AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 2002
REGISTRATION NO. 333-90918
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
COLE NATIONAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
<Table>
DELAWARE 5945 34-1744334
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</Table>
---------------------
5915 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO 44124
TELEPHONE: 440-449-4100
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
MS. LESLIE D. DUNN
SENIOR VICE PRESIDENT-BUSINESS DEVELOPMENT,
GENERAL COUNSEL AND SECRETARY
COLE NATIONAL GROUP, INC.
5915 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO 44124
TELEPHONE: 440-449-4100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
DAVID P. PORTER
JONES, DAY, REAVIS & POGUE
NORTH POINT
901 LAKESIDE AVENUE
CLEVELAND, OHIO 44114-1190
TELEPHONE: 216-586-3939
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effective date of this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The information in this prospectus is not complete. Cole National Group, Inc.
may not sell or offer these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and Cole National Group, Inc. is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
SUBJECT TO COMPLETION, DATED JULY 3, 2002
PROSPECTUS
$150,000,000
OFFER TO EXCHANGE
ALL OUTSTANDING 8 7/8% SENIOR SUBORDINATED NOTES DUE 2012
FOR
8 7/8% SENIOR SUBORDINATED NOTES DUE 2012
OF
COLE NATIONAL GROUP, INC.
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON AUGUST 8,
2002.
----------------------
THE EXCHANGE NOTES
- The terms of the notes to be issued are substantially identical to the
outstanding notes that Cole National Group, Inc. issued on May 22, 2002,
except for transfer restrictions, registration rights and liquidated
damages provisions relating to the outstanding notes that will not apply
to the exchange notes.
- Interest on the notes accrues at the rate of 8 7/8% per year, payable in
cash every six months on May 15 and November 15, with the first payment
on November 15, 2002.
- The notes are not secured by any collateral.
- There is no existing market for the notes.
MATERIAL TERMS OF THE EXCHANGE OFFER
- Expires at 5:00 p.m., New York City time, on August 8, 2002, unless
extended.
- This exchange offer is not subject to any condition other than that it
must not violate applicable law or any applicable interpretation of the
Staff of the Securities and Exchange Commission.
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged for an equal principal amount of notes which are
registered under the Securities Act of 1933.
- Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the exchange offer.
- Cole National Group, Inc. will not receive any cash proceeds from the
exchange offer.
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 so 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 of 1933. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for outstanding notes where
such outstanding notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. We have agreed that, for a
period of 180 days from the date upon which the exchange offer is consummated,
subject to any blackout period, or such shorter period in some circumstances, we
will make this prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
---------------------
PLEASE CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS
PROSPECTUS.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE SECURITIES TO BE DISTRIBUTED IN THE EXCHANGE OFFER,
NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IN ACCURATE
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this prospectus is July , 2002.
REFERENCES TO ADDITIONAL INFORMATION
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT US THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS. HOLDERS OF
OUTSTANDING NOTES MAY OBTAIN DOCUMENTS THAT ARE INCORPORATED BY REFERENCE IN
THIS PROSPECTUS FREE OF CHARGE BY REQUESTING THE DOCUMENTS, IN WRITING OR BY
TELEPHONE, FROM US AT:
COLE NATIONAL GROUP, INC.
5915 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO 44124
ATTENTION: SECRETARY
TELEPHONE: 440-449-4100
IF YOU WOULD LIKE TO REQUEST COPIES OF THESE DOCUMENTS, PLEASE DO SO BY
AUGUST 1, 2002 IN ORDER TO RECEIVE THEM BEFORE THE EXPIRATION OF THE EXCHANGE
OFFER. SEE "WHERE YOU CAN FIND ADDITIONAL INFORMATION."
---------------------
TABLE OF CONTENTS
<Table>
Summary............................... 1
Risk Factors.......................... 9
Forward-Looking Statements............ 16
Use of Proceeds....................... 16
Capitalization........................ 17
Selected Historical Consolidated
Financial Data...................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 27
Management............................ 35
Security Ownership of Certain
Beneficial Owners................... 45
Compensation Committee Interlocks and
Insider Participation and Certain
Relationships and Related Party
Transactions........................ 46
Description of Other Indebtedness..... 47
The Exchange Offer.................... 49
Description of Notes.................. 58
Certain U.S. Federal Income Tax
Considerations...................... 95
Plan of Distribution.................. 98
Legal Matters......................... 99
Experts............................... 99
Other Matters......................... 99
Where You Can Find Additional
Information......................... 100
Index to Consolidated Financial
Statements.......................... F-1
</Table>
---------------------
All trademarks set forth in this prospectus are the property of their
respective third-party owners, except for the trademarks Pearle Vision, Nobody
Cares for Eyes More than Pearle and Things Remembered and any others that we or
our subsidiaries own.
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE
ACCURATE ON THE DATE OF THIS PROSPECTUS.
i
SUMMARY
The following summary highlights certain significant aspects of our
business and this offering, but you should read this entire prospectus,
including the financial data and related notes, before making an investment
decision. Our fiscal years end on the Saturday closest to January 31 and are
identified according to the calendar year in which they begin. In this
prospectus, unless the context otherwise requires, the terms "we," "us," "our"
and other similar terms refer to the consolidated businesses of Cole National
Group, Inc. and all of its subsidiaries and not to its parent, Cole National
Corporation. You should carefully consider the information set forth under the
heading "Risk Factors."
COLE NATIONAL GROUP, INC.
OVERVIEW
We are a leading provider of vision care products and services, managed
vision care programs and personalized gifts with 2,917 retail locations in 50
states, Canada and the Caribbean as of February 2, 2002. Our retail vision
locations do business primarily under the names "Pearle Vision," "Sears
Optical," "Target Optical" and "BJ's Optical," and our managed vision care
programs are offered primarily through Cole Managed Vision. We refer to these
businesses as "Cole Vision." Our personalized gifts are offered through retail
locations, e-commerce and catalogs under the name "Things Remembered." We
believe that, based on industry data, we are one of the largest retail optical
companies in North America, and we believe we operate the only nationwide chain
of personalized gift stores. For fiscal 2001, we generated net revenue of $1.1
billion and EBITDA of $75.8 million.
COLE VISION
Cole Vision contributed 75% of our net revenue in fiscal 2001 with 2,143
company-owned and franchised retail locations throughout the United States,
Canada and the Caribbean as of February 2, 2002. Cole Managed Vision's programs
provide vision care benefits to participants through access to networks of
company-owned, franchised and third-party optical locations.
PEARLE VISION
As of February 2, 2002, Pearle Vision's operations consisted of 423
company-owned and 440 franchised stores located in 45 states, Canada and the
Caribbean. Most Pearle Vision stores operate in either an "Express" or
"Mainline" store format. Express stores contain a full surfacing lab that can
produce most glasses in approximately one hour. Mainline stores can produce
approximately 50% of prescriptions on-site in approximately one hour. Other
prescriptions are sent to Pearle Vision's central laboratory in Dallas. As of
February 2, 2002, 275 of the company-owned stores and 129 of the franchised
stores were Express format, with the balance being Mainline format.
COLE LICENSED BRANDS
Cole Licensed Brands operates principally under the "Sears Optical,"
"Target Optical" and "BJ's Optical" names. As of February 2, 2002, Cole Licensed
Brands operated 1,280 retail locations in 47 states and Canada, including 816
departments on the premises of Sears department stores, 124 free-standing Sears
Optical stores, 224 departments in Target stores and 116 departments in BJ's
Wholesale Club stores.
Locations are, in most cases, retail eyecare stores offering brand name and
private label prescription eyeglasses, contact lenses and accessories, which
make available services of a doctor of optometry who performs complete eye
examinations and prescribes eyeglasses and contact lenses. Eye examination
services are available in most stores and are provided by independent doctors of
optometry, when required by state law, and by employees of Cole Licensed Brands
in other situations.
1
COLE MANAGED VISION
Cole Managed Vision's programs provide a comprehensive range of eyecare
benefits primarily marketed directly to large employers, health maintenance
organizations, or HMOs, insurance companies and other organizations. It offers
enhanced programs to plan sponsors to provide their members with prepaid eye
examinations, as well as pricing discounts or funded materials benefits. Its
Vision One discount program gives plan sponsors the opportunity to offer their
members a group discount at locations within Cole Managed Vision's network with
minimal direct cost to the plan sponsor. Cole Managed Vision offers multiple
provider panels to its clients, including a network of more than 20,000
providers. Managed vision care programs generated approximately 37% of Cole
Vision's revenues in fiscal 2001.
THINGS REMEMBERED
Things Remembered contributed 25% of our net revenue in fiscal 2001. As of
February 2, 2002, Things Remembered operated 774 stores and kiosks generally
located in large, enclosed shopping malls located in 46 states. Each location
carries a wide assortment of engravable items and provides "while you shop"
personalization services for any occasion including holiday, wedding, business
recognition and other special occasion gift events. Engraving is offered for
items purchased at the store as well as for items purchased elsewhere. Customers
can also access Things Remembered's broad gift assortment through its catalogs
(1-800-274-7367) and its e-commerce site, www.thingsremembered.com (the contents
of this website are not a part of this prospectus).
RECENT DEVELOPMENTS
On April 26, 2002 we commenced a tender offer to purchase all of our $150.0
million aggregate principal amount of 9 7/8% senior subordinated notes due 2006.
The tender offer expired on May 23, 2002 at which time we purchased $136.8
million of our 9 7/8% senior subordinated notes due 2006 at 104.9375% of the
aggregate principal amount of the notes, plus accrued interest up to the date of
purchase. In addition, holders of the 9 7/8% senior subordinated notes due 2006
who tendered their notes and delivered the related consents on or before 5:00
p.m., New York City time, on May 9, 2002 received a premium of 0.1625% of the
aggregate principal amount of the notes. On May 30, 2002, we redeemed the
remaining $13.2 million of our 9 7/8% senior subordinated notes due 2006 at
104.9375% of the aggregate principal amount of the notes. None of our 9 7/8%
senior subordinated notes due 2006 remain outstanding.
On May 23, 2002, we and our lenders amended our senior credit facility to,
among other things, extend the term of our senior credit facility to May 31,
2006, provide a working capital commitment of $75 million and reduce borrowing
rates.
On June 13, 2002, we replaced Arthur Andersen LLP as our independent public
accountants and appointed Deloitte & Touche LLP as our auditors for fiscal year
2002.
INFORMATION ABOUT COLE NATIONAL GROUP, INC.
We are a Delaware corporation. Our principal executive office is located at
5915 Landerbrook Drive, Mayfield Heights, Ohio 44124, and our telephone number
is (440) 449-4100. We are a wholly-owned subsidiary of Cole National
Corporation, a holding company that has common stock traded on the New York
Stock Exchange. Our parent also has a 21% interest in Pearle Europe B.V., which
has optical stores in the Netherlands, Belgium, Germany, Austria, Italy,
Portugal and Poland.
2
THE EXCHANGE OFFER
THE EXCHANGE OFFER............ We are offering to exchange $150.0 million in
aggregate principal amount of our 8 7/8% senior
subordinated notes due 2012, which have been
registered under the federal securities laws,
for $150.0 million aggregate principal amount
of our outstanding unregistered 8 7/8% senior
subordinated notes due 2012, which we issued on
May 22, 2002 in a private offering. You have
the right to exchange your outstanding notes
for exchange notes with substantially identical
terms.
In order for your outstanding notes to be
exchanged, you must properly tender them before
the expiration of the exchange offer. All
outstanding notes that are validly tendered and
not validly withdrawn will be exchanged. We
will issue the exchange notes on or promptly
after the expiration of the exchange offer.
REGISTRATION RIGHTS
AGREEMENT..................... We issued the outstanding notes on May 22, 2002
to a limited number of initial purchasers. At
that time, we signed a registration rights
agreement with those initial purchasers, which
requires us to conduct this exchange offer.
This exchange offer is intended to satisfy
those rights set forth in the registration
rights agreement. After the exchange offer is
complete, you will not have any further rights
under the registration rights agreement,
including any right to require us to register
any outstanding notes that you do not exchange
or to pay you liquidated damages.
FAILURE TO EXCHANGE YOUR
OUTSTANDING NOTES............. If you do not exchange your outstanding notes
for exchange notes in the exchange offer, you
will continue to be subject to the restrictions
on transfer provided in the outstanding notes
and the indenture governing those notes. In
general, you may not offer or sell your
outstanding notes unless they are registered
under the federal securities laws or are sold
in a transaction exempt from or not subject to
the registration requirements of the federal
securities laws and applicable state securities
laws.
EXPIRATION DATE............... The exchange offer will expire at 5:00 p.m.,
New York City time, on August 8, 2002, unless
we decide to extend the expiration date. See
"The Exchange Offer -- Expiration Date;
Extensions; Amendments."
CONDITIONS TO THE EXCHANGE
OFFER......................... The exchange offer is subject to conditions
that we may waive. The exchange offer is not
conditioned upon any minimum amount of
outstanding notes being tendered for exchange.
See "The Exchange Offer -- Conditions."
We reserve the right, subject to applicable
law, at any time and from time to time, but
before the expiration of the exchange offer:
- to delay the acceptance of the outstanding
notes;
- to terminate the exchange offer if specified
conditions have not been satisfied;
- to extend the expiration date of the exchange
offer and retain all tendered outstanding
notes subject to the right of tendering
holders to withdraw their tender of
outstanding notes; and
3
- to waive any condition or otherwise amend the
terms of the exchange offer in any respect.
See "The Exchange Offer -- Expiration Date;
Extensions; Amendments."
PROCEDURES FOR TENDERING
NOTES......................... If you wish to tender your outstanding notes
for exchange, you must:
- complete and sign the enclosed letter of
transmittal by following the related
instructions; and
- send the letter of transmittal, as directed
in the instructions, together with any other
required documents, to the exchange agent,
either (1) with the outstanding notes to be
tendered or (2) in compliance with the
specific procedures for guaranteed delivery
of the outstanding notes.
Brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer.
Please do not send your letter of transmittal
or certificates representing your outstanding
notes to us. Those documents should only be
sent the exchange agent. Questions regarding
how to tender and requests for information
should be directed to the exchange agent. See
"The Exchange Offer -- Exchange Agent."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. If your outstanding notes are registered in the
name of a broker, dealer, commercial bank,
trust company or other nominee, we urge you to
contact that person promptly if you wish to
tender your outstanding notes pursuant to the
exchange offer. See "The Exchange
Offer -- Procedures for Tendering."
WITHDRAWAL RIGHTS............. You may withdraw the tender of your outstanding
notes at any time prior to the expiration date
of the exchange offer by delivering a written
notice of your withdrawal to the exchange
agent. You must also follow the withdrawal
procedures as described under the heading "The
Exchange Offer -- Withdrawal of Tenders."
FEDERAL INCOME TAX
CONSIDERATIONS................ The exchange of outstanding notes for the
exchange notes in the exchange offer will not
be a taxable event for U.S. federal income tax
purposes. See "Certain U.S. Federal Income Tax
Considerations."
RESALES OF EXCHANGE NOTES..... We believe that you will be able to offer for
resale, resell or otherwise transfer exchange
notes issued in the exchange offer without
compliance with the registration and prospectus
delivery requirements of the federal securities
laws, provided that:
- you are acquiring the exchange notes in the
ordinary course of business;
- you do not have any arrangement or
understanding with any person to participate
in the distribution of the exchange notes;
- you are not engaged in, and do not intend to
engage in, a distribution of the exchange
notes;
4
- you are not one of our "affiliates," as
defined in Rule 405 of the Securities Act.
Our belief is based on interpretations by the
staff of the SEC, as set forth in no action
letters issued to third parties unrelated to
us. The staff has not considered this exchange
offer in the context of a no-action letter, and
we cannot assure you that the staff would make
a similar determination with respect to this
exchange offer.
If our belief is not accurate and you transfer
an exchange note without delivering a
prospectus meeting the requirements of the
federal securities laws or without an exemption
from these laws, you may incur liability under
the federal securities laws. We do not and will
not assume, or indemnify you against, this
liability.
Each broker-dealer that receives exchange notes
for its own account in exchange for outstanding
notes, where such outstanding 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 exchange notes. See "The Exchange
Offer -- Resale of the Exchange Notes."
EXCHANGE AGENT................ The exchange agent for the exchange offer is
Wells Fargo Bank Minnesota, N.A. The address,
telephone number and facsimile number of the
exchange agent are set forth in "The Exchange
Offer -- Exchange Agent" and in the letter of
transmittal.
THE EXCHANGE NOTES
EXCHANGE NOTES................ $150,000,000 in aggregate principal amount of
8 7/8% Senior Subordinated Notes due 2012.
MATURITY DATE................. May 15, 2012.
INTEREST PAYMENT DATES........ May 15 and November 15, commencing November 15,
2002.
RANKING....................... The exchange notes will be unsecured and:
- subordinate in right of payment to all of
our existing and future senior
indebtedness;
- equal in right of payment to our existing
and future senior subordinated
indebtedness;
- senior in right of payment to our future
subordinated indebtedness; and
- effectively junior to all indebtedness of
our existing and future subsidiaries.
Assuming we had completed the offering of the
outstanding notes on February 2, 2002 and after
giving effect to the application of the
proceeds from that offering, our outstanding
senior debt and the debt and other obligations
of our subsidiaries would have been $204.0
million, including $69.4 million we owe to our
parent.
OPTIONAL REDEMPTION........... On or after May 15, 2007, we may redeem some or
all of the exchange notes at any time at the
redemption prices described in the section
"Description of Notes -- Optional Redemption."
5
Before May 15, 2005, we may redeem up to 40% of
the original aggregate principal amount of the
exchange notes with the net cash proceeds of
certain public offerings of equity, provided at
least 60% of the original aggregate principal
amount of the exchange notes remains
outstanding after the redemption.
MANDATORY OFFER TO PURCHASE... If we experience specific kinds of changes in
control, we must offer to repurchase the
exchange notes at the prices, plus accrued and
unpaid interest, if any, to the date of
redemption, listed in the section "Description
of Notes -- Repurchase at the Option of
Holders."
COVENANTS..................... The indenture governing the exchange notes
(among other things) limits our ability and
that of our restricted subsidiaries to:
- incur additional indebtedness and issue
preferred stock;
- pay dividends or make other distributions;
- make other restricted payments and
investments;
- create liens;
- incur restrictions on the ability of our
subsidiaries to pay dividends or other
payments to us;
- sell assets;
- merge or consolidate with other entities;
and
- enter into transactions with affiliates.
Each of the covenants is subject to a number of
important exceptions and qualifications. See
"Description of Notes -- Certain Covenants."
USE OF PROCEEDS............... We will not receive any cash proceeds from the
issuance of the exchange notes. See "Use of
Proceeds."
RISK FACTORS
You should consider carefully all the information set forth in this
prospectus and, in particular, should evaluate the specific factors under the
section "Risk Factors" beginning on page 9.
6
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data. The
summary statement of operations and balance sheet data as of and for the fiscal
years ended January 29, 2000, February 3, 2001 and February 2, 2002 are derived
from our audited consolidated financial statements. The summary statement of
operations and balance sheet data as of and for the first quarters ended May 4,
2002 and May 5, 2001 are derived from our unaudited consolidated financial
statements. Our consolidated balance sheets as of February 3, 2001 and February
2, and May 4, 2002 and our consolidated statements of operations and
consolidated statements of cash flows for the fiscal years ended January 29,
2000, February 3, 2001 and February 2, 2002, and first quarters ended May 5,
2001 and May 4, 2002 and the independent auditors' report for fiscal years ended
January 29, 2000, February 3, 2001 and February 2, 2002, are included elsewhere
in this prospectus. Fiscal years end on the Saturday closest to January 31 and
are identified according to the calendar year in which they begin. Fiscal 2001
and fiscal 1999 each consisted of a 52-week period, and fiscal 2000 consisted of
a 53-week period. The summary consolidated financial data should be read in
conjunction with, and are qualified in their entirety by reference to, our
audited consolidated financial statements and the related notes and our
unaudited interim consolidated financial statements and related notes. The
results of operation for interim periods are not necessarily indicative of
results for a full year's operations.
<Table>
<Caption>
FISCAL YEAR ENDED
------------------------------------------------------ FIRST QUARTER ENDED
JANUARY 29, 2000 FEBRUARY 3, 2001 FEBRUARY 2, 2002 -------------------------
(52 WEEKS) (53 WEEKS) (52 WEEKS) MAY 5, 2001 MAY 4, 2002
(dollars in thousands) ---------------- ---------------- ---------------- ----------- -----------
STATEMENT OF OPERATIONS
DATA:
Net revenue................. $1,037,581 $1,076,420 $1,101,333 $ 270,291 $ 290,109
Operating income............ 34,560 34,094 36,362 7,831 11,512
Interest expense............ 27,405 28,402 27,553 6,901 6,993
Net income.................. 4,140 1,883 4,911 560 2,890
BALANCE SHEET DATA (END OF
PERIOD):
Total assets................ 543,528 561,000 561,779 566,464 572,587
Total long-term debt (1).... 274,795 274,311 274,372 274,326 274,390
Stockholder's equity........ 52,949 54,291 59,176 54,642 62,188
OTHER DATA:
EBITDA (2).................. 73,045 71,445 75,807 17,140 20,470
EBITDAR (3)................. 200,080 201,869 214,913 51,706 56,969
Capital expenditures and
systems development....... 39,516 43,474 41,997 8,040 7,576
Depreciation and
amortization.............. 38,485 37,351 39,445 9,309 8,958
Ratio of total long-term
debt to EBITDA............ 3.8x 3.8x 3.6x 16.0x 13.4x
Ratio of EBITDA to interest
expense................... 2.7x 2.5x 2.8x 2.5x 2.9x
Ratio of earnings to fixed
charges (4)............... 1.2x 1.1x 1.2x 1.1x 1.3x
NUMBER OF UNITS (END OF
PERIOD):
Cole Licensed Brands........ 1,056 1,164 1,280 1,186 1,286
Pearle Vision
company-owned............. 454 439 423 438 422
Pearle Vision franchised.... 416 426 440 421 442
---------- ---------- ---------- ----------- -----------
Total Cole Vision......... 1,926 2,029 2,143 2,045 2,150
Things Remembered........... 796 784 774 781 776
---------- ---------- ---------- ----------- -----------
Total Cole National....... 2,722 2,813 2,917 2,826 2,926
</Table>
7
<Table>
<Caption>
FISCAL YEAR ENDED
------------------------------------------------------ FIRST QUARTER ENDED
JANUARY 29, 2000 FEBRUARY 3, 2001 FEBRUARY 2, 2002 -------------------------
(52 WEEKS) (53 WEEKS) (52 WEEKS) MAY 5, 2001 MAY 4, 2002
(dollars in thousands) ---------------- ---------------- ---------------- ----------- -----------
COMPARABLE STORE SALES
GROWTH:
Cole Licensed Brands
(U.S.).................... (2.7)% 3.7% 3.8% 4.9% 3.5%
Pearle Vision company-owned
(U.S.).................... (5.5)% 2.0% 2.6% 1.2% 10.6%
Total Cole Vision......... (3.5)% 3.1% 2.6% 2.7% 5.9%
Things Remembered........... 7.2% 5.4% (1.8)% 0.1% (3.0)%
Total Cole National....... (0.8)% 3.7% 1.4% 2.1% 3.9%
Pearle Vision U.S. franchise
stores.................... 0.4% 3.3% 0.0% (1.9)% 5.9%
Pearle Vision U.S.
chain-wide................ (2.4)% 2.7% 1.2% (0.5)% 8.1%
</Table>
- ---------------
(1) Total long-term debt includes current and non-current obligations under
capital leases.
