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File Pursuant To Rule 424(b)(4)
Registration No. 333-34963
COLE NATIONAL GROUP, INC.
PROSPECTUS
[COLE LOGO]
OFFER TO EXCHANGE ITS 8 5/8% SENIOR SUBORDINATED NOTES DUE 2007, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND ALL OF ITS OUTSTANDING 8 5/8%
SENIOR SUBORDINATED NOTES DUE 2007 ISSUED ON AUGUST 22, 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 12,
1998 UNLESS EXTENDED.
Cole National Group, Inc., a Delaware corporation (the "Company"), hereby
offers to exchange (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), up to $125,000,000 in aggregate
principal amount of the Company's new 8 5/8% Senior Subordinated Notes due 2007
(the "Exchange Notes"), for $125,000,000 in aggregate principal amount of the
Company's outstanding 8 5/8% Senior Subordinated Notes due 2007 (the "Original
Notes") originally issued on August 22, 1997. The Original Notes and the
Exchange Notes are sometimes referred to herein collectively as the "Notes."
The terms of the Exchange Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Original Notes for which they may be exchanged pursuant to this Exchange Offer,
except that (i) the Exchange Notes will be freely transferable by holders
thereof (other than as provided herein) and issued free of any covenant
restricting transfer absent registration and (ii) holders of the Exchange Notes
will not be entitled to certain rights of holders of the Original Notes under
the Registration Rights Agreement (as defined herein), which rights will
terminate upon the consummation of the Exchange Offer. The Exchange Notes will
evidence the same debt as the Original Notes (which they replace) and will be
entitled to the benefits of an Indenture dated as of August 22, 1997 governing
the Original Notes and the Exchange Notes (the "Indenture"). For a complete
description of the terms of the Exchange Notes, see "Description of the Notes."
There will be no cash proceeds to the Company from the Exchange Offer.
The Original Notes were sold on August 22, 1997, by the Company, a wholly
owned subsidiary of Cole National Corporation (the "Parent"), in connection with
the following transactions (collectively, the "Transactions"): (i) the making of
a tender offer (the "Tender Offer") for its 11 1/4% Senior Notes due 2001 (the
"Senior Notes"); (ii) the consent solicitation related to the Tender Offer and
(iii) the offering of the Original Notes (the "Offering").
Interest on the Notes will be payable in cash semi-annually on each
February 15 and August 15, commencing February 15, 1998. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after August 15, 2002, at the redemption prices set forth herein, plus accrued
and unpaid interest to the date of redemption. In addition, the Company, at its
option, may redeem in the aggregate up to 40% of the original principal amount
of the Notes at any time and from time to time prior to August 15, 2000 at
108.625% of the aggregate principal amount so redeemed plus accrued interest to
the redemption date, with the Net Proceeds (as defined herein) of one or more
Qualified Equity Offerings as defined herein of the Company or the Parent to the
extent such proceeds were contributed to the Company as common equity, provided
that at least $75.0 million of the principal amount of the Notes originally
issued remain outstanding immediately after the occurrence of any such
redemption and that any such redemption occurs within 90 days following the
closing of any such Qualified Equity Offering. See "Description of the
Notes -- Optional Redemption."
(continued on next page)
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 9, 1997.
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(continued from prior page)
Upon a Change of Control (as defined herein), each holder of the Notes will
be entitled to require the Company to purchase such holder's Notes at 101% of
the principal amount thereof plus accrued interest to the purchase date. See
"Description of the Notes -- Change of Control Offer." If a Change of Control
occurs, there can be no assurance that the Company will have, or will have
access to, sufficient funds to enable it to repurchase the Notes. In addition,
the Company is obligated in certain instances to make an offer to repurchase the
Notes at a purchase price in cash equal to 100% of the principal amount thereof
plus accrued interest to the date of repurchase with the net cash proceeds of
certain asset sales. See "Description of the Notes -- Certain
Covenants -- Limitation on Certain Asset Sales."
The Notes will be general unsecured obligations of the Company subordinate
in right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Company and senior in right of payment to any subordinated
indebtedness of the Company and pari passu to the Company's existing 9 7/8%
Senior Subordinated Notes due 2006 (the "Existing Senior Subordinated Notes")
and all other future senior subordinated indebtedness. As of August 2, 1997, on
a pro forma basis, after giving effect to the Transactions, the Company and its
subsidiaries would have had $1.4 million aggregate principal amount of Senior
Indebtedness and $150.0 million aggregate principal amount of Existing Senior
Subordinated Notes outstanding. In the Tender Offer, which was completed on
September 15, 1997, $151.3 million aggregate principal amount of Senior Notes
were purchased leaving $14.5 million aggregate principal amount of Senior Notes
outstanding, which constitute Senior Indebtedness. Substantially all of the
Company's assets are held through subsidiaries and the Notes will be effectively
subordinated to the obligations of such subsidiaries. As of August 2, 1997,
subsidiaries of the Company had $172.8 million of liabilities outstanding
consisting primarily of trade payables and accrued expenses. The Indenture
governing the Notes will prohibit the incurrence of additional indebtedness by
any subsidiaries other than a limited amount of purchase money indebtedness,
capitalized lease obligations and other limited indebtedness under the Credit
Facility (as defined herein). See "Description of Notes -- Certain Covenants."
The Original Notes were sold on August 22, 1997, in a transaction not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
in reliance upon an exemption provided in the Securities Act. Accordingly, the
Original Notes may not be offered, resold or otherwise pledged, hypothecated or
transferred in the United States unless registered under the Securities Act or
unless an exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered to satisfy the obligations of
the Company under the Registration Rights Agreement (as defined herein) relating
to the Original Notes. See "The Exchange Offer -- Purposes and Effects of the
Exchange Offer." Each holder receiving Exchange Notes, other than a
broker-dealer, will represent that the holder is not engaging in or intending to
engage in a distribution of such Exchange Notes. Exchange Notes issued pursuant
to the Exchange Offer in exchange for the Original Notes may be offered for
resale, resold or otherwise transferred by the holder thereof (other than any
holder that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holders' business and such holders
have no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by acknowledging and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The broker-dealers are
not deemed to admit to be underwriters within the meaning of the Securities Act
but may nevertheless be deemed to be underwriters. See "The Exchange Offer
- -- Purposes and Effects of the Exchange Offer" and "Plan of Distribution."
Broker-dealers may use this Prospectus, as amended or supplemented, in
connection with resales of the Exchange Notes received in exchange for the
Original Notes where such Original Notes were acquired by such broker-dealer as
a result of market making activities or other such trading.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Company will accept
for exchange any and all validly tendered Original Notes not withdrawn prior to
5:00 P.M., New York City time, on January 12, 1998 unless extended by the
Company, in its sole discretion (the "Expiration Date"). Tenders of Original
Notes may be withdrawn at any time prior to the Expiration Date. The Exchange
Offer is subject to certain customary conditions. See "The Exchange Offer
- -- Certain Conditions to the Exchange Offer." Original Notes may be tendered
only in integral multiples of $1,000. The Company will pay all expenses incident
to the Exchange Offer.
The Notes constitute securities for which there is no established trading
market. Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding. The Company does not currently intend to list the Exchange
Notes on any securities exchange. To the extent that any Original Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Original Notes would be adversely affected. No assurances can be
given as to the liquidity of the trading market for either the Original Notes or
the Exchange Notes.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Exchange Notes offered by this Prospectus. For the purposes
hereof, the term Registration Statement means the original Registration
Statement and any and all amendments thereto, including the schedules and
exhibits to such Registration Statement or any such amendment. This Prospectus,
which forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, to which reference is
hereby made. Each statement made in this Prospectus concerning a document filed
as an exhibit to the Registration Statement is qualified in its entirety by
reference to such exhibit for a complete statement of its provisions.
Pursuant to the terms of the Indenture, the Company files reports and other
information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may be obtained at prescribed
rates by writing the Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Web site, located at
http://www.sec.gov, that contains reports and information statements and other
information regarding registrants, including the Company, that file
electronically with the Commission.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
(as defined herein) and to registered holders of the Notes, without cost to the
Trustee or such registered holder, copies of all reports and other information
that would be required to be filed by the Company with the Commission under the
Securities Exchange Act of 1934 (the "Exchange Act"), whether or not the Company
is then required to file reports with the Commission. As a result of the
Exchange Offer, the Company will become subject to the periodic reporting and
other informational requirements of the Exchange Act. The Company has agreed
that, whether or not the Company is subject to filing requirements under Section
13 or 15(d) of the Exchange Act, and so long as any Notes remain outstanding, it
will file with the Commission (but only if the Commission at such time is
accepting such voluntary filings) and will send the Trustee copies of the
financial information, documents and reports that would have been required to be
filed with the Commission pursuant to the Exchange Act.
The principal address of the Company is 5915 Landerbrook Drive, Suite 300,
Mayfield Heights, Ohio 44124, telephone number (440) 449-4100.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
As used herein, unless the context otherwise indicates, references in this
Prospectus to the "Company" refer to Cole National Group, Inc. and its wholly
owned subsidiaries and references to the "Parent" refer to Cole National
Corporation. The Company's fiscal year ends on the Saturday closest to January
31. Fiscal years are identified according to the calendar year in which they
begin. For example, the fiscal year ended February 1, 1997 is referred to as
"fiscal 1996." Unless otherwise indicated, references herein to the number of
stores for the Company are as of August 7, 1997.
The Prospectus contains certain forward-looking statements (including,
without limitation, statements that reflect beliefs or anticipations of future
operations, results or events) with respect to the business of the Company and
the industry in which it operates. These forward-looking statements are subject
to certain risks and uncertainties which may cause actual results to differ
materially from those stated in or suggested by such forward-looking statements.
See "Risk Factors."
THE COMPANY
The Company, a leading vision care and personalization retailer, believes,
based on industry data, it is the largest optical retail company in the United
States, with approximately 2,000 company-owned and franchised optical locations
in the United States, Canada and the Caribbean. The Company's pro forma net
revenue and EBITDA for fiscal 1996 were $933.8 million and $94.6 million,
respectively, with approximately 70% of the Company's net revenue derived from
its optical business and the remaining 30% derived from its gift business, which
operates in approximately 1,300 retail locations. The Company conducts its
business through two principal operating units: (i) Cole Optical, consisting of
Cole Vision Corporation ("Cole Vision") and Pearle Inc. ("Pearle"); and (ii)
Cole Gift, consisting of Things Remembered, Inc. ("Things Remembered") and Cole
Gift Centers, Inc. ("CGC"). The Company differentiates itself from other
specialty retailers by providing value-added services at the point of sale at
all of its retail locations.
The Company is a wholly owned subsidiary of the Parent, a holding company
that has common stock traded on the New York Stock Exchange. The Parent also has
a 20% interest in Pearle Trust B.V., which operates 196 optical stores in the
Netherlands and Belgium.
COLE OPTICAL
Cole Vision operates principally under the "Sears Optical," "Montgomery
Ward Vision Center" and "BJ's Optical Department" names. Cole Vision operates
1,149 locations in 46 states and Canada, including 751 departments on the
premises of Sears department stores, 213 departments in Montgomery Ward stores,
77 departments in BJ's Wholesale Club stores, 24 departments located in five
other retailers and 84 freestanding stores operated under the name "Sears
Optical." Cole Vision departments are generally operated under a lease or
license arrangement through which the host store collects the sales receipts,
retains an agreed upon percentage of sales and remits the remainder to Cole
Vision on a weekly basis. Cole Vision's product line includes a broad selection
of prescription eyeglasses, contact lenses and accessories at all of its
locations. At most Cole Vision locations, a doctor of optometry provides eye
examination services on the premises. Each of Cole Vision's optical departments
are computer linked to its five centralized manufacturing laboratories, enabling
it to provide next day delivery on most eyewear when requested by its customers.
Pearle's operations consist of 366 company-owned and 321 franchised stores
located in 43 states, Canada and the Caribbean. Pearle's highly recognized brand
name and slogan, Nobody Cares For Eyes More Than Pearle, have been used for over
15 years. All Pearle stores operate in either an "Express" or "Mainline" store
format. Express stores contain a full surfacing lab that can manufacture most
glasses in approximately one hour. Mainline stores can manufacture over 50% of
prescriptions on-site in approximately one hour. Other prescriptions are sent to
a nearby Express location or to Pearle's main laboratory in Dallas, which can
generally complete orders for next day delivery upon request. Like Cole Vision,
a doctor of optometry provides
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eye examination services at the Pearle stores. While Pearle stores also sell a
broad range of optical products, Pearle features well-recognized designer brand
names which appeal to the more affluent and fashion-conscious consumer.
On August 5, 1997, the Parent acquired American Vision Centers, Inc.
("AVC"), the ninth largest retail optical chain in the United States, for $28.9
million, including debt assumed. Subsequent to the acquisition, the Parent
transferred AVC to the Company as an equity contribution. AVC operates 164
stores, including 85 franchised locations, under the names "NuVision Optical,"
"American Vision Center" and "EyesFirst Vision Center." The Company believes,
based on industry data, that the acquisition of AVC, combined with the Company's
existing company-owned and franchised locations, created the largest optical
retail company in the United States.
Cole Vision also offers a managed vision care program, which provides
comprehensive eyecare benefits marketed directly to employers, other employee
benefit plan sponsors and insurance companies, primarily under the name "Vision
One." Vision One's basic program gives employers the opportunity to offer their
employees a group discount at the managed vision care network with minimal
direct cost to the employer. An enhanced Vision One program allows employers to
provide their employees with prepaid eye examinations as well as pricing
discounts or reimbursements. Recently, all Pearle company-owned and a majority
of franchised locations were added to Cole Vision's managed vision care
programs.
COLE GIFT
The Company believes Cole Gift operates the only nationwide chain of gift
stores offering "while you shop" gift personalization, key duplicating,
engraving, monogramming and related merchandise. Things Remembered operated 796
locations consisting of 341 kiosks, 369 in-line stores and 86 personalization
superstores and CGC operated 498 departments in host stores, primarily Sears.
Things Remembered and CGC each offer a broad assortment of both branded and
private label gift categories and items at prices generally ranging from $10 to
$75. Most locations also offer softgoods that can be monogrammed and custom
embroidered in the store or at a central fulfillment facility.
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THE EXCHANGE OFFER
Purpose of the Exchange Offer.... The Original Notes were sold in a
transaction exempt from the registration
requirements of the Securities Act by the
Company on August 22, 1997 to CIBC Wood
Gundy Securities Corp., Credit Suisse First
Boston Corporation and McDonald & Company
Securities, Inc. (the "Initial
Purchasers"). In connection therewith, the
Company executed and delivered, for the
benefit of the holders of the Original
Notes, the Registration Rights Agreement
dated August 22, 1997 (the "Registration
Rights Agreement"), which is incorporated
by reference as an exhibit to the
Registration Statement of which this
Prospectus is a part, providing for, among
other things, the Exchange Offer so that
the Exchange Notes will be freely
transferable by the holders thereof without
registration or any prospectus delivery
requirements under the Securities Act,
except that a "dealer" or any of its
"affiliates" as such terms are defined
under the Securities Act, who exchanges
Original Notes held for its own account
will be required to deliver copies of this
Prospectus in connection with any resale of
the Exchange Notes issued in exchange for
such Original Notes. See "The Exchange
Offer -- Purposes and Effects of the
Exchange Offer" and "Plan of Distribution."
The Exchange Offer............... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Original Notes
that are properly tendered and accepted.
The Company will issue Exchange Notes on or
promptly after the Expiration Date. There
is $125,000,000 aggregate principal amount
of Original Notes outstanding. The Original
Notes and the Exchange Notes are
collectively referred to herein as the
"Notes." The terms of the Exchange Notes
are substantially identical in all respects
(including principal amount, interest rate
and maturity) to the terms of the Original
Notes for which they may be exchanged
pursuant to the Exchange Offer, except that
(i) the Exchange Notes are freely
transferable by holders thereof (other than
as provided herein), and are not subject to
any covenant restricting transfer absent
registration under the Securities Act and
(ii) holders of the Exchange Notes will not
be entitled to certain rights of holders of
the Original Notes under the Registration
Rights Agreement, which rights will
terminate upon the consummation of the
Exchange Offer. See "The Exchange Offer."
The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of
Original Notes being tendered for exchange.
Based on an interpretation by the staff of
the Commission set forth in no-action
letters issued to third parties, the
Company believes that the Exchange Notes
issued pursuant to the Exchange Offer in
exchange for Original Notes may be offered
for resale, resold and otherwise
transferred by a
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holder thereof (other than (i) a
broker-dealer who purchases such Exchange
Notes directly from the Company to resell
pursuant to Rule 144A under the Securities
Act or any other available exemption under
the Securities Act or (ii) a person that is
an affiliate (as defined in Rule 405 under
the Securities Act) of the Company),
without compliance with the registration
and prospectus delivery provisions of the
Securities Act, provided that the holder is
acquiring the Exchange Notes in the
ordinary course of its business and is not
participating, and has no arrangement or
understanding with any person to
participate, in the distribution of the
Exchange Notes. The Company has not sought,
and does not currently intend to seek a
no-action letter. There can be no assurance
that the staff of the Securities and
Exchange Commission would make a similar
determination with respect to the Exchange
Offer. Each broker-dealer that receives the
Exchange Notes for its own account in
exchange for the Original Notes, where such
Notes were acquired by such broker-dealer
as a result of market-making activities or
other trading activities, must acknowledge
that it will deliver a prospectus in
connection with any resale of such Exchange
Notes.
Registration Rights Agreement.... The Original Notes were sold by the Company
on August 22, 1997 to the Initial
Purchasers pursuant to a Securities
Purchase Agreement dated as of August 15,
1997 by and between the Company and the
Initial Purchasers (the "Purchase
Agreement"). Pursuant to the Purchase
Agreement, the Company and the Initial
Purchasers entered into the Registration
Rights Agreement which grants the holders
of the Original Notes certain exchange and
registration rights. See "The Exchange
Offer -- Termination of Certain Rights."
This Exchange Offer is intended to satisfy
such rights, which terminate upon the
consummation of the Exchange Offer. The
holders of the Exchange Notes are not
entitled to any exchange of registration
rights with respect to the Exchange Notes.
Expiration Date.................. The Exchange Offer will expire at 5:00
p.m., New York City time, on January 12,
1998, unless the Exchange Offer is extended
by the Company in its reasonable
discretion, in which case the term
"Expiration Date" shall mean the latest
date and time to which the Exchange Offer
is extended.
Accrued Interest on the Exchange
Notes and Original Notes......... Interest on the Exchange Notes will accrue
from August 22, 1997. Holders whose
Original Notes are accepted for exchange
will be deemed to have waived the right to
receive any interest accrued on the
Original Notes.
Conditions to the
Exchange Offer................. The Exchange Offer is subject to certain
customary conditions, which may be waived
by the Company. See "The Exchange
Offer -- Certain Conditions to the Exchange
Offer." The Exchange Offer is not
conditioned upon any mini-
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mum aggregate principal amount of Original
Notes being tendered for exchange. The
Company reserves the right to terminate or
amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence
of any such conditions.
Procedures for Tendering
Original Notes................. Each holder of Original Notes wishing to
accept the Exchange Offer must complete,
sign and date the Letter of Transmittal, or
a facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter
of Transmittal, or such facsimile, together
with the Original Notes and any other
required documentation to the exchange
agent (the "Exchange Agent") at the address
set forth herein. Original Notes may be
physically delivered, but physical delivery
is not required if a confirmation of a
book-entry of such Original Notes to the
Exchange Agent's account at The Depository
Trust Company ("DTC" or the "Depository")
is delivered in a timely fashion. By
executing the Letter of Transmittal, each
holder will represent to the Company that,
among other things, the Exchange Notes
acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of
business of the person receiving such
Exchange Notes, whether or not such person
is the holder, that neither the holder nor
any such other person is engaged in, or
intends to engage in, or has an arrangement
or understanding with any person to
participate in, the distribution of such
Exchange Notes and that neither the holder
nor any such other person is an
"affiliate," as defined under Rule 405 of
the Securities Act, of the Company. Each
broker or dealer that receives Exchange
Notes for its own account in exchange for
Original Notes, where such Original Notes
were acquired by such broker or dealer as a
result of market-making activities or other
trading activities, must acknowledge that
it will deliver a prospectus in connection
with any resale of such Exchange Notes. See
"The Exchange Offer -- Procedures for
Tendering" and "Plan of Distribution."
Special Procedures for
Beneficial Owners.............. Any beneficial owner whose Original Notes
are registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and who wishes to tender
should contact such registered holder
promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such
owner must, prior to completing and
executing the Letter of Transmittal and
delivering his Original Notes, either make
appropriate arrangements to register
ownership of the Original Notes in such
owner's name or obtain a properly completed
bond power from the registered holder. The
transfer of registered ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering."
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Guaranteed Delivery Procedures... Holders of Original Notes who wish to
tender their Original Notes and whose
Original Notes are not immediately
available or who cannot deliver their
Original Notes, the Letter of Transmittal
or any other documents required by the
Letter of Transmittal to the Exchange Agent
prior to the Expiration Date, must tender
their Original Notes according to the
guaranteed delivery procedures set forth in
the "Exchange Offer -- Guaranteed Delivery
Procedures."
Acceptance of the Original Notes
and Delivery of the Exchange
Notes.......................... Subject to the satisfaction or waiver of
the conditions to the Exchange Offer, the
Company will accept for exchange any and
all Original Notes which are properly
tendered in the Exchange Offer prior to the
Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be
delivered on the earliest practicable date
following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange
Offer."
Withdrawal Rights................ Tenders of Original Notes may be withdrawn
at any time prior to the Expiration Date.
See "The Exchange Offer -- Withdrawal of
Tenders."
Exchange Agent................... Norwest Bank Minnesota, National
Association is serving as the Exchange
Agent in connection with the Exchange
Offer. See "The Exchange Offer -- Exchange
Agent."
Effect on Holders of
the Original Notes............. As a result of the making of, and upon
acceptance for exchange of all validly
tendered Original Notes pursuant to the
terms of this Exchange Offer, the Company
will have fulfilled one of the covenants
contained in the Registration Rights
Agreement and, accordingly, there will be
no increase in the interest rate on the
Original Notes pursuant to the applicable
terms of the Registration Rights Agreement
due to the Exchange Offer. Holders of the
Original Notes who do not tender their
Original Notes will be entitled to all the
rights and limitations applicable thereto
under the Indenture between the Company and
Norwest Bank Minnesota, National
Association, as trustee (the "Trustee"),
relating to the Original Notes and the
Exchange Notes, except for any rights under
the Indenture or the Registration Rights
Agreement, which by their terms terminate
or cease to have further effectiveness as a
result of the making of, and the acceptance
for exchange of all validly tendered
Original Notes pursuant to, the Exchange
Offer. All untendered Original Notes will
continue to be subject to the restrictions
on transfer provided for in the Original
Notes and in the Indenture. To the extent
that Original Notes are tendered and
accepted in the Exchange Offer, the trading
market for untendered Original Notes could
be adversely affected.
Use of Proceeds.................. There will be no cash proceeds to the
Company from the exchange pursuant to the
Exchange Offer.
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THE NOTES
The Exchange Notes............... The Exchange Offer applies to $125,000,000
aggregate principal amount of the Original
Notes. The form and terms of the Exchange
Notes are the same as the form and terms of
the Original Notes except that (i) the
exchange will have been registered under
the Securities Act and, therefore, the
Exchange Notes will not bear legends
restricting their transfer pursuant to the
Securities Act, and (ii) holders of the
Exchange Notes will not be entitled to
certain rights of holders of the Original
Notes under the Registration Rights
Agreement, which rights will terminate upon
consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt
as the Notes (which they replace) and will
be issued under, and be entitled to the
benefits of, the Indenture. See
"Description of the Notes" for further
information and for definitions of certain
capitalized terms used below.
Issuer........................... Cole National Group, Inc.
Maturity Date.................... August 15, 2007.
Interest Rate.................... The Notes will bear interest at a rate of
8 5/8% per annum.
Interest Payment Dates........... Interest will accrue on the Notes from the
date of issuance (the "Issue Date") and
will be payable semi-annually on each
February 15 and August 15, commencing
February 15, 1998. Interest on the Notes
will be paid on the basis of a 360 day year
and twelve 30 day months.
Ranking.......................... The Notes will be general unsecured
obligations of the Company subordinate in
right of payment to all existing and future
Senior Indebtedness (as defined herein) of
the Company, senior in right of payment to
any subordinated indebtedness of the
Company and pari passu to the Company's
Existing Senior Subordinated Notes and all
other future senior subordinated
indebtedness. As of August 2, 1997, on a
pro forma basis, after giving effect to the
application of the net proceeds of the
Offering and the Transactions, the Company
and its subsidiaries would have had $1.4
million aggregate principal amount of
Senior Indebtedness outstanding. In the
Tender Offer, which was completed on
September 15, 1997, $151.3 million
aggregate principal amount of Senior Notes
were purchased leaving $14.5 million
aggregate principal amount of Senior Notes
outstanding, which constitute Senior
Indebtedness. Because the Company's
operations are conducted through
subsidiaries, the Notes will effectively
rank junior to all liabilities of the
Company's subsidiaries (which were $172.8
million as of August 2, 1997, consisting
primarily of trade payables and accrued
expenses). The Indenture pursuant to which
the Notes will be issued will prohibit the
incurrence of additional indebtedness by
the Company's subsidiaries other than
certain Permitted Indebtedness (as defined
herein), including, without limitation, up
to $15 million in the aggregate of purchase
money indebtedness and capital leases, up
to $3 million in the aggregate of
7
<PAGE> 12
guarantees of franchisee obligations, and
indebtedness under the Credit Facility (as
defined herein).
Mandatory Redemption............. There will be no mandatory redemption
requirements with respect to the Notes.
Optional Redemption.............. The Notes will be redeemable at the option
of the Company, in whole or in part, at any
time on or after August 15, 2002, at the
redemption prices set forth herein plus
accrued interest to the date of redemption.
In addition, the Company, at its option,
may redeem in the aggregate up to 40% of
the original principal amount of the Notes
at any time and from time to time prior to
August 15, 2000 at a redemption price equal
to 108.625% of the principal amount thereof
plus accrued interest to the redemption
date with the Net Proceeds (as defined
herein) of one or more Qualified Equity
Offerings (as defined herein), provided
that at least $75 million principal amount
of Notes issued remain outstanding
immediately after the occurrence of any
such redemption and that any such
redemption occurs within 90 days following
the closing of any such Qualified Equity
Offering.
Change of Control................ In the event of a Change of Control (as
defined herein), the Company will be
required to make an offer to purchase all
outstanding Notes at a price equal to 101%
of the principal amount thereof plus
accrued interest to the date of repurchase.
See "Description of the Notes -- Certain
Covenants." There can be no assurance that
the Company will have sufficient funds or
will be contractually permitted by
outstanding Senior Indebtedness to pay the
required purchase price for all Notes
tendered by holders upon a Change of
Control.
Asset Sale Proceeds.............. The Company will be obligated in certain
instances to make offers to repurchase the
Notes at a purchase price in cash equal to
100%, of the principal amount thereof plus
accrued interest to the date of repurchase
with the net cash proceeds of certain asset
sales. See "Description of the Notes --
Certain Covenants -- Limitation on Certain
Asset Sales."
Certain Covenants................ The Indenture will contain covenants for
the benefit of the holders of the Notes
that, among other things, restrict the
ability of the Company and any Subsidiaries
(as defined herein) to: (i) incur
additional Indebtedness; (ii) pay dividends
and make distributions; (iii) issue stock
of subsidiaries; (iv) repurchase stock, (v)
create liens; (vi) enter into transactions
with affiliates; (vii) enter into sale and
leaseback transactions; (viii) merge or
consolidate the Company or any
subsidiaries; and (ix) transfer and sell
assets. These covenants are subject to a
number of important exceptions. See
"Description of the Notes -- Certain
Covenants."
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the
information set forth under the caption "Risk Factors" and all other information
set forth in this Prospectus in evaluating an investment in the Notes.
8
<PAGE> 13
SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following sets forth summary unaudited pro forma condensed financial
information derived from the unaudited pro forma condensed consolidated
financial data contained elsewhere herein. The summary unaudited pro forma
condensed financial information for the fiscal year ended February 1, 1997 and
the 26 weeks ended August 2, 1997, gives effect to the acquisition of Pearle,
the issuance of the Existing Senior Subordinated Notes and the Transactions as
if each had occurred at the beginning of fiscal 1996. The summary pro forma
balance sheet data presented below presents the financial condition of the
Company as if the Transactions had occurred as of August 2, 1997. This summary
unaudited pro forma condensed financial information does not include any results
or other data for AVC, which was acquired by the Parent on August 5, 1997 and
transferred to the Company as an equity contribution.
The summary unaudited pro forma condensed financial information does not
purport to be indicative of the actual financial position or results of the
Company that would have actually been attained had the acquisition of Pearle or
the Transactions in fact occurred on the dates specified, nor are they
necessarily indicative of the results of operations that may be achieved in the
future. Furthermore, the summary unaudited pro forma condensed financial
information presented below does not consider any future events which may occur
after the Transactions have been consummated. The summary unaudited pro forma
condensed financial information is based on certain assumptions and adjustments
described in the notes to the unaudited pro forma condensed consolidated
financial data and should be read in conjunction therewith.
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------
FISCAL YEAR ENDED 26 WEEKS ENDED
FEB. 1, AUGUST 2,
1997 1997
------------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING RESULTS:
Net revenue............................................ $933,816 $ 502,572
Cost of goods sold and operating expenses (a).......... 839,222 454,263
Business integration and other non-recurring charges
(b)................................................. 59,633 --
Depreciation and amortization.......................... 31,211 14,717
-------- ---------
Income from operations................................. 3,750 33,592
Interest expense....................................... 27,938 13,688
Interest income........................................ (965) (905)
Income tax provision (benefit)......................... (2,413) 8,717
-------- ---------
Income (loss) before extraordinary item................ $(20,810) $ 12,092
======== =========
OTHER DATA:
EBITDA (c)............................................. $ 94,594 $ 48,309
Ratio of EBITDA to interest expense (c)................ 3.5x 3.7x
NUMBER OF UNITS (AT END OF PERIOD):
Cole Vision............................................ 1,138 1,149
Pearle (d)............................................. 686 687
Things Remembered...................................... 790 796
CGC.................................................... 501 498
-------- ---------
Total.......................................... 3,115 3,130
======== =========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets........................................... $ 663,400
Total debt............................................. 275,336
Stockholder's equity (e)............................... 19,582
</TABLE>
See accompanying Notes to Summary Unaudited Pro Forma Condensed Financial
Information.
9
<PAGE> 14
NOTES TO SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
(a) Prior to the acquisition date, gross profit and gross margin for Pearle were
not determined on a basis consistent with that of the Company. Pearle
included certain store occupancy costs and depreciation in cost of goods
sold, whereas the Company reports such costs as operating expenses or
depreciation and amortization. In addition, Pearle included payroll,
supplies and other costs related to the making of eyeglasses at its in-store
labs in selling, general and administrative expenses; the Company and Pearle
both classify similar costs of making eyeglasses at their central
laboratories in cost of goods sold. Information to reclassify Pearle's
historical costs and expenses on a basis consistent with the Company is not
readily available. For the purposes of the pro forma operating results
presented above, depreciation normally included in Pearle's cost of goods
sold and operating expenses has been reclassified to depreciation and
amortization.
(b) Represents a pretax charge for business integration and other non-recurring
items primarily related to the acquisition of Pearle.
(c) EBITDA is defined as income from operations before depreciation and
amortization and nonrecurring charges, including restructuring charges, if
any. The Company has included information concerning EBITDA here as it is
relevant for purposes of covenant analysis under the Indentures for the
Existing Senior Subordinated Notes, the Notes and the Senior Notes and may
be used by certain investors as a measure of a company's ability to service
its debt; however, such measure of EBITDA as used by the Company may not be
comparable to similarly titled measures reported by other companies. EBITDA
is not a performance measure under generally accepted accounting principles
and should not be considered more meaningful than operating income or cash
flows as an indicator of operating performance. For the purposes of
computing the ratio of EBITDA to interest expense, interest expense excludes
the amortization of deferred financing costs. Amortization of deferred
financing costs used to compute the pro forma ratios of EBITDA to interest
expense was $0.8 million for the fiscal year ended February 1, 1997 and $0.5
for the 26 weeks ended August 2, 1997.
(d) Includes Pearle franchised locations.
(e) Reflects the contribution to capital of $58.4 million from the Parent in
connection with the Transactions and an extraordinary charge of
approximately $11.9 million, net of tax benefit of $7.0 million, which would
be incurred as a result of a premium on the retirement of the Senior Notes,
the accelerated amortization of the related unamortized debt discount and
certain other costs.
10
<PAGE> 15
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
factors, as well as other information set forth in this Prospectus, before
making an investment in the Notes.
HIGH LEVEL OF INDEBTEDNESS; POTENTIAL INABILITY TO SERVICE DEBT
The Company is highly leveraged. As of August 2, 1997, the Company had
aggregate principal indebtedness of $317.3 million, comprised principally of
$165.8 million aggregate principal amount of the Senior Notes and $150.0 million
aggregate principal amount of the Company's Existing Senior Subordinated Notes.
Pro forma for the completion of the Transactions, the Company's consolidated
total principal indebtedness on August 2, 1997 would have been $276.4 million.
Although this Prospectus assumes that all of the Senior Notes will be tendered
pursuant to the Tender Offer, upon completion of the Tender Offer on September
15, 1997 approximately $14.5 million aggregate principal amount of Senior Notes
remained outstanding. The consequences of such leverage include, but are not
limited to, the following: (i) the ability of the Company to obtain additional
financing for acquisitions, working capital, capital expenditures or other
purposes, if necessary, may be impaired or such financing may not be on terms
favorable to the Company; (ii) the Company has and will continue to have
significant cash requirements for debt service; (iii) financial and other
covenants and operating restrictions imposed by the terms of the Indenture
entered into in connection with the Offering, along with the terms of the
existing indenture (the "Existing Senior Subordinated Note Indenture") relating
to the Existing Senior Subordinated Notes will limit, among other things, its
ability to borrow additional funds or to dispose of assets; (iv) the Company may
be at a competitive disadvantage because the Company is more highly leveraged
than some of its competitors; (v) a downturn in the Company's business will have
a more significant impact on its results of operations and (vi) the Company may
have indebtedness senior to the Notes.
The ability of the Company to satisfy its obligations will be primarily
dependent upon the future financial and operating performance of the Company's
subsidiaries and upon the Company's ability to renew or refinance borrowings or
to raise additional equity capital. Each of these alternatives is dependent upon
financial, business and other general economic factors affecting the Company's
subsidiaries and the retailing business in particular, many of which are beyond
the control of the Company and its subsidiaries. If the Company and its
subsidiaries are unable to generate sufficient cash flow to meet their debt
service obligations, they will have to pursue one or more alternatives, such as
reducing or delaying capital expenditures, refinancing debt, or selling assets.
There can be no assurance that any such alternatives could be accomplished on
satisfactory terms or that such actions would yield sufficient funds to retire
the Notes and the indebtedness senior to the Notes. While the Company believes
that cash flow from operations will provide an adequate source of long-term
liquidity, a significant drop in operating cash flows resulting from economic
conditions, competition or other uncertainties beyond the Company's control
would increase the need for alternative sources of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SUBORDINATION OF THE NOTES
The Notes are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined in the Indenture) of the Company, including the
Senior Notes and the Credit Facility, and will rank pari passu to the Existing
Senior Subordinated Notes and all other future senior subordinated indebtedness.
The Notes are also structurally subordinated to all existing and future
liabilities of the Company's subsidiaries. In addition, under the Indenture,
provided certain incurrence tests are met, the Company is able to borrow
additional Senior Indebtedness. In the event of a bankruptcy, liquidation or
reorganization of the Company or in the event that any default in payment of, or
the acceleration of, any indebtedness occurs, holders of Senior Indebtedness
will be entitled to payment in full from the proceeds of all assets of the
Company prior to any payment of such proceeds to the holders of the Notes. In
addition, the Company may not make any principal or interest payments in respect
of the Notes if any payment default exists with respect to Senior Indebtedness
and the maturity of such indebtedness is accelerated, or in certain
circumstances prior to such acceleration for a specified period of time, unless,
in any case, such default has been cured or waived, any such acceleration has
11
<PAGE> 16
been rescinded or such indebtedness has been repaid in full. Consequently, there
can be no assurance that the Company will have sufficient funds remaining after
such payments to make payments to the holders of the Notes. Because the assets
of the Company are and will be held by operating subsidiaries, the claims of
holders of the Notes (which are not guaranteed by the operating subsidiaries)
are and will be structurally subordinated to all existing and future liabilities
and obligations (whether or not for borrowed money), including trade payables,
accrued expenses, litigation costs and borrowings under the Credit Facility (as
defined herein) of such subsidiaries. See "Description of the
Notes -- Subordination" and "Description of the Notes -- Certain
Covenants -- Limitation on Additional Indebtedness."
Although the Indenture requires the Company to make an offer to repurchase
the Notes using the proceeds of certain asset sales, the indentures relating to
the Senior Notes and the Existing Senior Subordinated Notes require that the
Company first offer such proceeds to the holders of the Senior Notes and the
Existing Senior Subordinated Notes. Accordingly, there may be no net proceeds
available from asset sales to make an offer to the holders of the Notes.
ABSENCE OF GUARANTEE
The Notes are being issued solely by the Company and none of the Company's
subsidiaries or the Parent are or will be a guarantor under the Notes, and the
Indenture expressly provides that no person or entity other than the Company
will have any liability for any obligations of the Company under the Notes or
such Indenture or any claim based on, in respect of or by reason of such
obligations, and that by accepting the Notes, each holder of the Notes waives
and releases such liability, which waiver and release are part of the
consideration for the Notes. The operations of the Company are and will be
conducted through its subsidiaries and, therefore, the Company is and will be
dependent on the cash flow of its subsidiaries to meet its obligations. As of
August 2, 1997, the subsidiaries of the Company had $172.8 million of
liabilities outstanding, consisting primarily of trade payables and accrued
expenses. The Indenture pursuant to which the Notes have been issued prohibits
the incurrence of additional indebtedness by the Company's subsidiaries other
than a limited amount of purchase money indebtedness, capital leases and
guarantees of franchisee obligations, as well as indebtedness under the Credit
Facility. The Company's Credit Facility includes restrictions on the activities
of the Company's subsidiaries, including restrictions on payments to the
Company. Such restrictions do not include restrictions on distributions to the
Company for the purpose of paying the interest and principal on the Notes or
payments to the Company for certain administrative and operating expenses. In
the event of a default under the Credit Facility, the Company's subsidiaries may
not be allowed to make new cash borrowings under the Credit Facility. Management
believes such restrictions will not have an adverse affect on the Company's or
its subsidiaries' operations. See "Description of Other Indebtedness -- Credit
Facility."
FRAUDULENT TRANSFER CONSIDERATIONS
The Company incurred the indebtedness represented by the Senior Notes in a
transaction involving the refinancing of certain indebtedness of the Parent.
Under fraudulent transfer law, if a court were to find, in a lawsuit by an
unpaid creditor or representative of creditors of the Company, that the Company
received less than fair consideration or reasonable equivalent value for
incurring the indebtedness represented by the Notes, and, at the time of such
incurrence, the Company (i) was insolvent or was rendered insolvent by reason of
such incurrence, (ii) was engaged or about to engage in a business or
transaction for which its remaining property constituted unreasonably small
capital or (iii) intended to incur, or believed or reasonably should have
believed that it would incur, debts beyond its ability to pay as such debts
mature, such court could, among other things, (a) void all or a portion of the
Company's obligations to the holders of the Notes and/or (b) subordinate the
Company's obligations to the holders of the Notes to other existing and future
indebtedness of the Company, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the Notes. The
measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all of its liabilities were greater than the
value of all of its property at a fair valuation, or if the present fair salable
value of the
12
<PAGE> 17
debtor's assets was less than the amount required to repay its probable
liability on its debts as they become absolute and mature. There can be no
assurance as to what standard a court would apply in order to determine
solvency.
