMENDMENT"), to the Credit Agreement, dated as of November 15, 1996 (as
amended, supplemented or otherwise modified from time to time, the "CREDIT
AGREEMENT"), among COLE VISION CORPORATION, a Delaware corporation ("COLE
VISION"), THINGS REMEMBERED, INC., a Delaware corporation ("THINGS REMEMBERED")
and PEARLE, INC., a Delaware corporation ("PEARLE"; Cole Vision, Things
Remembered and Pearle each being referred to as a "BORROWER" and collectively as
the "BORROWERS"), the several banks and other financial institutions from time
to time parties thereto (collectively, the "LENDERS") and CANADIAN IMPERIAL BANK
OF COMMERCE, a Canadian-chartered bank acting through its New York Agency, as
administrative agent for the Lenders thereunder (in such capacity, the
"ADMINISTRATIVE AGENT").
W I T N E S S E T H:
WHEREAS, the Borrowers, the Lenders and the Administrative
Agent are parties to the Credit Agreement;
WHEREAS, the Borrowers have requested that the Administrative
Agent and the Lenders amend the Credit Agreement as set forth herein; and
WHEREAS, the Administrative Agent and the Lenders are willing
to effect such amendment, but only upon the terms and subject to the conditions
set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual
agreements contained herein, and for other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the Borrowers, the Lenders and the
Administrative Agent hereby agree as follows:
1 DEFINED TERMS. Unless otherwise defined herein, terms
defined in the Credit Agreement shall have such meanings when used herein.
2 AMENDMENT TO SUBSECTION 1.1. Subsection 1.1 of the Credit
Agreement is hereby amended by:
(a) changing the definitions of "Majority Lenders" and "Revolving
Credit Commitment Termination Date" to read in their entireties as follow:
"MAJORITY LENDERS": (i) at such periods in which each
Lender's Revolving Credit Commitment Percentage is less than
30%, Non-Defaulting Lenders the Revolving Credit Commitment
Percentages of which aggregate more than 50% of the aggregate
Revolving Credit Commitment Percentages of all Non-Defaulting
Lenders and (ii) at all such other periods, Non-Defaulting
Lenders the Revolving Credit Commitment Percentages of which
aggregate more than 66-2/3% of the aggregate Revolving Credit
Commitment Percentages of all Non-Defaulting Lenders.
<PAGE> 2
2
`REVOLVING CREDIT COMMITMENT TERMINATION DATE': the
earlier of (a) January 31, 2003 or, if such date is not a
Business Day, the Business Day next preceding such date and
(b) the date upon which the Revolving Credit Commitments shall
have terminated pursuant hereto."; and
(b) deleting the words "Adjusted Interest Coverage Ratio" appearing in
the definition of "Applicable Margin" and substituting in lieu thereof
the words "Leverage Ratio".
3 AMENDMENT TO SUBSECTION 2.4. Subsection 2.4 of the Credit
Agreement is hereby amended by changing such subsection to read in its entirety
as follows:
"2.4 COMMITMENT FEES; OTHER FEES. (a) The Borrowers agree,
jointly and severally, to pay to the Administrative Agent for the
account of each Lender, a commitment fee for the period from and
including the first day of the Revolving Credit Commitment Period to
the Revolving Credit Commitment Termination Date, computed at the rate
per annum set forth under the heading "Commitment Fees" on Schedule II
opposite the percentage which is the average daily amount of the
Aggregate Outstanding Revolving Credit of all Lenders during the period
for which payment is made constitutes of the average daily amount of
the Available Revolving Credit Commitment of such Lender during such
payment period, payable quarterly in arrears on the last day of each
fiscal quarter of CNG and on the Revolving Credit Commitment
Termination Date, commencing on the first of such days to occur after
the Closing Date."
4 AMENDMENT TO SECTION 7. Section 7 of the Credit Agreement is
hereby amended by adding to such Section the following new subsection 7.12:
"7.12 YEAR 2000. Ensure that any reprogramming and testing
required of all the material software, hardware, database and other
similar or related items of automated or computerized systems
(collectively, "Systems") relied on in its operations to permit such
Systems to be Year 2000 compliant shall be completed by November 2,
1999. For purposes of this Agreement, an item is "Year 2000 compliant"
if it will not malfunction, will not cease to function, will not
generate incorrect data, and will not produce incorrect results when
processing, providing or receiving (i) date-related data into and
between the twentieth and twenty-first centuries and (ii) date-related
data in connection with any valid data in the twentieth and
twenty-first centuries.".