(2) EBITDA represents income from operations before income taxes, interest
expense, depreciation and amortization. EBITDA is a widely accepted
financial indicator of a company's ability to service and/or incur debt.
However, EBITDA should not be construed as an alternative to operating
income (as determined in accordance with generally accepted accounting
principles) or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of our operating performance or as a measure of
liquidity.
(3) EBITDAR represents EBITDA plus rent expense.
(4) Ratio of earnings to fixed charges was 1.7x for the fiscal year ended
January 31, 1998 and 1.6x for the fiscal year ended January 30, 1999.
8
RISK FACTORS
You should carefully consider the risk factors set forth below as well as
the other information contained in this prospectus before exchanging any
outstanding notes pursuant to this prospectus. The risks described below are not
the only risks facing us. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial may also materially and
adversely affect our business operations. Any of the following risks could
materially adversely affect our business, financial condition or results of
operations. In such case, you may lose all or part of your original investment.
RISKS RELATING TO THIS OFFERING
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE EXCHANGE NOTES.
We have a significant amount of indebtedness. As of February 2, 2002, we
had $274.4 million of total long-term indebtedness and after giving pro forma
effect to the offering of the outstanding notes and the application of the
proceeds from that offering, we would have had total long-term indebtedness of
$275.1 million, of which $150.0 million would have consisted of the outstanding
notes. In addition, as of February 2, 2002 we owed $73.5 million to our parent
and after giving pro forma effect to the offering of the outstanding notes and
application of the proceeds from that offering, we would have owed our parent
$69.4 million. Also, after giving pro forma effect to the offering of the
outstanding notes and the application of the proceeds from that offering, our
ratio of earnings to fixed charges would have been 1.2x for the year ended
February 2, 2002.
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it difficult for us to satisfy our obligations with respect to the
exchange notes;
- make us vulnerable to general adverse economic and industry conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have less debt; and
- limit our ability to borrow additional funds.
In addition, the indenture, the senior credit facility and the other
existing indenture contain financial and other restrictive covenants that will
limit our ability to borrow additional funds and engage in other activities that
may be in our long-term best interests. Our failure to comply with those
covenants could result in an event of default which, if not cured or waived,
could result in the acceleration of all of our debts.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR MORE DEBT, WHICH COULD FURTHER EXACERBATE THE RISKS ASSOCIATED WITH OUR
SUBSTANTIAL LEVERAGE.
We and our subsidiaries may be able to incur additional indebtedness in the
future. The terms of the indenture will not fully prohibit us or our
subsidiaries from doing so. The senior credit facility, which we guarantee,
would permit additional borrowings by our subsidiaries of up to $75.0 million
less our outstanding letters of credit (which were $12.3 million as of February
2, 2002, and all of those borrowings would rank senior to the exchange notes. If
new debt is added to our current debt levels, the related risks that we now face
could intensify.
9
TO SERVICE OUR INDEBTEDNESS, WE REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
We currently expect we will continue to be able to service our obligations
on our debt out of cash flow from operations. Our ability to satisfy our
obligations will depend upon the future financial and operating performance of
our subsidiaries and upon our ability to renew or refinance borrowings or to
raise additional equity capital. Each of these alternatives depends on
financial, competitive, legislative, regulatory, business and other general
economic factors affecting us and our subsidiaries and the optical and
personalized gifts retailing businesses in particular, many of which are beyond
our control and the control of our subsidiaries. If we and our subsidiaries are
unable to generate sufficient cash flow to meet our debt service obligations, we
will have to pursue one or more alternatives, which may include reducing or
delaying capital expenditures, refinancing debt, selling assets or our parent
raising additional equity capital. We cannot assure you that any of these
alternatives could be accomplished on satisfactory terms. While we believe 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 our control would increase
the need for alternative sources of liquidity.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE EXCHANGE NOTES IS JUNIOR TO OUR EXISTING
SENIOR INDEBTEDNESS AND POSSIBLY ALL OF OUR FUTURE BORROWINGS.
The exchange notes rank behind all of our existing senior indebtedness,
other than trade payables, and all of our future borrowings, other than trade
payables, except any future indebtedness that expressly provides that it ranks
equal with, or subordinated in right of payment to, the exchange notes. As a
result, upon any distribution to our creditors in a bankruptcy, liquidation or
reorganization or similar proceeding relating to us or our property, the holders
of our senior debt will be entitled to be paid in full before any payment may be
made with respect to the exchange notes.
Assuming we had completed the offering of the outstanding notes and applied
the proceeds from that offering on February 2, 2002, the outstanding notes would
have been subordinated to $69.5 million of senior debt of which $69.4 million is
owed to our parent, and approximately $75.0 million (less outstanding letters of
credit of $12.3 million) would have been available for borrowing by our
subsidiaries and guaranteed by us under the senior credit facility. We will be
permitted to borrow substantial additional indebtedness, including senior debt,
in the future under the terms of the indenture. However, our senior credit
facility limits the amount of senior debt we can borrow, but from time to time
this limit may change.
In addition, all payments on the exchange notes will be blocked in the
event of a payment default on senior debt and may be blocked for up to 179 of
360 consecutive days in the event of certain non-payment defaults on senior
debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us, holders of the exchange notes will participate with
trade creditors and all other holders of our subordinated indebtedness in the
assets remaining after we have paid all of our senior debt. However, because the
indenture will require that amounts otherwise payable to holders of the exchange
notes in a bankruptcy or similar proceeding be paid to holders of senior debt
instead, holders of the exchange notes may receive less, ratably, than holders
of trade payables in any such proceeding. In any of these cases, we may not have
sufficient funds to pay all of our creditors and holders of exchange notes may
receive less, ratably, than the holders of our senior debt.
THE EXCHANGE NOTES WILL BE EFFECTIVELY SUBORDINATED TO THE DEBTS OF OUR
SUBSIDIARIES.
We derive all of our revenue and substantially all of our cash flow from
our subsidiaries. Our parent will not and our subsidiaries will not initially
guarantee the exchange notes. Creditors of our subsidiaries, including trade
creditors, will generally be entitled to payment from the assets of those
subsidiaries before those assets can be distributed to us. As a result, the
exchange notes will effectively be subordinated to the prior payment of all of
the debts, including trade payables, of our subsidiaries.
10
Assuming we had completed the offering of the outstanding notes and applied
the proceeds from that offering on February 2, 2002, the aggregate amount of
trade payables and other accrued and long-term liabilities of our subsidiaries
would have been approximately $134.5 million. Further, approximately $75.0
million (less outstanding letters of credit of $12.3 million) would have been
available to our subsidiaries for additional borrowing under the senior credit
facility, which is guaranteed by us. In the event a payment default exists on
our senior debt and the maturity of that debt is accelerated, we cannot assure
you that our subsidiaries will be able to repay such accelerated indebtedness.
We cannot assure you that our assets and our subsidiaries' assets will be
sufficient to fully repay the exchange notes and our other indebtedness.
WE MAY NOT HAVE ACCESS TO THE CASH FLOW AND OTHER ASSETS OF OUR SUBSIDIARIES
THAT MAY BE NEEDED TO MAKE PAYMENT ON THE EXCHANGE NOTES.
Although our business is conducted through our subsidiaries, none of our
subsidiaries is obligated to make funds available to us for payment on the
exchange notes. Accordingly, our ability to make payments on the exchange notes
depends on the earnings and the distribution of funds from our subsidiaries. The
terms of our senior credit facility restricts our subsidiaries from paying
dividends and otherwise transferring assets to us. Furthermore, our subsidiaries
will be permitted under the terms of the indenture to incur additional
indebtedness that may severely restrict or prohibit the making of distributions,
the payment of dividends or the making of loans by such subsidiaries to us. We
cannot assure you that the agreements governing the current and future
indebtedness of our subsidiaries will permit our subsidiaries to provide us with
sufficient dividends, distributions or loans to fund payments on the exchange
notes when due.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE EXCHANGE NOTES COULD BE ADVERSELY AFFECTED
IF ANY OF OUR SUBSIDIARIES DECLARE BANKRUPTCY, LIQUIDATE OR REORGANIZE.
Our parent will not guarantee the exchange notes and our subsidiaries will
not initially guarantee the exchange notes. In the event of a bankruptcy,
liquidation or reorganization of any of our subsidiaries, holders of their
indebtedness and their trade creditors will generally be entitled to payment of
their claims from the assets of those subsidiaries before any assets are made
available for distribution to us.
Assuming we had completed the offering of the outstanding notes and applied
the proceeds from that offering on February 2, 2002, the outstanding notes would
have been effectively junior to $134.5 million of trade payables and other
accrued and long-term liabilities of our subsidiaries and approximately $75.0
million (less outstanding letters of credit of $12.3 million), which is
guaranteed by us, would have been available to our subsidiaries for future
borrowing under the senior credit facility. Our subsidiaries generated 100% of
our consolidated revenues in the year ended February 2, 2002 and held 88.2% of
our consolidated assets as of February 2, 2002.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the happening of specified change of control events, we will be
required to offer to repurchase all of the exchange notes and the existing notes
at 101% of their principal amount, plus any accrued and unpaid interest and
liquidated damages, if any, to the date of the purchase. A change of control
under the indenture governing the exchange notes will result in a default under
the senior credit facility. The exercise by the holders of the exchange notes or
the existing notes of their right to require us to repurchase the exchange notes
or the existing notes upon a change of control could also cause a default under
other debt, including the senior credit facility, even if the change of control
itself does not, because of the financial effect on us of the repurchase. Our
ability to pay cash to the holders of the exchange notes or the existing notes
upon a repurchase may be limited by our then existing financial resources. We
cannot assure you that in the event of a change of control, we will have, or
will have access to, sufficient funds or will be contractually permitted under
the terms of outstanding debt to pay the required purchase price for all the
exchange notes or the existing notes tendered by holders upon a change of
control. Our obligations to offer to repurchase the exchange notes are subject
to our obligations to offer to repurchase the existing notes and redeem amounts
outstanding under the senior credit facility. Even if we can satisfy our
obligations to the holders of the
11
existing notes and under the senior credit facility, we cannot assure you that
we would be able to fund the repurchase of any exchange notes. In addition,
various corporate events, such as a leveraged recapitalization, which would
increase the level of our indebtedness, would not constitute a "change of
control" under the indenture.
THE TERMS OF OUR DEBT INSTRUMENTS IMPOSE FINANCIAL AND OPERATING RESTRICTIONS.
The senior credit facility, the indenture governing the exchange notes and
the indenture governing our existing notes each contain a number of covenants
that, among other things, limit our ability to:
- incur additional debt;
- pay dividends;
- prepay subordinated debt;
- dispose of specific assets;
- create liens;
- make capital expenditures;
- make investments or acquisitions; and
- otherwise restrict corporate activities.
The senior credit facility, the indenture governing the exchange notes and
the indenture governing our existing notes also require us to comply with
financial ratios and tests, under which we are required to achieve financial and
operating results. Our ability to comply with these provisions may be affected
by events beyond our control. A breach of any of these covenants could result in
a default under the senior credit facility, the indenture governing the exchange
notes or the indenture governing our existing notes, as the case may be. In the
event of any such default, depending on the actions taken by the lenders under
the senior credit facility, we could be prohibited from making any payments on
the exchange notes. In addition, these lenders could elect to declare all
amounts borrowed under the senior credit facility, together with accrued
interest, to be due and payable, which, in some instances, would be an event of
default under the indenture governing the exchange notes. As a result of the
priority afforded the senior credit facility, we cannot assure you that we would
have sufficient assets to pay debt then outstanding under the senior credit
facility, the indenture governing the existing notes and the indenture governing
the exchange notes. Any future refinancing of the senior credit facility is
likely to contain similar restrictive covenants.
AN ACTIVE LIQUID TRADING MARKET FOR THE EXCHANGE NOTES MAY NOT DEVELOP.
There is currently no public market for the exchange notes. The exchange
notes are a new class of securities which have never been traded. We cannot
assure you that an active trading market for the exchange notes will develop, or
if one does develop, that it will be sustained. Also, it is possible that the
market for the exchange notes will be volatile. This volatility in price may
affect your ability to resell your exchange notes or the timing of their sale.
IF YOU DO NOT EXCHANGE YOUR OUTSTANDING NOTES, YOU MAY HAVE DIFFICULTY IN
TRANSFERRING THEM AT A LATER TIME.
We will issue exchange notes in exchange for the outstanding notes after
the exchange agent receives your outstanding notes, the letter of transmittal
and all related documents. You should allow adequate time for delivery if you
choose to tender your outstanding notes for exchange. Outstanding notes that are
not exchanged will remain subject to restrictions on transfer and will not have
rights to registration.
If you do participate in the exchange offer for the purpose of
participating in the distribution of the exchange notes, you must comply with
the registration and prospectus delivery requirements of the Securities Act for
any resale transaction. Each broker-dealer who holds outstanding notes for its
own account due to market-making or other trading activities and who receives
exchange notes for its own account must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. If any
outstanding notes are not tendered in the exchange or are tendered but not
accepted, the trading market for
12
such outstanding notes could be negatively affected due to the limited amount
expected to remain outstanding following the completion of the exchange offer.
RISKS RELATING TO OUR BUSINESS
OUR RELATIONSHIPS WITH MAJOR HOST STORES AND FRANCHISEES COULD CHANGE, WHICH
COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR RESULTS.
We operate the majority of Cole Vision locations under the names of their
respective host stores under leases, licenses or other arrangements with those
host stores that may be terminated on 90 days notice or less in some
circumstances. We have had a host store relationship with Sears for over 40
years. We cannot assure you that our relationship with Sears or any other host
store will remain stable or be maintained or renewed. If our relationship with
any host store were to terminate or change materially, there could be a material
adverse effect on our business, results of operations or financial condition.
Further, our licensed optical business could be adversely affected by a decline
in the business of our host stores. In the past, we have operated in other
optical chains, such as Montgomery Ward, where we closed operations in December
1999, resulting in a charge of $2.0 million.
In addition, 440 of our Pearle Vision locations are operated by franchisees
as of February 2, 2002. Although we believe our relationship with our
franchisees is generally good, we cannot assure you that we will continue to
experience and enjoy good relations with our franchisees.
A WEAK FOURTH QUARTER IN OUR GIFT BUSINESS COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
Our Things Remembered gift business historically has been highly seasonal.
Over the last three fiscal years, on average, approximately 34.2% of its net
revenue and approximately 62.4% of its income from operations was generated in
the fourth fiscal quarter because of the importance of gift sales during the
Christmas retailing season. A weak fourth quarter in our gift business could
adversely affect us.
COMPETITION COULD NEGATIVELY IMPACT OUR OPERATIONS.
We operate in highly competitive businesses. Our retail optical businesses
compete with other optical companies, private ophthalmologists, optometrists,
opticians and a growing number of HMOs in a highly fragmented marketplace.
Pearle Vision competes on the basis of its recognized brand name and by offering
products that appeal to the more affluent and fashion-conscious consumer. Cole
Licensed Brands compete primarily on the basis of the service they provide as
well as price, fashion, product quality, the reputation of their host stores and
the appeal to the customers of the host stores. Things Remembered competes with
other gift store retailers on the basis of the value-added point-of-sales,
personalization and other services that it provides as well as price and product
quality. Competition for our Cole Managed Vision business is principally other
managed vision care companies, some of which are associated with professional
groups, insurance companies or major retail optical companies and the larger
regional optical firms. Competition for this business is driven by size of
provider network, the pricing of vision care services and quality and
consistency of service. Some of our competitors have greater financial resources
than we do.
WE COULD BE NEGATIVELY IMPACTED BY FACTORS THAT COMMONLY AFFECT BUSINESSES LIKE
OURS.
Our future performance may be subject to a number of factors beyond our
control, including:
- economic downturns and cyclical variations in the retail areas we serve;
- inefficiencies or breakdowns in our product supply chain;
- our ability to select and stock merchandise attractive to customers;
- our quality controls in optical manufacturing and engraving;
- operating factors affecting customer satisfaction, such as store
appearance;
- the mix of goods sold, pricing and other competitive factors;
- the maintenance and implementation of information systems;
- unanticipated changes in consumer spending and shopping patterns; and
- weather factors affecting retail operations.
13
Any of these factors may adversely affect our revenue, cash flow and
profitability.
WE CONDUCT BUSINESS IN A HEAVILY REGULATED INDUSTRY. VIOLATIONS OF FEDERAL AND
STATE LAWS MAY ADVERSELY AFFECT OUR BUSINESS.
Both federal and state governments extensively regulate the health care
industry, including relationships among health care providers such as
optometrists and retailers like us. Federal fraud and abuse laws and state
anti-kickback laws prohibit compensation for referrals of patients, items or
services in some circumstances. We must also comply with federal laws such as
the administrative simplification provisions of the Health Insurance Portability
and Accountability Act of 1996, or HIPAA, and the Food and Drug Administration
Act, which regulates medical devices such as contact lenses. In addition, many
states prohibit business corporations from practicing optometry or controlling
the professional judgments or decisions of optometrists. Laws of California and
Texas, where we own and operate HMOs, extensively regulate HMOs. Violations of
these and other laws could subject us to litigation and result in substantial
civil or criminal penalties, including treble civil monetary penalties, could
cause us to change our operations, and/or could cause the loss of one of more of
our licenses to operate certain of our stores or businesses.
California statutes and regulations are particularly restrictive. We were
recently sued by the Attorney General of California alleging violation of some
of these California laws. The suit alleges claims for various statutory
violations related to the operation of our 24 Pearle Vision stores in
California. Pearle Vision, Inc. does not employ optometrists in California.
Optometrists there are employed by Pearle Vision Care, Inc., a vision healthcare
service plan, which has been licensed by the State of California since 1986. The
claims include alleged untrue or misleading advertising, illegal dilation fees,
unlawful advertising of eye exams, maintaining an optometrist on or near the
premises by a registered dispensing optician, unlawful advertising of an
optometrist, unlicensed practice of optometry, and illegal relationships among
dispensing opticians and optometrists. The action seeks unspecified damages,
restitution and injunctive relief.
The case is in its early stages and we cannot predict with certainty its
outcome or costs. The California Attorney General's office has moved for a
preliminary injunction to enjoin certain advertising practices and from charging
dilation fees. Although we believe we are in compliance with California law and
intend to continue to defend the issues raised in the motion for injunctive
relief and the remaining issues in the case vigorously, we may be required to
modify our activities or might be required to pay damages or restitution in
currently undeterminable amounts, the cost of which might have an adverse effect
on our operating results in one or more periods.
ADOPTION OF NEW FEDERAL AND STATE RULES AND REGULATIONS OR ADVERSE CHANGES TO
EXISTING RULES AND REGULATIONS COULD REQUIRE US TO CHANGE OUR OPERATIONS OR MAKE
UNANTICIPATED EXPENDITURES.
Due to the extensive regulation of our business by federal and state
governments, new rules and regulations or adverse changes to existing rules and
regulations may adversely affect our business and results of operations. For
example, in late 2000, the Department of Health and Human Services issued final
regulations implementing the standards for electronic transactions and code set
and privacy of individually identifiable health information of the
Administrative Simplification provision of HIPAA, which regulations became
effective in October 2000 and April 2001. These regulations require the
development and implementation of privacy and transaction standards for
electronic health information and impose significant use and disclosure
obligations on covered entities that send or receive individually identifiable
electronic health information. We must be in compliance with the privacy
regulations by April 14, 2003 and the transaction and code set regulations by
October 16, 2002 or file for a one-year extension to meet an October 16, 2003
compliance date. Sanctions for failing to comply with the regulations can
include criminal penalties and civil sanctions. We believe that the regulations
will require substantial changes to our systems, policies and procedures, which
may be costly and may decrease our working capital for other expenditures.
In addition to the federal health information privacy regulations described
above, most states have enacted confidentiality laws that limit the disclosure
of confidential health information. The final privacy regulations under HIPAA do
not preempt state laws relating to health information privacy that are more
restrictive than the HIPAA regulations.
14
OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO DEVELOP NEW MANAGED CARE BUSINESS
AND MAINTAIN OUR EXISTING MANAGED CARE CONTRACTS.
As an increasing percentage of patients receive health care coverage
through managed care payors, our success will continue to depend on our ability
to negotiate contracts with employer groups, HMOs, insurance companies and other
private third-party payors. We cannot assure you that we will be able to
establish or maintain satisfactory relationships with managed care and other
third-party payors. In addition, to the extent that patients or enrollees under
capitated managed care arrangements require more frequent or extensive care than
anticipated, operating margins may be reduced.
Furthermore, most states impose strict licensure requirements on companies
that do business with HMOs. These licensing laws mandate strict financial and
other reporting requirements, which can include mandatory filings with the state
relating to the quality of care standards maintained by our businesses.
Violations of these laws or regulations could result in monetary fines and
penalties. We cannot assure you we will be able to continue to meet the
extensive licensure requirements in each state.
NEW MEDICAL AND TECHNOLOGICAL CHANGES MAY REDUCE THE NEED FOR OUR OPTICAL
PRODUCTS.
Technological developments in the eyecare industry, such as new surgical
procedures or medical devices, may adversely affect the demand for our products.
Corneal refractive surgical procedures such as Lasik surgery and the development
of new pharmaceutical products may decrease the demand for our optical products.
If these new advances were to provide a practical alternative to traditional
vision correction, the demand for contact lenses and eyeglasses may materially
decrease. We cannot assure you that medical advances and technological
developments will not have a material adverse effect on our optical business.
TERRORIST ATTACKS AND OTHER ACTS OF VIOLENCE OR WAR MAY IMPACT THE TRADING
MARKET OF THESE NOTES AND OUR OPERATIONS AND PROFITABILITY.
Terrorist attacks may negatively affect our operations and your investment.
Future attacks or armed conflicts may directly impact our physical facilities.