POTENTIAL INABILITY TO EFFECT PURCHASE OF NOTES UPON A CHANGE OF CONTROL
In the event of a "Change of Control" of the Company or of the Parent (as
defined in the Indenture, the Senior Note Indenture and the Existing Senior
Subordinated Note Indenture), the Company will be required to offer to
repurchase all of the outstanding Senior Notes, Existing Senior Subordinated
Notes and Notes at 101% of the principal amount thereof plus any accrued and
unpaid interest thereon to the date of the purchase. A Change of Control under
the Indenture, Senior Note Indenture and the Existing Senior Subordinated Note
Indenture will result in a default under the Credit Facility. The exercise by
the holders of the Senior Notes, Existing Senior Subordinated Notes and the
Notes of their right to require the Company to repurchase the Senior Notes,
Existing Senior Subordinated Notes and the Notes upon a Change of Control could
also cause a default under other indebtedness of the Company (including the
Credit Facility), even if the Change of Control itself does not, because of the
financial effect of such repurchase on the Company. The Company's ability to pay
cash to the holders of the Senior Notes, Existing Senior Subordinated Notes and
the Notes upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that in the event of a Change of
Control, the Company will have, or will have access to, sufficient funds or will
be contractually permitted under the terms of outstanding indebtedness to pay
the required purchase price for all Senior Notes, Existing Senior Subordinated
Notes and Notes tendered by holders upon a Change of Control. The obligations of
the Company to offer to repurchase the Notes are subject to its obligations to
offer to repurchase the Senior Notes and redeem amounts outstanding under the
Credit Facility. Even if the Company can satisfy its obligations to the holders
of the Senior Notes, the Existing Senior Subordinated Notes and under the Credit
Facility, there can be no assurance that it would be able to fund the repurchase
of any Notes. See "Description of the Notes -- Certain Covenants" and
"Description of Other Indebtedness -- Credit Facility."
RESTRICTIVE DEBT COVENANTS
The Credit Facility, the Senior Note Indenture and the Existing Senior
Subordinated Note Indenture each contain a number of covenants that, among other
things, limit the Company's ability to incur additional indebtedness, pay
dividends, prepay subordinated indebtedness, dispose of certain assets, create
liens, make capital expenditures, make certain investments or acquisitions and
otherwise restrict corporate activities. The Credit Facility, the Senior Note
Indenture and the Existing Senior Subordinated Note Indenture also require the
Company to comply with certain financial ratios and tests, under which the
Company is required to achieve certain financial and operating results. The
ability of the Company to comply with such provisions may be affected by events
beyond its control. A breach of any of these covenants would result in a default
under the Credit Facility, the Senior Note Indenture and the Existing Senior
Subordinated Note Indenture. In the event of any such default, depending on the
actions taken by the lenders under the Credit Facility, the Senior Note
Indenture and the Existing Senior Subordinated Note Indenture, the Company could
be prohibited from making any payments on the Notes. In addition, such lenders
could elect to declare all amounts borrowed under the Credit Facility, together
with accrued interest, to be due and payable, which would be an event of default
under the Senior Note Indenture, the Existing Senior Subordinated Note Indenture
and the Indenture. As a result of the priority and/or security afforded the
Credit Facility, there can be no assurance that the Company would have
sufficient assets to pay indebtedness then outstanding under the Credit
Facility, the Senior Note Indenture, the Existing Senior Subordinated Note
Indenture and the Note Indenture. Any refinancing of the Credit Facility is
likely to contain similar restrictive covenants. See "Description of Other
Indebtedness -- Credit Facility."
13
<PAGE> 18
POTENTIAL INABILITY TO INTEGRATE ACQUIRED OPERATIONS
The acquisitions of Pearle and AVC have been the largest acquisitions made
by the Company or the Parent in the last ten years. Acquisitions of such
magnitude are inherently subject to significant risk. There can be no assurance
that the Company will be able to integrate the acquired Pearle and AVC
operations successfully. Although the integration of Pearle has commenced, the
full benefits of the integration of the acquired Pearle and AVC operations will
require some further consolidation of management, control and administrative
systems. These steps will require substantial attention from and place
substantial demands upon the senior management of Cole Vision and/or the
Company, as well as the cooperation of the acquired companies' management,
employees and franchisees.
As a result of the acquisition of Pearle, the Company's consolidated gross
margin has declined from its historical levels as Pearle has a lower gross
margin than the Company due to the higher costs of in-store laboratories and
lower margin wholesale sales to franchised stores.
In addition, the Company, as a franchisor, will be required to operate such
business in accordance with applicable franchise laws and regulations. The
Company's plans for Pearle and AVC depend, in part, on the Company's ability to
continue the franchised operations, to improve relationships with franchisees,
and to attract new franchisees. The Company's flexibility in making changes to
franchisee operations are limited by the terms of the agreements entered into
with the franchisees, laws and regulations governing the relationship with the
franchisees and other obligations. As a result, the ability of the Company to
realize the benefits from the acquisitions of Pearle and AVC may be limited with
respect to the franchise operation. See "Business -- Government Regulations."
DEPENDENCE ON HOST STORES
All of the CGC and the vast majority of Cole Vision locations are operated
under the names of their respective host stores under leases or licenses from
such host stores that are terminable upon 60-90 days notice. In addition, Cole
Vision operates its freestanding stores under the name "Sears Optical" pursuant
to a license agreement with Sears that is cancelable on 90 days notice. However,
there can be no assurance that relationships with major host stores will remain
stable in the future or that any lease or license agreement between a host store
and the Company will not be terminated or adversely changed. There could be a
material adverse effect on the Company if the relationship with any major host
store were to terminate or change materially. See "Business -- Host
Relationships."
SEASONALITY
The Company's business historically has been seasonal with, on average,
approximately 30% of the Company's net revenue and approximately 50% of its
income from operations occurring in the fourth fiscal quarter because of the
importance of gift sales during the Christmas retailing season. Notwithstanding
that Cole Optical, which comprises approximately 70% of the Company's net
revenue is less seasonal than Cole Gift, which accounts for approximately 30% of
the Company's net revenue, the Company's business will remain seasonal. See
"Business -- Seasonality."
COMPETITION AND OTHER BUSINESS FACTORS
The Company operates in highly competitive businesses. Cole Optical
competes with other optical companies, private ophthalmologists, optometrists,
opticians and a growing number of health maintenance organizations ("HMOs") in a
highly fragmented marketplace. Pearle competes on the basis of its highly
recognized brand name, one-hour express service and by offering products which
appeal to the more affluent and fashion-conscious consumer. Cole Vision competes
primarily on the basis of the service it provides as well as price and product
quality, and the reputation of its host stores. Cole Gift competes with other
gift store retailers on the basis of the value-added point of sales services
that it provides as well as price and product quality. Some of the Company's
competitors have greater financial resources than the Company. See
"Business -- Competition." The Company's future performance may be subject to a
number of factors beyond its control, including economic downturns and cyclical
variations in the retail areas it serves, the Company's
14
<PAGE> 19
ability to select and stock merchandise attractive to customers, weather factors
affecting retail operations, its quality controls in optical manufacturing and
engraving, operating factors affecting customer satisfaction, the mix of goods
sold, pricing and other competitive factors, and the seasonality of the
Company's businesses. Moreover, the implementation of the Company's growth
strategies is subject to a number of factors, including general economic and
competitive conditions as well as on-going evaluation by the Company of its
opportunities for investment in its businesses. In addition, the optical retail
industry may be subject to new technological advances, such as alternative
surgical techniques. If such new advances were to provide a practical
alternative to vision correction, the demand for contact lenses and eyeglasses
may decrease.
LACK OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON RESALE
There is no existing trading market for the Notes, and the Company does not
intend to list any Notes on any securities exchange; however, Notes will be
eligible for trading in the PORTAL Market of the National Association of
Securities Dealer, Inc. The Initial Purchasers have advised the Company that
they currently intend to make a market in the Notes. The Initial Purchasers are
not obligated to do so, however, and any market-making with respect to the Notes
may be discontinued at any time without notice. In addition, any market-making
activities in the Original Notes may be limited during the pending of the
Exchange Offering. Therefore, there can be no assurance as to the liquidity of
any trading market for the Notes or that an active public market for the Notes
will develop. See "The Exchange Offer."
CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the offer or sale of the Original Notes pursuant to
an exemption from or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act or applicable state securities laws. The
Company does not currently expect that it will register the Original Notes under
the Securities Act. Based on interpretations by the staff of the Commission
issued in no-action letters to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for Original
Notes may be offered for resale, resold or otherwise transferred by the Holder
thereof (other than any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act), provided that such
Exchange Notes are acquired in the ordinary course of such Holder's business and
such Holder has no arrangement with any person to participate in the
distribution of such Exchange Notes. Such no-action letters are not binding
interpretations of the law. The Company has not sought, and does not currently
intend to seek a no-action letter. There can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any Holder of Original Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes would not be
acting consistently with such interpretation by the staff of the Commission and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Thus, any Exchange
Notes acquired by such Holder will not be freely transferable except in
compliance with the Securities Act. Each Restricted Holder that receives
Exchange Notes for its own account in exchange for the Original Notes, where
such Original Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution."
15
<PAGE> 20
THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on August 22, 1997 to the
Initial Purchasers pursuant to a Purchase Agreement dated as of August 15, 1997.
As a condition to the sale of the Original Notes, the Company and the Initial
Purchasers entered into the Registration Rights Agreement on August 22, 1997.
Pursuant to the Registration Rights Agreement, the Company agreed that, unless
the Exchange Offer is not permitted by applicable law or Commission policy, it
would (i) file with the Commission a Registration Statement under the Securities
Act with respect to the Exchange Notes within 45 days after the Issue Date, (ii)
use its best efforts to cause such Registration Statement to become effective
under the Securities Act within 120 days after the Issue Date and (iii) upon
effectiveness of the Registration Statement, commence the Exchange Offer, keep
the Exchange Offer open for at least 30 days (or a longer period if required by
law) and deliver to the Exchange Agent Exchange Notes in the same aggregate
principal amount at maturity as the Original Notes that were tendered by holders
thereof pursuant to the Exchange Offer. Under existing Commission
interpretations, the Exchange Notes would in general be freely transferable
after the Exchange Offer without further registration under the Securities Act;
provided, that in the case of broker-dealers, a prospectus meeting the
requirements of the Securities Act be delivered as required. The Company has
agreed to make available a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any such
Exchange Notes acquired as described below for such period of 180 days after the
Expiration Date. A broker-dealer that delivers such a prospectus to purchasers
in connection with such resales will be subject to certain of the civil
liability provisions under the Securities Act, and will be bound by the
Registration Rights Agreement (including certain indemnification rights and
obligations). A copy of the Registration Rights Agreements has been incorporated
by reference as an exhibit to the Registration Statement of which this
Prospectus is a part. The Registration Statement of which this Prospectus is a
part is intended to satisfy certain of the Company's obligations under the
Registration Rights Agreement and the Purchase Agreement.
The Company is generally not required to file any registration statement to
register any outstanding Original Notes. Holders of Original Notes who do not
tender their Original Notes or whose Original Notes are tendered but not
accepted will have to rely on exemptions to registration requirements under the
securities laws, including the Securities Act, if they wish to sell their
Original Notes.
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) who exchanges Original Notes for Exchange Notes in
the ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. The Company has not
sought, and does not currently intend to seek a no-action letter. There can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. However, if any holder acquires the Exchange
Notes in the Exchange Offer for the purpose of distributing or participating in
the distribution of the Exchange Notes or is a broker-dealer, such holder cannot
rely on the position of the staff of the Commission enumerated in certain
no-action letters issued to third parties and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within
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<PAGE> 21
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with the resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired by such broker-dealer as a result of
market-making or other trading activities. Pursuant to the Registration Rights
Agreement, the Company has agreed to make this Prospectus, as it may be amended
or supplemented from time to time, available to broker-dealers for used in
connection with any resale for a period of 180 days after the Expiration Date.
See "Plan of Distribution."
REGISTRATION RIGHTS; ADDITIONAL INTEREST
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 180 days of the date of the
Registration Rights Agreement, the Company will, at its own expense, (a) as
promptly as practicable, file a shelf registration statement covering resales of
the Notes (the "Shelf Registration Statement"), (b) use its best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act, and (c) use its best efforts to keep effective the Shelf
Registration Statement until three years after its effective date. The Company
will, in the event of the Shelf Registration Statement, provide to each holder
of the Notes copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
Notes has become effective and take certain other actions as are required to
permit unrestricted resales of the Notes. A holder of the Notes that sells such
Notes pursuant to the Shelf Registration Statement generally would be required
to be named as a selling securityholder in the related prospectus and to deliver
a prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Act in connection with such sales, and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification rights and obligations).
Although the Company intends to file one of the registration statements
described above, there can be no assurance that such registration statement will
be filed or, if filed, that it will become effective. If the Company fails to
comply with the above provisions or if such registration statement fails to
become effective, then, as liquidated damages, additional interest shall become
payable in respect of the Notes as follows:
If (i) the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 45 days after the Issue Date;
(ii) an Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within 120 days after the Issue Date;
or
(iii) either (A) the Company has not exchanged the Exchange Notes for
all Notes validly tendered in accordance with the terms of the Exchange
Offer on or prior to 60 days after the date on which the Exchange Offer
Registration Statement was declared effective or (B) the Exchange Offer
Registration Statement ceases to be effective at any time prior to the time
that the Exchange Offer is consummated or (C) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
third anniversary of its effective date;
(each such event referred to in clauses (i) through (iii) above is a
"Registration Default"), then the sole remedy available to holders of the Notes
will be the immediate assessment of additional interest ("Additional Interest")
as follows: the per annum interest rate on the Notes will increase by 50 basis
points; and the per annum interest rate will increase by an additional 25 basis
points for each subsequent 90-day period during which the Registration Default
remains uncured, up to a maximum additional interest rate of 200 basis points
per annum in excess of the interest rate on the cover of this Prospectus. All
Additional Interest will be payable to holders of the Notes in cash on each
February 15 and August 15, commencing with the first such date occurring after
any such Additional Interest commences to accrue, until such Registration
Default is cured. After the date on which such Registration Default is cured,
the interest rate on the Notes will revert to the interest rate originally borne
by the Notes (as shown on the cover of this Prospectus).
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<PAGE> 22
Although all material terms of the Registration Rights Agreement have been
described herein, the summary herein of certain provisions of the Registration
Rights Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Registration Rights Agreement, which has been incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part, a copy
of which will be available upon request to the Company.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Original Notes validly tendered and not withdrawn prior to the Expiration
Date. The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Original Notes
surrendered pursuant to the Exchange Offer. Holders may tender some or all of
their Original Notes pursuant to the Exchange Offer; provided, however, that
Original Notes may be tendered only in integral multiples of $1,000. The
Exchange Offer is not conditioned upon any minimum aggregate principal amount of
Original Notes being tendered for exchange.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will be registered
under the Securities Act and, therefore, will not bear legends restricting their
transfer and (ii) holders of the Exchange Notes will not be entitled to the
certain rights of holders of Original Notes under the Registration Rights
Agreement, which rights will terminate upon the consummation of the Exchange
Offer. The Exchange Notes will evidence the same debt as the Original Notes
(which they replace) and will be issued under, and be entitled to the benefits
of, the Indenture, which also authorized the issuance of the Original Notes,
such that all outstanding Notes will be treated as a single class of debt
securities under the Indenture.
Interest on the Exchange Notes will accrue from the last interest payment
date on which interest was paid on the Original Notes surrendered in exchange
therefor or, if no interest has been paid, from August 22, 1997. Accordingly,
registered holders of Exchange Notes on the relevant record date for the first
interest payment date following the consummation of the Exchange Offer will
receive interest accruing from the last interest payment date on which interest
was paid or, if no interest has been paid on the Notes, from August 22, 1997.
Original Notes accepted for exchange will cease to accrue interest from and
after the date of the consummation of the Exchange Offer. Holders whose Original
Notes are accepted for exchange will not receive any payment in respect of
interest on such Original Notes otherwise payable on any interest payment date,
the record date for which occurs on or after consummation of the Exchange Offer.
As of the date of this Prospectus, $124,250,000 aggregate principal amount
of the Original Notes are outstanding and registered in the name of Cede & Co.,
as nominee for the Depository Trust Company ("DTC") and $750,000 are registered
in the names of Dev & Co. Only a registered holder of the Original Notes (or
such holder's legal representative or attorney-in-fact) as reflected on the
records of the Trustee under the Indenture may participate in the Exchange
Offer. There will be no fixed record date for determining registered holders of
the Original Notes entitled to participate in the Exchange Offer.
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Securities
Act, the Exchange Act and the rules and regulations of the Commission
thereunder.
The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Original Notes for the purposes of receiving the Exchange Notes from
the Company.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, or due to the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Notes will be
returned without expense to the tendering holders thereof (or in the case of
Original Notes tendered by book-entry transfer, such Original Notes will be
credited to the account of such holder maintained at the Depository), as
promptly as practicable after the expiration or termination of the Exchange
Offer.
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<PAGE> 23
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; TERMINATION
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
January 12, 1998 unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer the Company will notify the Exchange
Agent of any extension by oral (promptly confirmed in writing) or written notice
and will make a public announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date of the Exchange Offer. Without limiting the manner in which the Company may
choose to make a public announcement of any delay, extension, amendment or
termination of the Exchange Offer, the Company shall have no obligation to
publish, advertise or otherwise communicate any such public announcement, other
than by making a timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Exchange Offer, (iii) if any
conditions set forth below under "-- Certain Conditions to the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer by giving oral or
written notice of such delay, extension or termination to the Exchange Agent or
(iv) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of
Original Notes, and the Company will extend the Exchange Offer for a period of
five to ten business days, depending upon the significance of the amendment and
the manner of disclosure to such registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period. The rights
reserved by the Company in this paragraph are in addition to the Company's
rights set forth below under the caption "-- Certain Conditions to the Exchange
Offer."
If the Company extends the period of time during which the Exchange Offer
is open, or if it is delayed in accepting for exchange of, or in issuing and
exchanging the Exchange Notes for, any Original Notes, or is unable to accept
for exchange of, or issue Exchange Notes for, any Original Notes pursuant to the
Exchange Offer for any reason, then, without prejudice to the Company's rights
under the Exchange Offer, the Exchange Agent may, on behalf of the Company,
retain all Original Notes tendered, and such Original Notes may not be withdrawn
except as otherwise provided below in "-- Withdrawal of Tenders." The adoption
by the Company of the right to delay acceptance for exchange of, or the issuance
and the exchange of the Exchange Notes, for any Original Notes is subject to
applicable law, including Rule 14e-1(c) under the Exchange Act, which requires
that the Company pay the consideration offered or return the Original Notes
deposited by or on behalf of the holders thereof promptly after the termination
or withdrawal of the Exchange Offer.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes
in the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, or facsimile thereof, have the
signature thereon guaranteed if required by the Letter of Transmittal and mail
or otherwise deliver such Letter of Transmittal or such facsimile to the
Exchange Agent at the address set forth below under "-- Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of a book-entry transfer of such
Notes, if such procedure is available, into the Exchange Agent's account at DTC
pursuant to the procedure for book-entry transfer described below, must be
received by the
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<PAGE> 24
Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below.
Any financial institution that is a participant in the Depository's
Book-Entry Transfer Facility system may make book-entry delivery of the Original
Notes by causing the Depository to transfer such Original Notes into the
Exchange Agent's account in accordance with the Depository's procedure for such
transfer. Although delivery of Original Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depository, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
or confirmed by the Exchange Agent at its addresses set forth under "-- Exchange
Agent" below prior to 5:00 p.m., New York City time, on the Expiration Date.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute a binding agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE
EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES
SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Original Notes whose Original Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owners's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Original Notes, either make appropriate
arrangements to register ownership of the Notes in such owner's name (to the
extent permitted by the Indenture) or obtain a properly completed assignment
from the registered holder. The transfer of registered ownership may take
considerable time.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Original Notes (which term includes any participants in
DTC whose name appears on a security position listing as the owner of the
Original Notes) or if delivery of the Exchange Notes is to be made to a person
other than the registered holder, such Original Notes must be endorsed or
accompanied by a properly completed bond power, in either case signed by such
registered holder as such registered holder's name appears on such Original
Notes with the signature on the Original Notes or the bond power guaranteed by
an Eligible Institution (as defined below).
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution unless the Original Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or another "Eligible Guarantor Institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (any of the foregoing,
an "Eligible Institution").
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<PAGE> 25
If the Letter of Transmittal or any Original Notes or assignments are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Original Notes not properly tendered or any Original Notes, the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Original Notes must be cured within such time as the Company shall determine.
Although the Company intends to request the Exchange Agent to notify holders of
defects or irregularities with respect to tenders of Original Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Original Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
While the Company has no present plan to acquire any Original Notes which
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Original Notes which are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Original Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "-- Certain
Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase Original Notes in the open market,
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Original
Notes in connection with the Exchange Offer are being acquired by the holder in
the ordinary course of business of the holder, (ii) the holder has no
arrangement or understanding with any person to participate in the distribution
of Exchange Notes, (iii) the holder acknowledges and agrees that any person who
is a broker-dealer registered under the Exchange Act or is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the staff of the Commission
set forth in certain no-action letters, (iv) the holder understands that a
secondary resale transaction described in clause (iii) above and any resales of
Exchange Notes obtained by such holder in exchange for Original Notes acquired
by such holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission, and (v) the holder is not an "affiliate," as defined in Rule 405 of
the Securities Act, of the Company. If the holder is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Original Notes that
were acquired as a result of market-making activities or other trading
activities, the holder is required to acknowledge in the Letter of Transmittal
that it will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the holder
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
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<PAGE> 26
RETURN OF NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Original Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Original Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depository pursuant to the book-entry transfer procedures
described below, such Original Notes will be credited to an account maintained
with the Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's system may make book-entry
delivery of Original Notes by causing the Depository to transfer such Original
Notes into the Exchange Agent's account at the Depository in accordance with the
Depository's procedures for transfer. However, although delivery of Original
Notes may be effected through book-entry transfer at the Depository, the Letter
of Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
by the Exchange Agent at the address set forth below under "-- Exchange Agent"
on or prior to the Expiration Date or pursuant to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available or (ii) who cannot deliver their Original
Notes (or complete the procedures for book-entry transfer), the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Original Notes (if
available) and the principal amount of Original Notes tendered, stating
that the tender is being made thereby guaranteeing that, within five New
York Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or a facsimile thereof) together with the certificate(s)
representing the Original Notes in proper form for transfer (or a
confirmation of a book-entry transfer into the Exchange Agent's account at
the Depository of Original Notes delivered electronically), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Original
Notes in proper form for transfer (or a confirmation of a book-entry
transfer into the Exchange Agent's account at the Depository of Original
Notes delivered electronically), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
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<PAGE> 27
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Original Notes to be withdrawn (the "Depositor"), (ii) identify the Original
Notes to be withdrawn (including the certificate number or numbers (if
applicable) and principal amount of such Original Notes), and (iii) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Original Notes were tendered (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company in
its sole discretion, whose determination shall be final and binding on all
parties. Any Original Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Original Notes so withdrawn are validly
retendered. Properly withdrawn Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Original Notes not theretofore accepted for exchange, and may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Original
Notes, if any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the reasonable judgment of the Company, might impair the ability of the Company
to proceed with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to the Company or there shall have
occurred any material adverse development in any existing action or proceeding
with respect to the Company or any of its subsidiaries; or
(b) there shall have been any material change, or development involving a
prospective change, in the business or financial affairs of the Company or any
of its subsidiaries which, in the reasonable judgment of the Company, could
reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated benefits
of the Exchange Offer to the Company; or
(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the judgment of the Company, could reasonably be
expected to materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the Exchange
Offer to the Company; or
(d) any governmental approval which the Company shall, in its reasonable
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby shall not have been obtained.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Original
Notes and return all tendered Original Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Original Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such Original Notes (see "-- Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Original Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Original Notes, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the
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<PAGE> 28
significance of the waiver and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business day period.
Holders may have certain rights and remedies against the Company under the
Registration Rights Agreement should the Company fail to consummate the Exchange
Offer, notwithstanding a failure of the conditions stated above. Such conditions
are not intended to modify those rights or remedies in any respect.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's reasonable discretion. The failure by the
Company at any time to exercise the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Original Notes eligible to participate in this
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify the
holders (including any broker-dealers) and certain parties related to the
holders against certain liabilities (including liabilities under the Securities
Act), (ii) to provide, upon the request of any holder of a transfer-restricted
Original Note, the information required by Rule 144A(d)(4) under the Securities
Act in order to permit resales of such Original Notes pursuant to Rule 144A,
(iii) to use its best efforts to keep the Registration Statement effective to
the extent necessary to ensure that it is available for resales of transfer
restricted Notes by broker-dealers for a period of 180 days from the date on
which the Registration Statement is declared effective and (iv) to provide
copies of the latest version of the Prospectus to broker-dealers upon their
request for a period of 180 days from the date on which the Registration
Statement is declared effective. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent for the Exchange Offer. All questions and requests for assistance as well
as all correspondence in connection with the Exchange Offer and the Letter of
Transmittal should be addressed to the Exchange Agent, as follows:
By Registered or Certified Mail:
Norwest Bank Minnesota, National Association
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480-1517
By Hand:
Norwest Bank Minnesota, National Association
Corporate Trust Operations
Northstar East, 12th Floor
608 2nd Avenue
Minneapolis, MN 55402
By Overnight Courier:
Norwest Bank Minnesota, National Association
Corporate Trust Operations
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-0113
By Facsimile:
Norwest Bank Minnesota, National Association
Corporate Trust Operations
(612) 667-4927
Confirm by telephone:
(612) 667-9764
Requests for additional copies of this Prospectus, the Letter of
Transmittal or the Notice of Guaranteed Delivery should be directed to the
Exchange Agent.
24
<PAGE> 29
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$200,000. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Original Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes, or Original Notes for principal amounts not
tendered or acceptable for exchange, are to be delivered to, or are to be issued
in the name of, any person other than the registered holders of the Original
Notes tendered, or if tendered Original Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Original Notes pursuant
to the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder of Original
Notes.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Original
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Original Notes which are not exchanged for the Exchange Notes pursuant
to the Exchange Offer will remain restricted securities. Accordingly, such
Original Notes may be resold only (i) to a person whom the seller reasonably
believes is a qualified institutional buyer (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of Rule 144A, (ii) in
a transaction meeting the requirements of Rule 144 under the Securities Act,
(iii) outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction.
25
<PAGE> 30
THE COMPANY
The Company, a leading vision care and personalization retailer, believes,
based on industry data, it is the largest optical retail company in the United
States, with approximately 2,000 company-owned and franchised optical locations
in the United States, Canada and the Caribbean. The Company's pro forma net
revenue and EBITDA for fiscal 1996 were $933.8 million and $94.6 million,
respectively, with approximately 70% of the Company's net revenue derived from
its optical business and the remaining 30% derived from its gift business, which
operates in approximately 1,300 retail locations. The Company conducts its
business through two principal operating units: (i) Cole Optical, consisting of
Cole Vision and Pearle ; and (ii) Cole Gift, consisting of Things Remembered,
and CGC. The Company differentiates itself from other specialty retailers by
providing value-added services at the point of sale at all of its retail
locations.
The Company is a wholly owned subsidiary of the Parent, a holding company
that has common stock traded on the New York Stock Exchange. The Parent also has
a 20% interest in Pearle Trust B.V., which operates 196 optical stores in the
Netherlands and Belgium.
The Company was incorporated in July 1993. Immediately prior to the
Company's issuance and sale of its Senior Notes on September 30, 1993, all of
the Parent's assets, except for the stock of the Company, were contributed to
the Company and the Company assumed all of the Parent's liabilities (the
"Initial Capitalization") other than $50.0 million of the Parent's obligations
under the Parent's 13% Senior Subordinated Notes, which were later retired.
Prior to the Initial Capitalization, all operations were conducted by
subsidiaries of the Parent.
COLE OPTICAL
Cole Vision operates principally under the "Sears Optical," "Montgomery
Ward Vision Center" and "BJ's Optical Department" names. As of August 2, 1997,
Cole Vision operated 1,149 locations in 46 states and Canada, including 751
departments on the premises of Sears department stores, 213 departments in
Montgomery Ward stores, 77 departments in BJ's Wholesale Club stores, 24
departments located in five other retailers and 84 freestanding stores operated
under the name "Sears Optical." Cole Vision departments are generally operated
under a lease or license arrangement through which the host store collects the
sales receipts, retains an agreed upon percentage of sales and remits the
remainder to Cole Vision on a weekly basis. Cole Vision's product line includes
a broad selection of prescription eyeglasses, contact lenses and accessories at
all of its locations. At most Cole Vision locations, a doctor of optometry
provides eye examination services on the premises. Each of Cole Vision's optical
departments are computer linked to its five centralized manufacturing
laboratories, enabling it to provide next day delivery on most eyewear when
requested by its customers.
At August 2, 1997, Pearle's operations consisted of 366 company-owned and
321 franchised stores located in 43 states, Canada and the Caribbean. Pearle's
highly recognized brand name and slogan, Nobody Cares For Eyes More Than Pearle,
have been used for over 15 years. All Pearle stores operate in either an
"Express" or "Mainline" store format. Express stores contain a full surfacing
lab that can manufacture most glasses in approximately one hour. Mainline stores
can manufacture over 50% of prescriptions on-site in approximately one hour.
Other prescriptions are sent to a nearby Express location or to Pearle's main
laboratory in Dallas, which can generally complete orders for next day delivery
upon request. Like Cole Vision, a doctor of optometry provides eye examination
services at the Pearle stores. While Pearle stores also sell a broad range of
optical products, Pearle features well-recognized designer brand names which
appeal to the more affluent and fashion-conscious consumer.
On August 5, 1997, the Parent acquired AVC, the ninth largest retail
optical chain in the United States, for $28.9 million, including debt assumed.
Subsequent to the acquisition, the Parent transferred AVC to the Company as an
equity contribution. AVC operates 164 stores, including 85 franchised locations,
under the names "NuVision Optical," "American Vision Center" and "EyesFirst
Vision Center." The Company believes, based on industry data, that the
acquisition of AVC, combined with the Company's existing company-owned and
franchised locations, created the largest optical retail company in the United
States.
26
<PAGE> 31
Cole Vision also offers a managed vision care program, which provides
comprehensive eyecare benefits marketed directly to employers, other employee
benefit plan sponsors and insurance companies, primarily under the name "Vision
One." Vision One's basic program gives employers the opportunity to offer their
employees a group discount at the managed vision care network with minimal
direct cost to the employer. An enhanced Vision One program allows employers to
provide their employees with prepaid eye examinations as well as pricing
discounts or reimbursements. Recently, all Pearle company-owned and a majority
of franchised locations were added to Cole Vision's managed vision care
programs.
COLE GIFT
The Company believes Cole Gift operates the only nationwide chain of gift
stores offering "while you shop" gift personalization, key duplicating,
engraving, monogramming and related merchandise. At August 2, 1997, Things
Remembered operated 796 locations consisting of 341 kiosks, 369 in-line stores
and 86 personalization superstores and CGC operated 498 departments in host
stores, primarily Sears. Things Remembered and CGC each offer a broad assortment
of both branded and private label gift categories and items at prices generally
ranging from $10 to $75. Most locations also offer softgoods that can be
monogrammed and custom embroidered in the store or at a central fulfillment
facility.
27
<PAGE> 32
THE TRANSACTIONS
The Company has undertaken a series of related financing Transactions
consisting of the offering of Original Notes, the Tender Offer and related
consent solicitation which are intended to reduce overall indebtedness and debt
service costs, as well as to provide the Company with greater financial
flexibility. To accomplish this goal, the Company has consummated the Tender
Offer, in which the Company offered to purchase for cash all of the Senior
Notes, and a related consent solicitation to modify certain terms of the
indenture for the Senior Notes. The Tender Offer provided for a purchase price
to be paid in respect of validly tendered Senior Notes and related consents at
110.56%, plus accrued interest up to, but not including the date of purchase.
Effective September 15, 1997, $151.3 million aggregate principal amount of
Senior Notes was purchased pursuant to the Tender Offer leaving $14.5 million
aggregate principal amount of Senior Notes outstanding. The net proceeds from
the sale of the Original Notes were or will be used, together with cash on hand
and an equity contribution from the Parent, to finance the repurchase of the
Senior Notes, for payment of fees and expenses and for the retirement of the
remaining $14.5 million aggregate principal amount Senior Notes. Effective
September 15, 1997, the Senior Note Indenture (the "Proposed Amendments") was
amended to delete substantially all of the restrictive covenants contained in
the Senior Note Indenture.
28
<PAGE> 33
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Original Notes in like principal amount, the terms of which are substantially
identical to the Exchange Notes. The Original Notes surrendered in exchange for
Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the indebtedness of the Company.
The following identifies the sources and uses related to the issuance of
the Original Notes:
<TABLE>
<S> <C>
Sources of funds:
Proceeds of Original Notes.......................................... $125,000
Cash on hand........................................................ 9,816
Equity contribution from the Parent................................. 58,352
--------
$193,168
========
Uses of funds:
Principal amount of Senior Notes(a)................................. $165,838
Accrued interest on Senior Notes(a)(b).............................. 6,316
Tender premium(a)................................................... 17,514
Estimated fees and expenses(c)...................................... 3,500
--------
$193,168
========
</TABLE>
- ---------------
(a) Assumes all such Senior Notes are tendered in the Tender Offer at a price of
110.56% of the aggregate principal amount of the Senior Notes, or are
subsequently retired at the same premium.
(b) The actual amount of accrued interest will vary depending on the date of the
consummation of the Tender Offer.
(c) The estimated fees and expenses consist of placement fees for the Notes, and
legal, accounting and other professional fees.
29
<PAGE> 34
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at August 2, 1997 and as adjusted to reflect the Transactions assuming
all Senior Notes are tendered in the Tender Offer. This table should be read in
conjunction with the information contained in "Use of Proceeds," "Unaudited Pro
Forma Condensed Consolidated Financial Data" and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as the Company's consolidated financial statements and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
AUGUST 2, 1997
-------------------------
COMPANY PRO FORMA
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Credit Facility................................................ $ -- $ --
Other Indebtedness(a).......................................... 1,413 1,413
Senior Notes................................................... 165,838 --
Discount on Senior Notes....................................... (1,332) --
Existing Senior Subordinated Notes............................. 150,000 150,000
Discount on Existing Senior Subordinated Notes................. (1,077) (1,077)
Notes.......................................................... -- 125,000
--------- ---------
314,842 275,336
Stockholder's equity:
Common stock................................................... -- --
Paid-in capital(b)............................................. 122,681 181,033
Foreign currency translation adjustment........................ (234) (234)
Accumulated deficit(c)......................................... (149,344) (161,217)
--------- ---------
Total stockholder's equity............................. (26,897) 19,582
--------- ---------
Total capitalization................................... $ 287,945 $ 294,918
========= =========
</TABLE>
- ---------------
(a) Includes $0.5 million of current maturities of long-term indebtedness.
(b) Reflects the contribution to capital of $58.4 million from the Parent in
connection with the Transactions.
(c) Reflects an extraordinary charge of approximately $11.9 million, net of tax
benefit of $7.0 million, which would be incurred as a result of a premium on
the retirement of the Senior Notes, the accelerated amortization of the
related unamortized debt discount and certain other costs.
30
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited condensed consolidated balance sheet as of August
2, 1997 and unaudited condensed consolidated statements of operations for the 26
week period ended August 2, 1997 and the fiscal year ended February 1, 1997 were
derived by adjusting the consolidated financial statements of the Company to
reflect the following, in each case as if each had occurred as of the beginning
of fiscal 1996: (i) the acquisition of Pearle and the related financing and (ii)
the consummation of the Transactions. The acquisition of Pearle was completed on
November 15, 1996 and 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 unaudited pro forma
condensed consolidated financial data does not include any results or other data
for AVC, which was acquired by the Parent on August 5, 1997 and transferred to
the Company as an equity contribution.
The adjustments are based on currently available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The unaudited pro forma consolidated financial data and
accompanying notes should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Prospectus. The
unaudited pro forma condensed consolidated financial data is presented for
informational purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred had the aforementioned
transactions occurred at the dates indicated, nor is it necessarily indicative
of future operating results or financial position.
31
<PAGE> 36
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF AUGUST 2, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and temporary cash investments................. $ 133,142 $ (9,816)(a) $ 123,326
Accounts receivable................................. 52,096 -- 52,096
Current portion of notes receivable................. 5,049 -- 5,049
Inventories......................................... 129,570 -- 129,570
Prepaid expenses and other.......................... 14,239 -- 14,239
Deferred income tax benefits........................ 24,925 -- 24,925
--------- --------- ---------
Total current assets........................ 359,021 (9,816) 349,205
--------- --------- ---------
Property and equipment, net........................... 111,388 -- 111,388
Other Assets:
Notes receivable, excluding current portion......... 20,146 -- 20,146
Deferred income taxes and other..................... 41,956 3,500(b) 45,456
Intangible assets, net.............................. 137,205 -- 137,205
--------- --------- ---------
Total assets................................ $ 669,716 $ (6,316) $ 663,400
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................... $ 465 $ -- $ 465
Accounts payable.................................... 47,648 -- 47,648
Payable to affiliates............................... 169,949 -- 169,949
Accrued interest.................................... 7,804 (6,316)(c) 1,488
Accrued liabilities................................. 129,421 (6,973)(d) 122,448
--------- --------- ---------
Total current liabilities................... 355,287 (13,289) 341,998
Long-term debt, net of discount and current portion... 314,377 (39,506)(a) 274,871
Other long-term liabilities........................... 26,949 -- 26,949
Stockholder's equity (deficit):
Common stock........................................ -- -- --
Paid-in capital..................................... 122,681 58,352(e) 181,033
Foreign currency translation adjustment............. (234) -- (234)
Accumulated deficit................................. (149,344) (11,873)(f) (161,217)
--------- --------- ---------
Total stockholder's equity (deficit)........ (26,897) 46,479 19,582
--------- --------- ---------
Total liabilities and stockholder's
equity.................................... $ 669,716 $ (6,316) $ 663,400
========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet.
32
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) Reflects the consummation of the Transactions as set forth under "Use of
Proceeds."
(b) Reflects the inclusion of estimated deferred financing costs associated with
the Transactions.
(c) Reflects the elimination of accrued interest related to the retirement of
outstanding indebtedness as of August 2, 1997 as described in "Use of
Proceeds."
(d) Reflects the tax benefit from the extraordinary charge.
(e) Reflects the contribution to capital of $58.4 million from the Parent in
connection with the Transactions.
(f) Reflects an extraordinary charge of approximately $11.9 million, net of tax
benefit of $7.0 million, which would be incurred as a result of a premium on
the retirement of the Senior Notes, the accelerated amortization of the
related unamortized debt discount and certain other costs.