<PAGE> 3
3
5 AMENDMENT TO SUBSECTIONS 8.1(a), 8.1(b) AND 8.1(c).
Subsections 8.1(a), 8.1(b) and 8.1(c) of the Credit Agreement are hereby amended
by deleting such subsections in their entireties and substituting in lieu
thereof the following:
"(a) LEVERAGE RATIO. Permit the Leverage Ratio as of the end
of each fiscal quarter of CNG ending on or about any of the dates set
forth below to be greater than the ratio set forth opposite such date
below:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Leverage Ratio
--------------------- --------------
<S> <C>
January 31, 1997 3.85 to 1.00
April 30, 1997 3.75 to 1.00
July 31, 1997 3.60 to 1.00
October 31, 1997 3.45 to 1.00
January 31, 1998 3.25 to 1.00
April 30, 1998 3.10 to 1.00
July 31, 1998 2.95 to 1.00
October 31, 1998 2.80 to 1.00
January 31, 1999 2.80 to 1.00
April 30, 1999 2.80 to 1.00
July 31, 1999 3.50 to 1.00
October 31, 1999 3.75 to 1.00
January 31, 2000 3.75 to 1.00
April 30, 2000 3.75 to 1.00
July 31, 2000 3.75 to 1.00
October 31, 2000 3.50 to 1.00
January 31, 2001 3.50 to 1.00
April 30, 2001 3.50 to 1.00
July 31, 2001 3.50 to 1.00
October 31, 2001 3.25 to 1.00
January 31, 2002 3.25 to 1.00
Thereafter 3.00 to 1.00
</TABLE>
<PAGE> 4
4
(b) ADJUSTED INTEREST COVERAGE RATIO. Permit the Adjusted
Interest Coverage Ratio as of the end of each fiscal quarter of CNG
ending on or about any of the dates set forth below to be less than the
ratio set forth opposite such date below:
<TABLE>
<CAPTION>
Adjusted
Fiscal Quarter Ending Interest Coverage Ratio
--------------------- -----------------------
<S> <C>
January 31, 1997 1.40 to 1.00
April 30, 1997 1.50 to 1.00
July 31, 1997 1.55 to 1.00
October 31, 1997 1.60 to 1.00
January 31, 1998 1.65 to 1.00
April 30, 1998 1.70 to 1.00
July 31, 1998 1.75 to 1.00
October 31, 1998 1.80 to 1.00
January 31, 1999 1.75 to 1.00
April 30, 1999 1.75 to 1.00
July 31, 1999 1.50 to 1.00
October 31, 1999 1.50 to 1.00
January 31, 2000 1.50 to 1.00
April 30, 2000 1.50 to 1.00
July 31, 2000 1.50 to 1.00
October 31, 2000 1.50 to 1.00
January 31, 2001 1.50 to 1.00
April 30, 2001 1.50 to 1.00
July 31, 2001 1.50 to 1.00
October 31, 2001 1.50 to 1.00
January 31, 2002 1.50 to 1.00
Thereafter 1.60 to 1.00
</TABLE>
<PAGE> 5
5
(c) MINIMUM CONSOLIDATED NET WORTH. Permit the Consolidated
Net Worth of CNG as of the end of each fiscal quarter of CNG ending on
or about any of the dates set forth below to be less than the amount
set forth opposite such date below:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Consolidated Net Worth
--------------------- ----------------------
<S> <C>
January 31, 1997 $9,000,000
April 30, 1997 $9,000,000
July 31, 1997 $15,000,000
October 31, 1997 $18,000,000
January 31, 1998 $28,000,000
April 30, 1998 $30,000,000
July 31, 1998 $40,000,000
October 31, 1998 $50,000,000
January 31, 1999 $60,000,000
April 30, 1999 $67,000,000
July 31, 1999 $80,000,000
October 31, 1999 $80,000,000
January 31, 2000 $85,000,000
April 30, 2000 $90,000,000
July 31, 2000 $90,000,000
October 31, 2000 $90,000,000
January 31, 2001 $95,000,000
April 30, 2001 $100,000,000
July 31, 2001 $100,000,000
October 31, 2001 $100,000,000
January 31, 2002 $105,000,000
April 30, 2002 $110,000,000
July 31, 2002 $115,000,000
October 31, 2002 $115,000,000
January 31, 2003 $120,000,000".
