SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number 33-66342

(440) 449-4100
(Registrant’s telephone number, including area code)

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form in the reduced disclosure format.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    X     YES                 NO

All of the outstanding capital stock of the registrant is held by Cole National Corporation.

As of August 24, 2000, 1,100 shares of the registrant’s common stock, $.01 par value, were outstanding.

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JULY 29, 2000
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PART I — FINANCIAL INFORMATION

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)

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

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands)

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

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

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

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(1) Basis of Presentation and Accounting Policies

      Cole National Group, Inc. is a wholly owned subsidiary of Cole National Corporation. The consolidated financial statements include the accounts of Cole National Group and its wholly owned subsidiaries (collectively, the “Company”). All significant intercompany transactions have been eliminated in consolidation.

      The accompanying consolidated financial statements have been prepared without audit and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although management believes that the disclosures herein are adequate to make the information not misleading. Results for interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its annual report on Form 10-K for the fiscal year ended January 29, 2000.

      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 July 29, 2000 and the results of operations and cash flows for the 26 weeks ended July 29, 2000 and July 31, 1999.

   Inventories

      The accompanying interim consolidated financial statements have been prepared without physical inventories.

   Cash Flows

      Net cash flows from operating activities reflect cash payments for income taxes and interest of $442,000 and $13,312,000 respectively, for the 26 weeks ended July 29, 2000, and $392,000 and $13,114,000 respectively, for the 26 weeks ended July 31, 1999.

   Total Other Comprehensive Income (Loss)

      Total other comprehensive income (loss) for the 13 and 26 weeks ended July 29, 2000 and July 31, 1999 is as follows (000’s omitted):

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(2) Credit Facility

      In June 2000, the credit facility was amended providing availability under the working capital commitment of from $50.0 million to 75.0 million based on the Company’s current debt leverage ratio described in the credit facility. As of July 29, 2000 total availability under the credit facility was $50.0 million (less commitments under outstanding letters of credit). The amendment also modified certain covenants, as well as the permitted levels on indebtedness, dividends, investments, and capital expenditures.

(3) Segment Information

      Information on the Company’s reportable segments is as follows (000’s omitted):

(4) Reclassifications

      Certain fiscal 1999 amounts have been reclassified to conform with the fiscal 2000 presentation.

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Item 2. Management’s Discussion and Analysis of Financial Condition and results of Operations

      Certain information required by this item has been omitted pursuant to General Instruction H of Form 10-Q.

      The following is a discussion of certain factors affecting Cole National Group’s results of operations for the 13 and 26 week periods ended July 29, 2000 and July 31, 1999 (the Company’s second quarter and first six months, respectively). This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this filing and the audited financial statements for the fiscal year ended January 29, 2000 included in the annual report on Form 10-K.

      Fiscal years end on the Saturday closest to January 31 and are identified according to the calendar year in which they begin. For example, the fiscal year ended January 29, 2000 is referred to as “fiscal 1999.” The current fiscal year, which will end February 3, 2001, is referred to as “fiscal 2000.”

Results of Operations

      The following table sets forth certain operating information for the second quarter and first six months of fiscal 2000 and fiscal 1999 (dollars in millions):

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      The increase in net revenue for the second quarter and first six months of fiscal 2000 was primarily attributable to increases in consolidated comparable store sales and revenue associated with the MetLife vision care business acquired in October 1999, offset by a reduction in the number of locations, including the closing of all optical departments at Montgomery Ward in December 1999. Changes in comparable store sales by business were:

      Sales at Cole Licensed Brands increased despite the closing of the Montgomery Ward departments. The average selling price at Cole Licensed Brands for the second quarter and first six months was slightly above last year, while the number of transactions was also up slightly even though there were fewer locations. Sales results for the second quarter and first six months at Pearle company-owned stores reflected a decrease in the number of transactions due, in part, to fewer locations. The average transaction increased slightly in the second quarter and first six months. At Things Remembered, the comparable store sales increases for the second quarter and first six months reflected an increase in sales of new merchandise at higher average unit retails and an increase in the number of transactions compared to a year ago.