33
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------
PEARLE
COMPANY ACQUISITION(a) TRANSACTIONS PRO FORMA
----------- -------------- ------------ ---------
<S> <C> <C> <C> <C>
Net revenue................................ $ 683,990 $249,826 $ -- $ 933,816
Costs and expenses:
Cost of goods sold and operating
expenses(b)........................... 612,167 227,055 -- 839,222
Business integration and other
non-recurring charges................. 64,400 (4,767)(c) -- 59,633
Depreciation and amortization............ 19,812 11,399 -- 31,211
--------- -------- -------- ---------
Total costs and expenses......... 696,379 233,687 -- 930,066
--------- -------- -------- ---------
Income (loss) from operations.............. (12,389) 16,139 -- 3,750
Interest expense........................... 24,372 11,334 (7,768)(d) 27,938
Interest income and other.................. (1,613) 648(e) -- (965)
--------- -------- -------- ---------
Income (loss) before income taxes.......... (35,148) 4,157 7,768 (23,223)
Income tax provision (benefit)............. (7,106) 1,819(f) 2,874(f) (2,413)
--------- -------- -------- ---------
Income (loss) before extraordinary item.... $ (28,042) $ 2,338 $ 4,894 $ (20,810)
========= ======== ======== =========
Ratio of earnings to fixed charges(g)...... -- --
EBITDA data(h):
Income (loss) from operations............ $ (12,389) $ 16,139 $ -- $ 3,750
Integration and other non-recurring
charges............................... 64,400 (4,767) -- 59,633
Depreciation and amortization............ 19,812 11,399 -- 31,211
--------- -------- -------- ---------
EBITDA................................ $ 71,823 $ 22,771 $ -- $ 94,594
========= ======== ======== =========
Ratio of EBITDA to interest expense(h)... 3.0x 3.5x
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations.
34
<PAGE> 39
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 26 WEEKS ENDED AUGUST 2, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Net revenue............................................. $ 502,572 $ -- $ 502,572
Costs and expenses:
Cost of goods sold and operating expenses............. 454,263 -- 454,263
Depreciation and amortization......................... 14,717 -- 14,717
--------- ------- ---------
Total costs and expenses...................... 468,980 -- 468,980
--------- ------- ---------
Income from operations.................................. 33,592 -- 33,592
Interest expense........................................ 17,539 (3,851)(d) 13,688
Interest income and other............................... (905) -- (905)
--------- ------- ---------
Income before income taxes.............................. 16,958 3,851 20,809
Income tax provision.................................... 7,292 1,425(f) 8,717
--------- ------- ---------
Income before extraordinary item........................ $ 9,666 $ 2,426 $ 12,092
========= ======= =========
Ratio of earnings to fixed charges(g)................... 1.4x 1.6x
EBITDA data(h):
Income from operations................................ $ 33,592 $ -- $ 33,592
Depreciation and amortization......................... 14,717 -- 14,717
--------- ------- ---------
EBITDA................................................ $ 48,309 $ -- $ 48,309
========= ======= =========
Ratio of EBITDA to interest expense(h)................ 2.8x 3.7x
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations.
35
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(a) Reflects the results of Pearle from the beginning of fiscal 1996 through
November 15, 1996 (the date of acquisition) after giving effect to certain
pro forma adjustments, including adjustments to reflect the amortization of
tradenames and goodwill, ($12.4 million) the elimination of transactions
between Pearle and its former parent, ($37.6 million) the elimination of
Pearle's provision for impairment of intangible assets and related costs
which resulted from the acquisition ($94.7 million) and increased interest
expense ($13.9 million). Results of Pearle since the date of acquisition
are included in the "Company" amounts. The acquisition of Pearle was
accounted for under the purchase method of accounting. The purchase price
was allocated to the assets acquired and liabilities assumed based upon
their relative fair values as of the closing date. This resulted in an
excess of purchase price over net assets acquired of $20.2 million. The
relative fair values of the assets acquired and liabilities assumed were
based upon valuations and other studies and included tradenames of $49.5
million, unfavorable leasehold interests of $7.5 million, accruals for
involuntary severance and termination benefits of $4.4 million and deferred
taxes of $14.4 million. Refer to Note 2 of the Audited Consolidated
Financial Statements.
(b) Prior to the acquisition date, gross profit and gross margin for Pearle
were not determined on a basis consistent with that of the Company. Pearle
included certain store occupancy costs and depreciation in cost of goods
sold, whereas the Company reports such costs as operating expenses or
depreciation and amortization. In addition, Pearle included payroll,
supplies and other costs related to the making of eyeglasses at its
in-store labs in selling, general and administrative expenses; the Company
and Pearle both classify similar costs of making eyeglasses at their
central laboratories in cost of goods sold. Information to reclassify
Pearle's historical costs and expenses on a basis consistent with the
Company is not readily available. For the purposes of the pro forma
operating results presented above, depreciation normally included in
Pearle's cost of goods sold and operating expenses has been reclassified to
depreciation and amortization.
(c) In fiscal 1996, Pearle recorded net credit adjustments to reduce
restructuring reserves previously established.
(d) Reflects the effect on interest expense resulting from the adjustments
below (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR 26 WEEKS
ENDED ENDED
FEB. 1, 1997 AUGUST 2, 1997
------------ --------------
<S> <C> <C>
Interest on the Notes, including amortization of
deferred financing costs............................. $ 11,131 $ 5,566
Elimination of interest expense on the Senior Notes,
including amortization of discount................... (18,899) (9,417)
------- ---------
$ (7,768) $ (3,851)
======= =========
</TABLE>
(e) Reflects elimination of interest income on temporary cash investments used
to fund the Pearle acquisition.
(f) Reflects the tax effect of the adjustments referred to above. Income tax
expense includes the provision for state, local and federal income taxes.
The pro forma effective tax rate differs from the federal statutory rate of
35% principally because of state and local taxes and permanent differences
arising from amortization of goodwill.
(g) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes and fixed charges. Fixed charges
consist of interest expense, including amortization of deferred debt
issuance costs and one-third of minimum rental expense less sublease rental
income (the portion deemed representative of the interest factor). Earnings
were insufficient to cover fixed charges on the "Company" and "Pro Forma"
bases for the fiscal year ended February 1, 1997 by $35.1 million and $23.2
million, respectively. Earnings included the business integration and other
non-recurring charges.
36
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(h) EBITDA is defined as income from operations before depreciation and
amortization and nonrecurring charges including restructuring and store
closure costs. The Company has included information concerning EBITDA here
as it is relevant for purposes of covenant analysis under the Indentures
for the Notes, the Existing Senior Subordinated Notes and the Senior Notes
and such data may be used by certain investors as a measure of a company's
ability to service its debt; however, such measure of EBITDA as used by the
Company may not be comparable to similarly titled measures reported by
other companies. EBITDA is not a performance measure under generally
accepted accounting principles and should not be considered more meaningful
than operating income or cash flows as an indicator of operating
performance. For purposes of computing the ratio of EBITDA to interest
expense, interest expense excludes the amortization of deferred financing
costs. Amortization of deferred financing costs used to compute the pro
forma ratios of EBITDA to interest expense were $0.8 million for the fiscal
year ended February 1, 1997 and $0.5 million for the 26 weeks ended August
2, 1997.
37
<PAGE> 42
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
Set forth below are selected historical financial and other data of the
Company for fiscal years 1992 through 1996 which have been derived from the
Company's audited consolidated financial statements for those years. Also set
forth below are selected summary financial data of the Company for the 26 weeks
ended August 3, 1996 and August 2, 1997, which have been derived from unaudited
financial statements for those periods. Results for interim periods are not
necessarily indicative of full year results. See "Risk Factors--Seasonality."
Prior to the Initial Capitalization, all operations of the Company were
conducted by subsidiaries of the Parent. The selected historical financial and
other data set forth below for fiscal years 1992 and 1993 are based on the
historical cost as if the Initial Capitalization had occurred at the beginning
of fiscal 1992 and the Company had been in existence for such period.
Accordingly, transactions of the Parent prior to the Initial Capitalization on
September 30, 1993, except for those relating to the debt not assumed by the
Company and the interest expense thereon, have been included in the selected
historical financial and other data below. The Company's fiscal year ends on the
Saturday closest to January 31. Fiscal years are identified according to the
calendar year in which they begin. For example, the fiscal year ended February
1, 1997 is referred to as "fiscal 1996." Fiscal 1995 consisted of a 53-week
period; all other fiscal years presented consisted of 52-week periods. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 26 WEEKS ENDED
-------------------------------------------------------- --------------------------
JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, AUGUST 3, AUGUST 2,
1993 1994 1995 1996 1997(a) 1996 1997
-------- -------- -------- -------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net revenue........................ $428,066 $472,888 $528,049 $577,091 $683,990 $ 296,355 $ 502,572
Gross profit....................... 304,012 331,936 363,326 394,157 462,686 204,455 331,450
Operating expenses................. 258,534 281,149 305,470 332,540 390,863 175,261 283,141
Depreciation and amortization...... 13,581 13,516 14,892 15,686 19,812 8,450 14,717
Business integration and other
non-recurring charges (b)........ -- -- -- -- 64,400 -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations...... 31,897 37,271 42,964 45,931 (12,389) 20,744 33,592
Interest expense, net.............. 18,770 17,651 21,823 21,382 22,759 9,982 16,634
Income tax provision (benefit)..... 6,161 2,361 (3,703) 10,799 (7,106) 4,735 7,292
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations....................... $ 6,966 $ 17,259 $ 24,844 $ 13,750 $(28,042) $ 6,027 $ 9,666
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Gross margin....................... 71.0% 70.2% 68.8% 68.3% 67.6% 69.0% 66.0%
EBITDA (c)......................... $ 45,478 $ 50,787 $ 57,856 $ 61,617 $ 71,823 $ 29,194 $ 48,309
EBITDA margin (c).................. 10.6% 10.7% 11.0% 10.7% 10.5% 9.9% 9.6%
Capital expenditures............... $ 9,580 $ 13,074 $ 18,527 $ 19,675 $ 23,269 $ 8,465 $ 13,103
Ratio of earnings to fixed charges
(d).............................. 1.5x 1.7x 1.7x 1.8x -- 1.4x 1.4x
NUMBER OF UNITS (AT END OF PERIOD):
Cole Vision........................ 769 774 938 1,013 1,138 1,038 1,149
Pearle (e)......................... -- -- -- -- 686 -- 687
Things Remembered.................. 717 737 760 778 790 779 796
CGC................................ 594 586 589 587 501 504 498
-------- -------- -------- -------- -------- -------- --------
Total............................ 2,080 2,097 2,287 2,378 3,115 2,321 3,130
======== ======== ======== ======== ======== ======== ========
COMPARABLE STORE SALES GROWTH (f)
Cole Vision........................ (1.4)% 10.7% 9.8% 5.6% 10.7% 11.4% 9.4%
Things Remembered.................. (0.7)% 1.8% 0.1% 3.1% 2.3% 4.6% (2.2)%
CGC................................ 1.8% 31.6% 5.8% (4.8)% (1.8)% 0.3% (6.0)%
Pearle............................. -- -- -- -- -- -- --
Total............................ (0.7)% 9.4% 5.5% 3.4% 6.3% 7.9% 4.2%
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets....................... $225,861 $257,945 $283,303 $298,187 $572,825 $ 317,764 $ 669,716
Long-term debt..................... 190,556 188,299 184,388 180,218 314,359 180,110 314,377
Stockholder's equity (deficit)..... (58,902) (29,793) 1,139 2,497 (36,355) 8,524 (26,897)
</TABLE>
See accompanying Notes to Selected Historical Financial and Other Data.
38
<PAGE> 43
NOTES TO SELECTED HISTORICAL FINANCIAL AND OTHER DATA
(a) Includes results for Pearle from November 15, 1996 through February 1, 1997.
On a pro forma basis, if the Pearle acquisition and the related financing
had occurred at the beginning of the period, the unaudited consolidated net
revenue would have been $933.8 million and the pro forma loss from
continuing operations would have improved by $2.3 million.
(b) Represents a pretax charge for business integration and other non-recurring
items in fiscal 1996 primarily related to the acquisition of Pearle.
(c) EBITDA is defined as income from operations before depreciation and
amortization and nonrecurring charges, if any. The Company has included
information concerning EBITDA here as it is relevant for covenant analysis
under the Indentures for the Senior Notes and the Existing Senior
Subordinated Notes and because it is used, by certain investors as a measure
of a company's ability to service its debt; however, such measure of EBITDA
as used by the Company may not be comparable to similarly titled measures
reported by other companies. EBITDA is not a performance measure under
generally accepted accounting principles and should not be considered more
meaningful than operating income or cash flows as an indicator of operating
performance. For the purpose of computing the ratio of EBITDA to interest
expense, interest expense excludes the amortization of deferred financing
costs. Cash flows from operating, financing and investing activities for
fiscal 1992 through fiscal 1996, and the 26 weeks ended August 3, 1996 and
August 2, 1997 totaled $1.8 million, $14.6 million, $(11.2) million, $9.5
million, $43.9 million, $16.8 million and $60.0 million, respectively.
(d) Earnings used in computing the ratio of earnings to fixed charges consist of
income (loss) before income taxes plus fixed charges. Fixed charges consist
of interest on indebtedness, amortization of deferred financing fees and the
portion of minimum rent expense less sublease rental income that represents
interest. Earnings were insufficient to cover fixed charges for the fiscal
year ended February 1, 1997 by $35.1 million. Earnings included the business
integration and other non-recurring charges.
(e) Includes Pearle franchised locations.
(f) Comparable stores sales growth is calculated using sales for all stores open
at least twelve months, for the weeks that the stores were open in both the
previous and current periods. For the year ended January 29, 1994, the
growth in comparable store sales for CGC includes the addition of greeting
card merchandise to 171 locations in February 1993.
39
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is a direct wholly owned subsidiary of the Parent. The
operations of the Company are and will be conducted through its subsidiaries
and, therefore, the Company is and will be dependent on the cash flow of its
subsidiaries to meet its obligations. As of August 2, 1997, the subsidiaries of
the Company had $172.8 million of liabilities outstanding, consisting primarily
of trade payables and accrued expenses. The Indenture pursuant to which the
Notes have been issued prohibits the incurrence of additional indebtedness by
the Company's subsidiaries other than a limited amount of purchase money
indebtedness, capital leases and guarantees of franchisee obligations, as well
as indebtedness under the Credit Facility. The Company's Credit Facility
includes restrictions on the activities of the Company's subsidiaries, including
restrictions on payments to the Company. Such restrictions do not include
restrictions on distributions to the Company for the purpose of paying the
interest and principal on the Notes or payments to the Company for certain
administrative and operating expenses. The following discussion should be read
in conjunction with the selected historical financial and other data and the
unaudited pro forma condensed consolidated financial data and the notes thereto.
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they begin.
For example, the fiscal year ended February 1, 1997 is referred to as "fiscal
1996." Fiscal 1996 consisted of a 52-week period. Fiscal 1995 and fiscal 1994
consisted of 53- and 52-week periods, respectively.
As a result of the acquisition of AVC, which was acquired by the Parent and
transferred to the Company as an equity contribution in the amount of
approximately $27.7 million, the Company intends to closely evaluate the various
operations of AVC for opportunities to effect operational efficiencies. The
Company expects that it will take a non-recurring business integration charge in
fiscal 1997 representing the costs to integrate the AVC stores into the Company.
On September 15, 1997, the Company completed a tender offer for its Senior
Notes pursuant to which Senior Notes in the aggregate principal amount of $151.3
million were purchased at a total purchase price (including premium and accrued
interest) of $175.1 million. As of October 21, 1997, Senior Notes in an
aggregate principal amount of $14.5 million remain outstanding. The earliest
redemption date for the remaining Senior Notes is October 1, 1998, at a
redemption price of 105.625% plus accrued and unpaid interest.
The following is a discussion of the results of the Company's operations
for the three fiscal years ended February 1, 1997 and for the 26 week periods
ended August 2, 1997 and August 3, 1996.
SUMMARY THIRD QUARTER RESULTS OF OPERATIONS
For the third quarter ended November 1, 1997, the Company had net revenue
of $262.0 million and income of $2.6 million, before an extraordinary charge of
$12.2 million related to the retirement of the Senior Notes. Increased sales and
earnings compared to last year were primarily due to the acquisitions of Pearle
and Sears Optical of Canada in November 1996 and AVC/NuVision in August 1997,
along with consolidated comparable store sales growth of 2.3% for the quarter.
Gross margins for the third quarter of fiscal 1997 and fiscal 1996 were 65.6%
and 69.5%, respectively. The lower gross margin resulted primarily from the
addition of Pearle, which was consistent with prior quarters, plus the impact of
clearance and other promotions during the quarter at both Cole Gift and Cole
Vision.
Third quarter fiscal 1997 income before extraordinary item included a
pretax charge of $1.1 million related to business integration costs associated
with the Company's acquisition of AVC/NuVision in August,
40
<PAGE> 45
1997. The Company estimates that it will record an additional pretax charge of
between $6.0 and $7.0 million in the fourth quarter of fiscal 1997 related to
AVC/NuVision integration costs.
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
--------------------------- ---------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue................................ $ 261,979 $ 146,702 $ 764,551 $ 443,057
Income from operations..................... 11,365 6,475 44,957 27,219
Income before extraordinary item........... 2,625 937 12,291 6,964
Loss on extinguishment of debt............. (12,183) -- (12,183) --
Net income (loss).......................... (9,558) 937 108 6,964
</TABLE>
RESULTS OF OPERATIONS
26 Weeks Ended August 2, 1997 Compared to 26 Weeks Ended August 3, 1996
Net revenue for the first six months of fiscal 1997 increased 69.6% to
$502.6 million from $296.4 million for the same period in fiscal 1996. The
increase in revenue was primarily attributable to the acquisitions of Pearle and
Sears Optical of Canada in November 1996, which accounted for $167.2 million of
the increase. The Company's consolidated comparable store sales increased 4.2%
in fiscal 1997 and 7.9% in fiscal 1996. A strong comparable store sales increase
of 9.4% at Cole Vision was primarily a result of successful eyewear promotions
and growth in managed vision care sales. Comparable store sales decreased 2.9%
at Cole Gift which was negatively impacted by the lower levels of mall traffic
and unseasonably bad weather in the early spring. In fiscal 1997, the Company
began classifying capitation and other fees associated with its growing managed
vision care business, totaling $20.2 million for the 26 weeks ended August 2,
1997, as revenue, which previously had been netted with operating expenses. The
opening of additional Cole Gift and Cole Vision units also contributed to the
revenue increase. At August 2, 1997, the Company had 3,130 specialty service
retail locations, including 321 franchised locations, compared to 2,321 at
August 3, 1996.
Gross profit increased to $331.5 million in fiscal 1997 from $204.5 million
in the same period last year. The gross profit increase was primarily
attributable to the addition of Pearle, increased revenue at Cole Vision and the
classification of managed vision care fees as revenue. Gross margins for fiscal
1997 and fiscal 1996 were 66.0% and 69.0%, 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 61.6% to $283.1 million in fiscal 1997 from
$175.3 million in fiscal 1996, but as a percentage of revenue, operating
expenses decreased to 56.3% in fiscal 1997 from 59.1% in fiscal 1996. The
leverage improvement was primarily a result of the addition of Pearle, which has
lower operating expenses as a percentage of revenue than the rest of the
Company, along with leverage gains achieved by Cole Vision's comparable store
sales increase. Fiscal 1997 depreciation and amortization expense of $14.7
million was $6.3 million more than fiscal 1996 reflecting the addition of Pearle
and an increase in capital expenditures.
Income from operations increased 61.9% to $33.6 million for the first six
months of fiscal 1997 from $20.7 million for the same period a year ago,
primarily the result of the Pearle acquisition and strong sales growth at Cole
Vision, offset in part by softer sales performance at Cole Gift.
Net interest expense increased $6.7 million over the first six months of
fiscal 1996 to $16.6 million. The increase was primarily attributable to the
additional interest on $150.0 million of Existing Senior Subordinated Notes
issued in connection with financing the acquisition of Pearle, partially offset
by a decrease in interest expense due to the retirement of $15.1 million of
Senior Notes in the fourth quarter of fiscal 1996.
41
<PAGE> 46
An income tax provision was recorded in the first six months of fiscal 1997
and fiscal 1996 using the Company's estimated annual effective tax rate of 43%
and 44%, respectively.
Net income increased to $9.7 million for the first six months of fiscal
1997 from $6.0 million for the first six months of fiscal 1996. The increase was
due to improvement in income from operations offset, in part, by the increase in
net interest expense.
The Company's business historically has been seasonal with approximately
30% of its net revenue and approximately 50% of its income from operations
occurring in the fourth fiscal quarter because of the importance of gift sales
during the Christmas retailing season. Although the acquisition of Pearle has
moderated the seasonality of the Company due to relatively lower levels of
optical product sales during the Christmas holiday season, the Company's
business will remain seasonal. Therefore, results of operations for interim
periods are not necessarily indicative of full year results.
Fiscal 1996 Compared to Fiscal 1995
On November 15, 1996, the Company acquired certain assets and all of the
issued and outstanding common stock of Pearle. A significant portion of the
purchase price was financed by the issuance of $150.0 million of Existing Senior
Subordinated Notes. The acquisition of Pearle was accounted for under the
purchase method of accounting. Accordingly, Pearle's results of operations have
been included in the Company's consolidated statement of operations since the
date of acquisition. For the eleven-week period, Pearle operated at
approximately a break-even level with net revenue of $58.3 million reflecting
the relatively lower level of optical retail sales during the holiday season. At
February 1, 1997, the Pearle system included 348 company-operated optical stores
and 338 franchised locations in the United States, Canada and the Caribbean. See
Notes 2 and 3 of the Notes to Audited Consolidated Financial Statements for
further discussion of the Pearle acquisition. Except as otherwise indicated, the
following discussion of net revenue, gross profit and operating expenses relates
to the Company on an historical basis without giving effect to the Pearle
acquisition.
Net revenue increased 8.4% to $625.7 million in fiscal 1996 from $577.1
million in fiscal 1995. The increase in consolidated revenue was due to a
comparable store sales increase of 6.3% and to the opening of additional Cole
Gift and Cole Vision units including 75 optical locations in Canada as a result
of the acquisition of AOCO Limited in November 1996. This was partially offset
by one less week of sales in fiscal 1996 compared to fiscal 1995 and the closing
of 95 low-volume Cole Gift departments. Comparable store sales increased 10.7%
at Cole Vision primarily as a result of successful eyewear promotions and growth
in the managed vision care program. Comparable store sales increased 1.4% at
Cole Gift benefiting from the roll-out of monogrammed softgoods and the
introduction of new merchandise. At February 1, 1997, the Company had 3,115
specialty service retail locations including the Pearle company-operated stores
and 338 franchised locations, versus 2,378 at the end of the prior year.
Gross profit increased to $429.4 million in fiscal 1996 from $394.2 million
in fiscal 1995. Gross margins for fiscal 1996 and fiscal 1995 were 68.6% and
68.3%, respectively. The increase in gross margin percentage was the result of
lower product costs, improved optical lab productivity and a higher level of
personalization in the sales mix at Things Remembered. In fiscal 1997, the
Company's consolidated gross margin is expected to decline from its historical
levels as Pearle has a lower gross margin than the Company due to the higher
costs of in-store laboratories and lower margin wholesale sales to franchised
stores partially offset by franchise royalties, fees and interest income on
franchise notes receivable which have no corresponding cost of goods sold.
Operating expenses increased 8.3% to $360.2 million in fiscal 1996 from
$332.5 million the prior year. As a percentage of revenue, operating expenses
were 57.6% in fiscal 1996 and 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
42
<PAGE> 47
superstores and higher percentage rents caused by increased comparable store
sales. Fiscal 1996 depreciation and amortization expense of $17.3 million was
$1.6 million more than fiscal 1995 reflecting an increase in capital
expenditures.
In the fourth quarter of fiscal 1996, the Company recorded a $64.4 million
pre-tax charge for certain unusual and non-recurring items. Such charge was
primarily related to the acquisition of Pearle and included costs incurred
related to the integration and consolidation of Pearle into the Company's
operations, as well as certain other non-recurring charges. See Note 3 of the
Notes to Audited Consolidated Financial Statements for further discussion of the
business integration and other non-recurring charges.
Income from operations excluding the charge for non-recurring items
increased 13.0% to $51.9 million in fiscal 1996 from $45.9 million the prior
year. The increase was primarily attributable to increased revenue and higher
gross margin.
Net interest expense for fiscal 1996 of $22.8 million was $1.4 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 November 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 $7.1 million for fiscal 1996 includes a $20.0
million income tax benefit related to the charge for business integration and
other non-recurring items. The effective income tax rate on income excluding the
charge for business integration and other non-recurring items was 44.0% in
fiscal 1996 and 1995. This rate reflects the significant impact of
non-deductible amortization of goodwill in both years. A more complete
discussion of income taxes is included in Note 7 of the Notes to Audited
Consolidated Financial Statements.
Fiscal 1995 Compared to Fiscal 1994
Net revenue increased 9.3% to $577.1 million in fiscal 1995 from $528.0
million in fiscal 1994. The increase in consolidated revenue was due to a
comparable store sales increase of 3.4%, sales for the 53rd week of
approximately $9.3 million and additional Things Remembered and Cole Vision
units open in fiscal 1995. Comparable store sales increased primarily as a
result of successful eyewear promotions and growth in the managed vision care
program at Cole Vision and expanded gift and softgoods merchandise at Things
Remembered locations. Fourth quarter comparable store sales were even with last
year as the retail industry in general experienced a very difficult Christmas
season and severe weather conditions in many major markets. At February 3, 1996,
the Company operated 2,378 specialty service retail locations versus 2,287 at
the end of the prior year. The net increase in retail units includes the
acquisition by Cole Vision on May 21, 1995, of 59 optical departments located in
BJ's Wholesale Club stores and the sale of the Company's 39 Sunspot fashion
sunglass kiosks as of April 29, 1995.
Gross profit increased to $394.2 million in fiscal 1995 from $363.3 million
in fiscal 1994. Gross margins for fiscal 1995 and fiscal 1994 were 68.3% and
68.8%, respectively. The decrease in gross margin percentage was primarily due
to an increase in the sales of lower margin optical products, including
disposable contact lenses, and a lower mix of higher margin merchandise,
primarily keys, at CGC. Gross margin in the fourth quarter of fiscal 1995,
however, improved to 67.1% from 66.9% in fiscal 1994, benefiting from fiscal
1994 and 1995 investments aimed at increasing optical laboratory capacity and
production efficiency and from reduced material costs for spectacles.
Operating expenses increased 8.9% to $332.5 million in fiscal 1995 from
$305.5 million the prior year. As a percentage of net revenue, operating
expenses decreased to 57.6% in fiscal 1995 from 57.8% in fiscal 1994. Operating
expenses increased primarily because of higher payroll costs, store occupancy
expenses and advertising expense due, in part, to the 53rd week. The higher
payroll costs were also the result of more retail units in fiscal 1995 and
additional payroll to support the higher level of sales. Partially offsetting
the payroll increases were savings from outsourcing the Company's data
processing operations in fiscal 1995. Store
43
<PAGE> 48
occupancy expense increased because of the increased number of retail units and
higher percentage rents due to increased comparable store sales. Advertising
costs increased primarily as a result of additional efforts to support eyewear
promotions. Also included in operating expense in fiscal 1995 was a $0.2 million
provision for the closing of approximately 90 low volume leased key and gift
departments in the first quarter of fiscal 1996. The closings are expected to
improve the Company's operating results during the first nine months of the
fiscal year. Fiscal 1995 depreciation and amortization expense of $15.7 million
was $0.8 million more than fiscal 1994 reflecting an increase in capital
expenditures that began in the latter part of fiscal 1993.
Income from operations increased 6.9% to $45.9 million in fiscal 1995 from
$43.0 million the prior year. The increase was primarily attributable to the
increased revenue. The lower gross margin percentage was partially offset by
improved leveraging of operating expenses.
Net interest expense for fiscal 1995 of $21.4 million was $0.4 million less
than that of the prior year. This decrease was primarily due to an increase in
interest income and lower borrowings on the Senior Notes.
The income tax provision of $10.8 million for fiscal 1995 represents an
effective tax rate of 44.0%. This rate reflects the significant impact of
non-deductible amortization of goodwill. The income tax benefit of $3.7 million
in fiscal 1994 included the effects of utilizing all of the Company's net
operating loss carryforwards and the reversal of a valuation allowance on net
deferred tax assets in the fourth quarter of fiscal 1994. A more complete
discussion of income taxes is included in Note 7 of Notes to Audited
Consolidated Financial Statements.
Net income in fiscal 1994 of $24.7 million included a loss on early
extinguishment of debt of $0.1 million to reflect the payment of premiums, the
write-off of unamortized debt discount and other costs associated with retiring
the debt in connection with the Parent's initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is funds provided from operations
of its wholly owned subsidiaries. In addition, the Company's operating
subsidiaries have available to them working capital commitments of $75.0
million, reduced by commitments under letters of credit, under a credit facility
put in place at the time of the acquisition of Pearle (the "Credit Facility").
The Credit Facility replaced a $50.0 million revolving credit facility. There
were no working capital borrowings outstanding during the first six months of
fiscal 1997 or at any time during fiscal 1996. The maximum amounts outstanding
during fiscal 1995 and fiscal 1994 were $3.5 million and $13.0 million,
respectively.
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 the Parent. The Credit Facility
permits the Company's subsidiaries to pay dividends to the Company to the extent
necessary to permit the Company to pay all interest and principal on the Senior
Notes, the Existing Senior Subordinated Notes and the Notes when due.
During the second quarter of fiscal 1996, the Parent completed a public
offering of 1,437,500 shares of its common stock at a price of $19.25 per share.
The net proceeds from the offering were $26.2 million. The Parent used a portion
of the net proceeds to purchase $15.1 million of the Senior Notes plus accrued
interest thereon in the open market. In connection with the acquisition of
Pearle in the fourth quarter, the Company purchased and retired the $15.1
million of Senior Notes held by the Parent at a price equal to net book value.
During the fourth quarter of fiscal 1996, in connection with the
acquisition of Pearle, the Company issued the Existing Senior Subordinated Notes
in the aggregate amount of $150.0 million. Issuance of the Existing Senior
Subordinated Notes and the retirement of $15.1 million of Senior Notes will
result in a net increase in annual interest expense in fiscal 1997 compared to
fiscal 1996 of approximately $10.4 million including amortization of the
discount on the Existing Senior Subordinated Notes and related deferred
financing costs.
During the second quarter of fiscal 1997, the Parent completed a public
offering of 2,587,500 shares of its Common Stock at an offering price of $47.00
per share. The Parent intends to use the net proceeds of approximately $116
million for general corporate purposes including reducing outstanding
indebtedness and
44
<PAGE> 49
financing possible future acquisitions including the transactions described
below. Up to approximately $58.4 million of the proceeds will be transferred to
the Company as an equity contribution in conjunction with the Transactions.
On August 5, 1997, the Parent acquired, for an aggregate purchase price of
approximately $28.9 million, including debt assumed, all of the issued and
outstanding common stock of American Vision Centers, Inc. ("AVC"). AVC consisted
of 79 company-owned and 85 franchised optical retail stores. Subsequent to the
acquisition, the Parent transferred AVC to the Company as an equity
contribution. The Company anticipates that it will take a non-recurring business
integration charge in fiscal 1997. The acquisition will be accounted for under
the purchase method of accounting and the results of AVC's operations will be
included in the consolidated financial statements for periods following the date
of acquisition. For its most recent fiscal year ended December 31, 1996, AVC
reported annual net revenue of $52.5 million.
In August 1997, the Company issued $125.0 million of 8 5/8% Senior
Subordinated Notes (the Senior Subordinated Notes) due 2007. The net proceeds of
the issuance were approximately $121.7 million. The Company 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 Senior
Subordinated Notes issuance and cash on hand. As a result, an extraordinary
charge of approximately $12.0 million will be recorded in connection with the
early extinguishment of debt, representing the tender premium, write-off of the
related unamortized debt discount and other costs associated with purchasing the
Senior Notes. The issuance of the Senior Subordinated Notes and the purchase of
the Senior Notes are expected to result in a reduction of interest expense of
approximately $7.0 million annually.
As of August 2, 1997, the Company had outstanding $165.8 million aggregate
principal amount of Senior Notes and $150.0 million aggregate principal amount
of Existing Senior Subordinated Notes. The Senior Notes and the Existing Senior
Subordinated Notes are unsecured and mature October 1, 2001 and December 31,
2006, respectively, with no earlier scheduled redemption or sinking fund
payment. The Senior Notes bear interest at a rate of 11.25% per annum, payable
semi-annually on each April 1 and October 1. Effective September 15, 1997,
$151.3 million aggregate principal amount of Senior Notes were repurchased
pursuant to the Tender Offer leaving $14.5 million aggregate principal amount of
Senior Notes outstanding. As of such date, the Senior Note Indenture was amended
to delete substantially all of the restrictive covenants contained in the Senior
Note Indenture. The Existing Senior Subordinated Notes bear interest at a rate
of 9.875% per annum, payable semi-annually on each June 30 and December 31,
commencing June 30, 1997. The indentures pursuant to which the Senior Notes and
the Existing Senior Subordinated Notes were issued contain certain optional and
mandatory redemption features and other financial covenants, including
restrictions on the ability of the Company to pay dividends or make other
restricted payments. The indentures permit dividend payments to the Parent of
one-half of the Company's consolidated net income, provided that no default or
event of default has occurred under the indentures and that the Company has met
a specified fixed charge coverage ratio test. The indentures also permit
payments to the Parent for certain tax obligations and for administrative
expenses of the Parent not to exceed 0.25% of net revenue. See Note 5 of the
Notes to Audited Consolidated Financial Statements.
The Company has no significant principal payment obligations under any of
its outstanding indebtedness until the Senior Notes mature in 2001. The ability
of the Company and its subsidiaries to satisfy its 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. The Company currently expects that it will be able to
service the principal obligations on its indebtedness out of cash flow from
operations.
All cash balances of the Parent are maintained by the Company. As of August
2, 1997, the Company had an intercompany payable to affiliates of $169.9
million. Such payable arose primarily from the Parent's loan to the Company of
proceeds from the Parent's 1997 and 1996 public offerings of common stock, cash
that had earlier been received as dividends from the Company and subsequently
borrowed by the Company and other cash receipts and disbursements of the Parent.
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<PAGE> 50
Cash balances at August 2, 1997 were $133.1 million compared to $73.1
million at February 1, 1997. Operations used net cash of $15.9 million in the
first six months of 1997 compared to $18.1 million net cash provided in the
first six months of 1996. The $34.0 million increase in cash used by operations
was primarily attributable to increased accounts receivables related to third
party optical sales, increased payments related to inventory disbursements and
payment of certain business integration and other non-recurring charges accrued
in fiscal 1996, partially offset by an increase in net income and higher
depreciation and amortization expense.
Cash balances at February 1, 1997 were $73.1 million compared to $29.3
million at February 3, 1996. Operations generated net cash of $68.9 million in
fiscal 1996, $36.2 million in fiscal 1995 and $19.1 million in fiscal 1994. The
$32.7 million increase in cash provided by operations in fiscal 1996 compared to
fiscal 1995 was primarily attributable to an increase in accounts payable and
accrued liabilities of $35.1 million excluding amounts related to the
non-recurring charge, increased income from operations of $6.1 million excluding
the non-recurring charge, increased depreciation and amortization expense of
$4.1 million and increased accrued income taxes. These cash flow increases were
partly offset by an increase in inventories of $3.6 million versus a $2.5
million reduction in fiscal 1995. The $64.4 million charge for business
integration and other non-recurring items recorded in fiscal 1996 had little
effect on the change in cash flow for fiscal 1996 since most of the items were
either non-cash or were accrued at year end. The total cash outlay related to
this charge is expected to be approximately $41.1 million ($21.1 million after
tax), of which $2.9 million has been paid as of February 1, 1997. The remaining
amount is expected to be incurred within the next 12 to 18 months, except for
certain lease costs which may be incurred over the remaining life of the leases.
The $17.1 million increase in cash provided by operations in fiscal 1995
compared to fiscal 1994 was primarily due to a $2.5 million reduction in
inventory, despite a 9.3% increase in revenue, compared to an $8.7 million
increase in inventory the prior year. Also, income from operations in fiscal
1995 was higher by $3.0 million and interest expense was lower by $0.4 million
than in fiscal 1994.
Net capital additions were $13.1 million and $8.5 million in the first six
months of fiscal 1997 and fiscal 1996, respectively, and $23.3 million, $19.7
million and $18.5 million in fiscal 1996, 1995 and 1994, respectively. In
addition, the Company used $157.4 million for the purchases of Pearle and AOCO
Limited in fiscal 1996, $0.8 million for the purchase of the BJ's Wholesale Club
optical departments in fiscal 1995 and $4.7 million for the purchase of 107
Montgomery Ward optical departments in fiscal 1994. The majority of the capital
additions were for store fixtures, equipment and leasehold improvements for new
stores and the remodeling of existing stores. Expenditures of $6.9 million were
also incurred in the first six months of 1997 in connection with the
construction of Cole Gift's new warehouse and distribution facility. For fiscal
1997, the Company expects to continue to expand the number of stores as well as
remodel and relocate stores. The Company currently estimates capital
expenditures in fiscal 1997 will approximate $32.0 million.
The Company has constructed a new warehouse and distribution facility for
Cole Gift that is expected to improve distribution efficiencies. The facility is
expected to be financed through a sale and lease-back transaction or through
conventional secured real estate financing. The Company estimates the cost of
this facility to be approximately $9 million.
The Company believes that funds provided from operations along with funds
available under the Credit Facility will provide adequate sources of long-term
liquidity to allow the Company's operating subsidiaries to continue to expand
the number of stores.
This Prospectus contains and incorporates by reference certain statements
that are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Those statements include,
among other things, the discussions of the Company's business strategy and
expectations concerning the Company's position in the industry, future
operations, margins, profitability, liquidity and capital resources, as well as
statements concerning the integration of the acquisition of Pearle and AVC and
achievement of cost savings and other efficiencies in connection therewith.
Investors in the Notes offered hereby are cautioned that reliance on any
forward-looking statement involves risks and uncertainties, and that although
the Company believes that the assumptions on which the forward-looking
statements contained herein are based are reasonable, any of those assumptions
could prove to be inaccurate, and as a result, the forward-looking statements
based on those assumptions also could be materially incorrect. The
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<PAGE> 51
uncertainties in this regard include, but are not limited to, those identified
in the risk factors discussed above. In light of these and other uncertainties,
the inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's plans and objectives will be
achieved.
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<PAGE> 52
BUSINESS
GENERAL
The Company, a leading vision care and personalization retailer, believes,
based on industry data, it is the largest optical retail company in the United
States, with approximately 2,000 company-owned and franchised optical locations
in the United States, Canada and the Caribbean. The Company's pro forma net
revenue and EBITDA for fiscal 1996 were $933.8 million and $94.6 million,
respectively, with approximately 70% of the Company's net revenue derived from
its optical business and the remaining 30% derived from its gift business, which
operates approximately 1,300 retail locations. The Company conducts its business
through two principal operating units: (i) Cole Optical, consisting of Cole
Vision and Pearle and (ii) Cole Gift, consisting of Things Remembered and CGC.
The Company differentiates itself from other specialty retailers by providing
value-added services at the point of sale at all of its retail locations.
The Company is a wholly owned subsidiary of the Parent, a holding company
that has common stock traded on the New York Stock Exchange. The Parent also has
a 20% interest in Pearle Trust B.V., which operates 196 optical stores in the
Netherlands and Belgium.
The Company, which is headquartered at 5915 Landerbrook Drive, Suite 300,
Mayfield Heights, Ohio 44124, ((440) 449-4100), was incorporated as a Delaware
corporation in July 1993. The Company and its predecessor companies have
operated optical and gift businesses for more than 50 years. Immediately prior
to the Company's issuance and sale of its Senior Notes on September 30, 1993,
all of the Parent's assets, except for the stock of the Company, were
contributed to the Company and the Company assumed all of the Parent's
liabilities (the "Initial Capitalization") other than $50.0 million of the
Parent's obligations under the Parent's 13% Senior Subordinated Notes, which
were later retired. Prior to the Initial Capitalization, all operations were
conducted by subsidiaries of the Parent.