</TABLE>
6 AMENDMENT TO SUBSECTION 8.8. Subsection 8.8 of the Credit
Agreement is hereby amended by deleting the words appearing in the last line of
the table appearing therein and substituting in lieu thereof the following:
<TABLE>
<S> <C>
"January 30, 2000 - January 29, 2001 $45,000,000
January 30, 2001 - January 29, 2002 $50,000,000
January 30, 2002 - Revolving Credit Termination Date $55,000,000".
</TABLE>
<PAGE> 6
6
7 AMENDMENT TO SUBSECTION 9(M). Subsection 9(m) of the Credit
Agreement is hereby amended by deleting the amount "$20,000,000" appearing
therein and substituting in lieu thereof the amount "$30,000,000".
8 AMENDMENT TO SCHEDULES I AND II TO CREDIT AGREEMENT.
Schedules I and II to the Credit Agreement are hereby amended by deleting such
Schedules in their entireties and inserting in lieu thereof the revised
Schedules I and II attached hereto as Exhibits A and B, respectively.
9 AMENDMENT FEE. In consideration of the agreement of the
Lenders to consent to the amendments contained herein, the Borrowers agree to
pay to each Lender which so consents on or prior to August 13, 1999 (by
executing and delivering to the Administrative Agent or its counsel this
Amendment on or prior to such date), an amendment fee in an amount equal to
.375% of the amount of such Lender's Commitment, payable on the effective date
of this Amendment in immediately available funds to the Administrative Agent on
behalf of such Lender.
10 REPRESENTATIONS AND WARRANTIES. Each Borrower hereby
confirms, reaffirms and restates the representations and warranties made by it
in Section 5 of the Credit Agreement, PROVIDED that each reference to the Credit
Agreement therein shall be deemed to be a reference to the Credit Agreement
after giving effect to this Amendment. Each Borrower represents and warrants
that, after giving effect to this Amendment, no Default or Event of Default has
occurred and is continuing.
11 CONDITIONS TO EFFECTIVENESS. This Amendment shall become
effective on the date (the "AMENDMENT EFFECTIVE DATE") on which all of the
following conditions precedent have been satisfied or waived:
(a) the Borrowers, the Lenders, and the Administrative Agent
shall have executed and delivered to the Administrative Agent this
Amendment, and the Guarantors shall have executed and delivered to the
Administrative Agent the Acknowledgment and Consent attached hereto;
(b) each of the lenders listed on the Consent of Withdrawing
Lenders attached hereto (each, a "WITHDRAWING LENDER") shall have
executed and delivered to the Administrative Agent a counterpart of
such Consent; and
(c) the Borrowers shall have paid (i) the fees referred to in
Section 9 above and (ii) all commitment fees and letter of credit
commissions accrued for the account of the Withdrawing Lenders under
subsections 2.4 and 3.3, respectively, of the Credit Agreement that are
unpaid as of the Amendment Effective Date (the "PAYOFF AMOUNT") (the
Administrative Agent shall promptly remit to each Withdrawing Lender
its respective Payoff Amount so received by the Administrative Agent).
<PAGE> 7
7
12. WITHDRAWING LENDERS. Upon the occurrence of the Amendment
Effective Date and the payment to the Withdrawing Lenders of any interest, fees
or principal due to such parties as of the Amendment Effective Date (a) the
Withdrawing Lenders shall no longer be the Lenders under the Credit Agreement
and the terms "Lenders" and "Lender" shall not include the Withdrawing Lenders,
(b) the Lenders which are listed on Exhibit A hereto shall be the "Lenders"
under the Credit Agreement for all purposes thereof, the Revolving Credit Notes
and the other Loan Documents and, in the case of each Lender which was not a
party to the Credit Agreement prior to the Amendment Effective Date, shall
thereafter be entitled to all benefits of a Lender and subject to all
obligations of a Lender thereunder and (c)(i) each Withdrawing Lender shall be
released from all of its obligations under the Credit Agreement and the other
Loan Documents and shall cease to be a party thereto (except for obligations set
forth in subsection 11.15 of the Credit Agreement) and (ii) each Borrower shall
be released from its obligations to the Withdrawing Lenders under the Credit
Agreement and the other Loan Documents (except for obligations set forth in
subsections 4.10, 4.11 and 11.5 of the Credit Agreement). Each of the parties to
this Amendment agrees that at any time and from time to time upon the written
request of any other party, it will execute and deliver such further documents
and do such further acts and things as such other party may reasonably request
in order to effect the purposes of this Amendment.