Furthermore, these attacks may make the transportation of our supplies and
products more difficult and expensive, which could have a material adverse
impact on our operating results. In addition, terrorist attacks or related armed
conflicts could adversely affect mall traffic or cause consumer confidence and
spending to decrease or result in increased volatility in the U.S. and worldwide
financial markets and economy and could result in economic recession in the U.S.
or abroad. Any of these occurrences could have a significant impact on our
operating results, revenues and costs and may adversely affect the market price
and liquidity of the exchange notes.
THERE MAY BE RISKS RELATED TO OUR PREVIOUS USE OF ARTHUR ANDERSEN LLP, OUR
FORMER INDEPENDENT PUBLIC ACCOUNTANTS.
On March 14, 2002, Arthur Andersen LLP, our former independent public
accountants, was indicted on federal obstruction of justice charges arising from
the government's investigation of Enron Corp. On June 15, 2002, Arthur Andersen
was found guilty of obstruction of justice. We filed the registration statement
of which this prospectus is a part to comply with the provisions of a
registration rights agreement we entered into on May 22, 2002 with the initial
purchasers of the outstanding notes. If we fail to comply with the registration
provisions of the registration rights agreements within the time periods
specified therein, we will be required to pay holders of the notes special
interest while the failure continues. Although we recently engaged Deloitte &
Touche LLP as our auditors for fiscal 2002, our ability to comply with our
registration obligations, whether contractual or statutory, in a timely manner
could be adversely affected if the SEC ceases accepting financial statements
audited previously by Arthur Andersen. Further, it is possible events arising
out of the guilty verdict may adversely affect the ability of Arthur Andersen to
satisfy any claims that may arise out of Arthur Andersen's audit of our
financial statements that are contained in this prospectus. In addition, Arthur
Andersen has not consented to the inclusion of their report in this prospectus,
and we have dispensed with the requirement to file their consent in reliance
upon Rule 437a of the Securities Act. Because we are filing the registration
statement without the consent of Arthur Andersen, investors will not be able to
pursue claims against Arthur Andersen under Section 11(a) of the Securities Act.
15
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements including, without
limitation, the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." The words "believes," "anticipates," "plans," "expects," "intends,"
"estimates," "will" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance and achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements.
All forward-looking statements included in this prospectus are based on
information available to us on the date of this prospectus. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements contained throughout this prospectus.
Additional factors that could cause actual results to differ materially
include, but are not limited to:
- risks associated with the timing and achievement of improvements in the
operations of the optical business;
- the nature and extent of disruptions of the economy from terrorist
activities and from governmental and consumer responses to such acts;
- the success of new store openings and the rate at which new stores
achieve profitability;
- our relationships with host stores and franchisees;
- our ability to select, stock and price merchandise attractive to
customers;
- success of systems development and integration;
- competition and regulation in the optical industry;
- adverse effect of litigation;
- integration of acquired businesses;
- economic, political and weather factors affecting consumer spending;
- operating factors affecting customer satisfaction, including
manufacturing quality of optical and engraved goods;
- the mix of goods sold, pricing and other competitive factors;
- the seasonality of our business; and
- the actual effect of implementation of new accounting standards.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. Because we are exchanging the exchange notes for the outstanding notes,
which have substantially identical terms, the issuance of the exchange notes
will not result in any increase in our indebtedness.
16
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
February 2, 2002 on an actual basis and as adjusted to reflect completion of the
offering of the outstanding notes and the application of the net proceeds from
that offering. You should read this table in conjunction with our consolidated
financial statements and the related notes included elsewhere in this
prospectus. See "Use of Proceeds," "Selected Historical Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Description of Certain Indebtedness."
<Table>
<Caption>
FEBRUARY 2, 2002
-----------------------
ACTUAL AS ADJUSTED
(dollars in thousands) --------- -----------
Debt (including current portion) (1):
9 7/8% senior subordinated notes due 2006 (2)............. $ 150,000 $ --
Less unamortized discount on 9 7/8% notes due 2006........ (682) --
8 5/8% senior subordinated notes due 2007................. 125,000 125,000
8 7/8% senior subordinated notes due 2012................. -- 150,000
Obligations under capital leases.......................... 54 54
--------- ---------
Total debt............................................. 274,372 275,054
Stockholder's equity:
Common stock.............................................. -- --
Paid-in capital........................................... 195,676 195,676
Accumulated other comprehensive loss...................... (1,198) (1,198)
Accumulated deficit (3)................................... (135,302) (143,023)
--------- ---------
Total stockholder's equity............................. 59,176 51,455
--------- ---------
Total capitalization................................. $ 333,548 $ 326,509
========= =========
</Table>
- ---------------
(1) We are also a party to the $75.0 million senior credit facility that was
amended, as of May 23, 2002, to among other things, extend the term to May
31, 2006. As of February 2, 2002, there were no amounts outstanding under
the senior credit facility.
(2) Reflects the tender of the 9 7/8% senior subordinated notes due 2006, which
occurred on May 23, 2002, and the redemption of the remaining 9 7/8% senior
subordinated notes due 2006, which occurred on May 30, 2002, as though each
occurred on February 2, 2002.
(3) Reflects the extraordinary charge of $7.7 million, net of tax benefit of
$4.2 million, as if it had been incurred on February 2, 2002, as a result of
the early extinguishment of the 9 7/8% senior subordinated notes due 2006,
the write-off of the related unamortized debt discount, the write-off of the
related deferred financing costs and the premium and other costs related to
the tender offer. Reflects the aggregate principal amount of 9 7/8% senior
subordinated notes tendered on or before May 9, 2002 of $134.6 million
purchased at 105.1% of the aggregate principal amount of such notes
outstanding, which includes a premium of 0.1625% of the aggregate principal
amount of such notes and the aggregate principal amount of such notes
tendered after May 9, 2002, but on or before May 23, 2002 of $2.2 million
purchased at 104.9375% of the aggregate principal amount of such notes.
17
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
The selected statement of operations and balance sheet data as of and for the
fiscal years ended January 31, 1998, January 30, 1999, January 29, 2000,
February 3, 2001 and February 2, 2002 are derived from our audited consolidated
financial statements. The selected statement of operations and balance sheet
data as of and for the first quarters ended May 4, 2002 and May 5, 2001 are
derived from our unaudited consolidated financial statements. Our consolidated
balance sheets as of February 3, 2001 and February 2, and May 4, 2002 and our
consolidated statements of operations and consolidated statements of cash flows
for the fiscal years ended January 29, 2000, February 3, 2001 and February 2,
2002, and first quarters ended May 5, 2001 and May 4, 2002 and the independent
auditors' report for fiscal years ended January 29, 2000, February 3, 2001 and
February 2, 2002, are included elsewhere in this prospectus. Our consolidated
balance sheets as of January 31, 1998, January 30, 1999 and May 5, 2001 and our
consolidated statements of operations and consolidated statements of cash flows
for the fiscal years ended January 31, 1998 and January 30, 1999 and the
independent auditors' report thereon are not included in this prospectus. The
selected consolidated financial data should be read in conjunction with, and are
qualified in their entirety by reference to, our audited consolidated financial
statements and the related notes and our unaudited interim consolidated
financial statements and related notes. The results of operations for interim
periods are not necessarily indicative of results for full year's operations.
<Table>
<Caption>
FISCAL YEAR ENDED
-------------------------------------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29, FEBRUARY 3, FEBRUARY 2, FIRST QUARTER ENDED
1998 1999 2000 2001 2002 -------------------------
(DOLLARS IN THOUSANDS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) MAY 5, 2001 MAY 4, 2002
---------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net revenue (1)................. $978,165 $1,045,494 $1,037,581 $1,076,420 $1,101,333 $ 270,291 $ 290,109
Operating income................ 63,011 52,366 34,560 34,094 36,362 7,831 11,512
Interest expense................ 30,112 27,354 27,405 28,402 27,553 6,901 6,993
Net (loss) income............... (6,561) 19,335 4,140 1,883 4,911 560 2,890
BALANCE SHEET DATA (END OF
PERIOD):
Total assets.................... 628,335 578,705 543,528 561,000 561,779 566,464 572,587
Total long-term debt (2)........ 290,070 275,113 274,795 274,311 274,372 274,326 274,390
Stockholder's equity............ 27,553 48,246 52,949 54,291 59,176 54,642 62,188
OTHER DATA:
EBITDA (3)...................... 92,069 85,169 73,045 71,445 75,807 17,140 20,470
EBITDAR (4)..................... 210,335 209,169 200,080 201,869 214,913 51,706 56,969
Capital expenditures and systems
development................... 50,556 44,716 39,516 43,474 41,997 8,040 7,576
Depreciation and amortization... 29,058 32,803 38,485 37,351 39,445 9,309 8,958
Net cash provided by operating
activities.................... 33,134 60,436 24,104 33,673 65,419 2,496 5,666
Net cash used for investing
activities.................... 51,450 42,800 42,134 43,347 30,991 (3,433) (7,671)
Net cash provided by (used for)
financing activities.......... 13,164 (34,568) (4,074) 17,446 (7,497)
Ratio of long-term debt to
EBITDA........................ 3.2x 3.2x 3.8x 3.8x 3.6x 16.0x 13.4x
Ratio of EBITDA to interest
expense....................... 3.1x 3.1x 2.7x 2.5x 2.8x 2.5x 2.9x
Ratio of earnings to fixed
charges....................... 1.7x 1.6x 1.2x 1.1x 1.2x 1.1x 1.3x
NUMBER OF UNITS (END OF PERIOD):
Cole Licensed Brands............ 1,157 1,186 1,056 1,164 1,280 1,186 1,286
Pearle Vision company-owned..... 444 471 454 439 423 438 422
Pearle Vision franchised........ 401 409 416 426 440 421 442
-------- ---------- ---------- ---------- ---------- ----------- -----------
Total Cole Vision............. 2,002 2,066 1,926 2,029 2,143 2,045 2,150
Things Remembered............... 831 818 796 784 774 781 776
-------- ---------- ---------- ---------- ---------- ----------- -----------
Total Cole National........... 2,833 2,884 2,722 2,813 2,917 2,826 2,926
COMPARABLE STORE SALES GROWTH:
Cole Licensed Brands (U.S.)..... 6.1% 2.9% (2.7)% 3.7% 3.8% 4.9% 3.5%
Pearle Vision company-owned
(U.S.)........................ 2.5% (1.5)% (5.5)% 2.0% 2.6% 1.2% 10.6%
Total Cole Vision............. 5.9% 1.6% (3.5)% 3.1% 2.6% 2.7% 5.9%
Things Remembered............... (0.5)% 7.4% 7.2% 5.4% (1.8)% 0.1% (3.0)%
Total Cole National........... 3.6% 3.1% (0.8)% 3.7% 1.4% 2.1% 3.9%
Pearle Vision U.S. franchise
stores........................ N/A 3.0% 0.4% 3.3% 0.0% (1.9)% 5.9%
Pearle Vision U.S. chain-wide... N/A 0.9% (2.4)% 2.7% 1.2% (0.5)% 8.1%
</Table>
- ---------------
(1) Certain items were reclassified in the years ended January 31, 1998 and
January 30, 1999 to conform with current presentation.
(2) Total long-term debt includes current and non-current obligations under
capital leases.
(3) EBITDA represents income from operations before income taxes, interest
expense, depreciation and amortization. EBITDA is a widely accepted
financial indicator of a company's ability to service and/or incur debt.
However, EBITDA should not be construed as an alternative to operating
income (as determined in accordance with generally accepted accounting
principles) or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of our operating performance or as a measure of
liquidity.
(4) EBITDAR represents EBITDA plus rent expense.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the heading "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus.
OVERVIEW
We are a leading provider of vision care products and services, managed
vision care programs and personalized gifts with 2,917 retail locations in 50
states, Canada and the Caribbean as of February 2, 2002. We believe that, based
on industry data, we are one of the largest retail optical companies in North
America and we believe we operate the only nationwide chain of personalized gift
stores. We differentiate ourselves from other specialty retailers by providing
value-added services at the point-of-sale at all of our retail locations.
We have two reportable segments: Cole Vision, which accounted for 75% of
total revenue in fiscal 2001, and Things Remembered, which accounted for 25% of
total revenue in fiscal 2001. Most of Cole Vision's revenue represents sales of
prescription eyewear, accessories and services through its Cole Licensed Brands
and Pearle Vision retail locations. Cole Vision's revenue also includes sales of
merchandise to franchisees, royalties based on franchise sales, interest income
on franchise notes receivable, initial franchise fees and fees from managed
vision care programs. Things Remembered's revenue represents sales of engravable
gift merchandise, personalization and other services primarily through retail
stores and kiosks.
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 February 2, 2002 is referred to as "fiscal 2001." Fiscal 2001 and fiscal
1999 each consisted of a 52-week period, and fiscal 2000 consisted of a 53-week
period.
RESULTS OF OPERATIONS
The following is a discussion of the results of continuing operations for
the three fiscal years ended February 2, 2002 and the first quarters ended May
5, 2001 and May 4, 2002. This discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
prospectus. The following table sets forth certain operating information for
each period (dollars in millions):
<Table>
<Caption>
CHANGE FIRST QUARTER ENDED
FISCAL YEAR ------------------- -------------------
------------------------------ 2001 VS. 2000 VS. MAY 4, MAY 5,
2001 2000 1999 2000 1999 2002 2001
-------- -------- -------- -------- -------- -------- --------
Net revenue:
Cole Vision..................... $ 829.3 $ 800.5 $ 779.0 3.6% 2.8% $ 236.6 $ 216.4
Things Remembered............... 272.0 275.9 258.6 (1.4) 6.7 53.5 53.9
-------- -------- -------- -------- --------
Total net revenue............. 1,101.3 1,076.4 1,037.6 2.3 3.7 290.1 270.3
Gross margin...................... 736.6 718.4 673.0 2.5 6.7 194.5 182.3
Operating expenses................ 694.4 678.5 633.1 2.4 7.2 183.0 173.3
Goodwill and tradename
amortization.................... 5.8 5.8 5.3 (1.2) 10.6 -- 1.5
-------- -------- -------- -------- --------
Operating income.............. $ 36.4 $ 34.1 $ 34.6 6.7% (1.3)% $ 11.5 $ 7.8
======== ======== ======== ======== ========
Percentage of net revenue:
Gross margin.................... 66.9% 66.7% 64.9% 0.2% 1.8% 67.0% 67.5%
Operating expenses.............. 63.1 63.0 61.1 0.1 1.9 63.0 64.1
Goodwill and tradename
amortization.................. 0.5 0.5 0.5 -- -- -- 0.5
-------- -------- -------- -------- --------
Operating income.............. 3.3% 3.2% 3.3% 0.1% (0.1)% 4.0% 2.9%
======== ======== ======== ======== ========
</Table>
19
<Table>
<Caption>
FIRST QUARTER ENDED
FISCAL YEAR -------------------
------------------------------ MAY 4, MAY 5,
2001 2000 1999 2002 2001
-------- -------- -------- -------- --------
Number of retail locations at the end of
the period:
Cole Licensed Brands..................... 1,280 1,164 1,056 1,286 1,186
Pearle Vision company-owned.............. 423 439 454 422 438
Pearle Vision franchised................. 440 426 416 442 421
-------- --------
Total Cole Vision..................... 2,143 2,029 1,926 2,150 2,045
Things Remembered........................ 774 784 796 776 781
-------- --------
Total Cole National................... 2,917 2,813 2,722 2,926 2,826
======== ======== ======== ======== ========
Comparable store sales growth:
Cole Licensed Brands (U.S.).............. 3.8% 3.7% (2.7)% 3.5% 4.9%
Pearle Vision company-owned (U.S.)....... 2.6 2.0 (5.5) 10.6 1.2
Total Cole Vision..................... 2.6 3.1 (3.5) 5.9 2.7
Things Remembered........................ (1.8) 5.4 7.2 (3.0) 0.1
Total Cole National................... 1.4% 3.7% (0.8)% 3.9% 2.1%
======== ======== ======== ======== ========
Pearle Vision U.S. franchise stores........ --% 3.3% 0.4% 5.9% (1.9)%
Pearle Vision U.S. chain-wide.............. 1.2 2.7 (2.4) 8.1 (0.5)
</Table>
FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001
The $20.2 million increase in consolidated net revenue for the first
quarter was primarily attributable to increases in comparable store sales at
Cole Vision, growth in managed vision care revenue and an increase in the number
of Target Optical stores now open.
At Cole Licensed Brands, comparable store sales increased primarily from an
increase in the average spectacle selling price, as unit sales decreased
slightly. At Pearle Vision, the increase in company-owned comparable store sales
was driven primarily by an increase in the number of transactions with a modest
increase in average spectacle selling price. At Things Remembered, comparable
store sales declined as fewer transactions more than offset the increase in
average selling price resulting from sales of new merchandise at higher average
unit retails, more personalization and less clearance merchandise.
The first quarter gross margin increase of $12.2 million was attributable
to improvements in net revenue at Cole Vision. Overall, the gross margin rate
decreased to 67.0% from 67.5% in fiscal 2001 due to a number of factors,
including more aggressive pricing of contact lenses, the mix of frames selected
by Sears Optical customers and an increase in products sold to Pearle Vision
franchisees. Although sales to franchisees generate lower margins, they add
gross margin dollars and provide other benefits to the Company including a more
uniform merchandise assortment and a consistent brand look across all stores. As
a result, the gross margin rate at Cole Vision declined by 0.7 percentage points
compared to first quarter 2001. However, the gross margin rate at Things
Remembered increased 0.8 percentage points compared to first quarter 2001
benefiting primarily from the improvement in average selling price discussed
above.
The $9.7 million increase in operating expenses for first quarter 2002 was
primarily due to costs incurred to support the increase in net revenue and the
number of Target Optical stores opened in the past twelve months, partially
offset by reduced advertising expenditures at Pearle Vision. As a percentage of
net revenue, operating expenses improved to 63.0% from 64.1% in fiscal 2001,
gaining operating leverage of 1.1 percentage points. The leverage gain was
primarily due to the increase in comparable store sales at Cole Vision and
reduced advertising expenditures. Amortization of goodwill and tradenames was
stopped in fiscal 2002 as a result of adopting Statement of Financial Accounting
Standards No. 142 (SFAS 142).
20
The $3.7 million improvement in first quarter 2002 operating income
compared to first quarter 2001 was primarily attributable to the increase in net
revenues and operating leverage at Cole Vision and the adoption of SFAS 142 as
discussed above.
The $0.8 million increase in interest and other (income) expense, net, was
primarily the result of a $0.7 million gain from the sale of a Dallas office
facility in fiscal 2001. An income tax provision was recorded in the first
quarter of fiscal 2002 and fiscal 2001 using our estimated annual effective tax
rates of 40.0% and 70.0%, respectively. The reduction in the estimated effective
tax rate compared to fiscal 2001 was primarily a result of adopting SFAS 142
which stopped nondeductible goodwill amortization.
FISCAL 2001 COMPARED TO FISCAL 2000
The increase in net revenue for fiscal 2001 was attributable to increases
in consolidated comparable store sales, the Target Optical expansion, growth in
managed vision care revenue and increases in direct channel revenues (both
catalog and Internet) at Things Remembered. These increases were partially
offset by one less week of revenue in fiscal 2001. The 53rd week in fiscal 2000
provided approximately $18.5 million in revenue.
At Cole Licensed Brands, the comparable store sales increased by 3.8%
primarily reflecting an increase in the average spectacle selling price. At
Pearle Vision company-owned stores, the comparable store sales increased 2.6%
reflecting an increase in average transaction selling price for the first nine
months and an increase in the number of transactions for the fourth quarter. The
increase in average transaction selling price was due, in part, to not repeating
a "50% off frame" promotion that ran during the entire first quarter of fiscal
2000. At Things Remembered, the comparable store sales decline was attributable
to the general slowdown in mall traffic which worsened following the events of
September 11 and from not repeating February 2000's aggressive merchandise
clearance promotion. However, the average transaction selling price increased as
a result of sales of new merchandise at higher average unit retails, more
personalization and less promotion.
The gross margin dollar increase in fiscal 2001 resulted from increased net
revenue at Cole Vision and improvements in gross margin rate at Things
Remembered. The gross margin rate at Cole Vision was flat compared to the prior
year, inclusive of a 0.7 percentage point decline in the second half of fiscal
2001 primarily because more customers selected merchandise from Cole Licensed
Brand's new, higher cost frame assortment at Sears. Higher revenue from managed
vision care partially offset the impact of the decline in frame margins in
fiscal 2001. The offset equaled 0.3% of the gross margin rate. At Things
Remembered, the gross margin rate improved 0.5 percentage points compared to the
prior year, reflecting the improvement in average selling price and less
inventory shrinkage.
Operating expenses as a percentage of net revenue were essentially even
with fiscal 2000. The dollar increase in operating expenses was primarily due to
higher store payroll, store occupancy and other store costs incurred to support
the increases in revenues and the Target Optical expansion. We opened 107 new
Target Optical stores during fiscal 2001. Operating margin improvements from
nonstore overhead expenses and reduced advertising expenditures were offset by
the negative operating margin impact of fixed payroll and occupancy costs due to
lower sales volume following September 11. In fiscal 2000, operating expenses
also included a $1.8 million first quarter severance charge in connection with a
personnel reduction at Cole Vision.
In fiscal 2001, our operating income improved 6.7% from $34.1 million to
$36.4 million while maintaining expense ratios despite one less week of sales,
the absorption of increased losses from the continued expansion of Target
Optical and the third quarter decrease in operating expense leverage
attributable to the modest growth in net revenue following September 11. The
losses associated with the Target Optical expansion are expected to decline as
older stores ramp up to profitability, as a result of the new focus on opening
only in SuperTarget stores and with a switch from fixed to percentage rent. The
average time to store level profitability is also expected to reduce.
Interest and other (income) expense, net, decreased $1.9 million in fiscal
2001. Contributing factors included one less week of interest expense, no
seasonal borrowing during fiscal 2001 and higher interest
21
income from increased temporary cash investments and a $0.7 million gain from
the sale of a Dallas office facility no longer needed for Pearle Vision's
operations.
The effective income tax rate was 53.0% in fiscal 2001 compared to 69.8% in
fiscal 2000. The effective rates are significantly above the statutory rate
because of the impact of nondeductible goodwill. The decrease in the rate for
fiscal 2001 versus fiscal 2000 was primarily a result of the increase in pretax
income. A more complete discussion of income taxes is included in Note 6 of the
Notes to Consolidated Financial Statements.
FISCAL 2000 COMPARED TO FISCAL 1999
The increase in net revenue for fiscal 2000 was primarily attributable to
increases in consolidated comparable store sales, the 53rd week, revenue
associated with the MetLife vision care business acquired in October 1999 and
the Target Optical expansion. These increases were partially offset by the
closing of poor performing stores at Pearle Vision and Things Remembered and the
closing of 150 optical departments at Montgomery Ward in December 1999. See Note
2 of the Notes to Consolidated Financial Statements for further discussion of
the closing of the Montgomery Ward departments.