COLE OPTICAL
On August 5, 1997, the Company acquired AVC, the ninth largest retail
optical chain in the United States, for $28.9 million, including debt assumed.
AVC operates 164 stores, including 85 franchise locations, under the names
"NuVision Optical," "American Vision Center" and "EyesFirst Vision Center." The
Company believes, based on industry data, that the acquisition of AVC, combined
with the Company's existing company-owned and franchised locations, created the
largest optical retail company in the United States. AVC was acquired by the
Parent and transferred to the Company as an equity contribution.
Cole Vision
Cole Vision operates principally under the "Sears Optical," "Montgomery
Ward Vision Center" and "BJ's Optical Department" names. As of August 2, 1997,
Cole Vision operated 1,149 departments in 46 states and Canada, including 751
departments on the premises of Sears department stores, 213 departments in
Montgomery Ward stores, 77 departments in BJ's Wholesale Club stores, 24
departments located in five other retailers and 84 freestanding stores operated
under the name "Sears Optical." Cole Vision departments are generally operated
under a lease or license arrangement through which the host store collects the
sales receipts, retains an agreed upon percentage of sales and remits the
remainder to Cole Vision on a weekly basis.
Cole Vision optical departments 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.
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Each of Cole Vision's optical departments 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.
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 comprehensive eyecare benefits marketed directly to
employers, other employee benefit plan sponsors and insurance companies,
primarily under the name "Vision One." Vision One's basic program gives
employers the opportunity to offer their employees a group discount at the
managed vision care network with minimal direct cost to the employer. An
enhanced Vision One program allows employers to provide their employees with
prepaid eye examinations as well as pricing discounts or reimbursements. Cole
Vision added the Pearle company-owned and a majority of franchised locations to
its managed vision care programs in fiscal 1997.
Pearle
At August 2, 1997, Pearle's operations consisted of 366 company-owned and
321 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 August 2, 1997, approximately 80% of the company-owned stores and
approximately 36% of the franchised stores were Express, with the balance being
Mainline.
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 slogan, Nobody Cares for Eyes More Than Pearle.
Pearle operates a warehouse facility in Dallas which inventories and
distributes a comprehensive product line including frames, eyeglass lenses,
contact lenses, optical supplies and eyewear accessories to company-owned and
franchised locations.
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 five stores. With the proper financial approvals, a franchise purchase
can be financed through Pearle. Currently, Pearle offers financing over seven to
ten years at a rate of prime plus three points adjusted quarterly.
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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 nonsurgical 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.
While Pearle franchisees representing over 70% of the franchised locations
have agreed to enter into new franchising arrangements with the Company, the
Company's flexibility in making changes to Pearle's franchised operations is
limited by laws and regulations governing the relationships with franchisees and
certain other obligations. The new franchising arrangements reduce the royalty
and advertising fees paid by the franchisees and provide, among other things,
for the franchisee's participation in Cole Vision's managed vision care
programs.
COLE GIFT
Cole Gift, pro forma for the Pearle acquisition, contributed approximately
30% of the Company's net revenue in fiscal 1996. As of August 2, 1997, Cole Gift
operated nearly 1,300 locations throughout the United States. Things Remembered
and CGC share management expertise, purchasing power, warehousing, distribution
systems and corporate support functions.
Things Remembered
As of August 2, 1997, Things Remembered operated 796 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.
At August 2, 1997, Things Remembered locations consisted of 369 in-line
stores, 86 personalization superstores and 341 kiosks. The typical in-line store
consists of about 1,000 square feet, while kiosks, which are units located in
the center of the common mall area, are typically 200 square feet in size.
Personalization superstores average approximately 2,200 square feet in size.
In fiscal 1995, Cole Gift established a central fulfillment facility with
computer-controlled embroidery equipment. In fiscal 1996, the Company added
softgoods to most of Things Remembered's other locations providing these stores
with personalization services from the central facility.
CGC
As of August 2, 1997, CGC operated 498 leased locations primarily in Sears
stores in 44 states. CGC stores are generally operated under a lease or license
arrangement under which the host store collects the sales receipts, retains an
agreed upon percentage of sales and remits the remainder to CGC on a weekly
basis.
CGC locations sell gifts and gift engraving and other services similar to
those offered by Things Remembered, in addition to key duplicating and watch
repair services. As of August 2, 1997, 92 of the CGC locations in operation were
standard format shops occupying approximately 150 square feet. Since 1989, CGC
has also operated greeting card locations in Sears stores and combined them with
the CGC operations in such stores. Locations in this enhanced format, which
numbered 55 as of August 2, 1997, average approximately
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1,000 square feet in size. Over approximately four years, 288 CGC locations have
been converted to gift centers. Gift centers, which occupy approximately 1,200
square feet of space, typically carry a substantially expanded line of
engravable and non-engravable gifts along with greeting cards. In the fourth
quarter of fiscal 1995, gift centers began offering selected softgoods supported
by the Cole Gift central fulfillment operation. CGC also operates 53 key kiosks,
of approximately 80 square feet in size, that provide key duplicating and key
related products only.
In fiscal 1995, CGC opened the first "Personally Yours" department within
Sears. Personally Yours is a concept designed to generate additional customer
traffic and increase sales by offering personalization for hard and soft line
products for both CGC and Sears merchandise. As of August 2, 1997, there were
ten Personally Yours departments in operation.
General
Cole Gift 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 are part-time
sales associates.
Nearly all Cole Gift locations are equipped with gift engravers and key
duplicating machines. Cole Gift has computerized engraving equipment in most
Things Remembered stores and kiosks. Many Things Remembered stores also have
equipment for etching glassware items. All Cole Gift locations are equipped with
point of sale terminals.
The Company ships most of Cole Gift's store merchandise, other than
greeting cards, through its centralized distribution system at its warehouse in
North Jackson, Ohio. The warehouse, which services both Things Remembered and
CGC, 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 major
host stores in which CGC and Cole Vision operate. The Company has maintained its
relationships with Sears and Montgomery Ward for over 40 years in the gift and
key business and over 35 years in the optical business. Of the Sears and
Montgomery Ward stores that offer optometric services, virtually all are
operated by Cole Vision. Although CGC's and Cole Vision's leases with their
major hosts are terminable by either party upon relatively short notice, neither
has ever had a lease terminated other than in connection with a store closing,
relocation or major remodeling. See "Risk Factors -- Relationships with Major
Host Stores."
SEASONALITY
The Company's business historically has been seasonal, with, on average,
approximately 30% of its net revenue and approximately 50% of its income from
operations generated in the fourth fiscal quarter because of the importance of
gift sales during the important Christmas retailing season. Although the
acquisitions of Pearle and AVC will moderate the seasonality of the Company due
to relatively lower levels of optical product sales during the Christmas holiday
season, the Company's business will remain seasonal.
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 1996, 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 HMO's in a highly
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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 service it provides as well
as price and product quality, and the reputation of its host stores. The Company
believes it is the largest retail optical Company in the United States with
approximately 2,000 company-owned and franchised optical locations in the United
States, Canada and the Caribbean. Although Cole Gift operates the only two
nationwide chains 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. Cole Gift competes with
such other gift stores 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.
STORE LOCATIONS AND ACQUISITIONS
The Company has increased the number of its retail locations from a total
of approximately 2,050 as of February 1, 1992 to more than 3,100 company-owned
and franchised locations as of August 2, 1997. The increase was accomplished
through new store openings and by acquisitions. The following table shows the
number of stores open or franchised at the end of each of the last five fiscal
years:
LOCATIONS OPEN AT PERIOD END
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------ AUGUST 2,
1992 1993 1994 1995 1996 1997
---- ---- ---- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
COLE OPTICAL
Cole Vision...................... 769 774 938 1,013 1,138 1,149
Pearle, owned.................... -- -- -- -- 348 366
Pearle, franchised............... -- -- -- -- 338 321
COLE GIFT
Things Remembered................ 717 737 760 778 790 796
CGC.............................. 594 586 589 587 501 498
</TABLE>
The Company has completed the following acquisitions (involving more than 5
locations) since fiscal 1992:
- In February 1993, the Company acquired the greeting card locations
operated by American Greetings in 171 Sears stores.
- In September 1993, the Company acquired Contact Lens Supply, Inc., a mail
order contact lens supplier.
- In January 1994, the Company acquired 107 optical locations in Montgomery
Wards stores that had been operated by others.
- In May 1995, the Company acquired 59 optical locations in B.J.'s
Wholesale Club stores that had been operated by others.
- In November 1996, the Company acquired 346 company-owned and 340
franchised Pearle locations.
- In November 1996, Cole Vision acquired 73 Sears Optical departments and
two freestanding Vision Club stores in Canada.
- In August 1997, the Company acquired 79 company-owned and 85 franchised
AVC locations.
EMPLOYEES
As of February l, 1997, the Company and its subsidiaries had approximately
8,600 full-time and 5,100 part-time employees. During October, November and
December, the Company employs additional full- and part-time employees. In
fiscal 1996, approximately 5,000 additional employees were employed during such
period. The hourly employees at Cole Gift's distribution center (approximately
80 employees in the
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aggregate) and approximately 140 employees at certain Pearle store locations are
represented by labor unions. In addition, certain AVC employees are subject to
collective bargaining agreements. The Company considers its present labor
relations to be satisfactory.
PROPERTIES
The Company owns an office and warehouse in Highland Heights, Ohio that is
subject to a mortgage and leases its executive offices and another office in
Cleveland, Ohio. All of Cole Vision's and Cole Gift'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
stores 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, two of which are located in Knoxville, Tennessee; 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.
At August 2, 1997, Pearle had 633 stores based in forty-three states, 18
stores in Canada and 36 stores in the Caribbean. Stores are located in malls,
strip centers and freestanding locations. Pearle leases most of its retail
stores under noncancellable operating leases with terms generally ranging from
five to ten years and which generally contain renewal options for additional
periods. Pearle also is the principal lessee on a majority of stores operated by
franchisees, who sublease the facilities from Pearle. 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.
The Company has constructed a new warehouse and distribution facility for
Cole Gift that is expected to improve distribution efficiencies. The facility
will be financed through a sale and lease-back transaction or through
conventional secured real estate financing. The Company estimates the cost for
this facility will be approximately $9 million.
PATENTS AND TRADEMARKS
The Company has received a license to use the names of its host stores for
use in communicating with customers or potential customers. The Company also is
licensed to operate its Sears freestanding locations under the name "Sears
Optical."
Pearle has registered numerous trademarks and service marks worldwide.
Pearle Trust B.V. has received a royalty-free license to the Pearle name in
Europe.
GOVERNMENT REGULATIONS
The offer and sale of franchises is subject to the Federal Trade
Commission's (the "FTC") rule entitled Disclosure Requirements and Prohibitions
Concerning Franchising and Business Opportunity Ventures, which requires, among
other things, that the franchisor prepare and update periodically a
comprehensive disclosure document in connection with the sale of its franchises.
A franchisor also must comply with state franchising laws and a wide range of
other state rules and regulations governing its ongoing relationship with its
franchisees. While the Company believes that the Pearle franchises are in
compliance in all material respects with all such applicable laws and
regulations, continued compliance with this broad federal and state regulatory
network by the Company will be essential and costly, and the failure to comply
with such regulations may have an adverse effect on the Company and its
operations. Violations of franchising laws and/or state laws and regulations
regulating substantive aspects of doing business as a franchisor in a particular
state could subject the Company and its affiliates to rescission offers,
monetary damages, civil and criminal penalties and/or injunctive proceedings. In
addition, absolute vicarious liability has been imposed upon franchisors based
upon claims made against franchisees. Further, franchisors are subject to an
implied covenant of good faith and fair dealing in their franchise
relationships, which implied covenant may restrict the manner in which the
Company operates. Even if the Company is able to obtain insurance coverage for
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such claims, there can be no assurance that such insurance will be sufficient to
cover potential claims against the Company.
Cole Vision and Pearle are subject to extensive federal, state and local
laws, rules and regulations affecting the health care industry and the delivery
of health care, including laws and regulations prohibiting the practice of
medicine and optometry by persons not licensed to practice medicine or
optometry, prohibiting the unlawful rebate or unlawful division of fees and
limiting the manner in which prospective patients may be solicited. The
regulatory requirements that Cole Vision and Pearle must satisfy to conduct its
business will vary from state to state. In particular, some states have enacted
laws governing the ability of ophthalmologists and optometrists to enter into
contracts to provide professional services with business corporations or lay
persons, and some states prohibit Cole Vision and Pearle from computing their
fee for management services based upon a percentage of the gross revenues of the
ophthalmological practice being managed.
The field of optical retailing is regulated by state or provincial
governments in those regions in which Cole Vision, Pearle and other retail
optical firms do business. The legality of Cole Vision's and Pearle's
relationships with optical professionals in the jurisdictions in which it
operates has been and may be challenged from time to time, and if challenged,
Cole Vision and Pearle may be required to alter the manner in which they conduct
their business in the jurisdictions in which they are challenged. Such
alterations may adversely affect the Company's business.
LEGAL PROCEEDINGS
The Company is subject to a variety of routine legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND PARENT
The following table sets forth certain information concerning the directors
and executive officers of the Company and the Parent. Directors serve for a term
of one year and until their successors are elected. Officers hold office until
their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- ------ ---------------------------------------------------------------
<S> <C> <C>
Jeffrey A. Cole 56 Chairman, Chief Executive Officer, Chief Financial Officer and
Director
Brian B. Smith 44 President, Chief Operating Officer and Director
Leslie D. Dunn 52 Senior Vice President -- Business Development, Secretary and
General Counsel
Joseph Gaglioti 51 Vice President and Treasurer
Wayne L. Mosley 43 Vice President, Controller, Assistant Secretary and Assistant
Treasurer
Timothy F. Finley 53 Director
Irwin N. Gold 40 Director
Peter V. Handal 54 Director
Charles A. Ratner 55 Director
Walter J. Salmon 66 Director
</TABLE>
Mr. Cole has been Chairman, Chief Executive Officer, Chief Financial
Officer and a Director of the Company since its formation. Mr. Cole has been a
Director of the Parent since 1984, and since 1969 had been a director of a
predecessor company which operated the business of the Parent prior to 1984 (the
"Predecessor"), serving as Chairman of the Predecessor's Executive Committee
from 1978 to 1984. He has been Chairman and Chief Executive Officer of the
Parent since 1992, Chief Financial Officer of the Parent since 1991 and was
President and Chief Executive Officer of the Parent from 1984 to 1992. He was
Chief Financial Officer and Treasurer of the Predecessor from 1978 to 1983 and
was Vice Chairman of the Board of Directors, President and Chief Operating
Officer of the Predecessor from 1983 to 1984. He is also a Director of Hartmarx
Corporation.
Mr. Smith has been President and Chief Operating Officer of the Company
since its formation, and a Director since November 1994. Mr. Smith has been
President and Chief Operating Officer of the Parent since 1992, and a Director
since November 1994. From January 1992 until September 1992, he was President
and Chief Operating Officer of a subsidiary company that merged into the Parent
in September 1992 ("CNCD"). He was Executive Vice President and Chief Operating
Officer of CNCD until January 1992. Mr. Smith has been Vice Chairman of Cole
Vision and CGC, each of which is a wholly owned subsidiary of the Company, since
January 1995 and previously was President of Cole Vision and CGC since 1987 and
1990, respectively. He has been President of Things Remembered, a wholly owned
subsidiary of the Company, since 1990.
Ms. Dunn has held her position with the Company and an identical position
with the Parent since September 3, 1997. For more than five years prior to that
date, she was a partner with the law firm of Jones, Day, Reavis & Pogue.
Mr. Gaglioti has been Vice President and Treasurer of the Company since its
formation. Mr. Gaglioti has been Vice President of the Parent since 1992 and
Treasurer of the Parent since 1991. He was Assistant Treasurer of the Parent and
CNCD from 1984 to 1991 and has served in various capacities with the Predecessor
from 1981 to 1984.
Mr. Mosley has been Vice President and Controller of the Company since its
formation. Mr. Mosley has been Vice President and Controller (principal
accounting officer), Assistant Secretary and Assistant Treasurer of the Parent
since 1992. Mr. Mosley served as Vice President, Controller -- Finance of CNCD
from 1991 to 1992, was Chief Accounting Officer of CNCD from 1990 to 1991 and
Assistant Corporate Controller of CNCD from 1986 to 1990.
55
<PAGE> 60
Mr. Finley has been a Director of the Company since its formation and has
been a Director of the Parent since 1992. Since 1990, Mr. Finley has been
Chairman and Chief Executive Officer of Jos. A. Bank Clothiers, Inc., a clothing
retailer, and Chairman and President of The Finley Group since 1986. He is also
a director of Venture Stores, Inc.
Mr. Gold has been a Director of the Company since its formation and has
been a Director of the Parent since 1992. Mr. Gold has been a Managing Director
of Houlihan Lokey Howard & Zukin, Inc. ("Houlihan Lokey"), an investment banking
firm, since 1988.
Mr. Handal has been a Director of the Company since its formation and has
been a Director of the Parent since 1992. Currently, Mr. Handal is President of
the consulting company COWI International Group, Managing Partner of J4P
Associates, a real estate firm, and President of Fillmore Leasing Company.
Previously, Mr. Handal served as the President of Victor B. Handal and Bro.,
Inc., an apparel manufacturer and distributor. He is also a director of Jos. A.
Bank Clothiers, Inc., a clothing retailer.
Mr. Ratner has been a Director of the Company and the Parent since 1995.
Mr. Ratner has served as the President, the Chief Executive Officer and a
director of Forest City Enterprises, Inc., a national real estate development
and management company, since 1993, prior to which he served as its Executive
Vice President. Mr. Ratner is Chairman of Forest City Rental Properties
Corporation, a subsidiary of Forest City Enterprises, Inc., a position he has
held for at least five years. He is also a director of Forest City Enterprises,
Inc.
Mr. Salmon is the Stanley Roth Sr., Professor of Retailing at the Harvard
University Graduate School of Business Administration, where he has been a
member of the faculty since 1956. Mr. Salmon also served as Senior Associate
Dean and Director of External Relations from 1989 to 1994. Mr. Salmon previously
served as a director of the Predecessor from 1961 to 1984. He is also a director
of Circuit City Stores, Inc.; Hannaford Bros. Co.; Harrah's Entertainment, Inc.;
Luby's Cafeterias, Inc.; The Neiman Marcus Group; and The Quaker Oats Company.
EXECUTIVE COMPENSATION
The following table sets forth for the last three fiscal years certain
compensation information about the Company's chief executive officer and the
other persons who served as executive officers of the Company during fiscal
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------------------
ANNUAL AWARDS
COMPENSATION(1) RESTRICTED SECURITIES
--------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(3) OPTIONS(#) COMPENSATION(5)
- -------------------------------- ---- -------- -------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Cole -- 1996 $638,452 $553,752 240,000 $ 78,491
Chairman, Chief 1995 617,692 193,440 25,000 74,649
Executive Officer and 1994 600,385 295,331 131,815(4) 320,239
Chief Financial Officer
Brian B. Smith -- 1996 $437,586 $282,207(2) $ 124,344 180,000 $ 39,845
President and Chief 1995 400,192 125,654 17,500 37,617
Operating Officer 1994 371,154 183,056 79,322(4) 34,515
Joseph Gaglioti -- 1996 $132,117 $ 85,309(2) 37,580 20,000 $ 12,366
Vice President and 1995 122,231 38,376 3,500 10,885
Treasurer 1994 116,846 61,644 4,666(4) 10,433
Wayne L. Mosley -- 1996 $132,117 $ 85,309(2) 37,580 20,000 $ 11,704
Vice President and 1995 122,231 38,376 3,500 10,721
Controller 1994 116,846 61,644 4,666(4) 10,312
</TABLE>
56
<PAGE> 61
- ---------------
(1) Other annual compensation did not exceed the lesser of $50,000 or 10% of the
salary plus bonus of any of the executive officers for any of the years
listed.
(2) Reflects a portion of incentive compensation awarded on March 20, 1997 as
shares of Common Stock as follows: Mr. Smith ($62,188); Mr. Gaglioti
($18,806); and Mr. Mosley ($18,806), based on the value of unrestricted
shares of Common Stock at such date. Such shares are not transferable prior
to March 20, 1998.
(3) Reflects March 20, 1997 awards pursuant to the Company's Management
Incentive Bonus Program as follows: (i) Mr. Smith (1,951 shares that vest
March 20, 1998 and 1,950 shares that vest March 20, 1999); (ii) Mr. Gaglioti
(590 shares that vest March 20, 1998 and 589 shares that vest March 20,
1999); and (iii) Mr. Mosley (590 shares that vest March 20, 1998 and 589
shares that vest March 20, 1999). Although such shares are restricted and
subject to a risk of forfeiture, the value of such awards shown is based on
the value of unrestricted shares of Common Stock as of March 20, 1997.
(4) Reflects options repriced during 1994.
(5) The amounts listed consist of (i) payments by the Parent pursuant to an
agreement between the Parent and an insurance company that provides for
reimbursements to Messrs. Cole and Smith in amounts up to $20,000 per year
for certain medical expenses for themselves and their families not otherwise
covered by the Parent's group medical insurance plan, (ii) contributions to
the Parent's 401(k) Plan to match pre-tax elective deferral contributions,
(iii) the value of life insurance provided by the Parent for the benefit of
the executive officers and (iv) contribution credits in fiscal 1995 and 1994
provided under the Company's Supplemental Retirement Benefit Plan. See
"Supplemental Executive Retirement Plans."
CERTAIN AGREEMENTS
Effective April 1, 1996, Jeffrey A. Cole and Brian B. Smith entered into
separate agreements with the Parent and its principal subsidiaries, which
replaced earlier employment agreements, pursuant to which Messrs. Cole and Smith
are employed by the Parent and each of its principal subsidiaries. The
agreements provide for a three-year term that, on the first anniversary of the
agreement and each successive anniversary thereafter, automatically extends for
an additional year up to and until Messrs. Cole and Smith, respectively, reach
age 65, unless notice to the contrary has been furnished in accordance with the
provisions of the agreements. The agreements provide for an annual base salary
of not less than $640,000 for Mr. Cole and $440,000 for Mr. Smith, along with
participation in bonus programs and other customary benefits. For 1997, Mr.
Cole's salary has been fixed at $675,000 and Mr. Smith's salary will be
$525,000. Under the agreements, upon their termination of employment (including
a self-termination during a period following a change of control of the Parent)
except (i) termination by reason of death or disability, (ii) voluntary
resignation other than (a) a voluntary resignation involving a substantial
adverse change in duties without consent or (b) following a change of control of
the Company, (iii) the expiration of the term of the agreement or (iv)
termination for cause, Messrs. Smith and Cole are entitled to receive a lump sum
payment equal to three times the sum of (x) their respective salaries at the
time of such termination and (y) their respective average bonuses for the last
five fiscal years. The agreements also contain provisions with respect to
compensation, bonus and benefits in the event of their death or disability. The
agreements provide that, in the event that any payments received by Messrs. Cole
and Smith under the agreements or otherwise are subject to an excise tax, they
will be entitled to a gross-up payment.
Each of the other executive officers of the Company has agreed not to
compete with the Parent or its affiliates or to do certain other acts contrary
to its interests following cessation of employment. Such agreements provide,
upon termination by the Parent or its subsidiaries of such executive officer's
employment other than for cause, for up to 12 monthly payments of the difference
(if any) between such executive officer's base salary with the Parent or its
affiliates and any base salary received from new employment. The exact amount of
such payment obligations cannot be determined prior to termination of the
officer's employment.
Leslie D. Dunn has entered into an arrangement with the Company that will
provide her with a salary of $205,000 and participation in the Management
Incentive Bonus Program at up to 100% of her base salary level. Ms. Dunn is also
entitled to participate in the Company's supplemental executive retirement plans
57
<PAGE> 62
(as defined herein). Ms. Dunn has also received a grant of options to acquire
15,000 shares of Parent Common Stock (as defined herein) with an exercise price
equal to the fair market value on the date of grant.
COMPENSATION PURSUANT TO EMPLOYEE BENEFIT PLANS OF THE COMPANY
Described below are certain employee benefit plans of the Company pursuant
to which cash or non-cash compensation was paid or distributed to its executive
officers during the last fiscal year, or is proposed to be paid or distributed
to its executive officers in the future.
RETIREMENT PLAN
The Cole National Group, Inc. Retirement Plan (the "Retirement Plan")
provides non-contributory benefits that are integrated with Social Security
based upon an employee's years of credited service and highest average annual
base salary for any five consecutive years in the last ten years of service.
Compensation covered by the Retirement Plan consists of an employee's base
salary, not including bonuses or any other form of compensation. Under the
Internal Revenue Code of 1986, as amended (the "Code"), the maximum retirement
benefit payable under the Retirement Plan and the maximum amount of annual
compensation that can be taken into consideration in the calculation of pension
benefits under the Retirement Plan are limited. At retirement, based on years of
service and current salary levels, it is estimated that the retirement benefits
payable to Jeffrey A. Cole and Brian B. Smith will be reduced because of these
limits.
Credited service under the Retirement Plan for each of the individuals
named in the Summary Compensation Table is as follows: Jeffrey A. Cole -- 18
years; Brian B. Smith -- 13 years; Joseph Gaglioti -- 15 years; and Wayne L.
Mosley -- 10 years.
Participants in the Retirement Plan may elect payment of retirement
benefits under various alternative formulae. The following table shows the
estimated annual retirement benefits which will be payable to participating
employees under the Retirement Plan's normal retirement formula upon retirement
at age 65 after selected periods of service. The benefits as presented below do
not take into account any reduction for joint and survivor payments.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE (1)
--------------------------------------------------------
REMUNERATION 10 15 20 25 30 OR MORE
------------------ ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$100,000.......... $ 7,901 $11,851 $ 15,802 $ 19,752 $ 23,702
125,000.......... 10,151 15,226 20,302 25,377 30,452
150,000.......... 12,401 18,601 24,802 31,002 37,202
175,000(2)....... 14,651 21,976 29,302 36,627 43,952
200,000(2)....... 16,901 25,351 33,802 42,252 50,702
225,000(2)....... 19,151 28,726 38,302 47,877 57,452
250,000(2)....... 21,401 32,101 42,802 53,502 64,202
300,000(2)....... 25,901 38,851 51,802 64,752 77,702
350,000(2)....... 30,401 45,601 60,802 76,002 91,202
400,000(2)....... 34,901 52,351 69,802 87,252 104,702
500,000(2)....... 43,901 65,851 87,802 109,752 131,702
600,000(2)....... 52,901 79,351 105,802 132,252 158,702
700,000(2)....... 61,901 92,851 123,802 154,752 185,702
</TABLE>
- ---------------
(1) Based on retirement in 1996.
(2) The Code places certain limitations on the amount of compensation that may
be taken into account in calculating pension benefits and on the amount of
pensions that may be paid under federal income tax qualified plans. For
benefits accruing in plan years beginning after December 31, 1993, no more
than $150,000 (indexed for inflation) in annual compensation can be taken
into account. However, under the Pension Plan SERP (as defined below),
participating executives will receive the amounts to which they
58
<PAGE> 63
otherwise would have been entitled under the Retirement Plan, provided they
have five years of service with the Company.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
The Company has two supplemental executive retirement plans (the "SERPs")
that provide for payment of benefits to the participating executives (who
include, among others, the officers named in the Summary Compensation Table)
supplementing amounts payable under the Retirement Plan. The Cole National
Group, Inc. Supplemental Pension Plan (the "Pension Plan SERP") 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 Code
limitations. The Cole National Group, Inc. Supplemental Retirement Benefit Plan
(the "Benefit Plan SERP") is a defined contribution plan under which
participants will receive an annual credit based on a percentage of base salary
and an earnings assumption to be determined on an annual basis. Participants in
the Pension Plan SERP will vest in the excess benefits after five years of
service (with credit for past service). Participants in the Benefit Plan SERP
will be fully vested in the defined contribution benefits after ten years of
service (with credit given for a year of actual past service for each year of
future service). Benefits under the Pension Plan SERP will be payable on the
same basis as the Retirement Plan benefits, while benefits under the Benefit
Plan SERP will generally be payable upon retirement (at age 55 or older) in ten
annual installments or in another form elected by the participant prior to
retirement. The following contribution credits were provided in 1996 under the
Benefit Plan SERP to the named individuals and are included in "All Other
Compensation" in the Summary Compensation Table: Mr. Cole -- $64,000; Mr.
Smith -- $35,200; Mr. Gaglioti -- $10,640; and Mr. Mosley -- $10,640.
COMPENSATION PURSUANT TO EMPLOYEE BENEFIT PLANS OF THE PARENT
Described below are certain employee benefit plans of the Parent pursuant
to which cash or non-cash compensation was paid or distributed to its executive
officers during the last fiscal year, or is proposed to be paid or distributed
to its executive officers in the future.
STOCK OPTION PLANS
The Parent's 1992 Management Stock Option Plan (the "1992 Plan") provides
for the granting of stock options for up to 555,556 shares of the Parent's
Common Stock to the officers or key employees of the Parent and its
subsidiaries, including the Company. The 1993 Management Stock Option Plan (the
"1993 Plan") provides for the granting of stock options for up to 600,000 shares
of the Parent's Common Stock to the officers or key employees of the Parent and
its subsidiaries, including the Company. The Parent's 1996 Management Stock
Option Plan (the "1996 Plan") provides for the granting of stock options for up
to 884,000 shares of the Parent's Common Stock to the officers or key employees
of the Parent and its subsidiaries, including the Company. The 1992 Plan and the
1993 Plan were approved by the stockholders of the Parent in February 1994 prior
to the Parent's initial public offering and the 1996 Plan was approved by the
Parent's stockholders at the 1996 annual meeting.
The stock options under the 1992 Plan provided for periodic vesting over
five years, with early vesting of all or a portion of the unvested options in
the case of certain events, such as consummation of a public offering of the
Parent's Common Stock, a sale of all or substantially all of the assets of the
Parent, certain change in control transactions, certain mergers or the voluntary
dissolution of the Parent. In May 1993, the Parent's Board of Directors
authorized amendments (the "May Amendments") to the stock option agreements
under the 1992 Plan for all of the Parent's executive officers and for certain
senior personnel of the Parent's subsidiaries, including the Company. The May
Amendments provided for the immediate vesting of the stock options under such
option agreements, but provided that any shares acquired upon exercise of the
options in excess of the number of shares that would have been vested under the
option agreements at the date of exercise had the May Amendments not been
adopted would be subject to forfeiture in the event that the employee ceased to
be employed by the Parent or any of its subsidiaries, as a result of either
voluntary departure or termination for cause, during the period during which the
vesting provision applicable to such
59
<PAGE> 64
shares prior to such amendment would not have expired. There were no grants made
under the 1992 Plan in fiscal 1995 to the individuals included in the Summary
Compensation Table.
The stock options under the 1993 Plan provide for periodic vesting over
five years, with early vesting of all or a portion of the unvested options in
circumstances similar to those that apply to the options under the 1992 Plan.
The original option grants under the 1993 Plan were amended in 1994 to reduce
their exercise prices, to extend their vesting period from four to five years,
and to reduce the number of options granted. The following table contains
information concerning options granted under the 1993 Plan during fiscal 1995 to
the executive officers of the Parent included in the Summary Compensation Table.
The stock options granted as of the date hereof under the 1996 Plan provide
for vesting over four or five years, with early vesting of all or a portion of
the unvested options in the case of certain events, such as after a change in
control of the Company or following certain terminations of an employee's
service to the Company. In addition, certain options provide for early vesting
if the Company's Common Stock trades at a target price for a period of 20
consecutive trading days; in 1996, options for 77,500 shares vested as a result
of such provision. None of the options granted to the named executive officers
contain such a provision.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
OPTIONS POTENTIAL REALIZABLE
GRANTED VALUE AT ASSUMED ANNUAL
NUMBER OF TO RATES OF STOCK PRICE
SECURITIES EMPLOYEES EXERCISE APPRECIATION FOR OPTION
UNDERLYING IN OR BASE TERM(1)
OPTIONS FISCAL PRICE EXPIRATION -------------------------
NAME GRANTED(#) YEAR(%) ($/SH) DATE 5%($) 10%($)
- ------------------------ --------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Cole 240,000 30.1% $10.81 2/22/06 $1,631,982 $4,135,762
Brian B. Smith 180,000 22.6 10.81 2/22/06 1,223,986 3,101,821
Joseph Gaglioti 16,000 2.0 10.81 2/22/06 108,799 275,717
4,000 0.5 28.63 1/23/07 72,008 182,484
Wayne L. Mosley 16,000 2.0 10.81 2/22/06 108,799 275,717
4,000 0.5 28.63 1/23/07 72,008 182,484
</TABLE>
- ---------------
(1) The value, if any, one may realize upon the exercise of a stock option
depends on the excess of the then current market value per share over the
exercise price per share. There is no assurance that the values to be
realized upon exercise of the stock options listed above will be at or near
the amounts shown.
The following table contains information concerning options exercised
during fiscal 1995 and unexercised stock options held as of February 1, 1997.
60
<PAGE> 65
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FEB. FEB. 1, 1997
SHARES 1, 1997(#) ($)(1)
ACQUIRED ON --------------- --------------------
EXERCISE EXERCISABLE/ EXERCISABLE/
NAME (#) UNEXERCISABLE UNEXERCISABLE
----------------- ----------- --------------- --------------------
<S> <C> <C> <C>
Jeffrey A. Cole -- 136,388/316,927 $2,318,731/5,541,013
Brian B. Smith -- 82,892/227,930 1,409,787/3,992,571
Joseph Gaglioti -- 14,700/ 24,466 326,583/ 358,864
Wayne L. Mosley -- 14,700/ 24,466 326,583/ 358,864
</TABLE>
- ---------------
(1) Based on the closing price of $28.50 per share of the Parent's Common Stock
on the New York Stock Exchange on January 31, 1997, the last trading day of
fiscal 1996.
The 1992 Plan, the 1993 Plan and the 1996 Plan and the option agreements
thereunder, subject to certain restrictions, permit each optionee to exercise
options through borrowing funds from the Parent. The principal on such loans is
payable five years following the date of exercise, with interest payable
annually at a rate fixed at the date of exercise based on a formula tied to
federal borrowing rates. Each loan is made on a recourse basis and is secured by
the option shares acquired from the proceeds of such loan. Messrs. Cole and
Smith each elected to exercise options in 1993 by borrowing from the Parent the
full amount of the exercise price of such shares granted under the 1992 Plan. As
of January 31, 1997, the amount (excluding accrued interest) owed by each
individual named in the Summary Compensation Table with respect to such loans is
as follows (the interest rate per annum payable by such individual is shown in
parentheses): Jeffrey A. Cole -- $666,666 (5.47%) and Brian B. Smith -- $333,336
(5.47%).
The Board of Directors and the Compensation Committee are authorized to
determine the time at which options granted under the 1996 Plan will become
exercisable and will terminate. Notwithstanding the foregoing, the 1996 Plan
provides that an option will immediately become fully exercisable upon the
occurrence of a "Sale Transaction" prior to the fifth anniversary of the date on
which such option was granted. For purposes of the foregoing, a "Sale
Transaction" means (a) the sale, transfer or other disposition of all or
substantially all of the assets of the Parent, except a sale, transfer or
disposition (i) to a subsidiary of the Parent or (ii) that results in the
holders of the then-outstanding securities of the Parent generally eligible to
vote in the election of directors of the Parent possessing, in the aggregate, a
majority ownership interest in the corporation, partnership, association, firm,
entity or individuals (collectively, a "Person") acquiring such assets, (b) any
transaction resulting in a majority of the then-outstanding securities of the
Parent generally eligible to vote in the election of directors of the Parent
being held or owned beneficially by one Person or an affiliated group of
Persons, (c) a merger or consolidation of the Parent with another Person, except
a merger or consolidation of the Parent (i) with a subsidiary of the Parent or
(ii) that results in the holders of the then-outstanding securities of the
Parent generally eligible to vote in the election of directors of the Parent
possessing, in the aggregate, a majority ownership interest in the surviving
Person or (d) the voluntary liquidation or dissolution of the Parent. The 1996
Plan further provides that no option may run for more than ten years from the
date of grant.
EXECUTIVE LIFE INSURANCE PLAN
The Parent's Executive Life Insurance Plan permits certain officers and key
employees to obtain life insurance benefits in addition to those generally
provided to salaried employees. The level of coverage provided to such officers
and key employees includes (1) basic term life insurance coverage equal to twice
the individual's base salary, (2) an opportunity for the individual to purchase,
at group rates based upon age, an additional amount of insurance equal to one or
two times such individual's base salary and (3) purchase by the
61
<PAGE> 66
Parent of an additional amount of coverage equal to 50% of the amount purchased
by the individual under (2). The maximum level of coverage per individual is
$1,500,000.
MANAGEMENT INCENTIVE BONUS PROGRAM
In March 1996, the Board of Directors approved the adoption by the Parent
of the Management Incentive Bonus Program (the "Incentive Program"), to replace
the Parent's existing bonus plans for certain senior managers. The Incentive
Program was approved by the Parent's stockholders at the 1996 annual meeting.
Under the Incentive Program, the Compensation Committee establishes performance
goals within 90 days of the commencement of a fiscal year. The performance goals
for the Parent as a whole or the operating units of the Parent may include
earnings, operating income, increases in revenue, return on assets, investment,
sales or equity, total stockholder return or any combination thereof.
The actual level of achievement of the performance goals serves as the
basis for establishing the amount of the award payable to a participant for the
fiscal year. If operating performance fails to achieve the performance goals
established, no awards will be made. The highest award that may be given under
the Incentive Program is 100% of base salary. The Incentive Program provides
that awards under the Incentive Plan may be made in cash or shares of Common
Stock at the discretion of the Compensation Committee. The Compensation
Committee approves the list of participants for the fiscal year who include the
Parent's executive officers and certain other senior managers. For fiscal 1996,
the Compensation Committee designated nine senior managers, including Messrs.
Cole, Smith, Gaglioti and Mosley, to participate in the Incentive Program.
401(k) PLAN
The Parent provides a defined contribution plan, including features under
section 401(k) of the Internal Revenue Code of 1986, which provides retirement
benefits to its employees. Eligible employees may contribute up to 15% of their
compensation to the plan, although highly compensated employees, including all
executive officers of the Company, were limited to a maximum of 2% of their
compensation. There is no mandatory matching of employee contributions by the
Company, but a discretionary match is determined annually by the Board of
Directors. The Board of Directors approved the Company's contribution of
$325,000 to be used to partially match employee contributions made in 1996.
COMPENSATION OF DIRECTORS
The Parent pays each Director who is not an employee of the Parent or its
subsidiaries, including the Company, an annual fee of no less than $20,000 plus
reasonable out-of-pocket expenses. Members of the Audit Committee and the
Compensation Committee receive $500 for each day of attendance at a committee
meeting that is not held on the same day as a meeting of the Board of Directors.
In addition, the chairpersons of the Audit Committee and the Compensation
Committee receive an additional $2,000 and $3,000 per year, respectively.
In January 1993, options to purchase 7,500 shares of the Parent's Common
Stock were issued to Messrs. Finley, Gold and Handal. The options are fully
vested and are exercisable at $3.00 per share. At February 1, 1997, options to
purchase 7,500 shares were exercisable for each of those Directors.
The Parent's Amended and Restated Nonqualified Stock Option Plan for
Nonemployee Directors (the "Directors' Plan") provides for the granting of stock
options for up to 100,000 shares of the Parent's Common Stock to Directors of
the Parent who are not employees of the Parent or any of its subsidiaries,
including the Company. The Directors' Plan was approved by the stockholders of
the Parent prior to the Parent's initial public offering in April 1994. The
Directors' Plan provides for the automatic grant of a nonqualified option to
purchase 1,500 shares of Common Stock to each newly elected or appointed
nonemployee Director of the Parent on January 1 of the year immediately
following the year in which he or she is elected or appointed and on each
January 1 thereafter for as long as he or she is elected or appointed and on
each January 1 thereafter for as long as he or she continues to serve.