      The gross margin increase was primarily attributable to the revenue increase at Things Remembered. Gross margin as a percentage of net revenue at Cole Vision improved 1.9 and 1.4 percentage points in fiscal 2000 compared to the second quarter and first six months of last year, respectively. The primary cause for the improvement was the additional revenue associated with the MetLife vision care business. Gross margin as a percentage net revenue at Things Remembered was flat to last year in the second quarter and decreased 0.9 percentage points compared to the first six months in fiscal 1999 reflecting the impact of an aggressive merchandise clearance promotion in the first quarter of this year.

      The unfavorable leverage in operating expenses for the second quarter was primarily attributable to a 1.8 percentage point increase in payroll costs, and a 1.0 percentage point increase in managed vision care costs. The unfavorable leverage for the first six months was primarily attributable to a 2.0 percentage point increase in payroll costs, including a 0.3 percentage point increase from first quarter severance costs, and a 0.5 percentage point increase in managed vision care costs primarily associated with the MetLife vision care business. The leverage loss resulted primarily from the decline in comparable store sales at Pearle company-owned stores, a $1.8 million first quarter charge for severance costs recorded in connection with a personnel reduction at Cole Vision, and increased expenses associated with the Target Optical expansion. The increase in depreciation and amortization was primarily attributable to amortization of systems development costs related to the Pearle manufacturing and merchandise/inventory management system implemented in the third quarter last year and amortization of restricted stock awarded in January 2000.

      The decreases in operating income for the second quarter and first six months compared to the same periods a year earlier were primarily the result of the increases in operating expenses and depreciation and amortization as noted above.

      Net interest and other expense increased slightly for the second quarter and first six months compared to the same periods a year ago. Income tax provisions were recorded in the first six months of fiscal 2000 and fiscal 1999 using the Company’s estimated annual effective tax rates of 59% and 41%, respectively.

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      Net income for the second quarter decreased to $0.3 million from $3.6 million for the same period last year. For the first six months of fiscal 2000, net income decreased to a loss of $1.0 million from a profit of $7.0 million for the first six months of fiscal 1999. The decrease was primarily due to the decrease in income from operations, offset in part by the higher effective tax rate on the fiscal 2000 loss.

Recent Developments and Forward-Looking Information

      Primarily as a result of the costs associated with the rapid expansion of Target Optical, the Company expects that third quarter operating results will be below last year’s level.

      Certain sections of this Form 10-Q, including this Management’s Discussion and Analysis, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forecasted due to a variety of factors that can adversely affect the Company’s operating results, liquidity and financial condition such as risks associated with the timing and achievement of the continuing restructuring and improvements in the operations of the optical business, the Company’s ability to select, stock and price merchandise attractive to customers, success of systems integration, competition in the optical industry, integration of acquired businesses, economic and weather factors affecting consumer spending, operating factors affecting customer satisfaction, including manufacturing quality of optical and engraved goods, the Company’s relationships with host stores and franchisees, the mix of goods sold, pricing and other competitive factors, and the seasonality of the Company’s business. Forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting the Company. All forward-looking statements involve risk and uncertainty.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

      The Company is exposed to market risk from changes in foreign currency exchange rates, which could impact its results of operations and financial condition. Foreign exchange risk arises from the Company’s exposure in fluctuations in foreign currency exchange rates because The Company’s reporting currency is the United States dollar. Management seeks to minimize the exposure to foreign currency fluctuations through natural internal offsets to the fullest extent possible.

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PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits. The following Exhibits are filed herewith and made a part hereof:

		10.1	Eighth Amendment to the Credit Agreement, dated as of June 9, 2000, among Cole Vision Corporation, Things Remembered, Inc., and Pearle, Inc. and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.1 to Cole National Corporation's Quarterly Report on Form 10-Q for the period ended July 29, 2000 (File 1-12814)
		27	Financial Data Schedule

      (b) Reports on Form 8-K

	None.

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SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: September 11, 2000

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COLE NATIONAL GROUP, INC.
FORM 10-Q
QUARTER ENDED JULY 29, 2000

EXHIBIT INDEX

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