At Cole Licensed Brands and Pearle Vision company-owned stores, the
comparable store sales increases primarily reflected increases in the average
selling price. The number of transactions at Cole Licensed Brands was even with
last year. At Pearle Vision company-owned stores, the average transaction
increase was partially offset by a decrease in the number of transactions during
the first half of the year. At Things Remembered, the comparable store sales
increase reflected an increase in sales of new merchandise at higher average
unit retails.
The gross margin dollar increase was attributable to the revenue increase
at Pearle Vision and Things Remembered, the additional revenue associated with
the MetLife vision care business and an improvement in gross margin as a
percentage of net revenue. The improvement in the gross margin rate was
primarily the result of higher average selling prices in the optical businesses.
Other factors in the improvement were additional MetLife vision care revenues,
resolution of problems experienced during 1999's integration of new
manufacturing and merchandise/inventory management systems at Pearle Vision and
1999's inventory write-off due to the closing of the Montgomery Ward Optical
departments. At Cole Vision, the gross margin rate improved 2.5 percentage
points in fiscal 2000 compared to fiscal 1999. The gross margin rate at Things
Remembered decreased 0.3 percentage points compared to fiscal 1999 reflecting
the impact of an aggressive merchandise clearance promotion in the first quarter
of fiscal 2000.
The fiscal 2000 operating expense increase was due primarily to increases
in staffing for improved service levels in the optical businesses, increases in
expenses associated with the 53rd week and the Target Optical expansion,
increases in managed vision care costs (primarily associated with the MetLife
vision care business) and increases in incentive bonus expense due to improved
performance at Cole Vision. These increases were partially offset by $4.7
million of severance costs in fiscal 1999 for our former president and several
other executives. As a percentage of net revenue, operating expenses lost
leverage in fiscal 2000 because payroll costs increased 2.0 percentage points
compared to a year ago for the reasons discussed above. A decline in comparable
store sales at Pearle Vision company-owned stores during the first six months of
fiscal 2000 and a $1.8 million first quarter 2000 charge for severance costs
recorded in connection with a personnel reduction at Cole Vision also impacted
the comparison.
Operating income in fiscal 2000 was slightly below fiscal 1999 reflecting
improved operating results at both Cole Vision and Things Remembered offset by
increased corporate expenses and the first quarter severance costs. The
operating income at Cole Vision improved despite absorbing increased losses
associated with the Target Optical start up and store opening program.
Interest and other (income) expense, net, increased in fiscal 2000 compared
to fiscal 1999 because of increased interest expense from the 53rd week,
seasonal borrowing and less income from reduced temporary cash investments.
22
The effective income tax rate was 69.8% in fiscal 2000 compared to 47.4% in
fiscal 1999. The rates reflect the significant impact of nondeductible goodwill
in both years. In fiscal 2000, the increase in rate was primarily a result of
the lower pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is funds provided from operations of our
operating subsidiaries. In addition as of year end and as of May 4, 2002, we and
our operating subsidiaries have a working capital line of credit ranging from
$50.0 million to $75.0 million based on our current debt leverage ratio as
described in the senior credit facility. As of year end and as of May 4, 2002,
the total commitment was $75.0 million and availability under the senior credit
facility totaled $62.7 million, after reduction for commitments under
outstanding letters of credit. There were no working capital borrowings
outstanding as of February 2, 2002 or at any time during fiscal 2001. In
addition, there were no working capital borrowings outstanding at any time
during the first quarter of fiscal 2002 or the first quarter of fiscal 2001. The
maximum amount outstanding during fiscal 2000 was $20.2 million and the daily
average borrowing during fiscal 2000 was $2.8 million.
The senior credit facility, which is guaranteed by us and our parent,
requires us and our principal operating subsidiaries to comply with various
operating covenants that restrict corporate activities, including covenants
restricting the ability of the subsidiaries to incur additional indebtedness,
pay dividends, prepay subordinated indebtedness, dispose of certain investments
or make acquisitions. The senior credit facility also requires us to comply with
certain financial covenants, including covenants regarding minimum interest
coverage, maximum leverage and consolidated net worth. We and our principal
operating subsidiaries were in compliance with these covenants at February 2,
2002 and May 4, 2002.
At the end of fiscal 2001, $150.0 million of 9 7/8% senior subordinated
notes due 2006 and $125.0 million of 8 5/8% senior subordinated notes due 2007
were outstanding. The 9 7/8% notes and the 8 5/8% notes are unsecured and mature
December 31, 2006 and August 15, 2007, respectively, with no earlier scheduled
redemption or sinking fund payment. Interest on the 9 7/8% notes is payable
semi-annually on each June 30 and December 31, while the interest on the 8 5/8%
notes is payable semi-annually on each February 15 and August 15. The indentures
pursuant to which the 9 7/8% notes and the 8 5/8% notes were issued contain
certain optional redemption features and mandatory offers to purchase and other
covenants, including restrictions on our ability to pay dividends or make other
restricted payments to our parent. The indentures permit dividend payments to
our parent equal to one-half of our consolidated net income, provided that no
default or event of default has occurred under the indentures and that we have
met a specified fixed charge coverage ratio test. The indentures also permit
payments to our parent for certain tax obligations and for administrative
expenses not to exceed 0.25% of net sales. See Note 4 of the Notes to
Consolidated Financial Statements. We or our parent may from time to time
purchase our existing notes in the open market or refinance them depending on
capital market conditions.
On May 22, 2002, we issued the outstanding notes. These notes are unsecured
and mature on May 15, 2012. Interest on the notes is payable semi-annually on
each May 15 and November 15, commencing November 15, 2002.
The indenture pursuant to which the outstanding notes were issued contains
certain optional and mandatory redemption features and other financial covenants
including restrictions on our ability to pay dividends or make other restricted
payments to our parent. The indenture permits dividend payments to our parent
equal to 50% of our consolidated net income, provided that no default or event
of default has occurred under the indenture and that we have met a specified
fixed charge coverage ratio test. The indenture also permits payments to our
parent for certain tax obligations and for administrative expenses not to exceed
0.25% of net revenue.
Net proceeds from the offering of the outstanding notes, together with cash
on hand, were used to retire $150.0 million of 9 7/8% senior subordinated notes
due 2006 and pay premiums and other costs associated with retiring those notes.
We anticipate that our second quarter results will include an extraordinary loss
on
23
early extinguishment of debt of approximately $7.6 million, net of an income tax
benefit of approximately $4.1 million, representing the payment of premiums and
other costs of retiring those notes and the write-offs of unamortized discount
and deferred financing fees. In addition to extending our debt maturity
schedule, the offering and retirement will reduce annual cash interest expense
by $1.5 million.
In connection with the offering of the outstanding notes, we and our
operating subsidiaries amended our existing senior credit facility to, among
other things, extend its term to May 31, 2006, provide a working capital
commitment of $75.0 million and reduce borrowing rates. The senior credit
facility, which is guaranteed by us and our parent, requires us and our
principal operating subsidiaries to comply with customary operating covenants
that restrict corporate activities, including covenants restricting the ability
of the subsidiaries to incur additional indebtedness, pay dividends, prepay
subordinated indebtedness, dispose of certain investments or make acquisitions.
The senior credit facility also requires us to comply with certain financial
covenants, including covenants regarding minimum interest coverage and maximum
leverage.
Our ability and the ability of our subsidiaries to satisfy our obligations
will be primarily dependent upon future financial and operating performance of
the subsidiaries and upon our ability to renew or refinance borrowings or to
raise additional capital through equity financing or sales of assets.
Cash balances at year end were $63.7 million compared to $36.7 million at
February 3, 2001. Operations generated net cash of $65.4 million in fiscal 2001,
$33.7 million in fiscal 2000 and $24.1 million in fiscal 1999. The primary
source of the $31.7 million improvement in cash provided from operations in
fiscal 2001 compared to fiscal 2000 was an improvement in working capital. A
reduction in inventories at Cole Vision and Things Remembered during fiscal 2001
provided improved cash flows of $16.7 million compared to fiscal 2000. Changes
in accounts payable, accrued liabilities, accounts receivable, prepaid expenses
and other assets and liabilities provided improved cash flows of $5.9 million.
Most of the remaining improvement resulted from increased operating income
before depreciation and amortization and lower interest and other (income)
expense, net.
The primary source of the $9.6 million improvement in cash provided from
operations in fiscal 2000 compared to fiscal 1999 was a change in working
capital. In fiscal 1999, the decrease in accounts payable and accrued
liabilities used $32.1 million more cash than in fiscal 2000. In fiscal 2000,
increases in prepaid expenses and inventories used $10.8 million and $9.1
million more cash, respectively, than in fiscal 1999. The increase in prepaid
expenses in fiscal 2000 was due to the fact that the fiscal year ended after
February 1 when the minimum rent payments were made. The increase in inventories
in fiscal 2000 was attributable to the remerchandising of Pearle Vision and the
expansion of Target Optical.
Cash balances at May 4, 2002 were $62.6 million compared to $35.5 million
at May 5, 2001. Operations for the first quarter provided $5.7 million of cash
in fiscal 2002 compared to $2.5 million in fiscal 2001. The primary reasons for
the $3.2 million increase in cash provided by operations were the increase in
net income and changes in certain operating assets and liabilities during the
first quarter of fiscal 2002 as compared to the same period in fiscal 2001. In
the first quarter of fiscal 2002, funds provided by temporary increases in
accounts payable and accrued liabilities due primarily to the timing of
purchases and payments were partially offset by an increase in accounts
receivable from strong April comparable store sales at Cole Vision.
Capital expenditures and systems development were $42.0 million, $43.5
million, and $39.5 million in fiscal 2001, 2000 and 1999, respectively. The
majority of the capital expenditures were for store fixtures, equipment and
leasehold improvements for new stores, including the Target Optical expansion,
and the remodeling of existing stores. In fiscal 2001, net proceeds of $12.5
million were received from the sales of two facilities no longer needed and from
the sale and leaseback of Pearle Vision's central lab and distribution center.
We also used $0.7 million in fiscal 2001 and $3.0 million in fiscal 1999
primarily for payments in connection with the acquisition of MetLife's managed
vision care business. Finally, we paid approximately $6.9 million, $8.4 million
and $13.6 million for systems development costs in fiscal 2001, 2000 and 1999,
respectively. Such costs have been capitalized and are being amortized over
their estimated useful lives.
24
Capital expenditures were $6.3 million and $5.9 million for the first
quarter of fiscal 2002 and fiscal 2001, respectively. The majority of capital
expenditures were for store fixtures, equipment and leasehold improvements for
new stores, including the Target Optical expansion, and the remodeling of
existing stores. In fiscal 2001, net proceeds of $4.7 million were received from
the sale of a facility in Dallas, Texas that was no longer needed. We paid
approximately $1.2 million and $2.1 million for systems development costs in the
first quarter of fiscal 2002 and fiscal 2001, respectively.
For fiscal 2002, management plans to expand the number of stores including
the opening of approximately 30 Target Optical stores, and to remodel and
relocate other stores. In fiscal 2002, we will open only in new SuperTarget
stores. SuperTarget stores will offer Target Optical highly visible locations
and high traffic. As a result, our emphasis at Target Optical is moving from
opening stores to improving their operations. Management currently estimates
that capital expenditures in fiscal 2002 will be approximately $38.7 million,
excluding acquisitions and systems development costs. Approximately $5.3 million
is estimated to be incurred for systems development costs in 2002, which will be
capitalized and subsequently amortized.
We believe that funds provided from operations including cash on hand along
with funds available under the credit facility will provide adequate sources of
liquidity to allow our operating subsidiaries to continue to expand the number
of stores and to fund capital expenditures and systems development costs.
SIGNIFICANT ACCOUNTING POLICIES
Management relies on the use of estimates and makes assumptions that impact
our financial position and results of operations. These estimates are based on
historical results and trends as well as our forecasts as to how these might
change in the future. A more complete discussion of our accounting policies is
included in Note 1 of the Notes to Consolidated Financial Statements. Some of
the most critical accounting policies that might materially impact our results
include:
Allowance for Doubtful Accounts. Most of our accounts and notes
receivable are due from Licensed Brands' host stores, managed vision care
accounts and Pearle Vision franchisees. Estimates are used in determining
our allowance for bad debts and are based on historical experience, current
trends, credit policy and a percentage of accounts receivable by aging
category.
Reserve for Excess and Obsolete Inventory. Inventories are valued at
the lower of cost or market value and have been reduced by a reserve for
excess and obsolete inventories. The estimated reserve is based on
management's review of inventories on hand compared to estimated future
usage and sales. Factors considered include inventory age, condition and
whether reorder of the product has been or is about to be discontinued.
Valuation of Systems Development Costs and Software. Systems
development costs and software are amortized over the useful life of the
software. Useful lives are based on management's estimates of the period
the software will be in service. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that the software's
future usefulness has been adversely impacted.
Valuation of Long-Lived Assets. Property and equipment, goodwill and
other intangibles are amortized over their useful lives. Useful lives are
based on management's estimates of the period that the assets will generate
revenue. These assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. We are subject to financial statement risk to the extent
goodwill and tradenames become impaired. A discussion of the fiscal 2002
impact of a change in accounting required by the Financial Accounting
Standards Board (FASB) that will affect our accounting for goodwill and
tradenames is included in "New Accounting Pronouncements" below.
Valuation of Deferred Income Taxes. Deferred tax assets and
liabilities are recognized based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
Management regularly reviews its deferred tax assets for recoverability and
establishes a valuation allowance for tax assets based on historical
taxable income, projected future taxable income and the expected timing of
the reversals of existing temporary differences. In determining the
valuation allowance
25
related to deferred tax assets, management estimates taxable income into
the future. Future taxable income could be materially different from
amounts estimated, in which case the valuation allowance and future net
income would need to be adjusted.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). We adopted SFAS 142
in the first quarter of fiscal 2002. This statement requires that goodwill and
certain intangible assets deemed to have indefinite useful lives will no longer
be amortized, but instead, will be subject to annual reviews for impairment, or
more frequently if certain indicators arise. With the adoption of this
statement, we ceased amortization of goodwill and tradenames as of February 3,
2002. Amortization of goodwill and tradenames totaled $5.8 million in fiscal
2001. A substantial portion of the goodwill amortization is nondeductible for
tax purposes. We are in the process of completing the required transitional
impairment testing of goodwill.
The FASB has also issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (SFAS 141), No. 143 "Accounting for Asset
Retirement Obligations" (SFAS 143) and No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 141 changes the accounting for
business combinations by, among other things, prohibiting the use of the pooling
of interests method. SFAS 143 provides guidance for legal obligations arising
from the retirement of long-lived assets. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
None of these standards is expected to have a material effect on our financial
position or operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our major market risk exposure is to changes in foreign currency exchange
rates, which could impact our results of operations and financial condition.
Foreign exchange risk arises from our exposure to fluctuations in foreign
currency exchange rates because our 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.
26
BUSINESS
GENERAL
Cole National Group, Inc., a wholly owned subsidiary of Cole National
Corporation, was incorporated as a Delaware corporation in July 1993 as a
successor to companies that began operations approximately 60 years ago. We are
a leading provider of vision care products and services, managed vision care
programs and personalized gifts with 2,917 retail locations in 50 states, Canada
and the Caribbean as of February 2, 2002. Our retail vision locations do
business primarily under the names "Pearle Vision," "Sears Optical," "Target
Optical" and "BJ's Optical," and our managed vision care programs are offered
primarily through Cole Managed Vision. We refer to these businesses as "Cole
Vision." Our personalized gifts are offered through retail locations, e-commerce
and catalogs under the name "Things Remembered." We believe that, based on
industry data, we are one of the largest retail optical companies in North
America, and we believe we operate the only nationwide chain of personalized
gift stores. We differentiate ourselves from other specialty retailers by
providing value-added services at the point-of-sale at all of our retail
locations. For fiscal 2001, we generated net revenue of $1.1 billion and EBITDA
of $75.8 million.
COLE VISION
Cole Vision contributed 75% of our net revenue in fiscal 2001 with 2,143
company-owned and franchised retail locations throughout the United States,
Canada and the Caribbean as of February 2, 2002. Cole Managed Vision's programs
provide vision care benefits to participants through access to networks of
company-owned, franchised and third-party optical locations.
PEARLE VISION
As of February 2, 2002, Pearle Vision's operations consisted of 423
company-owned and 440 franchised stores located in 45 states, Canada and the
Caribbean. Most Pearle Vision stores operate in either an "Express" or
"Mainline" store format. Express stores contain a full surfacing lab that can
produce most glasses in approximately one hour. Mainline stores can produce
approximately 50% of prescriptions on-site in approximately one hour. Other
prescriptions are sent to Pearle Vision's central laboratory in Dallas. As of
February 2, 2002, 275 of the company-owned stores and 129 of the franchised
stores were Express format, with the balance being Mainline format.
The Express stores typically are located in high traffic free-standing,
strip centers and mall locations with most stores averaging approximately 3,000
square feet. The Express stores are usually staffed with a manager and a support
staff of four to eight associates. Mainline stores have an average size of
approximately 1,700 square feet and are also located in free-standing buildings,
or in smaller strip or regional centers. Mainline stores are usually staffed
with a manager and two to three associates. Most Pearle Vision stores make exams
available by on-site doctors of optometry with most leasing space from Pearle
Vision on an independent basis with most of the remaining being direct employees
of Pearle Vision. In California, eye exams are provided by doctors of optometry
employed by Pearle Vision Care, Inc., a licensed health care service plan.
Pearle Vision'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 Vision's marketing budget with a
significant amount of Pearle Vision's marketing expenditures devoted to
television. Pearle Vision's brand positioning of high-quality eyecare products
and services has been reinforced by an advertising and promotions program, which
includes Pearle Vision's long-standing advertising slogan: Nobody Cares for Eyes
More Than Pearle.
Pearle Vision operates a central lab and distribution center in Dallas that
inventories and distributes a comprehensive product line, including frames,
eyeglass lenses, contact lenses, optical supplies and eyewear accessories to
company-owned and franchised locations.
Pearle Vision has maintained a franchise program since 1980. Most of the
franchised stores are single-store franchise operations. 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
lesser of ten years or
27
the term of the underlying base lease. Royalty and advertising contributions
typically have been based on a percentage of the franchisee's gross revenues
from the retail operation, excluding nonsurgical professional fees and third
party revenues. The total monthly advertising contribution is distributed to
Pearle Vision's system-wide advertising fund and the local co-op market
advertising fund. Franchisees are generally eligible to participate in Cole
Vision's managed vision care programs. In fiscal 2001, 27 new franchise
locations were opened.
COLE LICENSED BRANDS
Cole Licensed Brands operates principally under the "Sears Optical,"
"Target Optical" and "BJ's Optical" names. As of February 2, 2002, Cole Licensed
Brands operated 1,280 retail locations in 47 states and Canada, including 816
departments on the premises of Sears department stores, 124 free-standing Sears
Optical stores, 224 departments in Target stores and 116 departments in BJ's
Wholesale Club stores. Retail locations are generally operated under a lease,
license or other arrangement through which the host store collects the sales
receipts, retains an agreed upon percentage of sales and remits the remainder on
a weekly or monthly basis.
Locations are, in most cases, retail eyecare stores offering brand name and
private label prescription eyeglasses, contact lenses and accessories, which
make available services of a doctor of optometry who performs complete eye
examinations and prescribes eyeglasses and contact lenses. Most optical
departments, which are typically 1,000 square feet in size, operate with a
department manager and support staff of one to seven associates depending on
store sales volume. Eye examination services are available in most stores and
are provided by independent doctors of optometry, when required by state law,
and by employees of Cole Licensed Brands in other situations.
Each of the United States retail locations is computer linked to six
centralized laboratory facilities, which grind, cut and fit lenses to order and
ship them to the stores. The Canadian retail locations are served by a
centralized laboratory located near Toronto. Next day delivery is provided on
most eyewear when requested by customers. All of the frames and most lenses used
in eyeglasses are purchased from outside suppliers, both in the United States
and several foreign countries.
A variety of marketing and promotional efforts, primarily host advertising,
newspaper, direct mail, magazines and yellow pages are used to build and
maintain the customer base for each of the Cole Licensed Brands stores. Host
advertising includes the placement of promotional material within sales
circulars or credit card billings sent out by the host store to its customers.
We believe that we have developed excellent relationships with the host
stores in which Cole Licensed Brands operates. We have maintained our
relationships in the optical business with Sears for over 40 years. Although
leases and licenses with major hosts are terminable upon relatively short
notice, Cole Licensed Brands has never had a lease terminated other than in
connection with a store closing, relocation or major remodeling.
COLE MANAGED VISION
Cole Managed Vision's programs provide a comprehensive range of eyecare
benefits primarily marketed directly to large employers, HMOs, insurance
companies and other organizations. It offers enhanced programs to plan sponsors
to provide their members with prepaid eye examinations, as well as pricing
discounts or funded materials benefits. Its Vision One discount program gives
plan sponsors the opportunity to offer their members a group discount at
locations within Cole Managed Vision's network with minimal direct cost to the
plan sponsor. Cole Managed Vision offers multiple provider panels to its
clients, including a network of more than 20,000 providers. Managed vision care
programs generated approximately 37% of Cole Vision's revenues in fiscal 2001.
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THINGS REMEMBERED
Things Remembered contributed 25% of our net revenue in fiscal 2001. As of
February 2, 2002, Things Remembered operated 774 stores and kiosks generally
located in large, enclosed shopping malls located in 46 states. Each location
carries a wide assortment of engravable items and provides "while you shop"
personalization services for any occasion including holiday, wedding, business
recognition and other special occasion gift events. Engraving is offered for
items purchased at the store as well as for items purchased elsewhere. Customers
can also access Things Remembered's broad gift assortment through its catalogs
(1-800-274-7367) and its e-commerce site, www.thingsremembered.com (the contents
of this website are not a part of this prospectus).
Merchandise sold at Things Remembered stores and through the catalog and
internet consists of a broad selection of moderately priced gift categories and
items at prices generally ranging from $15 to $150. The gift offerings include
writing instruments, clocks, music boxes, picture frames and albums, executive
desk sets and accessories, engravable jewelry, 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 computer-controlled embroidery equipment is utilized for the
personalization of merchandise, such as throws, pillows, polo shirts, bathrobes,
jackets, baby apparel and baby blankets. These softgoods are also available in
most of Things Remembered's other locations with personalization services
provided from a central fulfillment facility.
As of February 2, 2002, Things Remembered locations consisted of 456 stores
and 318 kiosks. The typical store consists of about 1,300 square feet, while
kiosks, which are units generally located in the center of the common mall area,
are typically 200 square feet in size.
Things Remembered locations are usually operated by one or two employees
during nonpeak periods and up to 15 employees during the peak Christmas season.
Locations typically employ a store manager on a full-time basis, an assistant
store manager on a full or part-time basis and the balance of employees are
part-time sales associates.