Nonemployee Directors serving at the time of the adoption of the Directors' Plan
received option grants under such plan on January 1, 1997. Options granted under
the Directors' Plan generally vest on the first anniversary of the date of grant
of the option, provided that the
62
<PAGE> 67
optionee is still serving as a nonemployee Director at that time. The exercise
price per share for options granted under the Directors' Plan is the average of
the high and low selling prices of the Parent's Common Stock on the New York
Stock Exchange on the date of grant, or, if no such prices are quoted on the
date of grant, on the last date on which such prices are quoted prior to the
date of grant. Mr. Ratner received an automatic grant of options for 1,500
shares on January 1, 1996 with an exercise price of $13.6875, the average of the
high and low selling prices for the Common Stock on December 29, 1995. On
January 1, 1997, Messrs. Finley, Gold, Handal and Ratner received automatic
grants of options for 1,500 shares with an exercise price of $26.125, the
average of the high and low selling prices for the Common Stock on December 31,
1996.
COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND CERTAIN
TRANSACTIONS
Deliberations concerning compensation for fiscal 1996 generally involved
the Compensation Committee, the Special Compensation Committee and the full
Board of Directors of the Parent, including Jeffrey A. Cole and Brian B. Smith,
who are employees of the Company.
The Company currently leases its headquarters office space in a building
which is owned by a partnership in which Jeffrey A. Cole currently has a 46.5%
limited partnership interest. The Company believes that the lease terms are
equivalent to those that could have been obtained pursuant to an arm's length
transaction with unaffiliated parties. Lease payments to the partnership
totalled $344,637, $354,194 and $338,174, net of payments made by the Company's
subtenant, during fiscal 1994, 1995 and 1996, respectively.
Until August 1995, when American Consumer Products, Inc. ("ACP") was
acquired by Vista 2000, Stephan W. Cole, the brother of Jeffrey A. Cole, was the
controlling shareholder, Chief Executive Officer and a director of ACP, and
Jeffrey A. Cole was a beneficial owner of 16.62% of the shares of common stock
of ACP and a director of ACP. In fiscal 1993, 1994 and 1995, the Company
acquired approximately $1.6 million, $1.3 million and $1.1 million,
respectively, of key blanks and other related products from ACP in transactions
the Company believes were on terms equivalent to those that could have been
obtained pursuant to arm's length transactions with unaffiliated parties. These
amounts are not considered material to either the Company or ACP, as they
represent less than 5% of the annual gross revenues of each entity.
Mr. Ratner is the President, Chief Executive Officer, and a director of
Forest City Enterprises, Inc. ("Forest City"). Forest City and its affiliates
are developers and managers of commercial real estate, including shopping malls
in which the Company's stores may operate. Things Remembered currently operates
thirteen stores under leases with Forest City or its affiliates. Under such
leases, which expire at different times during the period from 1996 to 2005,
Things Remembered paid aggregate rent of $545,443 during 1996. Additional common
area charges, insurance charges, taxes and similar charges were paid. The
Company believes that the terms of its leases with Forest City or its
affiliates, as applicable, are equivalent to those that could have been obtained
pursuant to arm's length transactions with unaffiliated parties.
Effective as of March 1992, Joseph E. Cole, founder of the Company and the
father of Jeffrey A. Cole, who was then serving as Chairman of the Company,
relinquished that title and took on the title of Senior Chairman. Joseph E.
Cole, who served as Chairman of the Board and as a Director of the Company until
March 1992, was compensated prior to his death in January 1995 pursuant to an
employment agreement with the Company that provided for an annual salary of
$200,000, commencing in fiscal 1993. Under the agreement, Joseph E. Cole
received payments of $200,000 in fiscal 1993 and 1994. In fiscal 1995, Jeffrey
A. Cole's mother, who is the widow of Joseph E. Cole, received a final $200,000
payment under Joseph E. Cole's employment agreement with the Company.
Houlihan Lokey of which Mr. Irwin Gold, a director of the Company, is a
managing director, served as a financial advisor to the Company in connection
with the Parent's Acquisition of Pearle and was compensated by the Company in
the amount of $50,000, as a non-refundable retainer fee. Following the
consummation of the Pearle Acquisition, the Company paid Houlihan Lokey an
additional payment of $950,000. Walter J. Salmon is currently retained as a
consultant to the Company, and receives compensation of $25,000 per year. In
addition, under a deferred compensation agreement entered into in 1979, Mr.
Salmon is entitled to receive annual payments of $5,500 for the period that
commenced in 1996 and will end in 2004. The transactions with Houlihan Lokey and
Mr. Salmon were on terms no less favorable to the Company than would have been
available pursuant to arms-length negotiations with unaffiliated parties.
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<PAGE> 68
PRINCIPAL STOCKHOLDERS
The Company is a wholly owned subsidiary of the Parent, which owns 1,100
shares of the Company Common Stock, par value $.01 per share, which are the only
shares of the Company's Capital Stock that are outstanding. The following table
sets forth certain information as of August 29, 1997 (except as otherwise noted)
as to the ownership of the Common Stock of the Parent, par value $.001 per share
(the "Parent Common Stock"), by each of those persons owning of record or known
to the Parent to be the beneficial owner of more than five percent of the Parent
Common Stock; each of the Parent's Directors; each of the Parent's executive
officers; and all Directors and executive officers of the Parent as a group. The
number of shares of the Parent's Common Stock outstanding on August 29, 1997 was
14,724,935. Except as noted, all information with respect to beneficial
ownership has been furnished by the respective Director or officer or is based
on filings with the Commission. Unless otherwise indicated below, the persons
named below have sole voting and investment power with respect to the number of
shares set forth opposite their names. Beneficial ownership of the Parent's
Common Stock has been determined for this purpose in accordance with Rules 13d-3
and 13d-5 under the Exchange Act, which provide, among other things, that a
person is deemed to be the beneficial owner of the Parent's Common Stock if such
person, directly or indirectly, has or shares voting power or investment power
in respect of such stock or has the right to acquire such ownership within sixty
days. Accordingly, the amounts shown in the table do not purport to represent
beneficial ownership for any purpose other than compliance with Commission
reporting requirements. Further, beneficial ownership as determined in this
manner does not necessarily bear on the economic incidence of ownership of the
Parent's Common Stock.
<TABLE>
<CAPTION>
PERCENT
NAME OF BENEFICIAL OWNER NO. OF SHARES OF CLASS
------------------------------------------------------- ------------- ----------------
<S> <C> <C>
FMR Corp.(1) 1,141,700 7.75%
82 Devonshire Street
Boston, MA 02109-3614
Palisade Capital Management, L.L.C.(2) 819,600 5.57%
One Bridge Plaza, Suite 695
Fort Lee, NJ 07024
T. Rowe Price Associates, Inc.(3) 1,100,000 7.47%
100 E. Pratt Street
Baltimore, MD 21202
Jeffrey A. Cole (4) 484,793 3.25%
Timothy F. Finley (4)(5) 12,159 *
Irwin N. Gold (4)(5) 17,355 *
Peter V. Handal (4)(5) 19,878 *
Charles A. Ratner 1,500 *
Brian B. Smith (4)(6) 256,093 1.73%
Leslie D. Dunn -- *
Joseph Gaglioti (6)(7) 18,382 *
Wayne L. Mosley (6)(7) 18,439 *
Walter Salmon 500 *
All Directors and executive officers 829,099 5.49%
as a group (10 persons) (4)(5)(6)(7)
</TABLE>
- ---------------
* Less than one percent
(1) Stock ownership is based on a Schedule 13G dated February 14, 1997 and does
not include transactions since such date. Fidelity Management & Research
Company, a wholly owned subsidiary of FMR Corp. and an investment adviser
registered under the Investment Advisers Act of 1940 ("Fidelity"), is the
beneficial owner of the shares indicated as a result of acting as investment
adviser to several investment companies registered under the Investment
Company Act of 1940 (the "Fidelity Funds").
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<PAGE> 69
The ownership of one investment company, Fidelity Low-Priced Stock Fund,
amounted to 1,100,000 shares or 7.47% of the Common Stock outstanding.
Fidelity Low-Priced Stock Fund has its principal business office at 82
Devonshire Street, Boston, Massachusetts 02109.
Edward C. Johnson 3d, FMR Corp. (through its control of Fidelity), and the
Fidelity Funds each has sole power to dispose of the 1,141,700 shares owned
by the Fidelity Funds. Neither FMR Corp. nor Edward C. Johnson 3d, Chairman
of FMR Corp., has the sole power to vote or direct the voting of the shares
owned directly by the Fidelity Funds, which power resides with the Fidelity
Funds' Boards of Trustees. Fidelity carries out the voting of the shares
under written guidelines established by the Fidelity Funds' Boards of
Trustees.
Edward C. Johnson 3d and Abigail P. Johnson own respectively 12.0% and 24.5%
of the outstanding voting common stock of FMR Corp. Mr. Johnson 3d is
Chairman of FMR Corp. Various Johnson family members and trusts for the
benefit of Johnson family members own approximately 49% of FMR Corp. voting
common stock. These Johnson family members, through their ownership of
voting common stock and the execution of a family shareholders' voting
agreement, may be deemed to form a controlling group with respect to FMR
Corp.
(2) Stock ownership is based on a Schedule 13G filed on February 1, 1997 and
does not include transactions since such date.
(3) Stock ownership is based on a Schedule 13G filed on February 14, 1997 and
does not include transactions since such date. These shares are owned by
various individual and institutional investors (including the T. Rowe Price
New America Growth Fund whose principal offices are located at 100 E. Pratt
Street, Baltimore, MD 21202, which owns 800,000 shares, representing 5.43%
of the shares outstanding), for which T. Rowe Price Associates, Inc. ("Price
Associates") serves as investment adviser with power to direct investments
and/or vote the securities. For purposes of the reporting requirements of
the Exchange Act, Price Associates is deemed to be a beneficial owner of
such shares; however, Price Associates disclaims that it is, in fact, the
beneficial owner of such shares.
(4) Includes shares of Parent Common Stock that may be acquired pursuant to the
exercise of warrants exercisable within 60 days held by the following
individuals: Mr. Cole -- 2,707 shares; Mr. Gold -- 625 shares; Mr.
Handal -- 2,760 shares; Mr. Smith -- 1,888; and Mr. Finley -- 1,228 shares.
Included in Mr. Cole's and Mr. Smith's Parent Common Stock shares are
185,209 and 113,089 shares, respectively, that may be acquired within 60
days pursuant to the exercise of options granted under the Company's 1993
Management Stock Option Plan (the "1993 Plan").
(5) Includes 7,500 shares of Parent Common Stock that may be acquired within 60
days pursuant to the exercise of options granted under stock option
agreements.
(6) Includes shares of Parent Common Stock awarded under the Management
Incentive Bonus Program as follows: Mr. Smith -- 1,951 shares; Mr.
Gaglioti -- 590 shares; and Mr. Mosley -- 590 shares. Certain of such shares
are restricted and subject to a risk of forfeiture. See note (3) to Summary
Compensation Table.
(7) Includes shares of the Parent Common Stock that may be acquired within 60
days pursuant to the exercise of options granted under the 1992 Plan and the
1993 Plan as follows: Mr. Gaglioti -- 17,300 shares and Mr. Mosley -- 17,300
shares.
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<PAGE> 70
DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR NOTES
Initially, $190.0 million of Senior Notes were issued pursuant to the
Senior Note Indenture between the Company and Norwest Bank Minnesota, N.A., as
trustee. After completion of the Tender Offer, $14.5 million aggregate principal
amount of Senior Notes remained outstanding. The Senior Notes are unsecured and
mature October 1, 2001 with no earlier scheduled redemption or sinking fund
payments. Interest on the Senior Notes accrues at the rate of 11.25% per annum
and is payable semiannually on April 1 and October 1 of each year. The Senior
Notes are not redeemable at the Company's option prior to October 1, 1998.
Thereafter, the Senior Notes will be subject to redemption at the option of the
Company, in whole or in part, at redemption prices ranging from 105.625% to 100%
of the principal amount, plus accrued and unpaid interest thereon.
The Senior Note Indenture pursuant to which the Senior Notes were issued
contains certain optional and mandatory redemption features. See "Risk
Factors -- Leverage."
Under the Senior Note Indenture each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Senior Notes; (ii) default in the payment when due of principal on the Senior
Notes; (iii) failure by the Company for 15 days after notice to comply with
certain "Change of Control," "Limitations on Restricted Payments" or "Limitation
on Indebtedness and Preferred Stock" provisions, as described in the Indenture;
(iv) failure by the Company for 60 days after notice to comply with other
agreements or covenants in the Senior Note Indenture or the Senior Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness, as
defined in the Senior Note Indenture, for money borrowed by the Company or any
of its subsidiaries (or the payment of which is guaranteed by the Company or any
of its subsidiaries) (other than the Senior Notes) whether such Indebtedness or
guarantee now exists, or is created after the date of the Senior Note Indenture;
(vi) failure by the Company or any of its subsidiaries to pay final judgments
(other than any judgment as to which a reputable insurance company has accepted
full liability) aggregating in excess of $5.0 million which judgments are not
stayed within 60 days after their entry; and (vii) certain events of bankruptcy
or insolvency with respect to the Company or any of its significant
subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Senior Notes
may declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all outstanding Senior Notes will
become due and payable without further action or notice. Holders of the Senior
Notes may not enforce the Senior Note Indenture or the Senior Notes except as
provided in the Senior Note Indenture. Subject to certain limitations, holders
of a majority in principal amount of the then outstanding Senior Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the Senior Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default in payment of principal
or interest) if it determines that withholding notice is in their interest.
EXISTING SENIOR SUBORDINATED NOTES
The Existing Senior Subordinated Notes in an aggregate principal amount of
$150.0 million were issued and are outstanding under the Existing Senior
Subordinated Note Indenture between the Company and Norwest Bank Minnesota,
N.A., as trustee. The Existing Senior Subordinated Notes are unsecured and
mature December 31, 2006 with no earlier scheduled redemption or sinking fund
payments. Interest on the Existing Senior Subordinated Notes accrues at the rate
of 9 7/8% per annum and is payable semiannually on June 30 and December 31 of
each year. The Existing Senior Subordinated Notes are not redeemable at the
Company's option prior to December 31, 2001; however, any time up to December
31, 1999 the Company may redeem up to 35% of the original principal amount of
the Existing Senior Subordinated Notes pursuant to a Qualified Equity Offering
and provided certain restrictions and qualifications are met. Thereafter, the
Existing Senior Subordinated Notes will be subject to redemption at the option
of the Company, in whole or in
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<PAGE> 71
part, at redemption prices ranging from 104.9375% to 100% of the principal
amount, plus accrued and unpaid interest thereon.
Upon the occurrence of a change of control of the Company, each holder of
Existing Senior Subordinated Notes will have the right to require the repurchase
of all or any part of such holder's Existing Senior Subordinated Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon. A "change of control" would occur if a
single purchaser or purchasers acting together as a "group" (which the meaning
of Section 13(d) and 14(d)(2) of the Exchange Act) acquire 50% or more of the
total voting power of the voting stock of the Company and/or warrants or options
to acquire such voting stock, calculated on a fully diluted basis, or if there
is a change in the Company's Board of Directors not approved by a majority of
directors who constitute continuing directors. So long as no single purchaser or
purchasers acting together as a "group" acquire 50% or more of the shares
outstanding following the offering, the sale of the shares of Common Stock made
pursuant to this offering will not constitute a change of control under the
Existing Senior Subordinated Note Indenture. See "Risk Factors -- Leverage."
The Existing Senior Subordinated Note Indenture pursuant to which the
Existing Senior Subordinated Notes were issued contains certain optional and
mandatory redemption features and other financial covenants, including
restrictions on the ability of the Company to pay dividends or make other
restricted payments to the Parent. The Existing Senior Subordinated Note
Indenture permits dividend payments to the Parent of one-half of the Company's
consolidated net income, provided that no default or event of default has
occurred under the Existing Senior Subordinated Note Indenture and that the
Company has met a specified fixed charge coverage ratio test. The indenture also
permits payments to the Parent for certain tax obligations and for
administrative expenses of the Parent not to exceed .25% of net sales.
In addition, the Existing Senior Subordinated Note Indenture contains
covenants restricting the ability of the Company and its subsidiaries to, among
other things, (i) sell or otherwise dispose of assets, (ii) create or incur
liens on their assets, (iii) incur or guaranty indebtedness (which is currently
more restrictive than is included in the Senior Notes), and (iv) merge or
consolidate with or into, or sell or otherwise dispose of all or substantially
all of the Company's assets to, another person.
Under the Existing Senior Subordinated Note Indenture each of the following
constitutes an Event of Default: (i) default for 30 days in the payment when due
of interest on the Existing Senior Subordinated Notes; (ii) default in the
payment when due of principal on the Existing Senior Subordinated Notes; (iii)
failure by the Company for 60 days after notice to comply with other agreements
or covenants in the Existing Senior Subordinated Note Indenture or the Existing
Senior Subordinated Notes; (iv) default in the amount of $5.0 million or more
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness, as defined in the
Existing Senior Subordinated Note Indenture, for money borrowed by the Company
or any of its subsidiaries (or the payment of which is guaranteed by the Company
or any of its subsidiaries) (other than the Existing Senior Subordinated Notes)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Existing Senior Subordinated Note Indenture; (v) failure by the Company
or any of its subsidiaries to pay final judgments (other than any judgment as to
which a reputable insurance company has accepted full liability) aggregating in
excess of $5.0 million which judgment are not stayed within 60 days after their
entry; and (vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its significant subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of then outstanding Existing Senior
Subordinated Notes may declare all the Existing Senior Subordinated Notes to be
due and payable immediately. Holders of the Existing Senior Subordinated Notes
may not enforce the Existing Senior Subordinated Note Indenture or the Existing
Senior Subordinated Notes except as provided in the Existing Senior Subordinated
Note Indenture. Subject to certain limitations, holders of a majority in
principal amount of the then outstanding Existing Senior Subordinated Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the Existing Senior Subordinated Notes notice of any
continuing Default of Event of Default (except a Default or Event of Default in
payment of principal or interest) if it determines that withholding notice is in
their interest.
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<PAGE> 72
CREDIT FACILITY
The Company's primary source of liquidity is funds provided from operations
of its operating subsidiaries. On November 15, 1996, Cole Vision, Things
Remembered and CGC, the principal operating subsidiaries of the Company, Pearle
and Pearle Service Corporation (collectively, the "Borrowers"), entered into the
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" and
$75,000,000. A portion of the Credit Facility not in excess of $30,000,000 is
available for the issuance of letters of credit. Borrowings under the Credit
Facility initially will bear interest at a rate equal to, at the option of the
Borrowers, either (a) the Eurodollar Rate plus 1.25% or (b) .25% plus the
highest of (i) the rate of interest publicly announced by Canadian Imperial Bank
of Commerce as its prime rate in effect at its principal office in New York
City, (ii) the secondary market rate for three-month certificates of deposit
(adjusted for statutory reserve requirements) plus 1% and (iii) the federal
funds effective rate from time to time plus 0.5%. These interest rates are
subject to quarterly adjustment after the first anniversary of the closing of
the Credit Facility based on the Company's achievement of certain interest
coverage ratio benchmarks. Proceeds of certain asset sales and proceeds of
casualty or condemnation recoveries by the Company or the Borrowers will be
required to be reinvested in specified capital assets of the Company or the
Borrowers or applied to reduce the commitments under the Credit Facility. 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 assets, create liens, make capital
expenditures and make certain investments or 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 Credit Facility permits the Company's subsidiaries
to pay dividends to the Company to the extent necessary to permit it to pay all
interest and principal on the Senior Notes, the Existing Senior Subordinated
Notes and the Notes when due so long as no default or event of default under the
Credit Facility has occurred and is continuing. The Credit Facility permits the
Company to use up to $20,000,000 to repurchase the Senior Notes and/or the
Existing Senior Subordinated Notes and/or the Notes so long as no default or
event of default under the Credit Facility has occurred and is continuing. The
Company is a limited guarantor under the Credit Facility, with recourse against
the Company limited to certain bank accounts. As of August 2, 1997,
approximately $15.6 million of letters of credit were outstanding under the
Company's Credit Facility.
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<PAGE> 73
DESCRIPTION OF THE NOTES
The Original Notes were, and the Exchange Notes will be, issued under an
Indenture, dated as of August 22, 1997 between the Company and Norwest Bank
Minnesota, National Association, as Trustee. The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") as in
effect on the date of the Indenture. The Notes are subject to all such terms,
and holders of the Notes are referred to the Indenture and the Act for a
statement of them. The following is a summary of the material terms and
provisions of the Notes. This summary does not purport to be a complete
description of the Notes and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the Notes and the Indenture
(including the definitions contained therein). A copy of the form of Indenture
may be obtained from the Company by any holder or prospective investor upon
request. Definitions relating to certain capitalized terms are set forth under
" -- Certain Definitions" and throughout this description. Capitalized terms
that are used but not otherwise defined herein have the meanings assigned to
them in the Indenture and such definitions are incorporated herein by reference.
GENERAL
The Notes will be limited in aggregate principal amount to $125,000,000.
The Notes will be general unsecured obligations of the Company, subordinate in
right of payment to all existing and future Senior Indebtedness of the Company,
senior in right of payment to any subordinated indebtedness of the Company and
pari passu to the Company's Existing Senior Subordinated Notes and all other
future senior subordinated indebtedness.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. The Notes will
be effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of the Company's
Subsidiaries, including borrowings under the Credit Facility. Any right of the
Company to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the holders of the
Notes to participate in those assets) will be effectively subordinated to the
claims of that Subsidiary's creditors, except to the extent that the Company is
itself recognized as a creditor of such Subsidiary, in which case the claims of
the Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on August 15, 2007. The Notes will bear interest at a
rate of 8 5/8% per annum from the date of original issuance until maturity.
Interest is payable semi-annually in arrears on February 15 and August 15
commencing February 15, 1998, to holders of record of the Notes at the close of
business on the immediately preceding February 1 and August 1, respectively.
Interest on the Notes will be paid on the basis of a 360 day year and twelve 30
day months. The interest rate on the Notes is subject to increase, and such
Additional Interest will be payable on the payment dates set forth above, in
certain circumstances, if the Notes (or other securities substantially similar
to the Notes) are not registered with the Commission within the prescribed time
periods. See "The Exchange Offer."
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after August 15, 2002 at the following redemption prices
(expressed as a percentage of principal amount), together,
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<PAGE> 74
in each case, with accrued interest to the redemption date, if redeemed during
the twelve-month period beginning on August 15, of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------------------------------- ----------
<S> <C>
2002...................................................... 104.3125%
2003...................................................... 102.8750%
2004...................................................... 101.4375%
2005 and thereafter....................................... 100.0000%
</TABLE>
Notwithstanding the foregoing, the Company may redeem in the aggregate up
to 40% of the original principal amount of Notes at any time and from time to
time prior to August 15, 2000 at a redemption price equal to 108.625% of the
aggregate principal amount so redeemed plus accrued interest to the redemption
date out of the Net Proceeds of one or more Qualified Equity Offerings; provided
that at least $75.0 million of the principal amount of Notes originally issued
remain outstanding immediately after the occurrence of any such redemption and
that any such redemption occurs within 90 days following the closing of any such
Qualified Equity Offering.
In the event of redemption of fewer than all of the Notes, the Trustee
shall select by lot or in such other manner as it shall deem fair and equitable
the Notes to be redeemed. The Notes will be redeemable in whole or in part upon
not less than 30 nor more than 60 days' prior written notice, made by first
class mail to a holder's last address as it shall appear on the register
maintained by the Registrar of the Notes. On and after any redemption date,
interest will cease to accrue on the Notes or portions thereof called for
redemption unless the Company shall fail to redeem any such Note.
SUBORDINATION
The indebtedness represented by the Notes is, to the extent and in the
manner provided in the Indenture, subordinated in right of payment to the prior
indefeasible payment and satisfaction in full in cash of all existing and future
Senior Indebtedness of the Company. As of August 2, 1997, after giving pro forma
effect to the application of the net proceeds of the Offering and the
Transactions, the principal amount of outstanding Senior Indebtedness of the
Company, on a consolidated basis, would have been approximately $1.4 million. In
the Tender Offer, which was completed on September 15, 1997, $151.3 million
aggregate principal amount of Senior Notes were purchased leaving $14.5 million
aggregate principal amount of Senior Notes outstanding, which constitute Senior
Indebtedness. In addition, the Company would have had $59.4 million of undrawn
commitments available under the Credit Facility.
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, arrangement, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, whether voluntary or involuntary, or any liquidation,
dissolution or other winding-up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or any general assignment
for the benefit of creditors or other marshaling of assets or liabilities of the
Company (except in connection with the merger or consolidation of the Company or
its liquidation or dissolution following the transfer of substantially all of
its assets, upon the terms and
conditions permitted under the circumstances described under "-- Merger,
Consolidation or Sale of Assets") (all of the foregoing referred to herein
individually as a "Bankruptcy Proceeding" and collectively as "Bankruptcy
Proceedings"), the holders of Senior Indebtedness of the Company will be
entitled to receive payment and satisfaction in full in cash of all amounts due
on or in respect of all Senior Indebtedness of the Company before the holders of
the Notes are entitled to receive or retain any payment or distribution of any
kind on account of the Notes. In the event that, notwithstanding the foregoing,
the Trustee or any holder of Notes receives any payment or distribution of
assets of the Company of any kind, whether in cash, property or securities,
including, without limitation, by way of set-off or otherwise, in respect of the
Notes before all Senior Indebtedness of the Company is paid and satisfied in
full in cash, then such payment or distribution will be held by the recipient in
trust for the benefit of holders of Senior Indebtedness and will be immediately
paid over or delivered to the holders of Senior Indebtedness or their
representative or representatives to the extent necessary to make payment in
full of all Senior Indebtedness remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holders
of Senior Indebtedness. By
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reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than other creditors of the Company, and creditors of the Company
who are not holders of Senior Indebtedness or of the Notes may recover more,
ratably, than the holders of the Notes.
No payment or distribution of any assets or securities of the Company or
any Subsidiary of any kind or character (including, without limitation, cash,
property and any payment or distribution which may be payable
or deliverable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Notes by the Company) may be made by or
on behalf of the Company or any Subsidiary, including, without limitation, by
way of set-off or otherwise, for or on account of the Notes, or for or on
account of the purchase, redemption or other acquisition of the Notes, and
neither the Trustee nor any holder or owner of any Notes shall take or receive
from the Company or any Subsidiary, directly or indirectly in any manner,
payment in respect of all or any portion of Notes following the occurrence of a
Payment Default, and in any such event, such prohibition shall continue until
such Payment Default is cured, waived in writing or ceases to exist or such
acceleration has been rescinded or otherwise cured. At such time as the
prohibition set forth in the preceding sentence shall no longer be in effect,
subject to the provisions of the following paragraph, the Company shall resume
making any and all required payments in respect of the Notes, including any
missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Indebtedness, no payment or distribution of any assets of the Company of any
kind may be made by the Company, including, without limitation, by way of
set-off or otherwise, on account of the Notes, for or on account of the
purchase, redemption, defeasance or other acquisition of Notes, and neither the
Trustee nor any holder or owner of Notes shall take or receive from the Company
or any Subsidiary, directly or indirectly in any manner, payment in respect of
all or any portion of the Notes for a period (a "Payment Blockage Period")
commencing on the date of receipt by the Trustee of written notice from an
authorized Person on behalf of the holders of Designated Senior Indebtedness
(the "Authorized Person") of such Non-Payment Event of Default unless and until
(subject to any blockage of payments that may then be in effect under the
preceding paragraph) the earliest of (x) more than 179 days shall have elapsed
since receipt of such written notice by the Trustee, (y) such Non-Payment Event
of Default shall have been cured or waived in writing or shall have ceased to
exist or such Designated Senior Indebtedness shall have been paid in full or (z)
such Payment Blockage Period shall have been terminated by written notice to the
Company or the Trustee from such Authorized Person, after which, in the case of
clause (x), (y) or (z), the Company shall resume making any and all required
payments in respect of the Notes, including any missed payments. Notwithstanding
any other provision of the Indenture, in no event shall a Payment Blockage
Period commenced in accordance with the provisions of the Indenture described in
this paragraph extend beyond 179 days from the date of the receipt by the
Trustee of the notice referred to above (the "Initial Blockage Period"). Any
number of additional Payment Blockage Periods may be commenced during the
Initial Blockage Period; provided, however, that no such additional Payment
Blockage Period shall extend beyond the Initial Blockage Period. After the
expiration of the Initial Blockage Period, no Payment Blockage Period may be
commenced until at least 180 consecutive days have elapsed from the last day of
the Initial Blockage Period. Notwithstanding any other provision of the
Indenture, no event of default with respect to Designated Senior Indebtedness
(other than a Payment Default) which existed or was continuing on the date of
the commencement of any Payment Blockage Period initiated by an Authorized
Person shall be, or be made, the basis for the commencement of a second Payment
Blockage Period initiated by an Authorized Person, whether or not within the
Initial Blockage Period, unless such event of default shall have been cured or
waived for a period of not less than 90 consecutive days.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of payment blockage
provisions, such failure would constitute an Event of Default under the
Indenture and would enable the holders of the Notes to accelerate the maturity
thereof. See "-- Events of Default."
A holder of Notes by his acceptance of Notes agrees to be bound by such
provisions and authorizes and expressly directs the Trustee, on his behalf, to
take such action as may be necessary or appropriate to effectuate the
subordination provided for in the Indenture and appoints the Trustee his
attorney-in-fact for such purpose.
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CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants. Except
as otherwise specified, all of the covenants described below will appear in the
Indenture.
Limitation on Additional Indebtedness
The Company will not, and will not permit any Subsidiary of the Company to,
directly or indirectly, incur (as defined) any Indebtedness (including Acquired
Indebtedness); provided, that the Company (but not any Subsidiary of the
Company) may incur Indebtedness if (i) after giving effect to the incurrence of
such Indebtedness and the receipt and application of the proceeds thereof, the
Company's Fixed Charge Coverage Ratio (determined on a pro forma basis for the
last four fiscal quarters of the Company for which financial statements are
available at the date of determination) is at least 2.00 to 1, and (ii) no
Triggering Default Event shall have occurred and be continuing at the time or as
a consequence of the incurrence of such Indebtedness. For purposes of computing
the Fixed Charge Coverage Ratio, (A) if the Indebtedness which is the subject of
a determination under this provision is Acquired Indebtedness, or Indebtedness
incurred in connection with the simultaneous acquisition (by way of merger,
consolidation or otherwise) of any Person, business, property or assets (an
"Acquisition"), then such ratio shall be determined by giving effect (on a pro
forma basis, as if the transaction had occurred at the beginning of the
four-quarter period) to both the incurrence or assumption of such Acquired
Indebtedness or such other Indebtedness by the Company and the inclusion in the
Company's EBITDA of the EBITDA of the acquired Person, business, property or
assets, (B) if any Indebtedness outstanding or to be incurred (x) bears a
floating rate of interest, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account on a pro forma basis
any Interest Rate Agreement applicable to such Indebtedness if such Interest
Rate Agreement has a remaining term as at the date of determination in excess of
12 months), (y) bears, at the option of the Company or a Subsidiary, a fixed or
floating rate of interest, the interest expense on such Indebtedness shall be
computed by applying, at the option of the Company or such Subsidiary, either a
fixed or floating rate and (z) was incurred under a revolving credit facility,
the interest expense on such Indebtedness shall be computed based upon the
average daily balance of such Indebtedness during the applicable period, (C) for
any quarter prior to the date hereof included in the calculation of such ratio,
such calculation shall be made on a pro forma basis, giving effect to the Pearle
Acquisition, the issuance of the Notes, the incurrence of Indebtedness under the
Credit Facility and the use of the net proceeds therefrom as if the same had
occurred at the beginning of the four-quarter period used to make such
calculation and (D) for any quarter included in the calculation of such ratio
prior to the date that any Asset Sale was consummated, or that any Indebtedness
was incurred, or that any Acquisition was effected, by the Company or any of its
Subsidiaries, such calculation shall be made on a pro forma basis, giving effect
to each Asset Sale, incurrence of Indebtedness or Acquisition, as the case may
be, and the use of any proceeds therefrom, as if the same had occurred at the
beginning of the four quarter period used to make such calculation.
Notwithstanding the foregoing, the Company and its Subsidiaries may incur
Permitted Indebtedness; provided, that the Company will not incur any Permitted
Indebtedness, without meeting the Indebtedness incurrence provisions of the
preceding paragraph, that ranks pari passu or junior in right of payment to the
Notes and that has a maturity or mandatory sinking fund payment prior to the
maturity of the Notes.
Limitation on Restricted Payments
The Company will not make, and will not permit any of its Subsidiaries to,
directly or indirectly, make, any Restricted Payment, unless:
(a) no Triggering Default Event shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
(b) immediately after giving pro forma effect to such Restricted
Payment, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the covenant set forth under
"-- Limitation on Additional Indebtedness"; and
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(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of (1) $25.0 million plus (2) (i) 50% of the
cumulative Consolidated Net Income of the Company subsequent to August 3,
1997 (or minus 100% of any cumulative deficit in Consolidated Net Income
during such period); (ii) 100% of the aggregate Net Proceeds and the fair
market value (as determined in good faith by the Board of Directors of the
Company) of securities or other property received by the Company from the
issue or sale, after the Issue Date, of Capital Stock (other than
Disqualified Capital Stock or Capital Stock of the Company issued to any
Subsidiary of the Company) of the Company or any Indebtedness or other
securities of the Company convertible into or exercisable or exchangeable
for Capital Stock (other than Disqualified Capital Stock) of the Company
which has been so converted or exercised or exchanged, as the case may be;
(iii) 100% of the capital contributions made by the Parent to the Company
after the Issue Date (other than capital contributions which constitute
Indebtedness); and (iv) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment made after the date hereof, an
amount equal to the lesser of the return of capital with respect to such
Investment and the initial amount of such Investment, in either case, less
the cost of the disposition of such Investment. For purposes of determining
under this clause (c) the amount expended for Restricted Payments, cash
distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its fair market value (as determined in good
faith by the Board of Directors of the Company).
The provisions of this covenant will not prohibit (i) the payment of any
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture; (ii) the repurchase, redemption or other acquisition or retirement of
any shares of Capital Stock of the Company or Indebtedness subordinated to the
Notes by conversion into, or by or in exchange for, shares of Capital Stock
(other than Disqualified Capital Stock), or out of, the Net Proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other shares of Capital Stock of the Company (other than Disqualified Capital
Stock); (iii) the repurchase, redemption or other acquisition or retirement of
Indebtedness of the Company subordinated to the Notes in exchange for, by
conversion into, or out of the Net Proceeds of, a substantially concurrent sale
or incurrence of Indebtedness (other than any Indebtedness owed to a Subsidiary)
of the Company that is contractually subordinated in right of payment to the
Notes to at least the same extent as the Indebtedness subordinated to the Notes
being redeemed or retired; (iv) the retirement of any shares of Disqualified
Capital Stock by conversion into, or by exchange for, shares of Disqualified
Capital Stock, or out of the Net Proceeds of the substantially concurrent sale
(other than to a Subsidiary of the Company) of other shares of Disqualified
Capital Stock; (v) the repurchase, redemption or other acquisition or retirement
for value of any Capital Stock of the Company or the Parent or any current or
former Subsidiary of the Company held by any member of the Company's (or any of
its Subsidiaries') current or former employees; provided, that the aggregate
price paid for all such repurchased, redeemed, acquired or retired Capital Stock
shall not exceed $4 million; (vi) the payment of dividends to the Parent solely
for the purpose of enabling Parent to pay the ordinary operating and
administrative expenses of the Parent (including all reasonable professional
fees and expenses) in connection with its complying with its reporting
obligations and obligations to prepare and distribute business records in the
ordinary course of business and the Parent's costs and expenses relating to
taxes (which taxes are attributable to the operations of the Company and its
Subsidiaries or to the Parent's ownership thereof); provided, however, that the
aggregate dividend payments paid in each fiscal year pursuant to this clause
(vi) will at no time exceed 0.25% of the Company's Net Sales for such fiscal
year; (vii) payments to the Parent for income taxes pursuant to the Tax
Allocation Agreement; and (viii) the payment of dividends to the Parent solely
for the purpose of enabling the Parent to pay taxes other than income taxes, to
the extent actually owed and attributable to the operations of the Company and
its Subsidiaries or to the Parent's ownership thereof, provided, that, for
purposes of determining whether Restricted Payments can be made pursuant to the
previous paragraph, all payments made pursuant to clauses (ii), (iv), (v), (vi),
(vii) and (viii) of this paragraph will reduce the amount that would otherwise
be available for such Restricted Payments and payments made pursuant to the
other clauses of this paragraph shall not so reduce the amount available for
Restricted Payments.
Not later than the date of making any Restricted Payment which may only be
made pursuant to subclause (c) above, the Company shall deliver to the Trustee
an Officers' Certificate stating that such
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Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Limitation on Restricted Payments" were
computed, which calculations may be based upon the Company's latest available
financial statements, and that no Triggering Default Event exists and is
continuing and no Triggering Default Event will occur immediately after giving
effect to any Restricted Payments.
Limitation on Other Senior Subordinated Debt
The Company will not, directly or indirectly, incur any Indebtedness that
is both (i) subordinate in right of payment to any Senior Indebtedness of the
Company and (ii) senior in right of payment to the Notes. For purposes of this
covenant, Indebtedness is deemed to be senior in right of payment to the Notes
if it is not explicitly subordinate in right of payment to Senior Indebtedness
at least to the same extent as the Notes are subordinate to Senior Indebtedness.
Limitations on Liens
The Company will not create, incur or otherwise cause or suffer to exist
any Liens of any kind (other than Permitted Liens) upon any property or asset of
the Company to secure Indebtedness which is pari passu with or subordinate in
right of payment to the Notes, unless (i) if such Lien secures Indebtedness
which is pari passu with the Notes, the Notes are secured on an equal and
ratable basis with the obligation so secured until such time as such obligation
is no longer secured by a Lien and (ii) if such Lien secures Indebtedness which
is subordinated to the Notes, such Indebtedness secured by such Lien and such
Lien shall be subordinated to the Lien granted to the Holders of the Notes to
the same extent as such Indebtedness is subordinated to the Notes.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (a) (i) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (A) on its Capital Stock
or (B) with respect to any other interest or participation in, or measured by,
its profits, or (ii) pay any Indebtedness owed to the Company or any of its
Subsidiaries or (b) make loans or advances to the Company or any of its
Subsidiaries or (c) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reasons of (i) Indebtedness outstanding on the date of the
Indenture, (ii) the Credit Facility as in effect as of the date of the
Indenture, (iii) the Senior Note Indenture, the Senior Notes and the Indenture,
(iv) applicable law, (v) customary nonassignment provisions in leases, (vi)
permitted Refinancing Indebtedness, provided that the restrictions contained in
the agreements governing such Refinancing Indebtedness shall not be materially
more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (vii) customary restrictions imposed in
connection with Purchase Money Indebtedness or Capital Lease Obligations
permitted under the covenant entitled "Limitation on Incurrence of Indebtedness"
as long as such customary restrictions are not materially more restrictive than
those set forth in the Credit Facility on the date of the Indenture (except that
they may impose restrictions on the transfer of the asset so financed), or
(viii) restrictions in agreements with Persons acquired by the Company or any
Subsidiary which do not extend to Property or assets other than the Property or
assets of such Persons.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into or suffer to exist any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate (including
Parent and entities in which the Company or any of its Subsidiaries owns a
minority interest) or holder of 10% or more of the Company's Common Stock (an
"Affiliate Transaction") or extend, renew, waive or otherwise modify the terms
of any Affiliate Transaction entered into prior to the Issue Date unless (i)
such Affiliate Transaction is between or among the Company and its Wholly-Owned
Subsidiaries; or (ii) the terms of such Affiliate Transaction are fair and
reasonable to the Company or such Subsidiary, as the case may be, and the terms
of
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such Affiliate Transaction are at least as favorable as the terms which could be
obtained by the Company or such Subsidiary, as the case may be, in a comparable
transaction made on an arm's-length basis between unaffiliated parties. In any
Affiliate Transaction involving an amount or having a value in excess of $5.0
million which is not permitted under clause (i) above, the Company must obtain a
resolution of the Board of Directors certifying that such Affiliate Transaction
complies with clause (ii) above. In transactions with a value in excess of $10.0
million which are not permitted under clause (i) above (other than loans from
the Parent to the Company at a rate not in excess of the incremental borrowing
rate of the Company as determined in good faith by the Board of Directors of the
Company, or loans from the Company or any Subsidiary to Parent, in each case at
a rate not in excess of the Parent's incremental borrowing rate, as determined
in good faith by the Board of Directors of the Company), the Company must obtain
a written opinion as to the fairness of such a transaction from an independent
investment banking firm.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "-- Limitation on Restricted
Payments" contained herein, (ii) Indebtedness incurred by the Company to the
Parent, provided such Indebtedness has terms no more onerous than those
contained in the Credit Facility or (iii) any compensation-related transaction,
approved by an independent committee of the Board of Directors of the Company,
with an officer or director of the Company or of any Subsidiary in his or her
capacity as officer or director entered into in the ordinary course of business.