13. CONTINUING EFFECT OF CREDIT AGREEMENT. This Amendment
shall not constitute a waiver, amendment or modification of any other provision
of the Credit Agreement not expressly referred to herein and shall not be
construed as a waiver or consent to any further or future action on the part of
the Borrowers that would require a waiver or consent of the Lenders or the
Administrative Agent. Except as expressly amended or modified herein, the
provisions of the Credit Agreement are and shall remain in full force and
effect.
14. COUNTERPARTS. This Amendment may be executed by one or
more of the parties to this Amendment on any number of separate counterparts
(including by facsimile transmission), and all of said counterparts taken
together shall be deemed to constitute one and the same instrument. A set of the
copies of this Amendment signed by all the parties shall be lodged with the
Borrowers and the Administrative Agent.
15. PAYMENT OF EXPENSES. The Borrowers agree, jointly and
severally, to pay or reimburse the Administrative Agent for all of its
out-of-pocket costs and expenses incurred in connection with the development,
preparation and execution of this Amendment and any other documents prepared in
connection herewith, and the consummation and administration of the transactions
contemplated hereby, including, without limitation, the reasonable fees and
disbursements of counsel to the Administrative Agent.
16. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
COLE VISION CORPORATION
By:
------------------------------
Name: Joseph Gaglioti
Title: Treasurer
THINGS REMEMBERED, INC.
By:
------------------------------
Name: Joseph Gaglioti
Title: Treasurer
PEARLE, INC.
By:
------------------------------
Name: Joseph Gaglioti
Title: Treasurer
<PAGE> 9
CANADIAN IMPERIAL BANK OF
COMMERCE, NEW YORK AGENCY,
as Administrative Agent
By:
------------------------------
Name: Katherine Bass
Title: Authorized Signatory
CIBC INC.
By:
------------------------------
Name: Katherine Bass
Title: Executive Director,
CIBC World Markets
Corp., As Agent
CREDIT SUISSE FIRST BOSTON
By:
------------------------------
Name: Robert Hetu
Title: Vice President
By:
------------------------------
Name: Bill O'Daly
Title: Vice President
<PAGE> 10
FIRST UNION NATIONAL BANK
By:
------------------------------
Name: Randall R. Meck
Title: Asst. Vice President
NATIONAL CITY BANK
By:
------------------------------
Name: Chris D. Thoraton
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By:
------------------------------
Name: Mark A. LoSchiavo
Title: Assistant Vice President
<PAGE> 11
FIFTH THIRD BANK, NORTHEASTERN OHIO
By:
------------------------------
Name: James P. Byrnes
Title: Vice President
<PAGE> 12
CONSENT OF WITHDRAWING LENDERS
The undersigned Withdrawing Lenders hereby agree to the terms
of Section 12 of this Amendment and the revised Schedule I attached hereto as
Exhibit A.
BANK OF AMERICA
By:
-----------------------------------
Name: Bridget Garavalia
Title: Managing Director
THE SANWA BANK, LIMITED,
CHICAGO BRANCH
By:
-----------------------------------
Name: Kenneth C. Eichwald
Title: First Vice President
Assistant General Manager
YASUDA TRUST & BANK CO.
By:
-----------------------------------
Name: Yoshihiko Shibata
Title: Vice President
THE FUJI BANK, LIMITED
By:
-----------------------------------
Name: Peter L. Chinnici
Title: Senior Vice President and
Group Head
<PAGE> 13
EXHIBIT A TO
FIFTH AMENDMENT
Schedule I
----------
to Credit Agreement
-------------------
Revolving Credit Commitments and Addresses
------------------------------------------
<TABLE>
<CAPTION>
Revolving Credit Commitment
---------------------------
<S> <C>
CIBC INC.
425 Lexington Avenue, 7th Floor
New York, NY 10017
Attention: Melissa Roedel
Telecopy: 212-856-3763 $30,000,000.00
CREDIT SUISSE FIRST BOSTON
Tower 49
12 East 49th Street
New York, NY 10017
Attention: Joel Gladowski/Ed Barr
Telecopy: 212-238-5441 $15,000,000.00
FIRST UNION NATIONAL BANK
PA4821
1345 Chestnut Street, 3 Widener
Philadelphia, PA 19101 $15,000,000.00
NATIONAL CITY BANK
1900 East 9th Street
Loc. #2083
Cleveland, OH 44114 $5,000,000.00
KEY BANK, N.A.