Nearly all locations are equipped with computerized engravers and key
duplicating machines. Most stores also have equipment for etching glassware
items. All locations are equipped with point-of-sale terminals.
Most of Things Remembered's store merchandise is shipped through its
centralized warehouse and distribution facility located near Youngstown, Ohio.
The warehouse utilizes a computerized carousel system to automate the process of
locating merchandise needed to fulfill store orders. Systems and support are
also provided to handle e-commerce, catalog and direct mail fulfillment.
BUSINESS STRATEGY
We intend to continue to increase our sales and profitability by
implementing focused initiatives started in January 2000 designed to increase
sales productivity of our stores and produce a strong, efficient,
customer-driven organization ensuring total customer satisfaction. We are
implementing our strategy through distinct management teams who are accountable
for the operating performance of each of our businesses. As a result of these
initiatives, we experienced increased comparable store sales on all vision
brands and the average dollar transaction increased in all our vision and gift
businesses in fiscal 2001. In addition, we reduced inventory by $11.1 million in
fiscal 2001. The elements of our strategy include:
DEVELOPING A CUSTOMER-DRIVEN SELLING CULTURE
We will continue developing a customer-driven selling culture that supports
and executes our new merchandising and marketing initiatives in all of our
retail brands. We have focused our sales associates on selling product features
and benefits. We intend to maintain a selling process that is employed
consistently in each of our brands by better training our employees and offering
compensation programs that include incentives. Our goal is to ensure our sales
associates develop good relationships with customers, identify their
29
needs and satisfy those needs. Ultimately, we expect that our customers will be
satisfied, will return to us for additional business and will generate
additional sales through positive word of mouth.
IMPROVING OUR PRODUCT OFFERINGS AND STRENGTHENING OUR MARKETING PROGRAMS
We will continue adding quality, fashionable merchandise to our product
assortments, including both brand names and private labels. We are also
upgrading our optical manufacturing capabilities to ensure functionality and
product quality and to incorporate important technological improvements into our
products, including titanium frames, which are significantly lighter and
stronger than plastic frames; rimless drill-mounted frames, which are
exceptionally flexible and light; and cast lenses, which provide our customers
with a clearer, lighter lens than traditional ground lenses. We believe our
improved product offerings will better satisfy our customers' needs.
In addition to these improvements in our product offerings, we are also
strengthening our marketing programs to grow our customer base by delivering a
consistent brand message and an enjoyable and satisfying customer experience.
The following are examples of our improved product offerings and our marketing
programs:
- Pearle Vision. We are improving our product assortment by focusing on
fashion and technology and by specifically tailoring merchandise
assortments based upon store demographics. These assortments now include
designer frames such as Ralph Lauren(R), Gucci(R) and Calvin Klein(R). We
will also continue to capitalize on the slogan Nobody Cares for Eyes More
than Pearle, which has been used for over 20 years and commands strong
consumer recognition. We are implementing a franchise focus store program
to introduce to franchise stores merchandising, marketing and operating
best practices from company-owned stores. As a result of these best
practices as well as the customer-focused selling efforts conducted by
our sales associates, comparable company-owned store sales increased 2.6%
in fiscal 2001.
- Sears Optical. We are continuing to focus and edit our assortment of
branded merchandise and fashionable private label merchandise, which
includes the Sears brands Canyon River Blues and Apostrophe. In addition,
we introduced over 360 new frames, representing over 50% of our total
assortment in fiscal 2001. We will position our products based upon
overall value, including price, service and assortment, with less
emphasis on promotional events. Comparable store sales increased 3.2% in
fiscal 2001.
- Things Remembered. We are continuing to expand our selection of
high-quality brands, such as Marquis by Waterford(R) giftware and clocks
by Movado(R), and to tailor store assortments based upon store size,
volume and demographics. To continue increasing the average dollar
transaction, we are training our employees to emphasize an assortment of
"best gifts," which are our most popular items, with appropriate add-ons
and personalization. In addition, our stores are equipped with
point-of-sale systems that allow our sales associates to capture an array
of personal data, including purchasing history, from our customers. This
database enables us to customize our marketing efforts toward specific
purchasing occasions, such as upcoming weddings or graduations, through
our in-store, online and catalog channels. We also are accelerating the
adoption of best practices with a focus store program that resulted in a
7.3% increase in comparable store sales for the focus stores in fiscal
2001 and a 13.2% increase in December 2001.
ACCELERATING PEARLE VISION FRANCHISE EXPANSION
The expansion of the Pearle Vision franchise program enables faster and
more profitable growth and further promotes the brand name without significant
capital commitment by us. We continue to improve relations with our franchisees
by adding more franchise services, using our buying power to lower our
franchisees' costs and improving our distribution and manufacturing
capabilities. We also plan to share the most successful initiatives from our
company-owned stores with our franchisees, initially through a franchise focus
store program. In fiscal 2001, we opened 27 new franchise stores, which was the
largest number of
30
franchise store openings in a single year in a decade. Half of these new
franchise stores were opened by operators of existing franchises.
CAPITALIZING ON OUR GROWTH IN MANAGED VISION CARE
We are winning new managed vision care accounts while upgrading our systems
to make our procedures more efficient. We offer our clients three network
options, the largest being a group that exceeds 20,000 providers. We believe our
multiple networks of quality eyecare providers enhance our appeal to large
national and regional accounts by offering members numerous access points at
competitive prices. This has helped Cole Managed Vision add new clients in
fiscal 2001 including Sun Microsystems, Inc., McDonald's Corporation, The
Sherwin Williams Company and Monsanto Company. Expanding our client base will
not only increase our revenue, but help leverage our expenses. In addition, our
optical stores as well as other network providers benefit from the traffic
generated by the increasing membership of our managed vision care plans.
ENHANCING OPERATING MARGINS
We are introducing value-added innovations and features to our products and
reducing costs. For example, in all our vision brands we have been incorporating
more technical innovations such as flexible frames and cast lenses into our
product offerings. This has not only brought improved products to our customers,
but has also increased the average retail sales price of spectacles. We will
continue to focus our efforts on the support processes in our businesses
including the leveraging of our data system investments and expenditures to
improve the effectiveness of our supply chain. In addition, our new Target
Optical departments will be located only in SuperTarget stores, which offer
visible, high traffic locations for our optical departments near the checkout
lanes. In fiscal 2001, our optical departments in SuperTarget stores produced
higher sales volumes and improved financial results compared to standard Target
stores. Target Optical produced four consecutive quarters of double-digit
increases in comparable store sales, which resulted in an increase in comparable
store sales of 19% in fiscal 2001.
In addition, in fiscal 2001, Cole Managed Vision implemented the first
phase of the paperless Patriot claims management system, which reduces claims
processing costs. As we implement the second phase, which centers on
streamlining claims processing and billing, we expect to achieve future cost
savings, which will further enhance our operating margins.
COMPETITIVE STRENGTHS
We believe we have the following competitive strengths within our industry:
WELL-KNOWN BRAND NAMES
We benefit from a portfolio of stores operating under strong, well-known
brands. Our company-owned and franchised stores under the Pearle Vision brand
and the licensed brands of our host stores (Sears Optical, Target Optical and
BJ's Optical) have become associated with high-quality product selection,
convenience and competitive prices. The variety of store brands and formats
allows us to reach a broad market of customers. In retail optical, these
attributes enable us to compete effectively against other branded optical
retailers and independent providers of eyecare.
We believe there is significant value in the Pearle Vision brand name based
in part on over 20 years of national brand advertising. We are widely recognized
by customers as a destination for quality, fashion-forward and
competitively-priced eyewear and professional service. As a leader based on
optical store count, we are able to leverage national marketing campaigns to
increase store traffic. The scale of Pearle Vision's business enables us to
effectively share the cost of advertising among a large base of both
company-owned and franchised stores. In addition, our host store formats (Sears
Optical, Target Optical and BJ's Optical) benefit from the brand attraction of
the host stores as well as their participation in our hosts' national
advertising programs.
31
Optical chains and mass merchants have gained business from independent
optometrists and we expect this trend to continue. We believe our strong brands,
together with our managed vision care business, enable us to benefit from this
shift in the industry. Based on industry data, optical chains and mass merchants
accounted for approximately 40% of the optical retailing business in 2001
compared to approximately 36% in 1997. Our brands also serve as a strong
platform to enlist independent optometrists to become affiliated with us, in
compliance with applicable law, through either company-owned or franchised
stores. In addition, our variety of brands provides us with scale advantages in
merchandising, advertising and the production of completed spectacles.
We believe our Things Remembered brand is the only nationwide retailer of
personalized and engravable gifts and that it is known for its high-quality
merchandise, superior customer service and convenience. We seek to build
increased brand recognition by reaching customers through our multiple retail
channels.
EXTENSIVE EXPERIENCE WITH OPTOMETRISTS
We have many years experience with both the employed and independent
doctors of optometry associated with our optical stores. We work with them to
increase customers' access to quality eye exams and to provide caring, friendly,
professional service. We also have strong relationships with the doctors of
optometry in the Cole Managed Vision network.
STRONG PROCUREMENT AND FULFILLMENT
We benefit from the aggregated purchasing power provided by all of our
owned and franchised retail optical locations, while maintaining customized
merchandising strategies at each of our operating businesses. In addition, we
benefit from being the largest nationwide operator of retail optical stores not
affiliated with a manufacturer of spectacle frames enabling us to offer a wider
selection of branded merchandise to our customers. We also believe our highly
advanced distribution and fulfillment capabilities at Things Remembered provide
us with a competitive advantage compared to local personalization gift
retailers.
EFFICIENT, CENTRALIZED, HIGH-QUALITY OPTICAL MANUFACTURING CAPABILITY
We believe our manufacturing capabilities, both in-store and through our
laboratory facilities, provide us with a competitive advantage. We utilize
optical laboratory facilities both within our stores (in the case of Pearle
Vision) and at eight centralized locations, which grind, cut and fit lenses into
frames to fulfill customer purchases. Cole Licensed Brands locations are linked
electronically to these centralized locations enabling next day delivery on most
eyewear, if requested by our customers. We have had over 40 years of experience
operating our centralized manufacturing facilities, which permits us to provide
both speed of delivery suited to our customers' preferences and economies of
scale and quality afforded by centralization. Pearle Vision Express stores
contain full surfacing labs that can produce most prescription eyeglasses in
approximately one hour and Pearle Vision Mainline stores can produce
approximately 50% of eyeglass prescriptions on-site in approximately one hour.
NATIONAL PRESENCE IN PERSONALIZED GIFT MARKET
We have 774 Things Remembered stores in 46 states as of February 2, 2002.
We believe our Things Remembered business segment is the only nationwide
retailer of personalized and engravable gifts. We believe our stores are known
for delivering high-quality products and service, including personalization
while the customer shops. We leverage our brand by offering our products through
catalogs and online. Our 35 years of experience in this business have provided
us with competitive advantages in our operations, including developing best
practices in training our associates in the selling of personalized gifts and
engraving techniques.
PURCHASING
The merchandise, supplies and component parts required for the various
products sold by us are purchased from a large number of suppliers and
manufacturers and are generally readily available. In most
32
cases, the purchases are not made under long-term contracts. We believe that the
loss of any one supplier or manufacturer would not have a material adverse
effect on our operations.
COMPETITION
We operate in highly competitive businesses. Cole Vision competes with
other optical companies, private ophthalmologists, optometrists and opticians
and HMOs and other managed vision care companies in a highly fragmented
marketplace on the basis of the service it provides, as well as price and
product quality. In addition, Pearle Vision competes on the basis of its highly
recognized brand name and one-hour express service. We believe that, based on
industry data, Cole Vision is one of the largest optical retail companies in
North America. We believe Things Remembered operates the only nationwide chain
of gift stores offering "while you shop" gift engraving, key duplicating, glass
etching and monogramming, as well as related merchandise, although it competes
with many other retailers that sell gift items. Things Remembered competes with
retailers that sell gift items primarily on the basis of the value-added
point-of-sale services, as well as price and product quality. Some competitors
have greater financial resources than us.
EMPLOYEES
As of February 2, 2002, we had approximately 9,600 full-time employees.
This full-time work force is supplemented by 7,400 part-time and seasonal
employees. Approximately 140 Pearle Vision employees are represented by labor
unions. We consider our present labor relations to be satisfactory.
SEGMENT INFORMATION
Information for our two reportable segments and geographical information
are contained in Note 8 of the Notes to our audited Consolidated Financial
Statements and Note 3 of the Notes to our unaudited interim Consolidated
Financial Statements.
PROPERTIES
We lease our executive offices in Mayfield Heights, Ohio.
In January 2001, our parent completed a third party sale and leaseback of
our office facility in Twinsburg, Ohio, which comprises approximately 175,000
square feet of space. The lease expires in 2019 and includes two options to
renew for ten-year terms. Cole Vision's home office functions are located in
this facility.
All Cole Licensed Brands retail locations are leased or operated under a
license with the host store, and none of the individual retail locations is
material to operations. Leases for departments operated in Sears, Target stores,
SuperTarget stores and BJ's Wholesale Club stores are terminable upon relatively
short notice.
Cole Licensed Brands leases six optical laboratory facilities, located in
Columbus, Ohio; Knoxville, Tennessee (two); Memphis, Tennessee; Salt Lake City,
Utah; and Richmond, Virginia, pursuant to leases expiring (including renewal
options) between 2005 and 2017.
Pearle Vision leases most of their retail stores under noncancelable
operating leases with terms generally ranging from five to ten years and which
generally contain renewal options for additional periods. Pearle Vision is the
principal lessee on a majority of stores operated by franchisees who sublease
the facilities from Pearle Vision.
In January 2002, Pearle Vision completed a sale and leaseback of its Dallas
Support Center, which comprises approximately 129,000 square feet of laboratory
and distribution facilities. The lease expires in 2017 and includes four options
to renew for five-year terms. An adjoining office facility no longer used for
operations was sold in April 2001. Pearle Vision also owns a small headquarters
and laboratory in Puerto Rico.
Cole Vision also leases a home office, an optical laboratory and a
distribution facility, near Toronto, Ontario for its Canadian operations
pursuant to leases expiring in 2004.
33
Leases for Things Remembered stores and kiosks are generally for terms of
ten and five years, respectively. Things Remembered's home office functions are
located in a 50,000 square foot leased facility in Highland Heights, Ohio. The
lease expires (including renewal options) in 2007. Things Remembered leases its
210,000 square foot warehouse and distribution facility located near Youngstown,
Ohio. The lease expires in 2013 and includes three options to renew for
five-year terms.
LEGAL PROCEEDINGS
From time to time during the ordinary course of business, we may be
threatened with, or may become party to, a variety of legal actions and other
proceedings incidental to our business.
A complaint was filed in the Superior Court of California, County of San
Diego against Cole National Corporation, its affiliates and certain of its
officers by the Attorney General of the State of California on February 14, 2002
and amended on February 22, 2002. The case, State of California v. Cole National
Corporation, et al., Case No. GIC783135, alleges claims for various statutory
violations related to the operation of 24 Pearle Vision Centers in California.
The claims include alleged untrue or misleading advertising, illegal dilation
fees, unlawful advertising of eye exams, maintaining an optometrist on or near
the premises by a registered dispensing optician, unlawful advertising of an
optometrist, unlicensed practice of optometry, and illegal relationships among
dispensing opticians, optical retailers and optometrists. The action seeks
unspecified damages, restitution and injunctive relief.
The case is in its early stages and we cannot predict with certainty its
outcome or costs. In May 2002, all of the individual officer defendants were
dismissed. The California Attorney General's office has moved for a preliminary
injunction to enjoin certain advertising practices and from charging dilation
fees. Although we believe we are in compliance with California law and intend to
continue to defend the issues raised in the motion for injunctive relief and the
remaining issues in the case vigorously, we may be required to modify our
activities or might be required to pay damages or restitution in currently
undeterminable amounts, the cost of which might have an adverse effect on our
operating results in one or more periods.
34
MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth information with respect to our officers and
directors.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Jeffrey A. Cole....................... 61 Chairman, Chief Executive Officer and
Director
Larry Pollock......................... 55 President, Chief Operating Officer and
Director
Thomas T.S. Kaung..................... 64 Executive Vice President and Chief
Financial Officer
Leslie D. Dunn........................ 57 Senior Vice President - Business
Development, General Counsel and
Secretary
Joseph Gaglioti....................... 56 Vice President and Treasurer
Timothy F. Finley..................... 58 Director
Irwin N. Gold......................... 45 Director
Melchert F. Groot..................... 42 Director
Peter V. Handal....................... 59 Director
Charles A. Ratner..................... 60 Director
Walter J. Salmon...................... 71 Director
</Table>
MR. COLE has been our director since we were organized. He has been
Chairman since 1992, Chief Executive Officer since 1984 and served as Chief
Financial Officer from 1991 until 1999. He is also a director of our parent,
Hartmarx Corporation and Pearle Europe B.V.
MR. POLLOCK became our director and President and Chief Operating Officer
in January 2000. Prior to joining us, Mr. Pollock served as President and Chief
Executive Officer of HomePlace, Inc., a housewares retailer, from September 1998
to June 1999. Mr. Pollock joined HomePlace, Inc. in January 1997 as Executive
Vice President and Chief Operation Officer. HomePlace, Inc. filed a voluntary
petition in bankruptcy in January 1998. From 1994 to 1996, Mr. Pollock served as
President, Chief Operating Officer and director of Zale Corporation, a jewelry
retailer. Mr. Pollock is also a partner of Independent Group L.P., a privately
held radio broadcasting company based in Cleveland, Ohio. Mr. Pollock is also a
director of our parent and Borders Group, Inc.
MR. KAUNG has been our Executive Vice President and Chief Financial Officer
since March 23, 2000. Mr. Kaung had been serving as a consultant to us since
October 18, 1999. Since 1991, Mr. Kaung provided financial consulting and
interim financial executive services to a variety of corporations through his
own company, River International. Mr. Kaung had previously been our Chief
Financial Officer from 1983 to 1991.
MS. DUNN has been our Senior Vice President-Business Development, General
Counsel and Secretary since September 1997. Prior to joining us, she had been a
partner in the law firm of Jones, Day, Reavis & Pogue since 1985.
MR. GAGLIOTI has been our Vice President since 1992 and Treasurer since
1991. Mr. Gaglioti joined us in 1981.
MR. FINLEY has been our director since 1992. In 1999, Mr. Finley retired as
Chairman and Chief Executive Officer of Jos. A. Bank Clothiers, Inc., a clothing
retailer, a position which he has held since 1990. Mr. Finley is also a director
of our parent.
MR. GOLD has been our director since 1992. Mr. Gold is a Senior Managing
Director of Houlihan Lokey Howard & Zukin, a specialty investment banking firm,
where he has been employed since 1988. Mr. Gold is also a director of our
parent, Houlihan Lokey Howard & Zukin and Nexiq Technologies, Inc.
35
MR. GROOT became our director on June 19, 2001 pursuant to an agreement
entered into with HAL International N.V. Since November 2001, Mr. Groot has
served as the Chief Executive Officer of Pearle Europe B.V., an optical
retailer. Cole National Corporation owns approximately 21% of the common stock
of Pearle Europe B.V. From May 1992 until 2001, Mr. Groot served as a director
of HAL Investments B.V., an investment company. Mr. Groot is also a director of
our parent.
MR. HANDAL has been our director since 1992. Currently, Mr. Handal serves
as President and Chief Executive Officer of Dale Carnegie Training & Associates,
Inc., a provider of corporate business seminars and training courses; President
of COWI International Group, a consulting company; President 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 our parent, Dale Carnegie
Training & Associates, Inc.; Factory 2U Stores, Inc.; and W. Kruk Company of
Poland, a specialty gift company.
MR. RATNER has been our director since March 1995. Since 1993, Mr. Ratner
has served as President and, since 1995, Chief Executive Officer of Forest City
Enterprises, Inc., a national real estate development and management company. He
is also a director of our parent, Forest City Enterprises, Inc. and American
Greetings Corporation.
MR. SALMON has been our director since June 1997. Mr. Salmon is the Stanley
Roth Sr. Professor of Retailing, Emeritus 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 of our parent from 1961 to 1984. He is also a director of our
parent; Harrah's Entertainment, Inc.; Luby's Cafeterias, Inc.; The Neiman Marcus
Group; PetSmart, Inc.; Party City Stores, Inc.; and Stage Stores, Inc.
DIRECTOR COMPENSATION
Directors serve for a term of one year and until their successors are
elected.
Cash Compensation
Our parent pays directors who are not employees of our parent or any of its
subsidiaries an annual fee of $25,000 plus reasonable out-of-pocket expenses.
Fees for Mr. Groot's service on the Board of Directors are paid to an affiliate
of HAL International N.V. Members of the Audit Committee, the Corporate Finance
and Strategic Issues Committee, the Compensation Committee and the Special
Compensation Committee receive $1,000 for each day of attendance at or
participation in 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, the Corporate Finance and Strategic Issues Committee and the
Compensation Committee receive an additional $7,500 per year. Other members of
the Corporate Finance and Strategic Issues Committee receive an additional
$2,500 per year.
Stock-Based Compensation
In 1997, stockholders of our parent approved the Nonemployee Director
Equity and Deferred Compensation Plan. This plan allows nonemployee directors to
receive their annual retainer and other fees in the form of shares of common
stock of our parent. The plan also allows nonemployee directors to defer the
payment and therefore the recognition as income for federal income tax purposes
of all or part of their annual retainer and other fees paid to them as
directors. During fiscal 2001, Messrs. Handal, Ratner and Salmon elected to
defer a portion of their fees and received credits payable in shares of common
stock of our parent as follows: Mr. Handal -- 3,325 shares; Mr. Ratner -- 2,197
shares; and Mr. Salmon -- 818 shares.
Our parent's Nonqualified Stock Option Plan for Nonemployee Directors (the
"DIRECTOR PLAN") provides for the granting of stock options for up to an
aggregate of 100,000 shares of common stock of our parent to directors who are
not employees of our parent or any of its subsidiaries, or who are not otherwise
excluded from participation in the Director Plan. This plan provides for the
automatic grant of a nonqualified option to purchase 2,500 shares of common
stock of our parent to each newly elected or appointed nonemployee
36
director on January 1 of the year immediately following the year in which the
director is elected or appointed, and on each January 1 thereafter for as long
as the director continues to serve. Nonemployee directors serving at the time of
the adoption of the Director Plan became eligible for option grants beginning on
January 1, 1997. Options granted under the Director Plan generally vest on the
first anniversary of the date of grant of the option, provided that the optionee
is still serving as a nonemployee director at that time. The exercise price per
share for options granted under the plan is the average of the high and low
selling prices of common stock of our parent on the New York Stock Exchange on
the last trading date on which such prices are quoted prior to the date of
grant. On January 1, 2002, Messrs. Finley, Gold, Handal, Ratner and Salmon each
received an automatic grant of options for 2,500 shares, with an exercise price
of $16.205. In lieu of a grant of options to Mr. Groot under the Director Plan,
on January 1, 2002, an affiliate of HAL International N.V. received a grant of
options for 2,500 shares. The exercise price of these options is $16.205, and
they are subject to the same vesting schedule and requirements of the Director
Plan, based on Mr. Groot's service on the Board of Directors.