Limitation on Certain Asset Sales
The Company will not, and will not permit any of its Subsidiaries to,
consummate an Asset Sale unless (i) the Company or its Subsidiaries, as the case
may be, receives consideration at the time of such sale or other disposition at
least equal to the fair market value thereof (as determined in good faith by the
Board of Directors of the Company); (ii) except in the case of the sale,
transfer or other disposition of Company-owned stores to franchisees in a
business related to the optical business that result in the conversion of such
stores to franchised stores, not less than 75% of the consideration received by
the Company or its Subsidiaries, as the case may be, is in the form of cash or
Temporary Cash Investments; and (iii) the Asset Sale Proceeds received by the
Company or such Subsidiary are applied (a) first, to the extent the Company
elects, or is required, to prepay, repay or purchase debt under any then
existing Senior Indebtedness of the Company or any Subsidiary within 12 months
following the receipt of the Asset Sale Proceeds from any Asset Sale, provided
that any such repayment shall result in a permanent reduction of the commitments
thereunder in an amount equal to the principal amount so repaid; (b) second, to
the extent of the balance of Asset Sale Proceeds after application as described
above, to the extent the Company elects, to an investment in assets (including
Capital Stock or other securities purchased in connection with the acquisition
of Capital Stock or property of another person) used or useful in businesses
similar or ancillary to the business of the Company or Subsidiary as conducted
at the time of such Asset Sale, provided that such investment occurs on or prior
to the 365th day following receipt of such Asset Sale Proceeds (the
"Reinvestment Date"); (c) third, to the making of an Excess Proceeds Offer (as
defined in the Senior Notes Indenture) with respect to any outstanding Senior
Notes; (d) fourth, the making of an Excess Proceeds Offer (as defined in the
Existing Senior Subordinated Note Indenture) with respect to the Existing Senior
Subordinated Notes and (e) fifth, if on the Reinvestment Date the Available
Asset Sale Proceeds with respect to any Asset Sale exceed $10 million, the
Company shall apply an amount equal to such Available Asset Sale Proceeds to an
offer to repurchase the Notes (which offer may, at the option of the Company,
also be made on a pro rata basis to holders of all other indebtedness of the
Company ranking pari passu), at a purchase price (in the case of the Notes) in
cash equal to 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase (an "Excess Proceeds Offer"). If an
Excess Proceeds Offer is not fully subscribed, the Company may retain the
portion of the Available Asset Sale Proceeds not required to repurchase Notes.
If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the
Holders stating, among other things: (1) that such Holders have the right to
require the Company to apply the Available Asset Sale Proceeds to repurchase
such Notes at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase; (2)
the purchase date, which shall be no earlier than 30 days and not later than
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60 days from the date such notice is mailed; (3) the instructions, determined by
the Company, that each Holder must follow in order to have such Notes
repurchased; and (4) the calculations used in determining the amount of
Available Asset Sale Proceeds to be applied to the repurchase of such Notes.
Limitation on Capital Stock of Subsidiaries
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Subsidiary (other than under the Credit
Facility or a successor facility or under the terms of any Designated Senior
Indebtedness) or (ii) permit any of its Subsidiaries to issue any Capital Stock,
other than to the Company or a Wholly Owned Subsidiary of the Company. The
foregoing restrictions shall not apply to an Asset Sale (other than the sale of
Preferred Stock of a Subsidiary) made in compliance with "-- Limitation on
Certain Asset Sales."
Limitation on Sale and Lease-Back Transactions
The Company will not, and will not permit any Subsidiary to, enter into any
Sale and Lease-Back Transaction unless (i) the consideration received in such
Sale and Lease-Back Transaction is at least equal to the fair market value of
the property sold, as determined by a board resolution of the Company and (ii)
the Company could incur Indebtedness in an amount equal to the Attributable
Indebtedness in respect of such Sale and Lease-Back Transaction in compliance
with the covenant described under "-- Limitation on Additional Indebtedness."
Payments for Consent
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or agreed
to be paid to all holders of the Notes which so consent, waive or agree to amend
in the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
CHANGE OF CONTROL OFFER
Within 30 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued interest to
the Change of Control Payment Date (as hereinafter defined) (such applicable
purchase price being hereinafter referred to as the "Change of Control Purchase
Price") in accordance with the procedures set forth in this covenant.
Within 40 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control Offer to be sent at least once
to the Dow Jones News Service or similar business news service in the United
States and (ii) send by first-class mail, postage prepaid, to the Trustee and to
each holder of the Notes, at the address appearing in the register maintained by
the Registrar of the Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 30 nor later than 40 days from the
date such notice is mailed (the "Change of Control Payment Date"));
(3) that any Note not tendered will continue to accrue interest;
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(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such Notes
purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, provided that each Note purchased and each such new
Note issued shall be in an original principal amount in denominations of
$1,000 and integral multiples thereof;
(8) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control offer, (ii) deposit with the Paying Agent money sufficient
to pay the purchase price of all Notes or portions thereof so tendered and (iii)
deliver or cause to be delivered to the Trustee Notes so accepted together with
an Officers' Certificate stating the Notes or portions thereof tendered to the
Company. The Paying Agent shall promptly mail to each holder of Notes so
accepted payment in an amount equal to the purchase price for such Notes, and
the Company shall execute and issue, and the Trustee shall promptly authenticate
and mail to such holder, a new Note equal in principal amount to any unpurchased
portion of the Notes surrendered; provided that each such new Note shall be
issued in an original principal amount in denominations of $1,000 and integral
multiples thereof.
The Indenture requires that if the Credit Facility is in effect and the
Senior Notes are outstanding, or any amounts are owing thereunder or in respect
thereof, at the time of the occurrence of a Change of Control, prior to the
mailing of the notice to holders described in the preceding paragraph, but in
any event within 30 days following any Change of Control, the Company covenants
to (i) repay in full all obligations under or in respect of the Credit Facility
and the Senior Notes or offer to repay in full all obligations under or in
respect of the Credit Facility and the Senior Notes and repay the obligations
under or in respect of the Credit Facility and the Senior Notes of each lender
and holder, as the case may be, who has accepted such offer or (ii) obtain the
requisite consent under the Credit Facility and the Senior Notes to permit the
repurchase of the Notes as described above. The Company must first comply with
the covenant described in the preceding sentence before it shall be required to
purchase Notes in the event of a Change of Control; provided that the Company's
failure to comply with the covenant described in the preceding sentence
constitutes an Event of Default described in clause (iii) under "-- Events of
Default" below if not cured within 60 days after the notice required by such
clause. As a result of the foregoing, a holder of the Notes may not be able to
compel the Company to purchase the Notes unless the Company is able at the time
to refinance all of the obligations under or in respect of the Credit Facility
and the Senior Notes or obtain requisite consents under the Credit Facility and
the Senior Notes. Failure by the Company to make a Change of Control Offer when
required by the Indenture constitutes a default under the Indenture and, if not
cured within 60 days after notice, constitutes an Event of Default.
The Indenture provides that, (A) if the Company or any Subsidiary thereof
has issued any outstanding (i) Indebtedness that is subordinated in right of
payment to the Notes or (ii) Preferred Stock, and the Company or such Subsidiary
is required to make a Change of Control Offer or to make a distribution with
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respect to such subordinated Indebtedness or Preferred Stock in the event of a
change of control, the Company shall not consummate any such offer or
distribution with respect to such subordinated Indebtedness or Preferred Stock
until such time as the Company shall have paid the Change of Control Purchase
Price in full to the holders of Notes that have accepted the Company's Change of
Control Offer and shall otherwise have consummated the Change of Control Offer
made to holders of the Notes and (B) the Company will not issue Indebtedness
that is subordinated in right of payment to the Notes or Preferred Stock with
change of control provisions requiring the payment of such Indebtedness or
Preferred Stock prior to the payment of the Notes in the event of a Change of
Control under the Indenture.
In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Company to purchase Notes, if such purchase
constitutes a "tender offer" for purposes of Rule 14e-I under the Exchange Act
at that time, the Company will comply with the requirements of Rule 14e-I as
then in effect with respect to such repurchase.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not and will not permit any Subsidiary to consolidate
with, merge with or into, or transfer all or substantially all of its assets (as
an entirety or substantially as an entirety in one transaction or a series of
related transactions), to any Person unless: (i) the Company or the Subsidiary,
as the case may be, shall be the continuing Person, or the Person (if other than
the Company or the Subsidiary) formed by such consolidation or into which the
Company or the Subsidiary, as the case may be, is merged or to which the
properties and assets of the Company or the Subsidiary, as the case may be, are
transferred shall be a corporation organized and existing under the laws of the
United States or any State thereof or the District of Columbia and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all of the obligations of the
Company or the Subsidiary, as the case may be, under the Notes and the
Indenture, and the obligations under the Indenture shall remain in full force
and effect; (ii) immediately before and immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing; and (iii) immediately after giving effect to such transaction on a
pro forma basis the Company or such Person could incur at least $1.00 additional
Indebtedness (other than Permitted Indebtedness) under the covenant set forth
under " -- Certain Covenants -- Limitation on Additional Indebtedness," provided
that a Person that is a Subsidiary on the Issue Date may merge into the Company
or another Person that is a Subsidiary on the Issue Date without complying with
this clause (iii).
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) default in payment of any principal of, or premium, if any, on the
Notes;
(ii) default for 30 days in payment of any interest on the Notes;
(iii) default by the Company or any Subsidiary in the observance or
performance of any other covenant in the Notes or the Indenture for 60 days
after written notice from the Trustee or the holders of not less than 25%
in aggregate principal amount of the Notes then outstanding;
(iv) failure to pay when due (within the grace period provided in such
Indebtedness) principal, interest or premium in an aggregate amount of
$5,000,000 or more with respect to any Indebtedness of the Company or any
Subsidiary thereof, or the acceleration of any such Indebtedness
aggregating $5,000,000 or more, which default or acceleration shall not be
cured, waived or postponed pursuant to an agreement with the holders of
such Indebtedness within 60 days after written notice, or such acceleration
shall not be rescinded or annulled within 20 days after written notice;
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(v) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $5,000,000 shall be rendered against
the Company or any Subsidiary thereof (other than a judgment or portion
thereof as to which an insurance company of national reputation has
accepted full liability), and shall not be discharged or fully bonded for
any period of 60 consecutive days during which a stay of enforcement shall
not be in effect; and
(vi) certain events involving bankruptcy, insolvency or reorganization
of the Company or any Significant Subsidiary thereof.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal or premium, if any,
or interest on the Notes) if the Trustee considers it to be in the best interest
of the holders of the Notes to do so.
The Indenture will provide that if an Event of Default (other than an Event
of Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus accrued interest to the date of
acceleration and (i) such amounts shall become immediately due and payable or
(ii) if there are any amounts outstanding under or in respect of the Credit
Facility, such amounts shall become due and payable upon the first to occur of
an acceleration of amounts outstanding under or in respect of the Credit
Facility or five business days after receipt by the Company and the
representative of the holders of Senior Indebtedness under or in respect of the
Credit Facility, of notice of the acceleration of the Notes; provided, however,
that after such acceleration but before a judgment or decree based on
acceleration is obtained by the Trustee, the holders of a majority in aggregate
principal amount of outstanding Notes may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than nonpayment of
accelerated principal, premium or interest, have been cured or waived as
provided in the Indenture. In case an Event of Default resulting from certain
events of bankruptcy, insolvency or reorganization shall occur, the principal,
premium and interest amount with respect to all of the Notes shall be due and
payable immediately without any declaration or other act on the part of the
Trustee or the holders of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture or the Notes and to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request and offered
reasonable indemnity to the Trustee to institute such proceeding as a trustee,
and unless the Trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted on such Note
on or after the respective due dates expressed in such Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides the Company may elect either (a) to defease and be
discharged from any and all obligations with respect to the Notes (except for
the obligations to register the transfer or exchange of such Notes, to replace
temporary or mutilated, destroyed, lost or stolen Notes, to maintain an office
or agency in respect of the Notes and to hold monies for payment in trust)
("defeasance") or (b) to be released from their obligations with respect to the
Notes under certain covenants contained in the Indenture and described above
under "-- Certain Covenants" ("covenant defeasance"), upon the deposit with the
Trustee (or other qualifying trustee), in trust for such purpose, of money
and/or United States Government Obligations which through the payment of
principal and interest in accordance with their terms will provide money, in an
amount sufficient to pay the principal of, premium, if any, and interest on the
Notes, on the scheduled due dates
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therefor or on a selected date of redemption in accordance with the terms of the
Indenture. Such a trust may only be established if, among other things, the
Issuers have delivered to the Trustee an Opinion of Counsel (as specified in the
Indenture) (i) to the effect that neither the trust nor the Trustee will be
required to register as an investment company under the Investment Company Act
of 1940, as amended, and (ii) in the case of defeasance describing either a
private ruling concerning the Notes or a published ruling of the Internal
Revenue Service, to the effect that, and in the case of covenant defeasance,
stating that, holders of the Notes or persons in their positions will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit, defeasance and discharge and will be subject to federal income tax
on the same amount and in the same manner and at the same times, as would have
been the case if such deposit, defeasance and discharge had not occurred.
MODIFICATION OF INDENTURE
From time to time, the Company and the Trustee may, without the consent of
holders of the Notes, amend the Indenture or the Notes or supplement the
Indenture for certain specified purposes, including providing for uncertificated
Notes in addition to certificated Notes, and curing any ambiguity, defect or
inconsistency, or making any other change that does not materially and adversely
affect the rights of any holder. The Indenture contains provisions permitting
the Company and the Trustee, with the consent of holders of at least a majority
in principal amount of the outstanding Notes, to modify or supplement the
Indenture or the Notes, except that no such modification shall, without the
consent of each holder affected thereby, (i) reduce the amount of Notes whose
holders must consent to an amendment, supplement, or waiver to the Indenture or
the Notes, (ii) reduce the rate of or change the time for payment of interest on
any Note, (iii) reduce the principal of or premium on or change the stated
maturity of any Note, (iv) make any Note payable in money other than that stated
in the Note or change the place of payment from New York, New York, (v) change
the amount or time of any payment required by the Notes or reduce the premium
payable upon any redemption of Notes, or change the time before which no such
redemption may be made, (vi) waive a default on the payment of the principal of,
interest on, or redemption payment with respect to any Note, or (vii) take any
other action otherwise prohibited by the Indenture to be taken without the
consent of each holder affected thereby.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it will continue to furnish the information required thereby
to the Commission and to the holders of the Notes. The Indenture provides that
even if the Company is entitled under the Exchange Act not to furnish such
information to the Commission or to the holders of the Notes, they will
nonetheless continue to furnish such information to the Commission and holders
of the Notes.
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 120 days after the end
of the Company's fiscal year and on or before 60 days after the end of each of
the first, second and third fiscal quarters in each year an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that has occurred. If they do, the certificate will describe the Default
or Event of Default and its status.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
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TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Note selected for redemption. Also,
the Registrar is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The Notes will be issued in a transaction exempt from registration under
the Act and will be subject to the restrictions on transfer described in "Notice
to Investors."
The registered holder of a Note may be treated as the owner of it for all
purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary or assumed in connection with the acquisition
of assets from such Person.
"Affiliate" of any specified Person means any other Person which directly
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"Acquired Optical Franchise Receivables" means franchise receivables
acquired in connection with the acquisition of a retailer or group of retail
locations whose business is primarily related to sales of optical products.
"Asset Sale" means the sale, transfer or other disposition (other than to
the Company or any of its Subsidiaries) in any single transaction or series of
related transactions having a fair market value in excess of $10.0 million of
(a) any Capital Stock of or other equity interest in any Subsidiary of the
Company, (b) all or substantially all of the assets of the Company or of any
Subsidiary, (c) real property or (d) all or substantially all of the assets of a
division, line of business or comparable business segment or part thereof of the
Company or any Subsidiary thereof; provided that Asset Sales shall not include
sales, transfers or other dispositions to the Company or to a Subsidiary or to
any other Person if after giving effect to such sale, lease, conveyance,
transfer or other disposition such other Person becomes a Subsidiary.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Company or any Subsidiary from such Asset Sale (including cash
received as consideration for the assumption of liabilities incurred in
connection with or in anticipation of such Asset Sale), after (a) provision for
all income or other taxes measured by or resulting from such Asset Sale, (b)
payment of all brokerage commissions, underwriting and other fees and expenses
related to such Asset Sale, (c) provision for minority interest holders in any
Subsidiary as a result of such Asset Sale and (d) deduction of appropriate
amounts to be provided by the Company or a Subsidiary as a reserve, in
accordance with GAAP, against any liabilities associated with the assets sold or
disposed of in such Asset Sale and retained by the Company or a Subsidiary after
such Asset Sale, including, without limitation, pension and other post
employment benefit liabilities and liabilities related to environmental matters
or against any indemnification obligations associated with the assets sold or
disposed of in such Asset Sale, and (ii) promissory notes and other noncash
consideration received by the Company or any Subsidiary from such Asset Sale or
other disposition upon the liquidation or conversion of such notes or noncash
consideration into cash.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the greater of (i) the fair value of the
property subject to such arrangement (as determined by
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the Board of Directors of the Company) and (ii) the present value (discounted at
a rate of 10%, compounded annually) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such Sale and
Lease-Back Transaction (including any period for which such lease has been
extended).
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied in
accordance with clauses (iii)(a), (iii)(b), (iii)(c) or (iii)(d) which have not
yet been the basis for an Excess Proceeds Offer in accordance with clause
(iii)(e) of the first paragraph of " -- Certain Covenants -- Limitation on
Certain Asset Sales."
"Capital Stock" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into any of the foregoing.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
A "Change of Control" of the Company will be deemed to have occurred at
such time as (i) any Person (including a Person's Affiliates and associates),
other than a Permitted Holder, becomes the beneficial owner (as defined under
Rule 13d-3 or any successor rule or regulation promulgated under the Exchange
Act) of 50% or more of the total voting or economic power of the Common Stock of
the Company or the Parent and/or warrants or options to acquire such Common
Stock on a fully diluted basis, (ii) either the Company or Parent consolidates
with, or merges with or into, another Person or conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any Person, or
any Person consolidates with, or merges with or into, either the Company or
Parent, in any such event pursuant to a transaction in which the outstanding
Common Stock of either the Company or Parent is converted into or exchanged for
cash, securities or other property, other than any such transaction where (a)
(1) the outstanding Common Stock of the Company or Parent, as the case may be,
is not converted or exchanged at all (except to the extent necessary to reflect
a change in the jurisdiction of incorporation) or is converted into or exchanged
for Common Stock (other than Disqualified Capital Stock) of the surviving or
transferee corporation (the "Surviving Entity") and (2) immediately after such
transaction, no "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) other than a Permitted Holder is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all securities that
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than a majority of the total outstanding Common Stock of the Surviving Entity,
or (b) the holders of the Common Stock of the Company outstanding immediately
prior to the consolidation or merger hold, directly or indirectly, at least a
majority of the Common Stock of the surviving corporation immediately after such
consolidation or merger, or (iii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company or the Parent (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
shareholders of the Company or the Parent has been approved by 66 2/3% of the
directors then still in office who either were directors at the beginning of
such period or whose election or recommendation for election was previously so
approved) cease to constitute a majority of the Board of Directors of the
Company or the Parent.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Fixed Charges" means, with respect to any Person and with
respect to any determination date, the sum of a Person's (i) Consolidated
Interest Expense, plus (ii) the product of (x) the aggregate amount of all
dividends paid on Disqualified Capital Stock of the Company or on each series of
preferred stock of each Subsidiary of such Person (other than dividends paid or
payable in additional shares of preferred stock
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or to the Company or any of its Wholly Owned Subsidiaries) times (y) a fraction,
the numerator of which is one and the denominator of which is one minus the then
current effective combined federal, state and local tax rate of such Person
(expressed as a decimal), in each case, for the prior four full fiscal quarter
period for which financial results are available.
"Consolidated Interest Expense" means, with respect to any Person, for any
period and without duplication, the aggregate amount of interest which, in
conformity with GAAP, would be set forth opposite the caption "interest expense"
or any like caption on an income statement for such Person and its Subsidiaries
on a consolidated basis (including, but not limited to, (i) imputed interest
included in Capitalized Lease Obligations, (ii) all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, (iii) net payments made in connection with Interest Rate
Agreements, (iv) the interest portion of any deferred payment obligation, (v)
amortization of discount or premium if any, and (vi) all other non-cash interest
expense (other than interest amortized to cost of sales)) plus all net
capitalized interest for such period and all interest paid under any guarantee
of Indebtedness (including a guarantee of principal, interest or any combination
thereof) of any Person, and minus (a) net payments received in connection with
Interest Rate Agreements and (b) amortization of deferred financing costs and
expenses.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person (the "other Person") in
which the Person in question or any of its Subsidiaries has less than a 100%
interest (which interest does not cause the net income of such other Person to
be consolidated into the net income of the Person in question in accordance with
GAAP) shall be included only to the extent of the amount of dividends or
distributions paid to the Person in question or the Subsidiary, (b) the Net
Income of any Subsidiary of the Person in question that is subject to any
restriction or limitation on the payment of dividends or the making of other
distributions (other than pursuant to the Notes or the Indenture) shall be
excluded to the extent of such restriction or limitation, (c) (i) the Net Income
of any Person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition and (ii) any net gain (but not loss)
resulting from an Asset Sale by the Person in question or any of its
Subsidiaries other than in the ordinary course of business shall be excluded,
(d) extraordinary, unusual and non-recurring gains and losses shall be excluded.
"Credit Facility" means the term and revolving credit agreement, dated
November 15, 1996, by and among Canadian Imperial Bank of Commerce, as agent,
the lenders named therein, one or more lenders parties thereto, as the same may
be amended, extended, renewed, restated, supplemented or otherwise modified from
time to time.
"Designated Senior Indebtedness," as to the Company, means any Senior
Indebtedness (a) under the Credit Facility or (b) which at the time of
determination exceeds $25 million in aggregate principal amount (or accreted
value in the case of Indebtedness issued at a discount) outstanding or available
under a committed facility.
"Disqualified Capital Stock" means any Capital Stock of the Company or a
Subsidiary thereof which, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable at the option of the
holder), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Notes, for cash or securities constituting Indebtedness.
Without limiting the foregoing, Disqualified Capital Stock shall be deemed to
include (i) any Preferred Stock of a Subsidiary of the Company and (ii) any
Preferred Stock of the Company, with respect to either of which, under the terms
of such Preferred Stock, by agreement or otherwise, such Subsidiary or the
Company is obligated to pay current dividends or distributions in cash during
the period prior to the maturity date of the Notes; provided, however, that
Preferred Stock of the Company or any Subsidiary thereof that is issued with the
benefit of provisions requiring a change of control offer to be made for such
Preferred Stock in the event of a change of control of the Company or
Subsidiary, which provisions have substantially the same effect as the
provisions of
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the Indenture described under " -- Certain Covenants -- Change of Control
Offer," shall not be deemed to be Disqualified Capital Stock solely by virtue of
such provisions.
"EBITDA" means, for any Person, for any period, an amount equal to (a) the
sum of (i) Consolidated Net Income for such period, plus (ii) the provision for
taxes for such period based on income or profits to the extent such income or
profits were included in computing Consolidated Net Income and any provision for
taxes utilized in computing net loss under clause (i) hereof, plus (iii)
Consolidated Interest Expense for such period (but only including Redeemable
Dividends in the calculation of such Consolidated Interest Expense to the extent
that such Redeemable Dividends have not been excluded in the calculation of
Consolidated Net Income), plus (iv) depreciation for such period on a
consolidated basis, plus (v) amortization of intangibles for such period on a
consolidated basis, plus (vi) any other non-cash items reducing Consolidated Net
Income for such period including the write-off of Acquired Optical Franchise
Receivables, franchise receivables acquired in the Pearle Acquisition which have
not been restructured or refinanced since the consummation of the Pearle
Acquisition but excluding the write-off of all other franchise receivables,
minus (b) all non-cash items increasing Consolidated Net Income for such period,
all for such Person and its Subsidiaries determined in accordance with GAAP,
except that with respect to the Company each of the foregoing items shall be
determined on a consolidated basis with respect to the Company and its
Subsidiaries only.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Senior Subordinated Notes" means the Company's 9 7/8% Senior
Subordinated Notes due 2006.
"Existing Senior Subordinated Note Indenture" means the indenture relating
to the Company's 9 7/8% Senior Subordinated Notes.
"Fixed Charge Coverage Ratio" of any Person means, with respect to any
determination date, the ratio of (i) EBITDA for such Person's prior four full
fiscal quarters for which financial results have been reported prior to the
determination date, to (ii) Consolidated Fixed Charges of such Person.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such person (and
"incurrence," "incurred," "incurrable," and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the ordinary
course of business) if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, and shall also include, to the extent not otherwise included (i) any
Capitalized Lease Obligations, (ii) obligations secured by a lien to which the
property or assets owned or held by such Person is subject, whether or not the
obligation or obligations secured thereby shall have been assumed (provided,
however, that if such obligation or obligations shall not have been assumed, the
amount of such indebtedness shall be deemed to be the lesser of the principal
amount of the obligation or the fair market value of the pledged property or
assets), (iii) guarantees of items of other Persons which would be included
within this definition for such other Persons (whether or not such items would
appear upon the balance sheet of the guarantor), (iv) all obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (provided that in the case of any such letters of
credit, the items for which such letters of credit provide credit support are
those of other Persons which would be included within
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this definition for such other Persons), (v) Disqualified Capital Stock of the
Company or any Subsidiary thereof, and (vi) obligations of any such Person under
any Interest Rate Agreement applicable to any of the foregoing (if and to the
extent such Interest Rate Agreement obligations would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP). The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, provided (i) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the principal amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at such time as
determined in conformity with GAAP and (ii) that Indebtedness shall not include
any liability for federal, state, local or other taxes. Notwithstanding any
other provision of the foregoing definition, any trade payable arising from the
purchase of goods or materials or for services obtained in the ordinary course
of business shall not be deemed to be "Indebtedness" of the Company or any
Subsidiaries for purposes of this definition. Furthermore, guarantees of (or
obligations with respect to letters of credit supporting) Indebtedness otherwise
included in the determination of such amount shall not also be included.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"Investments" means, directly or indirectly, any advance, account
receivable (other than an account receivable arising in the ordinary course of
business or acquired as part of the assets acquired by the Company in connection
with an acquisition of assets which is otherwise permitted by the terms of the
Indenture), loan or capital contribution to (by means of transfers of property
to others, payments for property or services for the account or use of others or
otherwise), the purchase of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities of, the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any Person or the making of any
investment in any Person. Investments shall exclude (i) extensions of trade
credit on commercially reasonable terms in accordance with normal trade
practices and (ii) the repurchase of securities of any Person by such Person.
"Issue Date" means the date the Notes are first issued by the Company and
authenticated by the Trustee under the Indenture.
"Lien" means with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Company, the aggregate net proceeds received by the Company, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in property (valued at the fair market value
thereof, as determined in good faith by the board of directors, at the time of
receipt) and (b) in the case of any exchange, exercise, conversion or surrender
of outstanding securities of any kind for or into shares of Capital Stock of the
Company which is not Disqualified Stock, the net book value of such outstanding
securities on the date of such exchange, exercise, conversion or surrender (plus
any additional amount required to be paid by the holder to the Company upon such
exchange, exercise, conversion or surrender, less any and all payments made to
the holders, e.g., on account of fractional shares and less all expenses
incurred by the Company in connection therewith).
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"Net Sales" means Net Revenue as shown on the Company's audited
consolidated statements of income for the applicable fiscal year.
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate the
maturity of any Designated Senior Indebtedness.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Operating Officer, the Chief Financial Officer, the
Treasurer, any Assistant Treasurer, Controller, Secretary or any Vice-President
of the Company or any Subsidiary, as the case may be.
"Officers' Certificate" means a certificate signed by two Officers, one of
whom must be the principal executive officer, principal financial officer,
treasurer or principal accounting officer of the Company.
"Parent" means Cole National Corporation, a Delaware corporation and the
Company's sole stockholder.
"Payment Default" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of (or premium, if any) or interest on or any other amount payable in connection
with Designated Senior Indebtedness.
"Pearle Acquisition" means the acquisition of the capital stock of Pearle,
Inc. and Pearle Service Corporation by the Parent from The Pillsbury Company
pursuant to a stock purchase agreement dated as of September 24, 1996 and
various documents related thereto.
"Permitted Holders" means (i) Jeffrey A. Cole, (ii) any employee stock
ownership plan or any "group" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) in which employees of Parent or its Subsidiaries beneficially own
at least 25% of the Common Stock of the Company or Parent owned by such group,
(iii) Parent and (iv) any Person that is controlled by any one or more of the
Persons set forth in (i)-(iii) above.
"Permitted Indebtedness" means:
(i) Indebtedness of the Company or any Subsidiary arising under or in
connection with the Credit Facility in an amount not to exceed the greater
of (a) $75,000,000 less any mandatory prepayments actually made thereunder
(to the extent, in the case of payments of revolving credit indebtedness,
that the corresponding commitments have been permanently reduced) or
scheduled payments actually made thereunder or (b) the sum of (x) 80% of
consolidated accounts receivable of the Company and its Subsidiaries and
(y) 50% of consolidated inventory of the Company and its Subsidiaries;
(ii) Indebtedness under the Notes, the Existing Senior Subordinated
Notes and the Exchange Notes;
(iii) Indebtedness not covered by any other clause of this definition
which is outstanding on the date of the Indenture;
(iv) Indebtedness of the Company to any Subsidiary and Indebtedness of
any Subsidiary to the Company or another Subsidiary;
(v) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred by the Company or its Subsidiaries to acquire property in the
ordinary course of business which Indebtedness and Capitalized Lease
Obligations do not in the aggregate exceed $15,000,000 at any time
outstanding;
(vi) Interest Rate Agreements;
(vii) Indebtedness of the Company or its Subsidiaries which do not in
the aggregate exceed $3,000,000 in principal amount at anytime outstanding
with respect to guarantees of obligations of franchisees in a business
related to the optical business of the Company or any Subsidiary as
conducted on the Issue Date;
(viii) Indebtedness incurred in connection with the financing of a new
warehouse facility relating to Cole Gift's business in an amount not to
exceed $7,500,000 in the aggregate;
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(ix) additional Indebtedness of the Company not to exceed $50,000,000
in principal amount outstanding at any time; and
(x) Refinancing Indebtedness.
"Permitted Investments," means, for any Person, Investments made on or
after the date of the Indenture consisting of
(i) Investments by the Company, or by a Subsidiary thereof, in the
Company or a Subsidiary; (xi) Temporary Cash Investments;
(ii) Investments by the Company, or by a Subsidiary thereof, in a
Person, if as a result of such Investment (a) such Person becomes a
Subsidiary of the Company or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Subsidiary thereof;
(iii) reasonable and customary loans made to employees in connection
with their relocation;
(iv) an Investment that is made by the Company or a Subsidiary thereof
in the form of any stock, bonds, notes, debentures, partnership or joint
venture interests or other securities that are issued by a third party to
the Company or Subsidiary solely as partial consideration for the
consummation of an Asset Sale that is otherwise permitted under the
covenant described under "Description of the Notes -- Certain Covenants;"
(v) Investments made by the Company or any Subsidiary in franchises in
a business related to the optical business of the Company as conducted on
the Issue Date; provided, that immediately after giving pro forma effect to
such Investment, the Company could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) under the covenant set forth under
"-- Certain Covenants -- Limitation on Additional Indebtedness"; provided,
however, that if the Company may not incur $1.00 of additional
Indebtedness, but otherwise satisfies the requirements of this clause (vi),
the Company may make Investments in such franchises in an amount not to
exceed $7,500,000 in any fiscal year, which unused portion of any such
annual amount, if any, may not be applied to any Investment in a subsequent
fiscal year; and
(vi) other Investments that do not exceed $15,000,000 at any time
outstanding.
"Permitted Liens" means (i) Liens on property or assets of, or any shares
of stock of or secured debt of, any corporation existing at the time such
corporation becomes a Subsidiary of the Company or at the time such corporation
is merged into the Company or any of its Subsidiaries; provided that such Liens
are not incurred in connection with, or in contemplation of, such corporation
becoming a Subsidiary of the Company or merging into the Company or any of its
Subsidiaries, (ii) Liens securing Refinancing Indebtedness; provided that any
such Lien on subordinated Indebtedness does not "extend to or cover any
Property, shares or debt other than the Property, shares or debt securing the
Indebtedness so refunded, refinanced or extended, (iii) Liens in favor of the
Company or any of its Subsidiaries, (iv) Liens securing industrial revenue
bonds, (v) Liens to secure Purchase Money Indebtedness that is otherwise
permitted under the Indenture, provided that (a) any such Lien is created solely
for the purpose of securing Indebtedness representing, or incurred to finance,
refinance or refund, the cost (including sales and excise taxes, installation
and delivery charges and other direct costs of, and other direct expenses paid
or charged in connection with, such purchase or construction) of such Property
and (b) such Lien does not extend to or cover any Property other than such item
of Property and any improvements on such item, (vi) statutory liens or
landlords', carriers', warehousemen's, mechanics', suppliers', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
do not secure any Indebtedness and with respect to amounts not yet delinquent or
being contested in good faith by appropriate proceedings, if a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor, (vii) other Liens securing obligations incurred
in the ordinary course of business which obligations do not exceed $3,000,000 in
the aggregate at any one time outstanding, (viii) Liens securing Interest Rate
Agreements, (ix) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other Property relating to such
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letters of credit and the products and proceeds thereof, (x) any extensions,
substitutions, replacements or renewals of the foregoing, (xi) Liens for taxes,
assessments or governmental charges that are being contested in good faith by
appropriate proceedings, and (xii) Liens securing Capital Lease Obligations
permitted to be incurred under clause (v) of the definition of "Permitted
Indebtedness," provided that such Lien does not extend to any property other
than that subject to the underlying lease.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (including any agency or political subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entities the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"Purchase Money Indebtedness" means any Indebtedness incurred by a Person
to finance the cost (including the cost of construction) of an item of Property,
the principal amount of which Indebtedness does not exceed the sum of (i) 100%
of such cost and (ii) reasonable fees and expenses of such Person incurred in
connection therewith.
"Qualified Equity Offering" means an offering by the Company or the Parent
of shares of its common stock (however designated and whether voting or
non-voting) and any and all rights, warrants or options to acquire such common
stock, whether registered or exempt from registration under the Securities Act;
provided, however, that in connection with a Qualified Equity Offering of the
Parent the net proceeds of such Qualified Equity Offering are contributed to the
Company as common equity.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Indebtedness of the Company outstanding on the Issue Date or other
Indebtedness permitted to be incurred by the Company or its Subsidiaries
pursuant to the terms of the Indenture, but only to the extent that (i) the
Refinancing Indebtedness is subordinated to the Notes to at least the same
extent as the Indebtedness being refunded, refinanced or extended, if at all,
(b) the Refinancing Indebtedness is scheduled to mature either (a) no earlier
than the Indebtedness being refunded, refinanced or extended, or (b) after the
maturity date of the Notes, (iii) the portion, if any, of the Refinancing
Indebtedness that is scheduled to mature on or prior to the maturity date of the
Notes has a weighted average life to maturity at the time such Refinancing
Indebtedness is incurred that is equal to or greater than the weighted average
life to maturity of the portion of the Indebtedness being refunded, refinanced
or extended that is scheduled to mature on or prior to the maturity date of the
Notes, (iv) such Refinancing Indebtedness is in an aggregate principal amount
that is equal to or less than the sum of (a) the aggregate principal amount then
outstanding under the Indebtedness being refunded, refinanced or extended, (b)
the amount of accrued and unpaid interest, if any, and premiums owed, if any,
not in excess of preexisting prepayment provisions on such Indebtedness being
refunded, refinanced or extended, plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined by
the Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated repurchase and (c) the amount of customary fees,
expenses and costs related to the incurrence of such Refinancing Indebtedness,
and (v) such Refinancing Indebtedness is incurred by the same Person that
initially incurred the Indebtedness being refunded, refinanced or extended,
except that the Company may incur Refinancing Indebtedness to refund, refinance
or extend Indebtedness of any Wholly Owned Subsidiary of the Company.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock of
the Company or any Subsidiary of the Company or any payment made to the direct
or indirect holders (in their capacities as such) of Capital Stock of the
Company or any Subsidiary of the Company (other than (x) dividends or
distributions payable solely in Capital Stock (other than Disqualified Capital
Stock), and (y) in the case of Subsidiaries of the Company, dividends or
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distributions payable to the Company or to a Wholly Owned Subsidiary of the
Company), (ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any of its Subsidiaries (other than
Capital Stock owned by the Company or a Wholly Owned Subsidiary of the Company),
(iii) the making of any principal payment on, or the purchase, defeasance,
repurchase, redemption or other acquisition or retirement for value, prior to
any scheduled maturity, scheduled repayment or scheduled sinking fund payment,
of any Indebtedness which is subordinated in right of payment to the Notes other
than subordinated Indebtedness acquired in anticipation of satisfying a
scheduled sinking fund obligation, principal installment or final maturity (in
each case due within one year of the date of acquisition), (iv) the making of
any Investment in any Person other than a Permitted Investment, and (v)
forgiveness of any Indebtedness of an Affiliate of the Company to the Company or
a Subsidiary. For purposes of determining the amount expended for Restricted
Payments, cash distributed or invested shall be valued at the face amount
thereof and property other than cash shall be valued at its fair market value.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Subsidiary of the Company of any
real or tangible personal property, which property has been or is to be sold or
transferred by the Company or such Subsidiary to such Person in contemplation of
such leasing.