127 Publc Square
Mail Code: OH-01-27-0606
Cleveland, OH 44114 $5,000,000.00
FIFTH THIRD BANK, NORTHEASTERN OHIO
1404 East 9th Street
Cleveland, OH 4414 $5,000,000.00
</TABLE>
<PAGE> 14
EXHIBIT B TO
FIFTH AMENDMENT
Schedule II
-----------
to Credit Agreement
-------------------
Applicable Margin Calculation for Revolving Credit Loans
--------------------------------------------------------
<TABLE>
<CAPTION>
ABR Loans Eurodollar Loans
Leverage Ratio Applicable Margin Applicable Margin
- -------------- ----------------- -----------------
<S> <C> <C>
Greater than 3.25 to 1.00 1.25% 2.25%
Greater than 3.00 to 1.00,
but less than or equal to
3.25 to 1.00 1.00% 2.00%
Greater than 2.50 to 1.00,
but less than or equal to
3.00 to 1.00 .75% 1.75%
Less than or equal to 2.50
to 1.00 .50% 1.50%
</TABLE>
Notwithstanding the foregoing table, the Applicable Margin will be adjusted on
each Adjustment Date to the applicable rate per annum set forth above under the
heading "ABR Loans Applicable Margin" or "Eurodollar Loans Applicable Margin"
MINUS .25% per annum in the event that, immediately preceding such Adjustment
Date, (i) the senior unsecured long-term debt of CNG shall be rated at least
"BBB-" by Standard & Poor's, a division of McGraw-Hill, Inc., and (ii) the
Administrative Agent shall have received written notice of such rating from a
Borrower.
Commitment Fees
---------------
<TABLE>
<CAPTION>
Percentage of Revolving Credit
Commitments Used Commitment Fees
- ---------------- ---------------
<S> <C>
Greater than 66.6% .375%
Greater than 33.3%, but less
than or equal to 66.6% .50%
Less than or equal to 33.3% .75%
</TABLE>
<PAGE> 15
ACKNOWLEDGMENT AND CONSENT
Each of the undersigned corporations as Guarantors under the
Guarantee and Collateral Agreement, dated as of November 15, 1996 (as amended,
supplemented or otherwise modified from time to time, the "GUARANTEE AND
COLLATERAL AGREEMENT"), made by the undersigned corporations in favor of the
Administrative Agent, for the benefit of the Lenders, hereby (a) consents to the
transactions contemplated by this Amendment, and (b) acknowledges and agrees
that the guarantees (and grants of collateral security therefor) contained in
such Guarantee and Collateral Agreement are, and shall remain, in full force and
effect after giving effect to this Amendment, and all prior modifications to the
Credit Agreement.
BAY CITIES OPTICAL COMPANY
By:
-------------------------------
Name: Joseph Gaglioti
Title: Treasurer
WESTERN STATES OPTICAL, INC.
By:
-------------------------------
Name: Joseph Gaglioti
Title: Treasurer
COLE VISION SERVICES, INC.
By:
-------------------------------
Name: Joseph Gaglioti
Title: Treasurer
COLE MANAGEMENT SERVICES, INC.
By:
-------------------------------
Name: Joseph Gaglioti
Title: Treasurer
<PAGE> 16
PEARLE VISIONCARE, INC.
By:
-------------------------------
Name: Joseph Gaglioti
Title: Treasurer
PEARLE VISION MANAGED CARE - HMO OF
TEXAS, INC.
By:
-------------------------------
Name: Joseph Gaglioti
Title: Treasurer
<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 Quarterly Report on Form 10-Q and is qualified in its entirety by
reference to such quarterly report on Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 25,254
<SECURITIES> 0
<RECEIVABLES> 58,960
<ALLOWANCES> 8,935
<INVENTORY> 126,852
<CURRENT-ASSETS> 233,955
<PP&E> 268,710
<DEPRECIATION> 142,721
<TOTAL-ASSETS> 610,738
<CURRENT-LIABILITIES> 159,244
<BONDS> 285,222
0
0
<COMMON> 15
<OTHER-SE> 151,767
<TOTAL-LIABILITY-AND-EQUITY> 610,738
<SALES> 534,134
<TOTAL-REVENUES> 534,134
<CGS> 177,503
<TOTAL-COSTS> 510,222
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,984
<INCOME-PRETAX> 11,928
<INCOME-TAX> 4,891
<INCOME-CONTINUING> 7,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,037
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.47
</TABLE>