EXECUTIVE COMPENSATION
The table below shows the before-tax compensation for the years shown for
our Chief Executive Officer and the four next highest paid executive officers at
the end of fiscal 2001, as well as our former Senior Vice President and
Controller, who served in that capacity until November 2001.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL LONG TERM**
COMPENSATION COMPENSATION AWARDS
---------------------------------- -----------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR* SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION(1)
- --------------------------- ----- -------- -------- ------------ ---------- ---------- ---------------
Jeffrey A. Cole............ 2001 $725,000 $ 0 -- -- 250,000 $221,619
Chairman, Chief Executive 2000 $738,942 $126,875 -- -- 50,000 $244,429
Officer(2) 1999 $725,000 $ 0 -- -- -- $246,407
Larry Pollock.............. 2001 $ 50,000 $125,000 $27,724(4) -- -- $ 9,417
President and Chief 2000 $ 50,962 $126,875 -- -- -- $ 7,590
Operating Officer(3) 1999 $ 1,731 $ 0 -- $3,478,125(3) 362,500(3) --
Thomas T.S. Kaung.......... 2001 $375,000 $ 0 -- -- -- $ 15,695
Executive Vice President
and 2000 $320,192 $ 65,625 -- -- 100,000 $ 9,159
Chief Financial
Officer(5)
Leslie D. Dunn............. 2001 $273,461 $ 0 -- -- 7,500 $ 38,665
Senior Vice President -- 2000 $267,500 $ 46,375 -- -- 25,000 $ 36,272
Business Development, 1999 $236,308 $ 0 -- -- 5,000 $ 32,634
General Counsel and
Secretary
Joseph Gaglioti............ 2001 $185,000 $ 0 -- -- -- $ 25,064
Vice President and 2000 $188,558 $ 32,375 -- -- -- $ 23,043
Treasurer 1999 $166,827 $ 0 -- -- -- $ 21,958
William P. Lahiff, Jr...... 2001 $179,615 $ 0 -- -- 10,000 $ 25,375
Senior Vice President and 2000 $152,885 $ 50,000 -- -- -- $ 104
Controller(6) 1999 $ 9,808 $ 0 -- -- 5,000 $ 0
</Table>
- ---------------
* Fiscal 2000 included 53 weeks of salary
** Involves equity securities of our parent.
(1) The amounts listed for fiscal 2001 consist of:
- payments by our parent pursuant to an agreement between our parent and an
insurance company that provides for reimbursements to the named executive
officers in amounts up to $20,000 per year for certain medical expenses
for themselves and their families not otherwise covered by our parent's
group medical insurance plan as follows: Mr. Cole ($5,354), Mr. Pollock
($8,273), Mr. Kaung ($5,745), Ms. Dunn ($8,273) and Mr. Gaglioti ($8,273)
and Mr. Lahiff ($8,273);
37
- payments under our parent's 401(k) Plan to match pre-tax elective
deferral contributions as follows: Mr. Cole ($340), Mr. Pollock ($1,006),
Ms. Dunn ($340), Mr. Gaglioti ($340) and Mr. Lahiff ($340);
- payments under our parent's Supplemental Deferred Compensation Plan to
match elective deferral contributions as follows: Mr. Cole ($7,563), Mr.
Kaung ($4,406) and Mr. Lahiff ($1,420);
- the value of life insurance provided by our parent for the benefit of the
executive officers as follows: Mr. Cole ($11,223), Mr. Pollock ($138),
Mr. Kaung ($5,544), Ms. Dunn ($2,552), Mr. Gaglioti ($1,651) and Mr.
Lahiff ($542);
- dollar value of the benefit of premiums paid for split-dollar life
insurance policies (unrelated to term life insurance coverage) projected
on an actuarial basis as follows: Mr. Cole ($124,639); and
- contribution credits in fiscal 2001 provided under our Supplemental
Retirement Benefit Plan as follows: Mr. Cole ($72,500), Ms. Dunn
($27,500), Mr. Gaglioti ($14,800) and Mr. Lahiff ($14,800). See
"-- Supplemental Executive Retirement Plans" below.
(2) Jeffrey A. Cole's employment agreement provides for a three-year term that
annually extends on a year-by-year basis until and including the year Mr.
Cole reaches age 65, unless notice to the contrary is given. Mr. Cole's
annual base salary is to be at least $800,000, and he is entitled to
participation in bonus programs and other customary benefits and
perquisites. The agreement provides for payments upon involuntary
termination of Mr. Cole's employment without cause, self-termination in a
window period following a change of control, or after a constructive
termination. Mr. Cole is entitled to receive a lump sum payment equal to
three times the sum of (a) his salary at the time of termination and (b) his
average bonus for the last five fiscal years, plus a prorated bonus for the
year of termination. Following the expiration of his agreement, Mr. Cole's
benefits will include post retirement coverage for life and medical
insurance, medical expense, office, secretarial and consulting services, an
automobile and limited use of the corporate aircraft, or in lieu thereof, a
lump sum payment. The agreement contains provisions with respect to
compensation, bonus and benefits in the event of Mr. Cole's death or
disability. In the event that any payments received by Mr. Cole under the
agreement or otherwise are subject to an excise tax, he will be entitled to
a gross-up payment. Mr. Cole has agreed to provide consulting services until
the earlier of 10 years or age 75 upon the expiration of his employment term
or his voluntary resignation (other than under circumstances that would have
triggered the payments described above). Mr. Cole would be paid consulting
fees of $150,000 per year for the first three years; $100,000 per year for
the next four years, and $75,000 per year for the last three years.
(3) Our parent entered into a four-year employment agreement with Larry Pollock
when he became President and Chief Operating Officer on January 18, 2000 at
an annual base salary of $50,000, along with participation in bonus programs
and certain of our parent's benefit programs, as well as other customary
perquisites. In connection with his employment, Mr. Pollock received grants
of nonqualified options to purchase a total of 362,500 shares of common
stock of our parent (262,500 of which options remain outstanding and 100,000
of which options expired after 90 days without having been exercised) and an
award of 525,000 shares of restricted common stock of our parent. Mr.
Pollock has delivered a promissory note to our parent in the amount of
$1,668,685, which equals the income tax imposed on his award of restricted
stock of our parent. The promissory note matures on January 18, 2004, bears
interest at a rate of 3% per annum and is secured by Mr. Pollock's
restricted stock of our parent. Mr. Pollock was required to purchase for his
own account 262,500 shares of common stock of our parent in the open market,
which he has purchased, and is permitted to purchase up to an additional
262,500 shares of common stock of our parent in addition to shares purchased
through the exercise of options. In addition, Mr. Pollock has agreed to vote
all shares of common stock of our parent owned by him according to the
recommendations of a majority of the Board of Directors.
Mr. Pollock's 262,500 options are fully vested and are exercisable at a
price of $10.00 per share. Of Mr. Pollock's shares of restricted stock,
262,500 are now vested. Half of the balance will vest on January 18, 2003
and the remainder on January 18, 2004. Early vesting of the restricted
shares will occur in the case of certain events, including after a change of
control of our parent or following certain terminations of his employment
with our parent. In addition, all unvested restricted shares will become
vested if, for any period of 20 consecutive trading days, the closing price
of our parent's common stock
38
on the New York Stock Exchange equals or exceeds $25.00 and Mr. Pollock
remains employed with our parent. Mr. Pollock has the right to vote the
restricted shares, and would be entitled to dividends on those shares were
any to be paid.
The table reflects the dollar value of the award of shares of restricted
stock described above, calculated by multiplying the number of shares
granted by $6.625, the closing price of the common stock of our parent on
the New York Stock Exchange on January 18, 2000, the date of award.
Mr. Pollock's agreement provides for payments upon a termination of his
employment without cause or after a constructive termination occurring
before a change of control during the first two years of his agreement. If
such a termination occurs before the second anniversary of the agreement,
25% of the amount outstanding under his promissory note would be forgiven.
(4) Includes car allowance of $11,100, the value of personal air travel of
$16,376 and the dollar value of the benefit of premiums paid for a long-term
disability insurance policy of $248. These perquisites are consistent with
company programs provided to other named executive officers but, because Mr.
Pollock's salary is minimal, their value exceeds the minimum SEC reporting
standard of 10% of Mr. Pollock's annual salary and bonus.
(5) Thomas T.S. Kaung served as a consultant from October 18, 1999 to March 23,
2000. On March 23, 2000, Mr. Kaung became Executive Vice President and Chief
Financial Officer of our parent and entered into an employment agreement
with a term ending on February 1, 2003 and providing for an annual base
salary of $375,000 and participation in bonus programs and other customary
benefits and perquisites.
In connection with his employment, Mr. Kaung was awarded two grants of
50,000 nonqualified stock options of our parent, all of which are vested.
The options had a two-year vesting period, with half of each grant vesting
on March 23, 2001 and the remainder vesting on March 23, 2002. The exercise
price for one grant of 50,000 options is $6.50 per share, the closing price
of our parent's common stock on March 23, 2000, the date of grant. The
exercise price of the second grant of 50,000 options was fixed at $10.00 per
share. As a condition to his employment agreement, Mr. Kaung entered into a
termination/ noncompete letter agreement with our parent. This letter
agreement also provides for the continuation of Mr. Kaung's base salary upon
involuntary termination of his employment without cause, self-termination in
a window period following a change of control or after a constructive
termination.
(6) Mr. Lahiff, age 48, served as our and our parent's Senior Vice President and
Controller from March 2001 to November 7, 2001, and Assistant Secretary and
Assistant Treasurer since January 2000. He was also Vice President and
Controller from January 2000 to March 2001. Prior to joining our parent, he
was a Management Consultant with RHI Management Resources from August 1998
to December 1999 and a Consulting Manager with LakeWest Group, Ltd. from
June 1997 to August 1998. Mr. Lahiff was previously employed by our parent
from 1987 to 1997, serving most recently as Vice President, Systems and
Administration for Things Remembered, Inc. from January 1995 to February
1997. On November 7, 2001, Mr. Lahiff became Senior Vice President of Cole
Vision Corporation and General Manager of Target Optical.
39
COMPENSATION PURSUANT TO EMPLOYEE BENEFIT PLANS
Retirement Plan
The Cole National Group Retirement Plan (the "RETIREMENT PLAN") generally
provides non-contributory benefits integrated with Social Security benefits,
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 only of an employee's base
salary, and does not include bonuses or any other form of compensation.
Effective as of March 31, 2002, the Retirement Plan was amended to completely
freeze benefits under the Retirement Plan for each participant who is not a
Grandfathered Participant. This means that for each participant in the
Retirement Plan who is not a Grandfathered Participant, years of credited
service and compensation are frozen as of March 31, 2002. In addition, effective
as of March 31, 2002, the Retirement Plan was amended to partially freeze
benefits under the Retirement Plan for each participant who is a Grandfathered
Participant. This means that for each participant in the Retirement Plan who is
a Grandfathered Participant, compensation is frozen as of March 31, 2002. A
Grandfathered Participant is any participant in the Retirement Plan who had
attained age 50 and completed at least 10 years of credited service under the
Retirement Plan on December 31, 2001. Of the named executive officers, Jeffrey
A. Cole, Joseph Gaglioti and Thomas T.S. Kaung are Grandfathered Participants.
Under the Internal Revenue 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 credited service
and current salary levels, it is estimated that the retirement benefits payable
to Jeffrey A. Cole, Thomas T.S. Kaung and Leslie D. Dunn will be reduced because
of those limits.
Credited service under the Retirement Plan for each of the individuals
named in the Summary Compensation Table is as follows: Jeffrey A. Cole -- 23
years; Leslie D. Dunn -- 3 years; Joseph Gaglioti -- 20 years; Larry
Pollock -- 1 year; Thomas T.S. Kaung -- 14 years; and William P. Lahiff -- 15
years.
Participants in the Retirement Plan may elect payment of retirement
benefits under several different 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
YEARS OF SERVICE(1)
<Table>
<Caption>
REMUNERATION 10 15 20 25 30
- ------------ ------- -------- -------- -------- --------
$100,000................................. $ 7,511 $ 11,267 $ 15,023 $ 18,778 $ 22,534
125,000................................. 9,761 14,642 19,523 24,403 29,284
150,000................................. 12,011 18,017 24,023 30,028 36,034
175,000(2).............................. 14,261 21,392 28,523 35,653 42,784
200,000(2).............................. 16,511 24,767 33,023 41,278 49,534
225,000(2).............................. 18,761 28,142 37,523 46,903 56,284
250,000(2).............................. 21,011 31,517 42,023 52,528 63,034
300,000(2).............................. 25,511 38,267 51,023 63,778 76,534
350,000(2).............................. 30,011 45,017 60,023 75,028 90,034
400,000(2).............................. 34,511 51,767 69,023 86,278 103,534
500,000(2).............................. 43,511 65,267 87,023 108,778 130,534
600,000(2).............................. 52,511 78,767 105,023 131,278 157,534
700,000(2).............................. 61,511 92,267 123,023 153,778 184,534
725,000(2).............................. 63,761 95,642 127,523 159,403 191,284
</Table>
- ---------------
(1) Based on retirement in 2002.
(2) The Internal Revenue 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
40
federal income tax qualified plans. For benefits accruing in plan years
beginning after December 31, 2001, no more than $200,000 (indexed for
inflation) in annual compensation can be taken into account. Effective March
31, 2002, compensation under the Retirement Plan is frozen at a maximum of
$200,000. Under the Pension Plan SERP (as defined below under the caption
"-- Supplemental Executive Retirement Plans"), participating executives will
receive the amounts to which they otherwise would have been entitled under
the Retirement Plan, subject to the freeze, without regard to Internal
Revenue Code limitations, provided that they have five years of service with
us.
Supplemental Executive Retirement Plans
We have several supplemental executive retirement plans (the "SERPS") that
provide for payment of benefits in addition to the benefits under the Retirement
Plan to the participating executives, which includes officers named in the
Summary Compensation Table.
The Cole National Group, Inc. Supplemental Pension Plan (the "PENSION PLAN
SERP") is an excess benefit plan that replaces benefits that would otherwise
have been payable under the Retirement Plan but that are limited due to Internal
Revenue Code limitations. Participants in the Pension Plan SERP will vest in the
excess benefits after five years of service (with credit for past service).
Benefits under the Pension Plan SERP will be payable on the same basis as the
Retirement Plan benefits or, for participants in the 1999 SERP, on the same
basis as a participant's 1999 SERP benefits.
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
Benefit Plan SERP will be fully vested in the defined contribution benefits
after ten years of service. Benefits under the Benefit Plan SERP will generally
be payable upon retirement (age 55 and older) in ten annual installments or,
upon approval by Cole National, in another form elected by the participant prior
to retirement. The following named individuals received contribution credits in
2001 under the Benefit Plan SERP, which amounts are included in "All Other
Compensation" in the Summary Compensation Table: Mr. Cole -- $72,500; Ms.
Dunn -- $27,500; Mr. Lahiff -- $14,800; and Mr. Gaglioti -- $14,800.
The Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan
(the "1999 SERP") is a defined benefit plan designed to provide additional
retirement benefits for certain members of management and highly compensated
employees. Benefits under the 1999 SERP will generally be payable on the same
basis as the Retirement Plan benefits, or, at the election of a participant, in
installments or in a lump sum. Mr. Cole and Ms. Dunn are currently the only
participants in the 1999 SERP and are each fully vested. Assuming retirement at
age 65, Mr. Cole's total annual retirement benefits under the 1999 SERP and the
Retirement Plan will not be less than $474,000. Effective January 25, 2002, Mr.
Cole waived participation in and his accrued benefits under the Pension Plan
SERP and the Benefit Plan SERP to preclude duplication of benefits under the
1999 SERP. Ms. Dunn's total annual retirement benefits under the 1999 SERP, the
Retirement Plan, the Pension Plan SERP and the Benefit Plan SERP, assuming
retirement at age 65, will equal 40% of twelve times her average monthly
compensation. The level of benefits will be reduced if Mr. Cole or Ms. Dunn
retires before age 65. The benefits under the 1999 SERP are payable to Mr.
Cole's and Ms. Dunn's respective beneficiaries in the event of his or her death
prior to complete payment of benefits.
41
Stock Option Plans
Stock option grants are awarded under several plans of our parent. The
following table contains information concerning options granted to those
executive officers listed in the Summary Compensation Table who received grants
during fiscal 2001.
OPTION GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
NUMBER OF PERCENT OF POTENTIAL REALISABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OR OPTION TERM(2)
GRANTED(#) FISCAL YEAR BASE PRICE EXPIRATION ------------------------------
NAME (1) (%) ($/SH) DATE 5% 10%
- ---- ---------- ------------- ----------- ---------- ------------- -------------
Jeffrey A. Cole.......... 250,000 43.6 15.15 1/25/2012 2,381,938 6,036,300
Leslie D. Dunn........... 7,500 1.3 9.25 3/29/2011 43,630 110,566
William P. Lahiff........ 10,000 1.7 9.25 3/29/2011 58,173 147,421
</Table>
- ---------------
(1) These stock options provide for periodic vesting in equal annual
installments over four to 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 of control of our parent or following certain terminations of
employment with Cole National. Some of the options described in the table
also provides for the re-grant of an additional option, with the same
expiration date but at the then-current market price of the common stock of
our parent, for each share of common stock of our parent that is surrendered
to our parent in payment of withholding taxes and the exercise price if the
option is exercised by the surrender of qualifying shares of common stock of
our parent.
(2) The value, if any, the optionee 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 2001 and unexercised stock options held as of February 2, 2002.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED ON FEBRUARY 2, 2002(#) AT FEBRUARY 2, 2002($)(1)
NAME EXERCISE(#) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- ------------------------------- --------------------------
Jeffrey A. Cole................. -- 329,157/537,500 1,204,999/301,875
Larry Pollock................... -- 262,500/0 1,194,375/0
Thomas T.S. Kaung............... -- 50,000/50,000 315,000/315,000
Leslie D. Dunn.................. -- 43,708/32,292 89,237/196,076
Joseph Gaglioti................. -- 41,416/3,750 90,932/0
William P. Lahiff............... -- 2,500/12,500 23,875/76,875
</Table>
- ---------------
(1) Based on the closing price of $14.55 per share of our parent's common stock
on the New York Stock Exchange on February 1, 2002, the last trading day of
fiscal 2001.
Some of the older option agreements permit an optionee to exercise options
by borrowing funds from our parent, subject to certain restrictions and, in some
instances, to preapproval at the time of exercise by the Compensation Committee
of the Board of Directors. The principal on such loans is payable five years
after
42
the date of exercise, with interest payable annually at a rate fixed on the date
of exercise. The interest rate is 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. Mr. Cole elected to exercise options in
1993 by borrowing from our parent the full amount of the exercise price of those
options. The maturity date of Mr. Cole's loan was extended beyond the original
five year term. Mr. Cole's loan will mature January 18, 2004, unless further
extended. As of the date of this proxy statement, the amount (excluding accrued
interest) owed by Mr. Cole with respect to his loan is $666,666, which bears
interest at a rate of 6.01% per year.
Life Insurance Plans
Our 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 the named
executive officers 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 our parent
of an additional amount of coverage equal to 50% of the amount purchased by the
individual under item (2). The maximum level of coverage per individual is
$1,500,000.
In 1999, our parent purchased a $4,000,000 split-dollar life insurance
policy for Mr. Cole. The premiums are to be reimbursed to our parent upon Mr.
Cole's death or his surrender of the policy. Our parent also has the option to
be reimbursed for the premiums at any time on or after June 2, 2016, if the
policy at such time has sufficient assets to maintain coverage. The split-dollar
agreement provides for funding of premiums through a trust in the event of a
threatened change of control of our parent or if Mr. Cole's employment is
terminated without cause. Our parent has agreed to pay taxes, if any, owed by
Mr. Cole as the result of the funding of the trust.
Management Incentive Bonus Program
Each fiscal year, the Compensation Committee establishes performance goals
for our parent's Management Incentive Bonus Program (the "INCENTIVE PROGRAM").
The Incentive Program was first approved by stockholders of our parent in 1996.
Our parent's stockholders reauthorized the Incentive Program at our annual
meeting for fiscal year 2000, which allowed the program to continue to be
qualified for exclusion from the tax deduction limitations of Section 162(m) of
the Internal Revenue Code, and approved certain amendments. The performance
goals for the amended Incentive Program include: operating profits (including
cash flow, EBIT or EBITDA); net profits; earnings per share; profit return
ratios and margins; revenues; stockholder return and/or value; stock price or
working capital; or any combination of those factors. The performance goals may
reflect absolute performance, a relative comparison of entity performance to the
performance of a peer group, growth or a selected external measure of the
selected performance goal. Profits, earnings and revenues used for any
performance goal measurement may exclude, among other items, gains or losses on
operating asset sales or dispositions, asset write-downs, litigation or claim
disputes or settlements, certain accruals and the effect of changes in tax laws
or accounting principles. If performance fails to achieve the performance goals
established by the Compensation Committee, no awards under the Incentive Program
will be made. None of the named executive officers received a bonus in fiscal
2001 under the Incentive Program.
401(k) Plan
On March 1, 2002, our parent merged its 401(k) plans into a single Cole
National Corporation 401(k) Plan. Eligible employees may contribute up to 17% of
their compensation to the plan, although highly compensated employees, including
all executive officers of our parent, were limited to a maximum of 2% of their
compensation. There is a 10% mandatory matching of employee contributions by our
parent, plus a discretionary match determined annually by the Board of
Directors. For fiscal 2001, no discretionary match was made, and the mandatory
match was approximately $640,000, net of forfeitures.
43
Deferred Compensation Plan
The Cole National Group, Inc. Deferred Compensation Plan for Executives and
Other Senior Management (the "DEFERRED COMPENSATION PLAN"), which went into
effect on February 1, 1999, generally allows deferral of income without regard
to limitations imposed on our parent's 401(k) savings plan. Our parent makes a
contribution of its common stock equal to 10% of the participant's deferrals.
For fiscal 2001, the mandatory match was approximately $60,000, net of
forfeitures. Participants in the Deferred Compensation Plan will be fully vested
in the defined contribution benefits after four years of service (with credit
for past service). Benefits under the Deferred Compensation Plan will generally
be payable upon retirement or voluntary termination in a single lump sum or in
installment payments, at the election of the participant prior to retirement.