"Senior Indebtedness" means the principal of and premium, if any, and
interest (including, without limitation, interest accruing or that would have
accrued but for the filing of a bankruptcy, reorganization or other insolvency
proceeding whether or not such interest constitutes an allowable claim in such
proceeding) on, and any and all other fees, expense reimbursement obligations
and other amounts due pursuant to the terms of all agreements, documents and
instruments providing for, creating, securing or evidencing or otherwise entered
into in connection with (a) all Indebtedness of the Company owed to lenders
under the Credit Facility, (b) the Senior Notes, (c) all obligations of the
Company with respect to any Interest Rate Agreement, (d) all obligations of the
Company to reimburse any bank or other person in respect of amounts paid under
letters of credit, acceptances or other similar instruments, (e) all other
Indebtedness of the Company which does not provide that it is to rank pari passu
with or subordinate to the Notes and (f) all deferrals, renewals, extensions and
refundings of, and amendments, modifications and supplements to, any of the
Senior Indebtedness described above. Notwithstanding anything to the contrary in
the foregoing, Senior Indebtedness will not include (i) Indebtedness of the
Company to any of its Subsidiaries, (ii) Indebtedness represented by the Notes
or the Existing Senior Subordinated Notes, (iii) any Indebtedness which by the
express terms of the agreement or instrument creating, evidencing or governing
the same is junior or subordinate in right of payment to any item of Senior
Indebtedness, (iv) any trade payable arising from the purchase of goods or
materials or for services obtained in the ordinary course of business, or (v)
Indebtedness (other than that described in clause (a) above) incurred in
violation of the Indenture.
"Senior Notes" means the Company's 11 1/4% Senior Notes due 2001.
"Senior Note Indenture" means the indenture dated as of October 1, 1993
between the Company and Norwest Bank Minnesota, National Association, as
trustee.
"Significant Subsidiary" means any Subsidiary which would be a "significant
subsidiary" as defined in Article I, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act and the Exchange Act, as in effect on the Issue Date.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which more
than 50% of the total voting power of the Capital Stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
officers or trustees thereof is held by such first-named Person or any of its
Subsidiaries; or (ii) in the case of a partnership, joint venture, association
or other business entity, with respect to which such first-named Person or any
of its Subsidiaries has the power to direct or cause the direction of the
management and policies of such entity by contract or otherwise or if in
accordance with generally accepted accounting principles such entity is
consolidated with the first-named Person for financial statement purposes.
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"Tax Allocation Agreement" means the Tax Allocation Agreement, dated as of
August 23, 1985, as amended, between the Parent and its subsidiaries, including
the Company, as the same may be amended or extended from time to time provided
that no such amendment may create greater additional liability of the Company
and its Subsidiaries than existing as of the Issue Date under such agreement.
"Temporary Cash Investments" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or of any
governmental agency or political subdivision thereof, maturing within 365 days
of the date of purchase, (ii) Investments in United States dollar denominated
time deposits and United States dollar denominated certificates of deposit
(including Eurodollar time deposits and certificates of deposit) maturing within
365 days of the date of purchase thereof issued by any United States or Canadian
national, provincial or state (including the District of Columbia) banking
institution having capital, surplus and undivided profits aggregating at least
$250,000,000, or by any British, French, German, Japanese or Swiss national
banking institution having capital, surplus and undivided profits aggregating at
least $1,000,000,000, in each case that is (a) rated at least "A" by Standard &
Poor's Corporation or at least "A-2" by Moody's Investors Service Inc., or (b)
that is a party to the Credit Facility, (iii) Investments in commercial paper
maturing within 270 days after the issuance thereof that has the highest credit
rating of either of such rating agencies, (iv) Investments in readily marketable
direct obligations issued by any state of the United States of America or any
political subdivision thereof having the highest rating obtainable from either
of such rating agencies, (v) Investments in tax exempted and tax advantaged
instruments including, without limitation, municipal bonds, commercial paper,
auction rate preferred stock and variable rate demand obligations with the
highest short-term ratings by either of such rating agencies or a long-term debt
rating of AAA from Standard & Poor's Corporation, (vi) Investments in repurchase
agreements and reverse repurchase agreements with institutions described in
clause (ii) above that are fully secured by obligations described in clause (i)
above and (vii) Investments not exceeding 365 days in duration in money market
funds that invest substantially all of such funds' assets in the Investments
described in the preceding clauses (i) through (v).
"Triggering Default Event" means a Default or Event of Default described in
clauses (i), (ii), (iv), (v) or (vi) under the captions "-- Events of Default"
or "-- Merger, Consolidation or Sale of Assets" or any breach or violation under
the covenants entitled "Limitation on Additional Indebtedness," "Limitation on
Restricted Payments," "Limitation on Other Senior Subordinated Debt,"
"Limitations on Liens," "Limitation on Sale and Lease-Back Transactions,"
"Dividend and Other Payment Restrictions Affecting Subsidiaries," "Limitation on
Transactions with Affiliates," "Limitation on Certain Asset Sales," "Limitation
on Capital Stock of Subsidiaries," "Payments for Consent" or "Change of Control
Offer."
"Wholly Owned Subsidiary" means any Subsidiary, all of the outstanding
Capital Stock (other than directors' qualifying shares) of which is owned,
directly or indirectly, by the Company.
BOOK-ENTRY, DELIVERY AND FORM
The Original Notes were issued in part in the form of a Note certificate
(the "Original Global Note") and were issued in part in a certificated note
registered in the name of Dev & Co. The Original Global Note was deposited on
the date of the closing of the sale of the Original Notes offered hereby (the
"Closing Date") with, or on behalf of, DTC and registered in the name of a
nominee of DTC. Except for Exchange Notes issued to Non-Global Purchasers (as
defined below), the Exchange Notes will initially be issued in the form of a
Global Note (the "Exchange Global Note"). The Exchange Global Note will be
deposited on the date of closing of the Exchange Offer, with, or on behalf of
DTC and registered in the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to "foreign purchasers" or
Accredited Investors who are not QIBs, or (ii) held by QIBs which elect to take
physical delivery of their certificates instead of holding their interest
through the Original Global Note (and which are thus ineligible to trade through
DTC) (collectively referred to herein as the "Non-Global Purchasers") will be
issued, in registered form, without interest coupons ("Certificated
Securities"). Upon the transfer to a QIB of such Certificated Securities
initially issued to a Non-Global Purchaser, such Certificated Securities will,
unless the Global Note has previously been exchanged in whole for such
Certificated Securities, be exchanged for an interest in the
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Global Note. "Global Notes" means the Original Global Notes or the Exchange
Global Notes, as the case may be.
The Global Note. The Company expects that pursuant to procedures
established by DTC (i) upon deposit of the Global Note, DTC will credit the
accounts of persons who have accounts with DTC ("participants") or persons who
hold interests through participants designated by such person with portions of
the Global Note and (ii) ownership of the Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). QIBs may hold their interests in the Global Note directly through
DTC if they are participants in such system, or indirectly through organizations
that are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee will be considered the sole owner or holder of the
Notes represented by the Global Note for all purposes under the Indenture. No
beneficial owner of an interest in the Global Note will be able to transfer such
interest except in accordance with DTC's applicable procedures, in addition to
those provided for under the Indenture.
Payments of the principal of, premium (if any) and interest on the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium (if any) and interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note, as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. If a holder
requires physical delivery of a Certificated Security for any reason, including
to sell Notes to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the Global Note in accordance with the normal procedures of DTC and including
the procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interest in the Global Note is credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants have given such direction. However, if there is an
Event of Default under the Indenture, DTC will exchange the Global Note for
Certificated Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
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Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depository for the Global Note and a successor depository is not
appointed by the Company within 90 days, the Company will issue Certificated
Securities in exchange for the Company's Global Note.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with any resale of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will use reasonable
efforts to make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale; provided that such
broker-dealer indicates in the Letter of Transmittal that it is a broker-dealer.
In addition, until March 9, 1998, all broker-dealers effecting transactions in
the Exchange Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act, and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer agrees that, upon receipt of
notice from the Company of the happening of any event which makes any statement
in the Prospectus untrue in any material respect or which requires the making of
any changes in the Prospectus in order to make the statements therein not
misleading (which notice the Company agrees to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of the Prospectus until the
Company has amended or supplemented the Prospectus to correct such misstatement
or omission and has furnished copies of the amended or supplemented Prospectus
to such broker-dealer. If the Company gives any such notice to suspend the use
of the Prospectus, it shall extend the 180-day period referred to above by the
number of days during the period from and including the date of the giving of
such notice up to and including when broker-dealers have received copies of the
supplement or amended Prospectus necessary to permit resales of Exchange Notes.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders (including any broker-dealers) and certain parties related
to the holders against certain liabilities, including liabilities under the
Securities Act.
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LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes will be passed
upon for the Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio.
EXPERTS
The audited financial statements of the Company included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report, which is included herein.
The consolidated financial statements of Pearle as of September 30, 1996
and 1995, and for each of the years in the three-year period ended September
30,1996, have been included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers
to a change in the method of accounting for income taxes in 1994.
94
<PAGE> 99
INDEX TO FINANCIAL STATEMENTS
COLE NATIONAL GROUP INC. AND SUBSIDIARIES:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of August 2, 1997 and February 1, 1997............... F-2
Consolidated Statements of Operations for the 26 weeks ended August 2, 1997 and
August 3, 1996................................................................... F-3
Consolidated Statements of Cash Flows for the 26 weeks ended August 2, 1997 and
August 3, 1996................................................................... F-4
Notes to Consolidated Financial Statements.......................................... F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants............................................ F-7
Consolidated Balance Sheets at February 1, 1997 and February 3, 1996................ F-8
Consolidated Statements of Operations for the 52 weeks ended February 1, 1997, the
53 weeks ended February 3, 1996, and the 52 weeks ended January 28, 1995......... F-9
Consolidated Statements of Stockholder's Equity (Deficit) for the 52 weeks ended
February 1, 1997, the 53 weeks ended February 3, 1996 and the 52 weeks ended
January 28, 1995................................................................. F-10
Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 1997, the
53 weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995.......... F-11
Notes to Consolidated Financial Statements.......................................... F-12
PEARLE, INC. AND SUBSIDIARIES:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report........................................................ F-23
Consolidated Balance Sheets at September 30, 1996 and 1995.......................... F-24
Consolidated Statements of Operations for the Years Ended September 30, 1996,
1995 and 1994.................................................................... F-25
Consolidated Statements of Stockholder's Equity for the Years
Ended September 30, 1996, 1995 and 1994.......................................... F-26
Consolidated Statements of Cash Flows for the Years Ended September 30, 1996,
1995 and 1994.................................................................... F-27
Notes to Consolidated Financial Statements.......................................... F-28
</TABLE>
F-1
<PAGE> 100
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 2, FEBRUARY 1,
1997 1997
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments................................ $ 133,142 $ 73,141
Accounts receivable, less allowance for doubtful accounts of $2,104
in 1997 and $3,068 in 1996...................................... 52,096 39,539
Current portion of notes receivable................................ 5,049 6,060
Inventories........................................................ 129,570 119,236
Prepaid expenses and other......................................... 14,239 7,362
Deferred income tax benefits....................................... 24,925 24,925
--------- -----------
Total current assets....................................... 359,021 270,263
Property and equipment, at cost...................................... 222,450 211,408
Less -- accumulated depreciation and amortization.................. (111,062) (100,598)
--------- -----------
Total property and equipment, net.......................... 111,388 110,810
Other assets:
Notes receivable, excluding current portion........................ 20,146 24,387
Deferred income taxes and other.................................... 41,956 28,057
Intangible assets, net............................................. 137,205 139,308
--------- -----------
Total assets............................................... $ 669,716 $ 572,825
========= ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt.................................. $ 465 $ 477
Accounts payable................................................... 47,648 62,145
Payable to affiliates.............................................. 169,949 65,590
Accrued interest................................................... 7,804 9,630
Accrued liabilities................................................ 118,823 123,001
Accrued income taxes............................................... 10,598 6,978
--------- -----------
Total current liabilities.................................. 355,287 267,821
Long-term debt, net of discount and current portion.................. 314,377 314,359
Other long-term liabilities.......................................... 26,949 27,000
Stockholder's equity (deficit):
Common stock....................................................... -- --
Paid-in capital.................................................... 122,681 122,681
Foreign currency translation adjustment............................ (234) (26)
Accumulated deficit................................................ (149,344) (159,010)
--------- -----------
Total stockholder's equity (deficit)....................... (26,897) (36,355)
--------- -----------
Total liabilities and stockholder's equity (deficit)....... $ 669,716 $ 572,825
========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-2
<PAGE> 101
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
----------------------
AUGUST 2, AUGUST 3,
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net revenue............................................................. $ 502,572 $ 296,355
Costs and expenses:
Cost of goods sold.................................................... 171,122 91,900
Operating expenses.................................................... 283,141 175,261
Depreciation and amortization......................................... 14,717 8,450
-------- --------
Total costs and expenses...................................... 468,980 275,611
-------- --------
Income from operations.................................................. 33,592 20,744
Interest expense, net................................................... 16,634 9,982
-------- --------
Income before income taxes.............................................. 16,958 10,762
Income tax provision.................................................... 7,292 4,735
-------- --------
Net income.............................................................. $ 9,666 $ 6,027
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE> 102
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
----------------------
AUGUST 2, AUGUST 3,
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 9,666 $ 6,027
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization...................................... 14,717 8,450
Non-cash interest.................................................. 450 214
Change in assets and liabilities:
Increase in accounts and notes receivable, prepaid expenses and
other assets.................................................. (18,644) (803)
Decrease (increase) in inventories............................... (10,334) 630
Increase (decrease) in accounts payable, accrued liabilities and
other liabilities............................................... (13,578) 3,389
Decrease in accrued interest..................................... (1,826) (47)
Increase in accrued income taxes................................. 3,620 238
-------- --------
Net cash provided (used) by operating activities.............. (15,929) 18,098
-------- --------
Cash flows from financing activities:
Repayment of long-term debt........................................... (143) (161)
Advances from affiliates, net......................................... 103,724 9,721
Other, net............................................................ (204) --
-------- --------
Net cash provided by financing activities..................... 103,377 9,560
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net.............................. (13,103) (8,465)
Systems development costs............................................. (6,990) (2,220)
Other................................................................. (7,354) (145)
-------- --------
Net cash used by investing activities......................... (27,447) (10,830)
-------- --------
Cash and temporary cash investments:
Net increase during the period........................................ 60,001 16,828
Balance, beginning of the period...................................... 73,141 29,260
-------- --------
Balance, end of the period............................................ $ 133,142 $ 46,088
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 103
COLE NATIONAL GROUP, INC. 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
Group, Inc. (CNG) and its wholly owned subsidiaries (collectively, the Company).
CNG is a wholly owned subsidiary of Cole National Corporation. All significant
intercompany transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes that the disclosures herein are adequate to make the information not
misleading. These statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
In the opinion of management, the accompanying financial statements contain
all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the Company's financial position as of August 2, 1997 and the
results of operations and cash flows for the 26 weeks ended August 2, 1997 and
August 3, 1996.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at August 2, 1997 and August
3, 1996 were valued at the lower of first-in, first-out (FIFO) cost or market.
Cash Flows
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $3,668,000 and $18,915,000, respectively, for the 26 weeks
ended August 2, 1997, and $4,544,000 and $10,460,000, respectively, for the 26
weeks ended August 3, 1996.
Revenues
In fiscal 1997, the Company began classifying capitation and other fees
associated with its growing managed vision care business, totaling $20.2 million
for the 26 weeks ended August 2, 1997, as revenue, which previously had been
netted with operating expenses.
(2) STOCK OFFERING
On July 18, 1997, the Parent completed a public stock 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.
(3) SEASONALITY
The Company's business historically has been seasonal with approximately
30% of its net revenue and approximately 50% of its income from operations
occurring in the fourth fiscal quarter because of the importance of gift sales
during the Christmas retailing season. Although the Pearle acquisition will
moderate the seasonality of the Company due to relatively lower levels of
optical product sales during the Christmas holiday season, the Company's
business will remain seasonal. Therefore, results of operations for interim
periods are not necessarily indicative of full year results.
(4) RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
F-5
<PAGE> 104
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(5) SUBSEQUENT EVENTS
On August 5, 1997, the Parent acquired all of the issued and outstanding
common stock of American Vision Centers, Inc. ("AVC"), the ninth largest retail
optical chain in the United States, for an aggregate purchase price of
approximately $28.9 million, including debt assumed. Subsequent to the
acquisition, the Parent transferred AVC to the Company as an equity
contribution. The Company anticipates that it will take a non-recurring business
integration charge in fiscal 1997.
On August 15, 1997, the Company announced a tender offer to purchase up to
all of its $165.8 million 11 1/4% Senior Notes (the Senior Notes) due 2001 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 Senior Notes were tendered, leaving $14.5 million
outstanding.
As a result of the tender offer, the Company expects to record an
extraordinary charge of approximately $12.0 million, representing the tender
premium, the write-off of the related unamortized debt discount and other costs
associated with purchasing the debt.
On August 22, 1997, the Company issued $125.0 million of 8 5/8% Senior
Subordinated Notes (the Senior Subordinated Notes) due 2007. Proceeds from this
debt issuance of approximately $121.7 million, along with cash on hand, were
used to fund the above mentioned tender offer.
F-6
<PAGE> 105
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF COLE NATIONAL GROUP, INC.:
We have audited the accompanying consolidated balance sheets of Cole
National Group, Inc. (a Delaware corporation) and Subsidiaries (the Company) as
of February 1, 1997 and February 3, 1996, and the related consolidated
statements of operations, stockholder's equity (deficit) and cash flows for each
of the three years in the period ended February 1, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cole
National Group, Inc. and Subsidiaries as of February 1, 1997 and February 3,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended February 1, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 19, 1997.
F-7
<PAGE> 106
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments................................. $ 73,141 $ 29,260
Accounts receivable, less allowance for doubtful accounts of $3,068
in 1996 and $-0- in 1995......................................... 39,539 18,544
Current portion of notes receivable................................. 6,060 --
Inventories......................................................... 119,236 84,794
Prepaid expenses and other.......................................... 7,362 5,869
Deferred income tax benefits........................................ 24,925 9,813
--------- ---------
Total current assets........................................ 270,263 148,280
Property and equipment, at cost....................................... 211,408 154,589
Less -- accumulated depreciation and amortization................... (100,598) (90,883)
--------- ---------
Total property and equipment, net........................... 110,810 63,706
Other assets:
Notes receivable, excluding current portion......................... 24,387 --
Deferred income taxes and other..................................... 28,057 5,038
Intangible assets, net.............................................. 139,308 81,163
--------- ---------
Total assets................................................ $ 572,825 $ 298,187
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................... $ 477 $ 292
Accounts payable.................................................... 62,145 29,082
Payable to affiliates............................................... 65,590 1,255
Accrued interest.................................................... 9,630 7,044
Dividend payable.................................................... -- 13,500
Accrued liabilities................................................. 123,001 51,381
Accrued income taxes................................................ 6,978 5,970
--------- ---------
Total current liabilities................................... 267,821 108,524
Long-term debt, net of discount and current portion................... 314,359 180,218
Other long-term liabilities........................................... 27,000 6,948
Stockholder's equity (deficit):
Common stock........................................................ -- --
Paid-in capital..................................................... 122,681 118,065
Foreign currency translation adjustment............................. (26) --
Accumulated deficit................................................. (159,010) (115,568)
--------- ---------
Total stockholder's equity (deficit)........................ (36,355) 2,497
--------- ---------
Total liabilities and stockholder's equity.................. $ 572,825 $ 298,187
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-8
<PAGE> 107
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net revenue............................................... $ 683,990 $ 577,091 $ 528,049
Costs and expenses:
Cost of goods sold...................................... 221,304 182,934 164,723
Operating expenses...................................... 390,863 332,540 305,470
Depreciation and amortization........................... 19,812 15,686 14,892
Business integration and other non-recurring charges.... 64,400 -- --
--------- --------- ---------
Total costs and expenses........................ 696,379 531,160 485,085
--------- --------- ---------
Income (loss) from operations............................. (12,389) 45,931 42,964
Interest expense, net..................................... 22,759 21,382 21,823
--------- --------- ---------
Income (loss) before income taxes and extraordinary
item.................................................... (35,148) 24,549 21,141
Income tax provision (benefit)............................ (7,106) 10,799 (3,703)
--------- --------- ---------
Income (loss) before extraordinary item................... (28,042) 13,750 24,844
Extraordinary loss on early extinguishment of debt........ -- -- (134)
--------- --------- ---------
Net income (loss)......................................... $ (28,042) $ 13,750 $ 24,710
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-9
<PAGE> 108
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES
FOREIGN RECEIVABLE
CURRENCY STOCK TOTAL
COMMON PAID-IN TRANSLATION OPTION ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL ADJUSTMENT EXERCISE DEFICIT EQUITY
------ -------- ----------- ---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 29, 1994........ $ -- $111,865 $ -- $ (1,130) $(140,528) $ (29,793)
---- -------- ----- -------- --------- ---------
Net income..................... -- -- -- -- 24,710 24,710
Capital contribution by
parent...................... -- 6,200 -- -- -- 6,200
Repayment of notes
receivable.................. -- -- -- 22 -- 22
---- -------- ----- -------- --------- ---------
Balance, January 28, 1995........ -- 118,065 -- (1,108) (115,818) 1,139
---- -------- ----- -------- --------- ---------
Net income..................... -- -- -- -- 13,750 13,750
Transfer of notes receivable... -- -- -- 1,108 -- 1,108
Dividend to parent............. -- -- -- -- (13,500) (13,500)
---- -------- ----- -------- --------- ---------
Balance, February 3, 1996........ -- 118,065 -- -- (115,568) 2,497
---- -------- ----- -------- --------- ---------
Net loss....................... -- -- -- -- (28,042) (28,042)
Stock options granted.......... -- 4,153 -- -- -- 4,153
Effect of foreign currency
translation................. -- -- (26) -- -- (26)
Tax benefit of stock option
exercises................... -- 463 -- -- -- 463
Dividend to parent............. -- -- -- -- (15,400) (15,400)
---- -------- ----- -------- --------- ---------
Balance, February 1, 1997........ $ -- $122,681 $ (26) $ -- $(159,010) $ (36,355)
==== ======== ===== ======== ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-10
<PAGE> 109
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ (28,042) $ 13,750 $ 24,710
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of
debt.............................................. -- -- 134
Depreciation and amortization....................... 19,812 15,686 14,892
Non-recurring charges............................... 23,292 -- --
Non-cash interest expense........................... 519 454 469
Deferred income taxes............................... (16,575) 4,394 (10,153)
Change in assets and liabilities:
Increase in accounts and notes receivable, prepaid
expenses and other assets...................... (3,896) (4,894) (4,596)
Decrease (increase) in inventories................ (3,582) 2,452 (8,723)
Increase in accounts payable, accrued liabilities
and other liabilities.......................... 73,491 2,812 211
Increase (decrease) in accrued interest........... 2,586 109 (272)
Increase in accrued income taxes.................. 1,305 1,419 2,386
---------- --------- ---------
Net cash provided by operating activities...... 68,910 36,182 19,058
---------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt............................ (15,511) (5,200) (5,667)
Payment of deferred financing fees..................... (6,066) -- (100)
Advances from affiliates, net.......................... 34,888 -- --
Proceeds from long-term debt, net...................... 148,875 -- --
Other.................................................. -- -- 22
---------- --------- ---------
Net cash provided (used) by financing
activities................................... 162,186 (5,200) (5,745)
---------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net............... (23,269) (19,675) (18,527)
Acquisition of businesses, net of cash acquired........ (157,426) (800) (4,675)
Systems development costs.............................. (3,820) (706) (1,295)
Other, net............................................. (2,700) (271) 10
---------- --------- ---------
Net cash used by investing activities.......... (187,215) (21,452) (24,487)
---------- --------- ---------
Cash and temporary cash investments:
Net increase (decrease) during the period.............. 43,881 9,530 (11,174)
Balance, beginning of the period....................... 29,260 19,730 30,904
---------- --------- ---------
Balance, end of the period............................. $ 73,141 $ 29,260 $ 19,730
========== ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-11
<PAGE> 110
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Cole National Group, Inc. (CNG) is a wholly owned subsidiary of Cole
National Corporation (the Parent). The consolidated financial statements
include the accounts of CNG and its wholly owned subsidiaries
(collectively, the Company). CNG's subsidiaries include Pearle, Inc.
(Pearle) which was acquired on November 15, 1996 (see Note 2). All
significant intercompany transactions have been eliminated in
consolidation.
The Company is a specialty service retailer operating in both host and
non-host environments. The Company's primary lines of business are eyewear
products and services and personalized gifts. Eyewear products and services
and personalized gifts represented approximately 60% and 40%, respectively,
of sales in 1996 and 50% of sales each in 1995 and 1994. With the
acquisition of Pearle, eyewear products and services are expected to
comprise over 70% of the Company's net revenue in 1997.
The Company sells its products through over 2,777 company-owned retail
locations and 338 franchised locations in all 50 states, Canada, and the
Caribbean, and differentiates itself from other specialty retailers by
providing value-added services at the point of sale at all of its retail
locations. The Company considers its operations to be in one business
segment.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they
begin. Fiscal years 1996 and 1994 consisted of 52 weeks while fiscal year
1995 consisted of 53 weeks.
INVENTORIES
The Company's inventories are valued at the lower of first-in,
first-out (FIFO) cost or market.
PROPERTY AND DEPRECIATION
The Company's policy is to provide depreciation using the
straight-line method over a period which is sufficient to amortize the cost
of the asset during its useful life or lease term, whichever is shorter.
The estimated useful lives for depreciation purposes are:
<TABLE>
<S> <C>
Buildings and improvements....................... 5 to 40 years
Equipment........................................ 3 to 10 years
Furniture and fixtures........................... 2 to 10 years
Leasehold improvements........................... 2 to 20 years
</TABLE>
F-12
<PAGE> 111
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Property and equipment, at cost, consists of the following as of
February 1, 1997 and February 3, 1996 (000's omitted):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and buildings....................... $ 10,604 $ 3,615
Furniture, fixtures and equipment........ 142,958 114,802
Leasehold improvements................... 57,846 36,172
-------- --------
Total property and equipment............. $211,408 $154,589
======== ========
</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 from Pearle's franchisees
throughout the U.S. and are collateralized by inventory, equipment, and
leasehold improvements at each location. The notes generally bear interest
at the prime rate plus 3% and require monthly payments of principal and
interest over periods of up to ten years.
INTANGIBLE ASSETS
Intangible assets, net consist of the following at February 1, 1997
and February 3, 1996 (000's omitted):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Tradenames................................ $ 49,198 $ --
Goodwill.................................. 90,110 81,163
-------- -------
$139,308 $81,163
======== =======
</TABLE>
Tradenames acquired in connection with the Pearle acquisition are
being amortized on a straight-line basis over 40 years and are presented
net of accumulated amortization of $262,000 at February 1, 1997.
Goodwill is being amortized on a straight-line basis over 40 years and
is presented net of accumulated amortization of $30,609,000 and $29,640,000
at February 1, 1997 and February 3, 1996, respectively. Management
regularly evaluates its accounting for goodwill considering primarily such
factors as historical profitability, current operating profits and cash
flows. The Company believes that, at February 1, 1997, the asset is
realizable and the amortization period is still appropriate.
OTHER ASSETS
Financing costs incurred in connection with obtaining long-term debt
are capitalized in other assets and amortized over the life of the related
debt using the effective interest method.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist primarily of certain employee
benefit obligations, deferred lease credits and other lease related
obligations not expected to be paid within 12 months and deferred income
taxes. Deferred lease credits are amortized on a straight-line basis over
the life of the applicable lease.
F-13
<PAGE> 112
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CASH FLOWS
For purposes of reporting cash flows, the Company considers all
temporary cash investments, which have original maturities of three months
or less, to be cash equivalents. The carrying amounts of cash and cash
equivalents approximate fair value due to the short maturity of those
instruments.
Net cash flows from operating activities reflect cash payments for
income taxes and interest as follows (000's omitted):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income taxes........................... $ 5,300 $ 4,264 $ 2,250
Interest............................... $21,275 $21,580 $22,069
</TABLE>
During 1994, the Parent contributed $6.2 million of its receivable
from the Company to the Company's paid in capital in exchange for 100
additional shares of the Company's common stock.
During 1995, non-cash financing activities included incurring $887,000
in capital lease obligations.
During 1995, a dividend in the amount of $13.5 million was declared
and was payable to the Parent at February 3, 1996. During 1996, a dividend
in the amount of $15.4 million was declared and paid to the Parent. Payment
of the dividends was recorded as an increase to payable to affiliates.
REVENUES
Revenues include sales of goods and services to retail customers at
company-operated stores, sales of merchandise inventory to franchisees and
other outside customers, and other revenues from franchisees such as
royalties based on sales, interest income on notes receivable and initial
franchise fees. Other revenues from franchisees totaled $4.0 million in
fiscal 1996.
Franchise revenues based on sales by franchisees are accrued as
earned. Initial franchise fees are recorded as income when all material
services or conditions relating to the sale of the franchises have been
substantially performed or satisfied by the Company and when the related
store begins operations.
ADVERTISING
The Company expenses advertising production costs and advertising
costs as incurred. Advertising expense was approximately $33,630,000;
$23,560,000 and $20,370,000 for 1996, 1995 and 1994, respectively. The
Company has certain commitments to purchase advertising in fiscal 1997
approximating $8,000,000.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are
translated to United States dollars at the rates of exchange on the balance
sheet date. Income and expense items of these subsidiaries are translated
at average monthly rates of exchange. Translation gains or losses are
included in the foreign currency translation adjustment component of
stockholder's equity.
CAPITAL STOCK
At February 1, 1997 and February 3, 1996, there were 1,100 shares of
common stock, par value $.01 per share, authorized, issued and outstanding.
F-14
<PAGE> 113
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
EARNINGS PER SHARE
Earnings per share and weighted average number of common shares
outstanding data for 1996, 1995 and 1994 have been omitted as the
presentation of such information, considering the Company is a wholly owned
subsidiary of the Parent, is not meaningful.
ASSET IMPAIRMENT
In the first quarter of 1996 the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Adoption of this standard did not have a
material impact on the Company's results of operations, financial position
or cash flows. During the fourth quarter of 1996, the Company recorded a
provision for impairment (see Note 3).
An impairment loss is recognized whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company primarily groups and evaluates assets, other than
intangible assets, at an individual store level, which is the lowest level
at which independent cash flows can be identified. Intangibles are assigned
to each business unit, which generally consists of groups of stores and
other operations, at the time of acquisitions, and are evaluated at the
business unit level. When evaluating assets for potential impairment, the
Company considers historical performance and, in addition, estimates future
results. If the carrying amount of the related assets exceeds the expected
future cash flows, the Company considers the assets to be impaired and
records an impairment loss.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform with
the 1996 presentation.
(2) ACQUISITIONS OF BUSINESSES
On November 15, 1996, the Company purchased from the Parent, for an
aggregate purchase price of $157.7 million including the costs of
acquisition, certain assets and all of the issued and outstanding common
stock of Pearle, Inc. (Pearle). Pearle consisted of 346 company-operated
optical stores and 340 franchised locations in the United States, Canada
and the Caribbean. For its most recent fiscal year ended September 30,
1996, Pearle had annual net revenue of $302.2 million.
The Pearle acquisition was accounted for under the purchase method of
accounting. The results of operations of Pearle have been included in the
consolidated financial statements since the date of acquisition. The
purchase price was allocated to the assets acquired and liabilities assumed
based upon their relative fair values as of the closing date. This resulted
in an excess of purchase price over net assets acquired of $20.2 million.
The relative fair values of the assets acquired and liabilities assumed
were based upon valuations and other studies and included tradenames of
$49.5 million, unfavorable leasehold interests of $7.5 million, accruals
for involuntary severance and termination benefits of $4.4 million and
deferred taxes of $14.4 million. As of February 1, 1997, approximately
$175,000 of severance and termination benefits were paid and charged
against these liabilities.
The purchase price allocation is substantially complete but is subject
to adjustment, should actual costs differ from the recorded amounts. Such
adjustments, if made within one year from the date of acquisition, will be
recorded as adjustments to goodwill. Thereafter, any cost incurred in
excess of the liability recorded will be included in the determination of
net income.
On a pro forma basis, if the Pearle acquisition had taken place at the
beginning of the respective periods, unaudited consolidated net revenues
would have been $933.8 million for fiscal 1996 and $873.7 million for
fiscal 1995. After giving effect to certain pro forma adjustments,
including adjustments
F-15
<PAGE> 114
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 $2.3 million and pro forma net income in 1995 would have
decreased by $10.6 million. Anticipated efficiencies from the consolidation
of the Company and Pearle have not been reflected in these amounts because
their realization cannot be assured.
The unaudited pro forma results have been prepared for informational
purposes only and should not be considered indicative of the actual results
of operations which would have occurred had the acquisition been in effect
at the beginning of the periods indicated, and do not purport to be
indicative of results of operations which may occur in the future.
The Company also made the following acquisitions, each of which has
been accounted for under the purchase method of accounting. In November
1996, the Company acquired all of the issued and outstanding stock of AOCO
Limited, which operates 73 Sears Optical Departments and two freestanding
Vision Club stores in Canada, for a purchase price of $2.6 million. In May
1995, the Company acquired the assets of 59 optical departments located in
BJ's Wholesale Clubs for a purchase price of $1.1 million. In January 1994,
the Company acquired the assets of 107 leased optical departments within
Montgomery Ward stores for a purchase price of $4.7 million. Pro forma
financial results have not been presented for these acquisitions as they
did not have a material effect on the Company's results of operations.
(3) BUSINESS INTEGRATION AND OTHER NON-RECURRING CHARGES
In the fourth quarter of fiscal 1996, the Company recorded a $64.4
million pre-tax charge for certain unusual and non-recurring items. Such
charge was primarily related to the acquisition of Pearle and included
costs incurred related to the integration and consolidation of Pearle into
the Company's operations, as well as certain other non-recurring charges.
The charge included $17.6 million for store and other facility closings,
$21.6 million related to computer systems, $9.4 million for asset
impairment and $15.8 million of other charges. Total cash outlay related to
these charges is approximately $41.1 million, of which $2.9 million has
been paid as of February 1, 1997. The remaining amount is expected to be
incurred within the next 12 to 18 months, except for certain lease costs
which may be incurred over the remaining life of the leases. Although the
Company currently does not anticipate that there will be additional
non-recurring charges in the future, as the integration and consolidation
of Pearle is completed, additional costs may be incurred that will be
charged against operating income at that time.
Subsequent to the effective date of the Pearle acquisition, the
Company identified certain unprofitable Pearle stores which it intends to
close in fiscal 1997. At certain other on-going retail locations, a
decision was made to close the in-store labs and supply these locations
from other facilities. In addition, the Company decided to retain Pearle's
distribution and central lab facilities, but to close Pearle's home office
facility in Dallas, Texas. The charge for store and other facilities
closings consists primarily of the remaining noncancelable term of
operating leases and other obligations remaining on these facilities
subsequent to their estimated date of closing along with the loss on fixed
assets.
In fiscal 1995, the Company entered into a ten-year agreement to
outsource its systems integration needs and data processing operations. Due
to the Pearle Acquisition, the Company has reassessed its system
requirements and decided to terminate its outsourcing agreement and install
new systems utilizing the resources of internal and external systems
integrators. The Company and the outsourcing entity have agreed in
principle to the terms of the termination arrangement. The settlement cost
of terminating the outsourcing agreement, as well as other related costs,
have been accrued as of February 1, 1997. Hardware and software costs
directly related to the development and installation of new systems which
will benefit future operations have been and will be capitalized as
incurred.
F-16
<PAGE> 115
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Following the Pearle acquisition and in light of current year
operating results, the Company reviewed the strategic direction of certain
other operations. In accordance with SFAS No. 121, the Company determined
that the goodwill associated with portions of its gift and optical
businesses would not be recoverable as the carrying values of these
businesses exceeded fair value, as measured by projected future discounted
cash flows.
The other charges include costs related to employee matters, including
duplicate costs incurred through fiscal year-end and costs related to
hiring employees in connection with the consolidation of the Pearle home
office functions and other costs of management realignment. In addition,
the other charges include incremental travel and professional fees incurred
in connection with the integration of Pearle, along with costs of
developing and implementing a new franchise agreement. Also, in February
1996, the Board of Directors of the Parent granted stock options to
executive officers at a share price equal to the market price of the
Parent's 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) LONG-TERM DEBT
Long-term debt at February 1, 1997 and February 3, 1996 is summarized
as follows (000's omitted):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
7.5% Obligation in connection with Industrial
Revenue Bonds................................ $ 338 $ 506
11.25% Senior Notes:
Face value................................... 165,838 181,000
Unamortized discount......................... (1,455) (1,834)
-------- --------
Total 11.25% Senior Notes............ 164,383 179,166
9.875% Senior Subordinated Notes:
Face value................................... 150,000 --
Unamortized discount......................... (1,111) --
-------- --------
Total 9.875% Senior Subordinated
Notes.............................. 148,889 --
Capital lease obligations (see Note 9)......... 1,226 838
-------- --------
314,836 180,510
Less current portion........................... (477) (292)
-------- --------
Net long-term debt................... $314,359 $180,218
======== ========
</TABLE>
The 11.25% Senior Notes (the Senior Notes) mature October 1, 2001 with
no earlier scheduled redemption or sinking fund payments. Interest on the
Senior Notes is payable semi-annually on each April 1 and October 1.
On November 15, 1996, CNG issued $150 million of 9.875% Senior
Subordinated Notes (the Notes) due in 2006. The Notes were used by the
Company to finance a portion of the Pearle acquisition (see Note 2).
Interest on the Notes is payable semi-annually in arrears on December 31
and June 30 commencing June 30, 1997.
F-17
<PAGE> 116
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Senior Notes and the Notes are general unsecured obligations of
CNG, subordinated in right of payment to senior indebtedness of CNG and
senior in right of payment to any current or future subordinated
indebtedness of CNG.
The indentures pursuant to which the Senior Notes and the Notes were
issued restrict dividend payments to the Company to 50% of CNG's net income
after October 31, 1993, plus amounts due to the Parent under a tax sharing
agreement and for administrative expenses of the Parent not to exceed 0.25%
of CNG's net revenue. The indentures also contain certain optional and
mandatory redemption features and other financial covenants. The Company
was in compliance with these covenants at February 1, 1997.
During the first quarter of 1994, the Parent completed an initial
public offering (IPO) of the Parent's Common Stock. A portion of the net
proceeds from the IPO was advanced to the Company by the Parent and used to
retire $4.0 million of the Senior Notes. The Company recorded an
extraordinary loss of $134,000 representing the payment of a premium, the
write-off of unamortized discount and other costs associated with retiring
this debt. The loss is net of an income tax benefit of $72,000.
During the second quarter of fiscal 1996, the Parent used a portion of
the net proceeds from its public stock offering to purchase approximately
$15.1 million of the Senior Notes in the open market. In connection with
the acquisition of Pearle, the Company purchased and retired the $15.1
million of Senior Notes held by the Parent at a price equal to net book
value.
The agreement in connection with the Industrial Revenue Bonds provides
for repayment of the obligation in annual installments of $168,750 through
1998. The Industrial Revenue Bonds are secured by office and distribution
facilities with a net book value of $1,646,000 at February 1, 1997.
At February 1, 1997, the fair value of the Company's long-term debt
was approximately $342.7 million compared to a carrying value of $314.8
million. The fair value was estimated primarily by using quoted market
prices.
(5) CREDIT FACILITY
Concurrent with the Pearle acquisition, the principal operating
subsidiaries of CNG (the Borrowers) entered into a Credit Facility. The
Credit Facility replaced, concurrent with the issuance of the Notes, the
existing revolving credit facility.
The Credit Facility provides the Borrowers with a four-year revolving
line of credit of up to the lesser of a "borrowing base" and $75 million.
Up to $30 million of the Credit Facility is available for the issuance of
letters of credit. Borrowings under the Credit Facility initially bear
interest at a rate equal to, at the option of the Borrowers, either (a) the
Eurodollar Rate plus 1.25% or (b) 0.25% plus the highest of (i) the prime
rate, (ii) the three-week moving average of the secondary market rates for
three-month certificates of deposit plus 1% and (iii) the federal funds
rate plus 0.5%. The Company pays a commitment fee of 0.375% per annum on
the total unused portion of the facility. Additionally, the Credit Facility
requires the Borrowers to comply with various operating covenants that
restrict corporate activities, including covenants restricting the
Borrowers' ability to incur additional indebtedness, pay dividends, prepay
subordinated indebtedness, dispose of certain investments or make
acquisitions. The Credit Facility also requires the Borrowers to comply
with certain financial covenants, including covenants regarding minimum
interest coverage, maximum leverage and consolidated net worth. The
Borrowers were in compliance with these covenants at February 1, 1997.
The Credit Facility restricts dividend payments to CNG to amounts
needed to pay interest on the Senior Notes and the Notes, and certain
amounts related to taxes, along with up to $8.0 million plus 0.25% of the
Company's net revenue annually for other direct expenses of the Parent or
CNG. In addition, dividends of up to $20.0 million are permitted to
repurchase the Senior Notes and/or the Notes.
F-18
<PAGE> 117
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The maximum amount of short term borrowings outstanding during 1995
was $3.5 million. No amounts were outstanding as of February 1, 1997 or
February 3, 1996, or at any time during fiscal 1996.
(6) STOCK OPTIONS
The Parent has various stock option plans in which key employees of
the Company are eligible to participate.
The Company applies APB Opinion 25 and related Interpretations in
accounting for the Parent's stock-based compensation plans. Accordingly, no
compensation cost has been recognized for the Parent's stock option plans
in fiscal 1994 and fiscal 1995. Compensation cost that has been charged
against income for the Parent's stock-based plans in fiscal 1996 was $4.2
million as discussed in Note 3. Had compensation cost for the Parent'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 in fiscal 1996 would have been increased to
$29,961,000 and its net income in fiscal 1995 would have been reduced to
$13,609,000.
The fair value of each option grant by the Parent in fiscal 1995 and
1996 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: risk-free interest
rates of 6.4 and 6.2 percent for grants in fiscal 1995 and 1996,
respectively, and expected lives of six years and volatility of 33 percent
for options granted in both fiscal years. Because the SFAS No. 123 method
of accounting has not been applied to options prior to January 29, 1995,
the resulting pro forma expense may not be representative of that to be
expected in the future.
(7) INCOME TAXES
Income tax provision (benefit) for fiscal 1996, 1995 and 1994 is
detailed below (000's omitted):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Currently payable --
Federal.................................................. $ 7,442 $ 4,615 $ 4,434
State and local.......................................... 2,027 1,790 2,016
-------- -------- --------
9,469 6,405 6,450
-------- -------- --------
Deferred --
Federal.................................................. (16,575) 3,260 (1,494)
Utilization of net operating loss carryforwards.......... -- 1,134 4,169
Change in valuation allowance............................ -- -- (12,828)
-------- -------- --------
(16,575) 4,394 (10,153)
-------- -------- --------
Income tax provision (benefit)............................. $ (7,106) $ 10,799 $ (3,703)
======== ======== ========
</TABLE>
F-19
<PAGE> 118
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The income tax provision (benefit) reflected in the accompanying
consolidated statements of operations differs from the federal statutory
rate as follows (000's omitted):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate...................... $(12,301) $ 8,592 $ 7,399
Tax effect of --
State income taxes, net of federal tax benefit............... 1,317 1,164 1,310
Amortization of cost in excess of net assets of purchased
businesses................................................ 936 900 901
Non-recurring charges........................................ 2,584 -- --
Change in valuation allowance................................ -- -- (12,828)
Other, net................................................... 358 143 (485)
-------- -------- --------
Tax provision (benefit)................................... $ (7,106) $ 10,799 $ (3,703)
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and deferred tax liabilities
at February 1, 1997 and February 3, 1996 are as follows (000's omitted):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Employee benefit accruals...................................... $ 6,137 $ 3,375
Business integration accruals.................................. 13,373 --
Other non-deductible accruals.................................. 15,066 3,922
State and local taxes.......................................... 1,254 1,086
Tax credit and net operating loss carryforwards................ -- 1,990
Intangibles.................................................... 6,148 --
Other.......................................................... 8,569 1,252
-------- --------
Total deferred tax assets................................... 50,547 11,625
-------- --------
Deferred tax liabilities:
Depreciation and amortization.................................. (5,043) (5,070)
Other.......................................................... (5,535) (836)
-------- --------
Total deferred tax liabilities.............................. (10,578) (5,906)
-------- --------
Net deferred taxes............................................... $ 39,969 $ 5,719
======== ========
</TABLE>
(8) RETIREMENT PLANS
The Company maintains a noncontributory defined benefit pension plan
(the Retirement Plan) that covers employees who have met eligibility
service requirements and are not members of certain collective bargaining
units. The Retirement Plan calls for benefits to be paid to eligible
employees at retirement based primarily upon years of service with the
Company and their compensation levels near retirement.
The Company's policy is to fund amounts necessary to keep the
Retirement Plan in full force and effect, in accordance with the Internal
Revenue Code and the Employee Retirement Income Security Act of 1974.
Actuarial present values of benefit obligations are determined using the
projected unit credit method.
F-20
<PAGE> 119
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Pension expense for fiscal 1996, 1995 and 1994 includes the following
components (000's omitted):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period..... $ 646 $ 528 $ 581
Interest cost on the projected benefit obligation..... 1,467 1,369 1,292
Less:
Return on plan assets --
Actual........................................... (1,669) (1,138) 178
Deferred......................................... 477 11 (1,294)
------- ------- -------
(1,192) (1,127) (1,116)
Amortization of transition asset over 17.9 years...... (179) (179) (179)
------- ------- -------
Net pension expense......................... $ 742 $ 591 $ 578
======= ======= =======
</TABLE>
The following sets forth the funded status of the Retirement Plan at
December 31, 1996 and 1995 based upon the actuarial present values of
benefit obligations (000's omitted):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accumulated benefit obligations:
Vested.................................................... $17,605 $17,147
Nonvested................................................. 238 291
------- -------
Total.................................................. $17,843 $17,438
======= =======
Projected benefit obligation for service rendered to date... $19,046 $19,030
Fair value of plan assets, primarily money market and equity
mutual funds.............................................. 16,774 13,849
------- -------
Plan assets less than projected benefit obligation.......... (2,272) (5,181)
Unrecognized prior service cost............................. 140 168
Net unrecognized loss....................................... 1,252 2,983
Unamortized transition asset................................ (1,416) (1,595)
------- -------
Pension liability included in accrued
liabilities..................................... $(2,296) $(3,625)
======= =======
</TABLE>
The weighted average discount rate used to measure the projected
benefit obligation was 8.0% in 1996 and 7.75% in 1995. For both years, the
rate of increase in future compensation levels was 5.0% and the expected
long-term rate of return on plan assets was 9.5%.
The Company has a defined contribution plan, including features under
Section 401(k) of the Internal Revenue Code, which provides retirement
benefits to its employees. Eligible employees may contribute up to 15% of
their compensation to the plan. There is no mandatory matching of employee
contributions by the Company, but discretionary matches of $327,000,
$164,000 and $164,000 were recorded for 1996, 1995 and 1994, respectively.
The Company also has a contributory profit sharing plan for Pearle
employees meeting certain service requirements as defined in the plan. The
Company's contribution to the plan consists of a minimum matching
contribution plus an additional performance contribution. Profit sharing
expense amounted to $229,000 in 1996.
During fiscal 1994, the Company established two Supplemental Executive
Retirement Plans which will provide for the payment of retirement benefits
to participating executives supplementing amounts
F-21
<PAGE> 120
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
payable under the Company's Retirement Plan. The first plan is an excess
benefit plan designed to replace benefits that would otherwise have been
payable under the Retirement Plan but that were limited as a result of
certain tax law changes. The second plan is a defined contribution plan
under which participants will receive an annual credit based on a
percentage of base salary, subject to vesting requirements. Expense for
these plans for fiscal 1996, 1995 and 1994 was $468,000, $447,000 and
$413,000, respectively.
(9) COMMITMENTS
The Company leases a substantial portion of its facilities including
laboratories, office and warehouse space, and retail store locations. These
leases generally have initial terms of up to 10 years and often contain
renewal options. Certain of the store locations have been sublet to
franchisees. In most leases covering retail store locations, additional
rents are payable based on store sales. In addition, the Company operates
departments in various host stores paying occupancy costs solely as a
percentage of sales under agreements containing short-term cancellation
clauses. Generally, the Company is required to pay taxes and normal
expenses of operating the premises for laboratory, office, warehouse and
retail store leases; the host stores pay these expenses for departments
operated on a percentage-of-sales basis. The following amounts represent
rental expense for fiscal 1996, 1995 and 1994 (000's omitted):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Occupancy costs based on sales................... $53,152 $50,218 $47,198
All other rental expense......................... 45,365 32,697 30,003
Sublease rental income........................... (5,935) (1,510) (1,455)
------- ------- -------
$92,582 $81,405 $75,746
======= ======= =======
</TABLE>
During 1995, the Company entered into leases for equipment which have
been accounted for as capital leases. At February 1, 1997 and February 3,
1996, property under capital leases consisted of $887,000 in equipment with
accumulated amortization of $111,000 and $22,000, respectively.
At February 1, 1997, future minimum lease payments and sublease income
receipts under noncancellable leases, and the present value of future
minimum lease payments for capital leases are as follows (000's omitted):
<TABLE>
<CAPTION>
OPERATING LEASES
CAPITAL ---------------------
LEASES PAYMENTS RECEIPTS
------- -------- --------
<S> <C> <C> <C>
1997........................................... $ 385 $ 66,887 $ 13,528
1998........................................... 382 58,641 11,503
1999........................................... 300 50,277 9,202
2000........................................... 385 37,386 6,655
2001........................................... -- 26,797 4,112
2002 and thereafter............................ -- 65,157 6,152
------- -------- --------
Total future minimum lease payments............ 1,452 $305,145 $ 51,152
======== ========
Amount representing interest................... (226)
-------
Present value of future minimum lease
payments..................................... $ 1,226
=======
</TABLE>
F-22
<PAGE> 121
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pearle, Inc.:
We have audited the accompanying consolidated balance sheets of Pearle,
Inc. and subsidiaries as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the years in the three-year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 Pearle, Inc.
and subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 8, the Company changed its method of accounting
for income taxes in fiscal 1994 to adopt the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
KPMG Peat Marwick LLP
Dallas, Texas
November 22, 1996
F-23
<PAGE> 122
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 7,411 $ 17,800
Accounts and notes receivable:
Trade, less allowance for doubtful accounts of $2,908 in 1996 and
$2,944 in 1995................................................... 21,326 15,657
Current portion of franchise notes................................ 7,310 8,252
Other............................................................. 3,787 3,947
Inventories.......................................................... 36,751 35,432
Prepaid expenses..................................................... 1,741 1,661
Deferred income taxes................................................ 9,118 9,710
-------- --------
Total current assets............................................ 87,444 92,459
Property, plant and equipment, net..................................... 57,860 62,459
Franchise notes receivable, excluding current portion.................. 25,250 32,137
Intangible assets, net................................................. 121,669 216,767
Other assets........................................................... 809 544
-------- --------
$293,032 $404,366
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................................... $ 12,998 $ 8,268
Checks outstanding................................................... 11,196 9,711
Accrued payroll costs................................................ 12,212 14,140
Income taxes payable................................................. -- 18,710
Accrued advertising.................................................. 342 3,707
Accrued store closure costs.......................................... 2,233 6,573
Other accrued expenses and liabilities............................... 21,356 25,168
-------- --------
Total current liabilities....................................... 60,337 86,277
Payables to Parent and affiliated companies............................ -- 201,399
Deferred income taxes.................................................. 1,927 9,059
Other noncurrent liabilities........................................... 5,036 6,501
-------- --------
Total liabilities............................................... 67,300 303,236
-------- --------
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, 100 shares
issued and outstanding............................................ -- --
Additional paid-in capital........................................... 646,243 417,187
Accumulated deficit.................................................. (426,775) (324,392)
Foreign currency translation adjustment.............................. 6,264 8,335
-------- --------
Total stockholder's equity...................................... 225,732 101,130
Commitments and contingencies.......................................... -- --
-------- --------
$293,032 $404,366
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE> 123
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Trade sales.............................................. $ 341,141 $331,105 $311,233
Franchise revenues....................................... 24,883 23,147 24,785
--------- -------- --------
Total revenues...................................... 366,024 354,252 336,018
--------- -------- --------
Operating expenses:
Cost of sales, including buying and occupancy costs...... 184,486 187,185 181,340
Selling, general and administrative expenses............. 164,129 155,256 160,820
Restructuring and store closure costs.................... (2,083) 7,265 1,876
Royalty payments and other affiliate charges............. 6,406 6,039 5,916
Amortization of intangible assets........................ 15,604 14,260 14,289
Provision for impairment of intangible assets and related
costs................................................. 94,673 -- --
--------- -------- --------
Total operating expenses............................ 463,215 370,005 364,241
--------- -------- --------
Operating loss...................................... (97,191) (15,753) (28,223)
Other expense (income):
Gain on sale of subsidiary............................... -- (14,811) --
Interest expense to Parent............................... 15,461 15,769 17,309
Other interest, net...................................... (4,258) (4,829) (4,080)
--------- -------- --------
Loss before income tax benefit and cumulative effect
of accounting change............................. (108,394) (11,882) (41,452)
Income tax benefit......................................... (6,011) (12,845) (10,480)
--------- -------- --------
Income (loss) before cumulative effect of accounting
change.............................................. (102,383) 963 (30,972)
Cumulative effect of a change in accounting for income
taxes.................................................... -- -- 842
--------- -------- --------
Net income (loss)................................... $(102,383) $ 963 $(31,814)
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 124
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
--------------------------------------------------------------------
FOREIGN
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S
STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
-------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1993...... $ -- $ 405,829 $(293,541) $ 976 $ 113,264
Net loss............................ -- -- (31,814) -- (31,814)
Capital contribution from
affiliate......................... -- 7,222 -- -- 7,222
Effect of foreign currency
translation....................... -- -- -- 3,283 3,283
-------- --------- --------- --------- ---------
Balances at September 30, 1994...... -- 413,051 (325,355) 4,259 91,955
Net income.......................... -- -- 963 -- 963
Capital contribution from
affiliate......................... -- 4,136 -- -- 4,136
Effect of foreign currency
translation....................... -- -- -- 4,076 4,076
-------- --------- --------- --------- ---------
Balances at September 30, 1995...... -- 417,187 (324,392) 8,335 101,130
Net loss............................ -- -- (102,383) -- (102,383)
Distribution of assets to
affiliate......................... -- (19,730) -- -- (19,730)
Capital contributions from
affiliate......................... -- 248,786 -- -- 248,786
Effect of foreign currency
translation....................... -- -- -- (2,071) (2,071)
-------- --------- --------- --------- ---------
Balances at September 30, 1996...... $ -- $ 646,243 $(426,775) $ 6,264 $ 225,732
======== ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 125
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $(102,383) $ 963 $(31,814)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 31,587 33,448 39,953
Provision for bad debts............................... 1,797 (481) 2,162
Provision for inventory shrinkage and reserves........ 2,037 1,361 6,137
Restructuring and store closure costs................. (2,015) 7,164 2,487
Provision for impairment of intangible assets and
related costs....................................... 94,673 -- --
Gain on sale of subsidiary............................ -- (14,811) --
Changes in assets and liabilities:
Accounts and notes receivable....................... (6,642) 260 3,595
Inventories......................................... (3,004) 1,627 10,564
Prepaid expenses.................................... (80) 5,409 (5,409)
Checks outstanding.................................. 1,485 5,185 (10,079)
Accrued payroll costs............................... (1,928) 2,755 (2,572)
Income taxes payable................................ 3,360 6,573 751
Accrued advertising................................. (3,365) (2,353) 1,795
Accrued store closure costs......................... (2,512) (4,434) (18,878)
Accounts payable and accrued and other
liabilities...................................... (1,391) (7,695) (19,797)
Other assets........................................ (265) 662 3,939
Deferred income taxes............................... (6,540) (4,094) 19,094
Other noncurrent liabilities........................ (912) 625 1,512
--------- -------- --------
Net cash provided by operating activities........ 3,902 32,164 3,440
--------- -------- --------
Cash flows from investing activities:
Capital expenditures..................................... (13,558) (7,321) (6,083)
Proceeds from sale of property, plant and equipment...... 1,078 400 1,840
Proceeds from sale of subsidiary......................... -- 14,811 --
Other, net............................................... (710) 2,045 (257)
--------- -------- --------
Net cash provided by (used in) investing
activities..................................... (13,190) 9,935 (4,500)
--------- -------- --------
Cash flows from financing activities:
Increase (decrease) in payables to Parent and affiliated
companies............................................. 18,629 (37,396) (10,355)
Capital contribution from affiliate...................... -- 4,146 7,222
Distribution of assets to affiliate...................... (19,730) -- --
--------- -------- --------
Net cash used in financing activities............ (1,101) (33,250) (3,133)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (10,389) 8,849 (4,193)
Cash and cash equivalents at beginning of year............. 17,800 8,951 13,144
--------- -------- --------
Cash and cash equivalents at end of year................... $ 7,411 $ 17,800 $ 8,951
========= ======== ========
Supplemental disclosures of cash flow information -- cash
paid (received) during the year for:
Income taxes.......................................... $ 101 $(16,988) $(29,878)
========= ======== ========
Interest.............................................. $ 11,203 $ 10,759 $ 13,229
========= ======== ========
Supplemental schedule of noncash financing activities:
Capitalization of amounts payable to Parent and
affiliated companies............................. $ 220,028 $ -- $ --
========= ======== ========
Current income taxes payable assumed by affiliate........ $ 22,070 $ -- $ --
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 126
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
Prior to November 15, 1996, Pearle, Inc. ("Pearle" or the "Company"), was a
wholly owned subsidiary of Grand Metropolitan Incorporated ("GrandMet" or the
"Parent") (see note 2). GrandMet is an indirect wholly-owned subsidiary of Grand
Metropolitan Public Limited Company. Pearle is a retailer of eyecare products
and services through company operated and franchised optical stores in the
United States, Canada, Puerto Rico, Belgium and the Netherlands. In addition,
Pearle operates an optical processing laboratory and distribution center in
connection with its retail operations.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Intercompany balances and transactions have
been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents were
$1,207,000 and $1,174,000 at September 30, 1996 and 1995, respectively.
(d) Inventories
Inventories consist of frames, lenses and other raw materials and are
stated at the lower of weighted average cost or market.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance and repair
costs are expensed as incurred.
Depreciation and amortization are computed on a straight-line basis over
the estimated useful lives of the assets. Amortization of leasehold improvements
is based on the shorter of the lives of the respective leases or the estimated
useful lives of the improvements. The following is a summary of depreciation and
amortization periods for each classification of property, plant and equipment:
<TABLE>
<S> <C>
Buildings................ 20-33 years
Leasehold improvements... 4-20 years
Fixtures and equipment... 3-10 years
</TABLE>
(f) Intangible Assets
The excess of cost over the fair value of net tangible assets acquired upon
GrandMet's acquisition of the Company in 1985 and other businesses acquired by
Pearle since that time has been reflected as intangible assets in the
accompanying consolidated balance sheets. Such intangible assets are being
amortized on a straight-line basis over periods up to 40 years (see note 7). As
a result of the sale of the stock of the Company on November 15, 1996, it was
determined that a portion of the excess of cost over the fair value of net
tangible assets acquired was not recoverable. Accordingly, an impairment of
$87,985,000 was recorded in the consolidated financial statements at September
30, 1996 (see note 2).
Goodwill is recorded on the repurchase of franchise locations based on a
discounted cash flow model and is amortized over the expected life of the store
location.
F-28
<PAGE> 127
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(g) Income Taxes
Effective October 1, 1993, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), Accounting for Income Taxes, requiring the
asset and liability method of accounting for deferred income taxes. SFAS No. 109
changes the Company's method of accounting for income taxes from the deferred
method required under Accounting Principles Board Opinion 11 to the asset and
liability method. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company has reported the cumulative effect of adopting SFAS No. 109 as
a change in method of accounting for income taxes in the fiscal year 1994
consolidated statement of operations.
(h) Trade Sales
Trade sales represent sales of goods and services to retail customers by
Company operated stores and sales of merchandise inventory to franchisees and
other outside customers.
(i) Franchise Revenues
Franchise royalty revenues based on sales by franchisees are accrued as
earned. Gains and losses from the sale of existing Company owned stores to
franchisees are recognized at the time of the sale. A provision for doubtful
notes receivable is included as an offset to gain or loss on sale of franchises,
as appropriate. 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 Pearle and when the related store begins
operations. Accrued franchise royalty revenues are included in trade accounts
receivable.
(j) Advertising Expenses
The Company expenses advertising production costs and advertising costs as
incurred. Gross advertising expense before contributions from franchisees was
approximately $47,678,000, $43,903,000 and $43,496,000 during the years ended
September 30, 1996, 1995 and 1994, respectively.
(k) Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated to United States dollars at the rates of exchange on the balance
sheet date. Income and expense items of these subsidiaries are translated at
average monthly rates of exchange. The resultant translation gains or losses are
included in the foreign currency translation adjustment component of
stockholder's equity.
(l) Postretirement Benefits Other than Pensions
The estimated cost of retiree benefit payments, principally health and life
insurance benefits, are accrued during the employees' active service periods
(see note 13).
(m) Use of Estimates
The preparation of the consolidated 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 consolidated
financial
F-29
<PAGE> 128
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) SALE OF COMPANY
On September 24, 1996, The Pillsbury Company ("Pillsbury"), an intermediate
parent of the Company, entered into a Stock Purchase Agreement (the Agreement)
with Cole National Corporation, an unrelated third party, to sell Pillsbury's
interest in the Company. The final closing of the sale occurred on November 15,
1996 at which time Cole National Corporation exchanged approximately $220
million cash for Pillsbury's interest in the Company.
As the net assets of the Company, excluding intercompany and other balances
which were assumed by Pillsbury at the time of the sale, exceeded the selling
price, an impairment of the assets of the Company was determined to exist at
September 30, 1996. Accordingly, an impairment of approximately $87,985,000 has
been recorded in the September 30, 1996 consolidated financial statements to
reflect the assets of the Company at their estimated fair value. The impairment
is recorded as a write-off of excess cost over fair value of net tangible assets
acquired. The terms of the Agreement will substantially affect the Company's
current affiliate tax, debt and cash sharing arrangements. As a result of the
sale, approximately $6,688,000 was or will be paid by an affiliate company on
behalf of Pearle. This amount has been included in the consolidated statement of
operations and as a corresponding capital contribution in the consolidated
statement of stockholder's equity, as this amount will not be repaid by Pearle.
(3) RESTRUCTURING AND STORE CLOSURE COSTS
During the year ending September 30, 1996, the Company recorded a
write-down of the accrued store closure costs in the consolidated statement of
operations of approximately $2,083,000 related to a change in estimate of the
liability relating to store closure costs. During the years ended September 30,
1995 and 1994 the Company recorded a net provision of approximately $7,265,000
and $1,876,000, respectively, for estimated costs, consisting primarily of
future commitments under operating leases, of closing unprofitable U.S. and
international retail locations. During the year ended September 30, 1994, the
Company also recorded a provision of $4,800,000 (included in cost of sales) for
charges related to obsolete inventory which occurred as a result of a change in
brand strategy.
(4) DISPOSAL OF SUBSIDIARY
On October 27, 1994, the Company entered into an agreement to sell all of
the capital stock of Ophthalmic Research Group International Company ("ORGIC")
to a third party for cash consideration of $14,811,000. Prior to fiscal year
1994, the remaining book value of the intangible assets acquired of
approximately $22,146,000 was written off since, in the opinion of management,
the value of such assets was not recoverable. As a result, the gain on sale in
1995 was equal to the cash consideration.
(5) RELATED PARTY TRANSACTIONS
In connection with an acquisition in 1989, Pearle pays to an affiliated
company an annual royalty payment equal to the greater of a predetermined
minimum amount or 4% of sales from the predecessor's stores as a license fee for
use of the predecessor's trademark. The Company paid $6,081,000, $5,714,000, and
$5,494,000 for royalties in 1996, 1995 and 1994, respectively, pursuant to the
licensing agreement. These amounts are included in the accompanying consolidated
statements of operations as royalty payments and other affiliate charges. The
Company paid $17,236,000 on November 15, 1996 to settle its obligation under the
license agreement. In exchange for the settlement all rights in the trademark
were assigned to the Company.
F-30
<PAGE> 129
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company received capital contributions from an affiliate of
approximately $4,146,000, and $7,222,000 during the years ended September 30,
1995 and 1994, respectively. These amounts have been recorded as additional
paid-in capital in the accompanying consolidated balance sheets. In addition, in
connection with the sale of the Company (see note 2), amounts payable to Parent
and affiliated companies have been cancelled and current income taxes payable
has been assumed by Pillsbury as of September 30, 1996, and accordingly have
been recorded as an increase to additional paid-in capital.
On September 30, 1996, the Company distributed assets of $19,730,000
relating to a controlled entity to an affiliated company. The distribution
resulted in a reduction of additional paid-in capital, and a corresponding
reduction in payables to Parent and affiliated companies.
On May 28, 1993, an affiliate of the Company purchased approximately
$75,280,000 of newly issued preferred stock from a subsidiary of the Company.
The cash received from the sale of such stock was then loaned to the affiliate
in exchange for a note receivable. All balances related to this transaction have
been eliminated in the consolidated financial statements due to the related
party nature of the transaction. In fiscal year 1995, the preferred stock was
redeemed and the proceeds used to retire the note receivable.
The Company maintains an ongoing financing relationship with GrandMet.
Excess cash from operations is transferred to GrandMet on a regular basis.
Interest expense related to intercompany balances is recorded monthly at the
LIBOR rate plus 1%.
Royalty payments and other affiliate charges included in the consolidated
statements of operations include allocations of management, tax, accounting and
other administrative expenses performed by GrandMet.
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Land........................................................ $ 6,803 $ 6,951
Buildings................................................... 26,922 26,784
Leasehold improvements...................................... 68,869 67,026
Fixtures and equipment...................................... 111,270 109,247
-------- --------
213,864 210,008
Less accumulated depreciation and amortization.............. 156,004 147,549
-------- --------
$ 57,860 $ 62,459
======== ========
</TABLE>
Depreciation and amortization expense related to property, plant and
equipment was $15,819,000, $18,619,000, and $22,567,000 for 1996, 1995 and 1994,
respectively.
F-31
<PAGE> 130
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(7) INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
AMORTIZATION -----------------------------
PERIOD 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Goodwill....................................... 7-40 years $ 213,221 $ 205,326
Patient files.................................. 4-8 years 21,297 21,600
Franchise agreements........................... 11-25 years 23,140 24,329
Franchise lease agreements..................... 1-11 years 2,234 2,235
Trademarks..................................... 40 years 55,496 55,496
Noncompetition agreements...................... 2-5 years 17,428 17,428
Other.......................................... 1-23 years 38,487 38,865
---------- ----------
371,303 365,279
Less:
Accumulated amortization..................... 161,649 148,512
Provision for impairment..................... 87,985 --
---------- ----------
$ 121,669 $ 216,767
========== ==========
</TABLE>
(8) INCOME TAXES
The Company is included in the consolidated Federal income tax return of
GrandMet. In 1989 the Company entered into a tax sharing agreement with GrandMet
whereby GrandMet agreed to allocate to the Company certain tax benefits
resulting from the utilization of the Company's tax deductions by other members
of the consolidated GrandMet group. For financial reporting purposes, the
Company's Federal income tax provision is calculated as though the Company filed
a separate Federal income tax return, except for the effect of the
aforementioned 1989 agreement with GrandMet.
As discussed in note 1, the Company adopted SFAS No. 109 as of October 1,
1993. The cumulative effect of this change in accounting for income taxes of
approximately $842,000 was determined as of October 1, 1993 and is reported
separately in the consolidated statement of operations for the year ended
September 30, 1994.
Federal income tax returns have been examined by the Internal Revenue
Service and settled through fiscal 1988.
The loss before income tax benefit and cumulative effect of accounting
change in the accompanying consolidated statements of operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Domestic operations........................... $(113,304) $(17,814) $ (30,171)
Foreign operations............................ 4,910 5,932 (11,281)
--------- -------- ---------
Loss before income tax benefit and
cumulative effect of accounting
changes................................ $(108,394) $(11,882) $ (41,452)
========= ======== =========
</TABLE>
F-32
<PAGE> 131
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The income tax expense (benefit) attributable to loss before income tax
benefit and cumulative effect of accounting change consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $ (7,123) $ (9,380) $(27,535)
State...................................... 48 97 103
Foreign.................................... 2,250 532 (1,300)
-------- -------- ---------
Total current......................... (4,825) (8,751) (28,732)
-------- -------- ---------
Deferred:
Federal.................................... (1,097) (4,037) 17,454
Foreign.................................... (89) (57) 798
-------- -------- ---------
Total deferred........................ (1,186) (4,094) 18,252
-------- -------- ---------
Income tax benefit.................... $ (6,011) $(12,845) $(10,480)
======== ======== =========
</TABLE>
The tax effects of the primary temporary differences giving rise to the
deferred income tax assets and liabilities as determined under SFAS No. 109 are
as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Restructuring reserves............................................. $ 627 $ 2,444
Inventories, principally due to additional costs inventoried for
tax pursuant
to the Tax Reform Act of 1986.................................... 1,264 3,130
Accounts and notes receivable, principally due to allowance for
doubtful accounts................................................. 2,834 3,039
Employee related accruals, principally vacation pay and
post-retirement medical accruals.................................. 1,407 2,573
Accrued store closure costs........................................ 969 1,921
Warranty reserves.................................................. 86 392
Plant and equipment, principally due to differences in
depreciation...................................................... 3,049 --
Self insurance reserves............................................ 1,185 113
Other.............................................................. 1,271 848
-------- -------
Total gross deferred tax assets............................... 12,692 14,460
-------- -------
Deferred tax liabilities:
Intangibles, principally due to differences in amortization........ (3,698) (4,830)
Deferred income on franchise notes receivable...................... (1,339) (3,482)
Plant and equipment, principally due to differences in
depreciation...................................................... -- (110)
Prepaid advertising................................................ -- (112)
Other.............................................................. (464) (5,275)
-------- -------
Total gross deferred tax liabilities.......................... 5,501 (13,809)
-------- -------
Net deferred income tax asset................................. $ 7,191 $ 651
======== =======
</TABLE>
F-33
<PAGE> 132
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
These deferred income tax assets and liabilities are presented as follows
in the consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
-------- -------
<S> <C> <C>
Current deferred income tax asset...................................... $ 9,118 $ 9,710
Noncurrent deferred income tax liability............................... (1,927) (9,059)
-------- -------
Net deferred income tax asset................................ $ 7,191 $ 651
======== =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences.
A reconciliation of the U.S. federal statutory rate to the effective income
tax rate applicable to loss before income tax benefit and cumulative effect of
accounting change follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
U.S. federal statutory rate.................................... (35.0)% (35.0)% (35.0)%
State income taxes, net of Federal benefit..................... 0.3 0.2 0.2
Nondeductible goodwill and trademarks.......................... 1.0 8.4 2.1
Provisions for impairment of intangible assets and related
costs........................................................ 29.1 -- --
Loss (earnings) of foreign subsidiaries........................ 0.5 (13.1) 8.3
Sale of ORGIC stock............................................ -- (70.8) --
Other.......................................................... (1.4) 2.2 (.9)
------ ------ -----
Effective income tax rate............................ (5.5)% (108.1)% (25.3)%
====== ====== =====
</TABLE>
The disposition of ORGIC resulted in an income tax deduction of
approximately $24,000,000 in 1995.
(9) FRANCHISE REVENUES
A summary of franchise revenues follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Franchise royalties........................................... $23,363 $23,978 $23,543
Gain (loss) on sale of franchises, net of reserves............ 1,240 (1,661) 482
Franchise fees................................................ 280 830 760
------- ------- -------
$24,883 $23,147 $24,785
======= ======= =======
</TABLE>
The Company financed approximately $1,239,000, $1,478,000 and $1,506,000 in
1996, 1995 and 1994, respectively, in notes receivable in connection with the
sale of franchises.
The Company is reimbursed by franchisees for certain advertising
expenditures made on their behalf. The reimbursements amounted to $25,122,000,
$25,480,000 and $24,591,000 for 1996, 1995 and 1994, respectively, and are
netted against advertising expense in the accompanying statement of operations.
F-34
<PAGE> 133
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company's franchise notes receivable are from 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 ten
years.
(10) LEASES
The Company leases most of its retail stores under noncancellable operating
leases with terms ranging from five to twenty years and which may contain
renewal options for consecutive five-year terms. Certain of these stores have
been sublet to franchisees. In addition, the Company also leases certain of its
manufacturing and office facilities and data processing equipment.
Net rent expense included in the accompanying consolidated statements of
operations is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Base rentals........................................ $ 39,312 $42,135 $43,185
Contingent rentals (based on sales)................. 924 330 35
Sublease rental income.............................. (17,626) (19,620) (20,796)
-------- ------- -------
$ 22,610 $22,845 $22,424
======== ======= =======
</TABLE>
Future minimum lease payments and sublease income receipts under
noncancellable operating leases as of September 30, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
PAYMENTS RECEIPTS
-------- --------
<S> <C> <C>
1997.......................................................... $ 38,834 $ 15,431
1998.......................................................... 35,245 13,269
1999.......................................................... 30,675 10,841
2000.......................................................... 22,416 8,165
2001.......................................................... 13,288 5,664
Thereafter.................................................... 28,663 7,615
-------- --------
$169,121 $ 60,985
======== =======
</TABLE>
Approximately $1,911,000 and $3,000,000 of these future minimum lease
payments are included in accrued store closure costs in the consolidated balance
sheet at September 30, 1996 and 1995, respectively.
(11) EMPLOYEE BENEFIT PLANS
The Company has a contributory profit sharing plan for employees in the
U.S. meeting certain service requirements as defined in the plan. The Company's
contribution to the plan consists of a minimum matching contribution plus an
additional performance contribution. Profit sharing plan expenses, which are
included in selling, general and administrative expenses, amounted to
$1,224,000, $1,279,000 and $1,010,000 in 1996, 1995 and 1994, respectively. The
Company also has retirement plans for employees of foreign subsidiaries.
(12) SALE OF FRANCHISE NOTES RECEIVABLE
Prior to fiscal year 1994, the Company sold approximately $72,500,000 of
franchise notes receivable with limited recourse to a large banking institution
for $81,000,000 in cash. The limited recourse provisions require Pearle to
reacquire all of the notes under certain circumstances, including failure to
maintain properties in good order, failure to deliver a monthly statement, or
false or misleading representations. Additionally, under other circumstances,
such as default, Pearle is required to repurchase the individual note involved.
Such repurchases are limited to 28% of the aggregate purchase price of all notes
($6,460,000 and $8,517,000
F-35
<PAGE> 134
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
remaining repurchase exposure at September 30, 1996 and 1995, respectively). The
notes are secured by inventory, receivables and fixed assets of the franchised
stores.
(13) POSTRETIREMENT BENEFIT PLANS
Prior to February 1993, the Company and its subsidiaries provided health
care and other benefits to substantially all retired employees and covered
dependents. Generally, employees who have attained certain age and service
requirements were eligible for these benefits.
Net postretirement benefit cost, included as a component of selling,
general and administration expenses, consisted of the following components:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Interest cost on accumulated postretirement benefit
obligation................................................. $ 42,100 $77,400 $76,800
Amortization of unrecognized gain............................ (19,700) -- --
-------- ------- -------
Net postretirement benefit cost.................... $ 22,400 $77,400 $76,800
======== ======= =======
</TABLE>
The actuarial present value of the accumulated postretirement benefit
obligation as recognized in the consolidated balance sheets at September 30,
1996 and 1995, respectively, is $589,200 and $978,000, and relates solely to
existing retirees.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 7.5% in 1996 and these rates are
anticipated to ratably decline to 5% by 2006. A one-percentage-point increase in
the assumed health care cost trend rate for each year would increase the
accumulated postretirement benefit obligation by approximately $46,600 and net
postretirement health care cost by approximately $3,500 as of September 30,
1996. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%.
(14) COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal proceedings and has certain
unresolved claims pending. The ultimate liability, if any, for the aggregate
amounts claimed cannot be determined at this time. Management of the Company,
based upon consultation with legal counsel, is of the opinion that there are no
matters pending or threatened which are expected to have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liability.
The Company has certain commitments to purchase advertising in fiscal year
1997 approximating $11,205,500.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade and other
receivables and payables approximate fair value due to the short maturity of
those instruments.
Franchise notes receivable and the payable to Parent and affiliated
companies bear interest at floating rates based on market rates and are adjusted
quarterly; therefore, the carrying value of these instruments approximates fair
value.
F-36
<PAGE> 135
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(16) SELECTED FINANCIAL DATA FOR EUROPEAN OPERATIONS
The following summary sets forth selected financial information for the
Company's European operations in Netherlands and Belgium included in the
Company's consolidated financial statements:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Total revenues................................................ $63,817 $59,841 $48,704
Cost of sales, including buying and occupancy costs........... 35,849 33,372 26,805
Selling, general and administrative expenses.................. 20,177 19,583 17,974
Amortization and impairment of intangible assets.............. 238 236 209
------- ------- -------
Operating income......................................... 7,553 6,650 3,716
Interest expense (income), net................................ (488) (429) (99)
Income tax provision.......................................... 2,510 2,135 1,216
------- ------- -------
Net income............................................... $ 5,531 $ 4,944 $ 2,599
======= ======= =======
Total depreciation and amortization........................... $ 3,563 $ 3,373 $ 2,996
Capital expenditures.......................................... 3,193 3,279 2,272
Cash.......................................................... $ 1,380 $ 8,812 $ 4,751
Total current assets.......................................... 19,178 26,048 20,627
Total assets.................................................. 38,274 47,311 40,229
Total current liabilities..................................... 9,107 6,680 6,158
Payable to Company and affiliated companies................... (8,028) (3,985) (1,917)
Stockholder's equity.......................................... 34,339 41,049 33,292
</TABLE>
F-37
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<PAGE> 137
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<PAGE> 138
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 139
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CON-
TAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................... i
Prospectus Summary...................... 1
Risk Factors............................ 11
The Exchange Offer...................... 16
The Company............................. 26
The Transactions........................ 28
Use of Proceeds......................... 29
Capitalization.......................... 30
Unaudited Pro Forma Condensed
Consolidated Financial Data........... 31
Selected Historical Financial and Other
Data.................................. 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 40
Business................................ 48
Management.............................. 55
Principal Stockholders.................. 64
Description of Other Indebtedness....... 66
Description of the Notes................ 69
Plan of Distribution.................... 93
Legal Matters........................... 94
Experts................................. 94
Index to Financial Statements........... F-1
</TABLE>
UNTIL MARCH 9, 1998, (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO DELIVER A PROSPECTUS
WHEN SELLING EXCHANGE NOTES RECEIVED IN EXCHANGE FOR ORIGINAL NOTES HELD FOR
THEIR OWN ACCOUNT. SEE "PLAN OF DISTRIBUTION."
======================================================
======================================================
$125,000,000
[COLE LOGO]
COLE NATIONAL
GROUP, INC.
OFFER TO EXCHANGE ITS
8 5/8% SENIOR SUBORDINATED
NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT FOR ANY AND ALL OUTSTANDING
8 5/8% SENIOR SUBORDINATED
NOTES DUE 2007
----------------------------------
PROSPECTUS
----------------------------------
DECEMBER 9, 1997
======================================================