1999 Employee Stock Purchase Plan
Our parent's 1999 Employee Stock Purchase Plan (Amended and Restated June
14, 2001) (the "1999 PLAN") provides eligible employees with the opportunity to
purchase up to an aggregate of 700,000 shares of common stock of our parent
pursuant to a payroll deduction program. The 1999 Plan provides for offering
periods of six months, unless the Compensation Committee of the Board of
Directors otherwise determines, during which contributions may be made to
purchase shares of common stock of our parent. At the end of each offering
period, shares of common stock of our parent are purchased automatically at a
price equal to the lesser of 85% of the market price of the shares at the
beginning of the offering period, or 85% of the market value of the shares on
the last day of the offering period. Approximately 379,874 shares of common
stock of our parent have been issued under the 1999 Plan through the end of
fiscal 2001. The 1999 Plan and the right of eligible employees to make purchases
thereunder are intended to qualify under the provisions of Sections 421 and 423
of the Internal Revenue Code. The 1999 Plan will continue in effect until all
shares of common stock of our parent available for issuance under the plan have
been issued, unless terminated earlier in the discretion of the Board of
Directors or upon the occurrence of certain types of corporate transactions. The
1999 Plan was originally approved by stockholders of our parent at the 1999
annual meeting, and an amendment to the 1999 Plan to increase the number of
shares available under the plan to an aggregate of 700,000 shares was approved
by stockholders of our parent at the fiscal year 2000 annual meeting.
44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<Table>
<Caption>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
TITLE OF CLASS OWNERSHIP(1) OF CLASS
-------------- ----------------- --------
Cole National Corporation................ Common Stock 1,100 100%
5915 Landerbrook Drive
Mayfield Heights, Ohio 44124
</Table>
- ---------------
(1) We are a wholly owned subsidiary of Cole National Corporation. Cole National
Corporation has the sole power to vote and dispose of all of our outstanding
capital stock.
The following table sets forth information regarding ownership of common
stock of Cole National Corporation, our parent, as of April 19, 2002 by each of
our directors, executive officers and directors and executive officers as a
group. The number of shares of common stock of our parent that was outstanding
on April 19, 2002 was 16,009,403. All information with respect to beneficial
ownership has been furnished by each director or officer. Unless otherwise
indicated below, voting and investment power of shares reported in this table is
not shared with others. Beneficial ownership of common stock of our parent has
been determined according to Rules 13d-3 and 13d-5 under the Securities Exchange
Act of 1934, which provide that a person is deemed to be the beneficial owner of
shares of stock if the person, directly or indirectly, has or shares the voting
or investment power of that stock, or has the right to acquire ownership of the
stock within 60 days.
<Table>
<Caption>
OUTSTANDING NO. OF TOTAL NUMBER
SHARES IMMEDIATELY OF SHARES
BENEFICIALLY EXERCISABLE BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED OPTIONS OWNED CLASS
- ------------------------ ------------ ----------- ------------ ----------
Jeffrey A. Cole (1)............................ 307,282 341,657 648,939 4.0%
Larry Pollock (2).............................. 791,085 262,500 1,053,585 6.6%
Timothy F. Finley.............................. 5,431 20,000 25,431 *
Melchert F. Groot.............................. 0 0 0 --
Irwin N. Gold.................................. 19,230 20,000 39,230 *
Peter V. Handal (3)............................ 26,456 20,000 46,456 *
Charles A. Ratner (3).......................... 14,798 11,000 25,798 *
Walter J. Salmon (3)(4)........................ 5,685 10,000 15,658 *
Thomas T.S. Kaung.............................. 10,735 100,000 110,735 *
Leslie D. Dunn................................. 10,100 53,916 64,016 *
Joseph Gaglioti (4)............................ 2,261 41,416 43,677 *
William P. Lahiff, Jr.......................... 2,526 5,000 7,526 *
All directors and executive officers as a group
(12 persons)................................. 1,195,589 885,489 2,081,078 13.0%
</Table>
- ---------------
* Less than one percent
(1) Includes 123,750 shares of restricted stock.
(2) Includes 262,500 shares of restricted stock. Also includes 133,042 shares
deposited with a voting trust of which Mr. Pollock is the trustee. Mr.
Pollock sold the economic interest in the shares held by the voting trust
but retains sole voting power and sole dispositive power with respect to
those shares.
(3) Includes share equivalents, which have no voting rights, held through the
Nonemployee Director Equity and Deferred Compensation Plan: Mr. Handal --
16,838 shares; Mr. Ratner -- 10,798; and Mr. Salmon -- 4,335 shares.
(4) Shares owned jointly with spouse.
45
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION AND CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Deliberations concerning compensation for fiscal 2001 generally involved
the compensation committee, the special compensation committee and the full
board of directors including Jeffrey A. Cole and Larry Pollock, employees of
Cole National.
Our parent charges us and our subsidiaries for various costs we incur for
the Twinsburg office facility, equipment leases, including capital leases, and
general corporate expenditures. These charges totaled $3.3 million in fiscal
2001, $2.9 million in fiscal 2000 and $2.8 million in fiscal 1999. Our parent
intends to charge these costs to us in the future.
We have been included in the consolidated federal income tax returns of our
parent and have been charged (credited) an amount equal to the taxes that would
have been payable by us if we were a corporation filing separate returns.
All excess cash balances of our parent are maintained by us. Funds are
returned to our parent as required by our parent. The aggregate amount of funds
distributed to our parent by us is subject to various restrictions in the senior
credit facility and the indentures governing the 9 7/8% senior subordinated
notes due 2006 and 8 5/8% senior subordinated notes due 2007. As of February 2,
2002, the aggregate intercompany account we owed to our parent was $73.5
million.
Charles A. Ratner, our director and a director of our parent, is the
President, Chief Operating Officer and a director of Forest City Enterprises,
Inc., a developer and manager of commercial real estate. Our subsidiaries
currently operate 15 stores under leases with Forest City or its affiliates.
Under such leases, which are generally for multiple year periods of differing
duration, our subsidiaries paid aggregate rent of approximately $638,664 and
other customary charges during fiscal 2001. We believe that the terms of these
leases are equivalent to those that could have been obtained pursuant to arm's
length transactions with unaffiliated parties.
Walter J. Salmon, our director and a director of our parent, is currently
retained as a consultant to us and receives compensation of $25,000 per year for
such services. In addition, under a deferred compensation agreement entered into
in 1979 with a predecessor of Things Remembered, Mr. Salmon is entitled to
receive annual payments of $5,500 for the period that commenced in 1996 and will
end in 2004.
46
DESCRIPTION OF OTHER INDEBTEDNESS
8 5/8% SENIOR SUBORDINATED NOTES DUE 2007
We have an aggregate principal amount of $125.0 million of 8 5/8% senior
subordinated notes due 2007 outstanding under an indenture dated August 22, 1997
between us and Wells Fargo Bank Minnesota, N.A., formerly Norwest Bank
Minnesota, N.A., as trustee. The 8 5/8% senior subordinated notes are unsecured
and mature on August 15, 2007 with no earlier scheduled redemption or sinking
fund payments. The 8 5/8% senior subordinated notes accrue interest at the rate
of 8 5/8% per annum, payable semi-annually on February 15 and August 15 of each
year. We do not have the right to redeem any 8 5/8% senior subordinated notes
prior to August 15, 2002. After August 15, 2002, at our option, we may redeem,
in whole or in part, the 8 5/8% senior subordinated notes at the redemption
prices set forth below, which are expressed as percentages of the principal
amount, plus accrued and unpaid interest thereon, if redeemed during the
twelve-month period beginning on August 15 of the years indicated below:
<Table>
<Caption>
YEAR REDEMPTION PRICE
- ---- ----------------
2002........................................................ 104.3125%
2003........................................................ 102.8750%
2004........................................................ 101.4375%
2005 and thereafter......................................... 100.0000%
</Table>
The indenture governing the 8 5/8% senior subordinated notes contains other
covenants, including restrictions on our ability to pay dividends or make other
restricted payments to Cole National Corporation. The indenture permits us to
pay dividends to Cole National Corporation in an aggregate amount of up to the
sum of (1) $25.0 million, (2) one-half of our consolidated net income and (3)
other specified amounts, provided that no default or event of default has
occurred under the indenture governing the 8 5/8% senior subordinated notes and
that we have met a specified fixed charge coverage ratio test. The indenture
governing the 8 5/8% senior subordinated notes also permits us to make payments
to Cole National Corporation for specified tax obligations and for
administrative expenses, which payments may not exceed 0.25% of our net sales in
any fiscal year.
In addition, the indenture governing the 8 5/8% senior subordinated notes
contains covenants restricting our and our subsidiaries' ability to, among other
things:
- sell or otherwise dispose of our assets;
- create or incur liens on our assets;
- incur or guaranty indebtedness; and
- merge or consolidate with or into, or sell or otherwise dispose of all or
substantially all of our assets to, another person.
Under the indenture governing the 8 5/8% senior subordinated notes, each of
the following constitutes an event of default:
- default for 30 days in the payment when due of interest on the 8 5/8%
senior subordinated notes;
- default in the payment when due of principal on the 8 5/8% senior
subordinated notes;
- our failure or the failure of any of our subsidiaries for 60 days after
notice to comply with other agreements or covenants in the indenture or
in the 8 5/8% senior subordinated notes;
- our failure or the failure by any of our subsidiaries to pay at final
maturity, within the applicable grace period, principal, interest or
premium in an aggregate amount of $5.0 million or more with respect to
any debt, or the acceleration of any debt in the aggregate of $5.0
million or more, which default or acceleration is not cured, waived or
postponed within 60 days after written notice by the trustee or any
holder of the 8 5/8% senior subordinated notes or which acceleration is
not rescinded or annulled within 20 days after written notice by the
trustee or any holder of the 8 5/8% senior subordinated notes;
47
- our failure or the failure by any of our subsidiaries to pay final
judgments aggregating in excess of $5.0 million if the judgments are not
stayed within 60 days after their entry, other than any judgment as to
which a reputable insurance company has accepted full liability; and
- specified events of bankruptcy or insolvency with respect to us or any of
our significant subsidiaries.
SENIOR CREDIT FACILITY
Our primary source of liquidity is funds provided from operations of our
operating subsidiaries. On May 23, 2002, Cole Vision Corporation, Things
Remembered, Inc. and Pearle, Inc., our principal operating subsidiaries, entered
into an amended senior credit facility with Canadian Imperial Bank of Commerce,
as administrative agent, and various financial institutions. Under the terms of
the amended senior credit facility, the principal operating subsidiaries have a
working capital commitment of $75.0 million. The amended senior credit facility
will terminate on May 31, 2006.
Borrowings under the amended senior credit facility currently bear interest
at a rate equal to, at the option of the principal operating subsidiaries,
either:
- the Eurodollar rate, plus a margin of 1.75% to 2.25% depending on
leverage ratios; or
- the highest of (a) the prime rate, (b) the latest three-week moving
average of the secondary market rates for three-month certificates of
deposit plus 1.0%, and (c) the federal funds rate plus 0.5%, plus a
margin of 0.75% to 1.25% depending on leverage ratios.
We pay a commitment fee of between .50% and .75% per annum on the total
unused portion of the facility based on the percentage of revolving credit
commitments used. Cole National Corporation fully and unconditionally guarantees
the amended senior credit facility. We unconditionally guarantee the amended
senior credit facility; however, recourse against us is limited to the amounts
on deposit in one of our bank accounts.
The amended senior credit facility requires the principal operating
subsidiaries to comply with various operating covenants that restrict corporate
activities, including covenants restricting the principal operating
subsidiaries' ability to:
- incur additional indebtedness;
- pay dividends;
- prepay subordinated indebtedness;
- dispose of assets;
- create liens;
- make capital expenditures; and
- make investments or acquisitions.
The amended senior credit facility also requires us and the principal
operating subsidiaries to comply with financial covenants, including covenants
regarding minimum interest coverage and maximum leverage.
The amended senior credit facility restricts the amount of dividends
payable to us by the principal operating subsidiaries to, among other things:
- amounts needed to pay interest on the 8 5/8% senior subordinated notes
due 2007 and the 8 7/8% senior subordinated notes due 2012;
- specified amounts related to the repurchase of the 8 5/8% senior
subordinated notes due 2007, and the 8 7/8% senior subordinated notes due
2012;
- specified amounts related to the repurchase of certain shares of ours and
Cole National Corporation;
- specified amounts related to taxes;
- 0.25% of our consolidated net revenue annually for other direct expenses
of ours and Cole National Corporation; and
- other dividends totaling no more than $10.0 million annually.
As of May 4, 2002, there were no amounts outstanding under the senior credit
facility.
48
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On May 22, 2002, we sold $150.0 million in aggregate principal amount at
maturity of the outstanding notes in a private placement through initial
purchasers to a limited number of "qualified institutional buyers," as defined
in the Securities Act. In connection with the sale of the outstanding notes, we
entered into a registration rights agreement with the initial purchasers, dated
as of May 22, 2002. Under that agreement, we must, among other things, file with
the SEC a registration statement under the Securities Act covering the exchange
offer and use our reasonable best efforts to cause that registration statement
to become effective under the Securities Act. Upon effectiveness of that
registration statement, we must offer each holder of the outstanding notes the
opportunity to exchange its securities for an equal principal amount at maturity
of exchange notes. You are a holder with respect to the exchange offer if you
are a person in whose name any outstanding notes are registered on our books or
any other person who has obtained a properly completed assignment of outstanding
notes from the registered holder.
We are making the exchange offer to comply with our obligations under the
registration rights agreement. A copy of the registration rights agreement has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
In order to participate in the exchange offer, you must represent to us,
among other things, that:
- the exchange notes being acquired pursuant to the exchange offer are
being obtained in the ordinary course of business of the person receiving
the exchange notes;
- you do not have any arrangement or understanding with any person to
participate in the distribution of the exchange notes;
- you are not engaged in, and do not intend to engage in, a distribution of
the exchange notes; and
- you are not one of our "affiliates," as defined in Rule 405 of the
Securities Act.
The exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of outstanding notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of the particular jurisdiction.
RESALE OF THE EXCHANGE NOTES
Based on a previous interpretation by the staff of the SEC set forth in
no-action letters issued to third parties, including Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), Mary Kay Cosmetics, Inc. (available June 5, 1991),
Warnaco, Inc. (available October 11, 1991), and K-III Communications Corp.
(available May 14, 1993), we believe that the exchange notes issued in the
exchange offer may be offered for resale, resold and otherwise transferred by
you, except if you are an affiliate of ours, without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that you are able to make the representations set forth in "-- Purpose and
Effect of the Exchange Offer."
If you tender in the exchange offer with the intention of participating in
a distribution of the exchange notes, you cannot rely on the interpretation by
the staff of the SEC as set forth in the Morgan Stanley & Co. Incorporated
no-action letter and other similar letters and you must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. In the event that our belief
regarding resale is inaccurate, those who transfer exchange notes in violation
of the prospectus delivery provisions of the Securities Act and without an
exemption from registration under the federal securities laws may incur
liability under these laws. We do not assume, or indemnify you against, this
liability.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or
49
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of exchange notes. See "Plan of Distribution." In
order to facilitate the disposition of exchange notes by broker-dealers
participating in the exchange offer, we have agreed, subject to specific
conditions, to make this prospectus, as it may be amended or supplemented from
time to time, available for delivery by those broker-dealers to satisfy their
prospectus delivery obligations under the Securities Act.
Any holder that is a broker-dealer participating in the exchange offer must
notify the exchange agent at the telephone number set forth in the enclosed
letter of transmittal and must comply with the procedures for brokers-dealers
participating in the exchange offer. Under the registration rights agreement, we
are not required to amend or supplement the prospectus for a period exceeding
180 days after the expiration date of the exchange offer, except in the case of
a blackout period.
We have not entered into any arrangement or understanding with any person
to distribute the exchange notes to be received in the exchange offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all outstanding notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the day the exchange offer expires.
As of the date of this prospectus, $150.0 million in aggregate principal
amount at maturity of the notes are outstanding. This prospectus, together with
the letter of transmittal, is being sent to all registered holders of the
outstanding notes on this date. There will be no fixed record date for
determining registered holders of the outstanding notes entitled to participate
in the exchange offer. Holders, however, of the outstanding notes must tender
their certificates therefor or cause their outstanding notes to be tendered by
book-entry transfer prior to the expiration date of the exchange offer to
participate.
The form and terms of the exchange notes will be the same as the form and
terms of the outstanding notes, except that the exchange notes will be
registered under the Securities Act and therefore will not bear legends
restricting their transfer. Following consummation of the exchange offer, all
rights under the registration rights agreement accorded to holders of
outstanding notes, including the right to receive additional incremental
interest on the outstanding notes, to the extent and in the circumstances
specified in the registration rights agreement, will terminate.
We intend to conduct the exchange offer in accordance with the provisions
of the registration rights agreement and applicable federal securities laws.
Outstanding notes that are not tendered for exchange under the exchange offer
will remain outstanding and will be entitled to the rights under the related
indenture. Any outstanding notes not tendered for exchange will not retain any
rights under the registration rights agreement and will remain subject to
transfer restrictions. See "-- Consequences of Failure to Exchange."
We will be deemed to have accepted validly tendered outstanding notes when,
as and if we will have given oral or written notice of its acceptance to the
exchange agent. The exchange agent will act as agent for the tendering holders
for the purposes of receiving the exchange notes from us. If any tendered
outstanding notes are not accepted for exchange because of an invalid tender,
the occurrence of other events set forth in this prospectus, or otherwise,
certificates for any unaccepted outstanding notes will be returned, or, in the
case of outstanding notes tendered by book-entry transfer, those unaccepted
outstanding notes will be credited to an account maintained with The Depository
Trust Company, without expense to the tendering holder of those outstanding
notes promptly after the expiration date of the exchange offer. See
"-- Procedures for Tendering."
Those who tender outstanding 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 pursuant
to the exchange offer. We will pay all charges and expenses, other than
applicable taxes described below, in connection with the exchange offer. See
"-- Fees and Expenses."
50
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date is 5:00 p.m., New York City time on August 8, 2002,
unless we, in our sole discretion, extend the exchange offer, in which case, the
expiration date will be the latest date and time to which the exchange offer is
extended. We may, in our sole discretion, extend the expiration date of the
exchange offer, or, upon the occurrence of particular events, terminate the
exchange offer. The events that would cause us to terminate the exchange offer
are set forth under "-- Conditions."
To extend the exchange offer, we must notify the exchange agent by oral or
written notice prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date and make a public announcement of
the extension.
We reserve the right:
- to delay accepting any outstanding notes, to extend the exchange offer or
to terminate the exchange offer if any of the conditions set forth below
under "-- Conditions" are not satisfied by giving oral or written notice
of the delay, extension, or termination to the exchange agent; or
- to amend the terms of the exchange offer in any manner consistent with
the registration rights agreement.
Any delay in acceptances, extension, termination, or amendment will be
followed as promptly as practicable by oral or written notice of the delay to
the registered holders of the outstanding notes. If we amend the exchange offer
in a manner that constitutes a material change, we will promptly disclose the
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the outstanding notes, and we will extend the exchange
offer for a period of up to ten business days, depending upon the significance
of the amendment and the manner of disclosure to the registered holders of the
outstanding notes, if the exchange offer would otherwise expire during that
extension period.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, amendment, or termination of the exchange
offer, we will have no obligation to publish, advertise, or otherwise
communicate that public announcement, other than by making a timely release to
an appropriate news agency.
Upon satisfaction or waiver of all the conditions to the exchange offer, we
will accept, promptly after the expiration date of the exchange offer, all
outstanding notes properly tendered and will issue the exchange notes promptly
after the expiration date of the exchange offer. See "-- Conditions" below. For
purposes of the exchange offer, we will be deemed to have accepted properly
tendered outstanding notes for exchange when, as and if we will have given oral
or written notice of our acceptance to the exchange agent.
In all cases, issuance of the exchange notes for outstanding notes that are
accepted for exchange pursuant to the exchange offer will be made only after
timely receipt by the exchange agent of certificates for those outstanding notes
or a timely confirmation of book-entry transfer of the outstanding notes into
the exchange agent's account at The Depository Trust Company, a properly
completed and duly executed letter of transmittal, and all other required
documents; provided, however, that we reserve the absolute right to waive any
defects or irregularities in the tender of outstanding notes or in the
satisfaction of conditions of the exchange offer by holders of the outstanding
notes. If any tendered outstanding notes are not accepted for any reason set
forth in the terms and conditions of the exchange offer, if the holder withdraws
such previously tendered outstanding notes, or if outstanding notes are
submitted for a greater principal amount of outstanding notes than the holder
desires to exchange, then the unaccepted, withdrawn or portion of non-exchanged
outstanding notes, as appropriate, will be returned promptly after the
expiration or termination of the exchange offer, or, in the case of outstanding
notes tendered by book-entry transfer, those unaccepted, withdrawn or portion of
non-exchanged outstanding notes, as appropriate, will be credited to an account
maintained with The Depository Trust Company, without expense to the tendering
holder thereof.
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CONDITIONS
Without regard to other terms of the exchange offer, we will not be
required to exchange any exchange notes for any outstanding notes and may
terminate the exchange offer before the acceptance of any outstanding notes for
exchange and before the expiration of the exchange offer, if:
- 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 our reasonable judgment, might materially impair our ability to
proceed with the exchange offer;
- the staff of the SEC proposes, adopts or enacts any law, statute, rule or
regulation or issues any interpretation of any existing law, statute,
rule or regulation, which, in our reasonable judgment, might materially
impair our ability to proceed with the exchange offer; or
- any governmental approval or approval by holders of the outstanding notes
has not been obtained, which approval we, in our reasonable judgment,
deem necessary for the consummation of the exchange offer.
If we determine that any of these conditions are not satisfied, we may:
- refuse to accept any outstanding notes and return all tendered
outstanding notes to the tendering holders, or, in the case of
outstanding notes tendered by book-entry transfer, credit those
outstanding notes to an account maintained with The Depository Trust
Company;
- extend the exchange offer and retain all outstanding notes tendered prior
to the expiration of the exchange offer, subject, however, to the rights
of holders who tendered the outstanding notes to withdraw their tendered
outstanding notes; or
- waive unsatisfied conditions with respect to the exchange offer and
accept all properly tendered outstanding notes that have not been
withdrawn. If the waiver constitutes a material change to the exchange
offer, we will promptly disclose the waiver by means of a prospectus
supplement that will be distributed to the registered holders of the
outstanding notes, and we will extend the exchange offer for a period of
up to ten business days, depending upon the significance of the waiver
and the manner of disclosure to the registered holders of the outstanding
notes, if the exchange offer would otherwise expire during this period.
PROCEDURES FOR TENDERING
To tender in the exchange offer, you must complete, sign and date an
original or facsimile letter of transmittal, have the signatures thereon
guaranteed if required by the letter of transmittal, and mail or otherwise
deliver the letter of transmittal to the exchange agent prior to the expiration
date of the exchange offer. You may also tender your outstanding notes by means
of The Depository Trust Company's Automatic Tenders Over the Participant
Terminal System ("ATOP"), subject to the terms and procedures of that system. If
delivery is made through ATOP, you must transmit any agent's message to the
exchange agent account at The Depository Trust Company. The term "agent's
message" means a message, transmitted to The Depository Trust Company and
received by the exchange agent and forming a part for a book-entry transfer,
that states that The Depository Trust Company has received an express
acknowledgement that you agree to be bound by the letter of transmittal and that
we may enforce the letter of transmittal against you. In addition, either:
- certificates for the outstanding notes must be received by the exchange
agent, along with the letter of transmittal;
- a timely confirmation of transfer by book-entry of those outstanding
notes, if the book-entry procedure is available, into the exchange
agent's account at The Depository Trust Company, as set forth in the
procedure for book-entry transfer described below, which the exchange
agent must receive prior to the expiration date of the exchange offer; or
- you must comply with the guaranteed delivery procedures described below.
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To be tendered effectively, the exchange agent must receive the letter of
transmittal and other required documents at the address set forth below under
"-- Exchange Agent" prior to the expiration of the exchange offer.
If you tender your outstanding notes and do not withdraw them prior to the
expiration date of the exchange offer, you will be deemed to have an agreement
with us in accordance with the terms and subject to the conditions set forth in
this prospectus and in the letter of transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR RISK. INSTEAD
OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE OF
THE EXCHANGE OFFER. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT
TO US. YOU MAY REQUEST YOUR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR YOU.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender its outstanding notes should contact the registered holder promptly
and instruct that registered holder to tender the outstanding notes on the
beneficial owner's behalf. If the beneficial owner wishes to tender its
outstanding notes on the owner's own behalf, that owner must, prior to
completing and executing the letter of transmittal and delivering its
outstanding notes, either make appropriate arrangements to register ownership of
the outstanding notes in that owner's name or obtain a properly completed
assignment from the registered holder. The transfer of registered ownership of
outstanding notes may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an eligible institution unless the
outstanding notes tendered pursuant thereto are tendered:
- by a registered holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the letter of
transmittal; or
- 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, each of the
following is deemed an eligible institution:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
- commercial bank;
- trust company having an office or correspondent in the United States; or
- eligible guarantor institution as provided by Rule 17Ad-15 of the
Exchange Act.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes, the outstanding notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as his, her or its name appears on the outstanding notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign the letter of transmittal or any outstanding notes or bond power,
those persons should so indicate when signing, and unless we waive the
requirement, evidence satisfactory to us of their authority to so act must be
submitted with the letter of transmittal.
We will determine all questions as to the validity, form, eligibility,
including time of receipt, acceptance of tendered outstanding notes, and
withdrawal of tendered outstanding notes, in our sole discretion. All of these
determinations will be final and binding. We reserve the absolute right to
reject any and all outstanding notes not properly tendered or any outstanding
notes our acceptance of which would, in the opinion of counsel for us, be
unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular outstanding notes. Our interpretation of
the terms and conditions of the exchange offer,
53
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 outstanding notes must be cured within the time we
determine. Although we intend to notify holders of outstanding notes of defects
or irregularities with respect to tenders of outstanding notes, neither we, nor
the exchange agent, or any other person will incur any liability for failure to
give this notification. Tenders of outstanding notes will not be deemed to have
been made until defects or irregularities have been cured or waived. Any
outstanding notes received by the exchange agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived will
be returned by the exchange agent to the tendering holders of outstanding notes,
unless otherwise provided in the letter of transmittal, promptly following the
expiration date of the exchange offer.
In addition, we reserve the right, in our sole discretion, to purchase or
make offers for any outstanding notes that remain outstanding subsequent to the
expiration date of the exchange offer or, as set forth above under
"-- Conditions," to terminate the exchange offer and, to the extent permitted by
applicable law and the terms of our agreements relating to our outstanding
indebtedness, purchase outstanding notes in the open market, in privately
negotiated transactions or otherwise. The terms of any purchases or offers could
differ from the terms of the exchange offer.
If the holder of outstanding notes is a broker-dealer participating in the
exchange offer that will receive exchange notes for its own account in exchange
for outstanding notes that were acquired as a result of market-making activities
or other trading activities, that broker-dealer will be required to acknowledge
in the letter of transmittal that it will deliver a prospectus in connection
with any resale of the exchange notes and otherwise agree to comply with the
procedures described above under "-- Resale of the Exchange Notes"; however, by
so acknowledging and delivering a prospectus, that broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
In all cases, issuance of exchange notes pursuant to the exchange offer
will be made only after timely receipt by the exchange agent of certificates for
the outstanding notes or a timely confirmation of book-entry transfer of
outstanding notes into the exchange agent's account at The Depository Trust
Company, a properly completed and duly executed letter of transmittal, and all
other required documents. If any tendered outstanding notes are not accepted for
any reason set forth in the terms and conditions of the exchange offer or if
outstanding notes are submitted for a greater principal amount of outstanding
notes than the holder of outstanding notes desires to exchange, the unaccepted
or portion of non-exchanged outstanding notes will be returned as promptly as
practicable after the expiration or termination of the exchange offer, or, in
the case of outstanding notes tendered by book-entry transfer into the exchange
agent's account at The Depository Trust Company pursuant to the book-entry
transfer procedures described below, the unaccepted or portion of non-exchanged
outstanding notes will be credited to an account maintained with The Depository
Trust Company, without expense to the tendering holder of outstanding notes.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the outstanding notes at The Depository Trust Company for the 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 Trust
Company's systems may make book-entry delivery of outstanding notes by causing
The Depository Trust Company to transfer the outstanding notes into the exchange
agent's account at The Depository Trust Company in accordance with The
Depository Trust Company's procedures for transfer. However, although delivery
of outstanding notes may be effected through book-entry transfer at The
Depository Trust Company, 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 of the
exchange offer, unless the holder either (1) complies with the guaranteed
delivery procedures described below or (2) sends an agents message through ATOP.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their outstanding notes and (1) whose
outstanding notes are not immediately available or (2) who cannot deliver their
outstanding notes, the letter of transmittal, or any other required documents to
the exchange agent prior to the expiration date, may effect a tender if:
- the tender is made through an eligible institution;
- before the expiration date of the exchange offer, the exchange agent
receives from such eligible institution a properly completed and duly
executed Notice of Guaranteed Delivery, by facsimile transmission, mail
or hand delivery, setting forth the name and address of the holder, the
certificate number(s) of the outstanding notes and the principal amount
of outstanding notes tendered and stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange
trading days after the expiration date of the exchange offer, the letter
of transmittal, together with the certificate(s) representing the
outstanding notes in proper form for transfer or a confirmation of book-
entry transfer, as the case may be, and any other documents required by
the letter of transmittal will be deposited by the eligible institution
with the exchange agent; and
- the exchange agent receives the properly completed and executed letter of
transmittal, as well as the certificate(s) representing all tendered
outstanding notes in proper form for transfer and other documents
required by the letter of transmittal within three New York Stock
Exchange trading days after the expiration date of the exchange offer.
Upon request to the exchange agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided, tenders of outstanding notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the expiration date of
the exchange offer.
To withdraw a tender of outstanding 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 5:00 p.m., New York City time, on
the expiration date of the exchange offer. Any such notice of withdrawal must:
- specify the name of the person having deposited the outstanding notes to
be withdrawn;
- identify the outstanding notes to be withdrawn;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the outstanding notes were tendered or
be accompanied by documents of transfer sufficient to have the exchange
agent register the transfer of the outstanding notes in the name of the
person withdrawing the tender; and
- specify the name in which any outstanding notes are to be registered, if
different from that of the person who deposited the outstanding notes to
be withdrawn.
We will determine all questions as to the validity, form, and eligibility
of the notices, which determination will be final and binding on all parties.
Any outstanding 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 to those outstanding notes unless the outstanding notes so
withdrawn are validly re-tendered.
Any outstanding notes that have been tendered but that are not accepted for
payment will be returned to the holder of those outstanding notes, or in the
case of outstanding notes tendered by book-entry transfer, will be credited to
an account maintained with The Depository Trust Company, without cost to the
holder promptly after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn outstanding notes may be re-tendered by
following one of the procedures described above under "-- Procedures for
Tendering" at any time prior to the expiration date of the exchange offer.
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TERMINATION OF CERTAIN RIGHTS
All rights given to holders of outstanding notes under the registration
rights agreement will terminate upon the consummation of the exchange offer
except with respect to our duty:
- to use our reasonable best efforts to keep the registration statement
continuously effective for a period of not more than 180 days, subject to
any blackout period; and
- to provide copies of the latest version of this prospectus to any
broker-dealer that requests copies of this prospectus for use in
connection with any resale by that broker-dealer of exchange notes
received for its own account pursuant to the exchange offer in exchange
for outstanding notes acquired for its own account as a result of
market-making or other trading activities, subject to the conditions
described above under "-- Resale of the Exchange Notes."
EXCHANGE AGENT
Wells Fargo Bank Minnesota, N.A. has been appointed exchange agent for the
exchange offer. Questions and requests for assistance, requests for additional
copies of this prospectus or the letter of transmittal, and requests for copies
of the Notice of Guaranteed Delivery with respect to the outstanding notes
should be addressed to the exchange agent as follows:
<Table>
By Registered or Certified By Regular Mail or In Person By Hand Only:
Mail: Overnight Courier: Wells Fargo Bank Minnesota,
Wells Fargo Bank Minnesota, Wells Fargo Bank Minnesota, N.A.
N.A. N.A. 608 Second Avenue South
MAC #N9303-121 MAC #N9303-121 Corporate Trust Operations,
Corporate Trust Operations Corporate Trust Operations 12th Floor
P.O. Box 1517 Sixth and Marquette Avenue Minneapolis, MN 55402
Minneapolis, MN 55480-4972 Minneapolis, MN 55479
</Table>
By Telephone (to confirm receipt of facsimile): (800) 344-5128
By Facsimile (for Eligible Institutions only): (612) 667-4927
FEES AND EXPENSES
We will pay the expenses of soliciting tenders in connection with the
exchange offer. The principal solicitation is being made by mail. Additional
solicitation, however, may be made by facsimile, telephone, or in person by our
officers and regular employees and by officers and regular employees of our
affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse the exchange
agent for its reasonable out-of-pocket expenses in connection with the exchange
offer.
We estimate that our cash expenses in connection with the exchange offer
will be approximately $150,000. These expenses include registration fees, fees
and expenses of the exchange agent, accounting and legal fees, and printing
costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of the
outstanding notes for exchange notes. The tendering holder of outstanding notes,
however, will pay applicable taxes if certificates representing outstanding
notes not tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered, or
- if tendered, the certificates representing outstanding 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
the outstanding notes in the exchange offer.
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If satisfactory evidence of payment of the transfer taxes or exemption from
payment of transfer taxes is not submitted with the letter of transmittal, the
amount of the transfer taxes will be billed directly to the tendering holder and
the exchange notes need not be delivered until the transfer taxes are paid.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the exchange offer is voluntary. Holders of the
outstanding notes are urged to consult their financial and tax advisors in
making their own decisions on what action to take.
Outstanding notes that are not exchanged for the exchange notes in the
exchange offer will not retain any rights under the registration rights
agreement and will remain restricted securities for purposes of the federal
securities laws. Accordingly, the outstanding notes may not be offered, sold,
pledged, or otherwise transferred except:
- to us or any of our subsidiaries;
- to a "Qualified Institutional Buyer" within the meaning of Rule 144A
under the Securities Act purchasing for its own account or for the
account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A;
- pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder, if available;
- pursuant to an exemption from registration under the Securities Act
provided by Rule 904 thereunder, if available;
- pursuant to an effective registration statement under the Securities Act,
and, in each case, in accordance with all other applicable securities laws and
the terms of the indenture governing the outstanding notes.
ACCOUNTING TREATMENT
For accounting purposes, we will recognize no gain or loss as a result of
the exchange offer. The exchange notes will be recorded at the same carrying
value as the outstanding notes, as reflected in our accounting records on the
date of the exchange. The expenses of the exchange offer will be amortized over
the remaining term of the exchange notes.
NO APPRAISAL OR DISSENTERS' RIGHTS
In connection with the exchange offer, you do not have any appraisal or
dissenters' rights under the General Corporation Law of the State of Delaware or
the indenture governing the notes. We intend to conduct the exchange offer in
accordance with the registration rights agreement, the applicable requirements
of the Exchange Act and the rules and regulations of the SEC related to exchange
offers.
57
DESCRIPTION OF NOTES
Cole National issued the outstanding notes and will issue the exchange
notes under an indenture, dated May 22, 2002, between itself and Wells Fargo
Bank Minnesota, N.A., as trustee. All references in this section to "notes"
include the outstanding notes and the exchange notes. 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 following description is a summary of the material provisions of the
indenture. It does not restate the agreement in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of the notes. Copies of the indenture are available as set forth below
under "-- Additional Information." You can find the definitions of certain terms
used in this description under the subheading "-- Certain Definitions." Certain
defined terms used in this description but not defined below under "-- Certain
Definitions" have the meanings assigned to them in the indenture. In this
description, the word "Cole National" refers only to Cole National Group, Inc.
and not to any of its subsidiaries or its parent, Cole National Corporation.
The registered Holder of a note will be treated as the owner of it for all
purposes. Only registered Holders will have rights under the indenture.
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are general unsecured obligations of Cole National;
- are subordinated in right of payment to all existing and future Senior
Debt of Cole National;
- are pari passu in right of payment with the 8 5/8% Notes and the 9 7/8%
Notes and any future senior subordinated indebtedness of Cole National;
and
- are senior in right of payment to any subordinated debt of Cole National,
which by its terms is subordinated to the notes.
Assuming we had completed the offering of the outstanding notes and applied
the net proceeds as intended as of February 2, 2002, (i) Cole National and its
subsidiaries would have had total Senior Debt of approximately $69.5 million, of
which $69.4 million would have been payable to the Parent, and would have had
$62.7 million of additional availability under the Senior Credit Facility and
(ii) our ratio of earnings to fixed charges would have been 1.2x for the year
ended February 2, 2002. As indicated above and as discussed in detail below
under the caption "-- Subordination," payments on the notes and under any future
guarantees of the notes will be subordinated to the payment of Senior Debt. The
indenture permits us and any future Guarantors to incur additional Senior Debt.
The Senior Credit Facility currently does not permit any of our
subsidiaries to guarantee the notes, and therefore none of our subsidiaries will
initially guarantee the notes. None of our subsidiaries will be permitted to
guarantee the notes in the future unless and until the Senior Credit Facility
permits the guarantees. Further, under the terms of the indenture, none of our
subsidiaries will be required to guarantee the notes in the future unless they
guarantee certain other debt of Cole National or incur certain debt of their
own. In the event of a bankruptcy, liquidation or reorganization of any of our
subsidiaries, our subsidiaries will pay the holders of their debt and their
trade creditors before they will be able to distribute any of their assets to
us. Our subsidiaries generated 100.0% of our consolidated revenues in the
twelve-month period ended February 2, 2002, and held 88.2% of our consolidated
total assets as of February 2, 2002. In addition, our ability to access the cash
flow of our subsidiaries is subject to certain restrictions. See "Risk
Factors -- These notes will be effectively subordinated to the debts of our
subsidiaries."
As of the date of the indenture, all of our subsidiaries will be
"Restricted Subsidiaries." However, under the circumstances described below
under the subheading "-- Certain Covenants -- Designation of Restricted and
Unrestricted Subsidiaries," we will be permitted to designate certain of our
subsidiaries as "Unrestricted
58
Subsidiaries." Our Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants in the indenture.
PRINCIPAL, MATURITY AND INTEREST
Cole National issued the notes initially in an aggregate principal amount
of $150.0 million. Cole National may issue additional notes from time to time
after the initial offering. Any offering of additional notes is subject to the
covenant described below under the caption "-- Certain Covenants -- Incurrence
of Indebtedness and Issuance of Preferred Stock." The notes and any additional
notes subsequently issued under the indenture will be treated as a single class
for all purposes under the indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. Cole National will issue notes
in denominations of $1,000 and integral multiples of $1,000. The notes will
mature on May 15, 2012.
Interest on the notes will accrue at the rate of 8 7/8% per annum and will
be payable semi-annually in arrears on May 15 and November 15, commencing on
November 15, 2002. Cole National will make each interest payment to the Holders
of record on the immediately preceding May 1 and November 1.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to Cole National, Cole
National will pay, or cause to be paid by the paying agent, all principal,
interest and premium and Liquidated Damages, if any, on that Holder's notes in
accordance with those instructions. All other payments on notes will be made at
the office or agency of the paying agent and registrar unless Cole National
elects to make interest payments by check mailed to the Holders at their address
set forth in the register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. Cole National
may change the paying agent or registrar without prior notice to the Holders of
the notes, and Cole National or any of its Subsidiaries may act as paying agent
or registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents in connection with a
transfer of notes. Holders will be required to pay all taxes due on transfer.
Cole National is not required to transfer or exchange any note selected for
redemption. Also, Cole National is not required to transfer or exchange any note
for a period of 15 days before a selection of notes to be redeemed.
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 Debt.
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 Cole National or to its
creditors, as such, or to its assets, whether voluntary or involuntary, or any
liquidation, dissolution or other winding-up of Cole National, 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 Cole National (except in connection with the merger or
consolidation of Cole National 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 "-- Certain Covenants --
Merger,
59
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 Debt will be entitled to receive payment
and satisfaction in full in cash of all amounts due on or in respect of all
Senior Debt 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 Cole National 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 Debt 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 Debt and will be
immediately paid over or delivered to the holders of Senior Debt or their
representative or representatives to the extent necessary to make payment in
full of all Senior Debt remaining unpaid, after giving effect to any concurrent
payment or distribution, or provision therefor, to or for the holders of Senior
Debt. By reason of such subordination, in the event of liquidation or
insolvency, creditors of Cole National who are holders of Senior Debt may
recover more, ratably, than other creditors of Cole National, and creditors of
Cole National who are not holders of Senior Debt or of the notes may recover
more, ratably, than the holders of the notes.
No payment or distribution of any assets or securities of Cole National 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 Cole National being
subordinated to the payment of the notes by Cole National) may be made by or on
behalf of Cole National 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 Cole
National 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. 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, Cole National
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
Debt, no payment or distribution of any assets of Cole National of any kind may
be made by Cole National, including, without limitation, by way of set-off or
otherwise, on account of any principal of, premium, if any, or interest on, or
Liquidated Damages with respect to, the notes, 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 Cole National 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 Debt (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 Debt shall have been paid in full or (z) such Payment Blockage Period
shall have been terminated by written notice to Cole National or the trustee
from such Authorized Person, after which, in the case of clause (x), (y) or (z),
Cole National 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 Debt (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
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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 Cole National 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 and Remedies." Cole National must promptly
notify holders of Senior Debt if payment of the notes is accelerated because of
an Event 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.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of Cole National, Holders of
notes may recover less ratably than creditors of Cole National who are holders
of Senior Debt. See "Risk Factors -- Your right to receive payments on these
notes is junior to our existing indebtedness and possibly all of our future
borrowings."
OPTIONAL REDEMPTION
At any time prior to May 15, 2005, Cole National may on any one or more
occasions redeem up to 40% of the aggregate principal amount of notes issued
under the indenture at a redemption price of 108.875% of the principal amount,
plus accrued and unpaid interest and Liquidated Damages, if any, to the
redemption date, with the net cash proceeds of one or more Qualified Equity
Offering; provided that:
(1) at least 60% of the aggregate principal amount of notes issued
under the indenture remains outstanding immediately after the occurrence of
such redemption (excluding notes held by Cole National and its
Subsidiaries); and
(2) the redemption occurs within 60 days of the date of the closing of
such Qualified Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at Cole National's option prior to May 15, 2007.
After May 15, 2007, Cole National may redeem all or, from time to time, a
part of the notes upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest and Liquidated Damages, if any, on the notes
redeemed, to the applicable redemption date, if redeemed during the twelve-month
period beginning on
of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2007........................................................ 104.438%
2008........................................................ 102.958%
2009........................................................ 101.479%
2010 and thereafter......................................... 100.000%
</Table>
MANDATORY REDEMPTION
Cole National is not required to make mandatory redemption or sinking fund
payments with respect to the notes.
61
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of notes will have the right to
require Cole National to repurchase all or any part (equal to $1,000 or an
integral multiple of $1,000) of that Holder's notes pursuant to a Change of
Control Offer on the terms set forth in the indenture. In the Change of Control
Offer, Cole National will offer a Change of Control Payment in cash equal to
101% of the aggregate principal amount of notes repurchased plus accrued and
unpaid interest and Liquidated Damages, if any, on the notes repurchased, to the
date of purchase. Within 15 days following any Change of Control, Cole National
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase notes on the
Change of Control Payment Date specified in the notice, which date will be no
earlier than 25 days and no later than 55 days from the date such notice is
mailed, pursuant to the procedures required by the indenture and described in
such notice. Cole National will comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change of
Control provisions of the indenture, Cole National will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under the Change of Control provisions of the indenture
by virtue of such conflict.
On the Change of Control Payment Date, Cole National will, to the extent
lawful:
(1) accept for payment all notes or portions of notes properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions of notes being purchased by Cole
National.
The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, Cole
National will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of notes required by this covenant. Cole National will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The provisions described above that require Cole National to make a Change
of Control Offer following a Change of Control will be applicable whether or not
any other provisions of the indenture are applicable. Except as described above
with respect to a Change of Control, the indenture does not contain provisions
that permit the Holders of the notes to require that Cole National repurchase or
redeem the notes in the event of a takeover, recapitalization or similar
transaction.
Cole National will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by Cole National
and purchases all notes properly tendered and not withdrawn under the Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of Cole
62
National and its Subsidiaries taken as a whole. Although there is a limited body
of case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a Holder of notes to require Cole National to repurchase its notes as
a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of Cole National and its Subsidiaries taken as a whole to
another Person or group may be uncertain.
ASSET SALES
Cole National will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) Cole National or the Restricted Subsidiary receives consideration
at the time of the Asset Sale at least equal to the fair market value of
the assets or Equity Interests issued or sold or otherwise disposed of;
(2) the fair market value is determined by Cole National's Board of
Directors; and
(3) except in the case of the sale, transfer or other disposition of
Cole National owned stores to franchisees in a business related to the
optical business that results in the conversion of such stores to
franchised stores, at least 75% of the consideration received in the Asset
Sale by Cole National or such Restricted Subsidiary is in the form of cash,
Cash Equivalents or Productive Assets. For purposes of this provision, each
of the following will be deemed to be cash:
(a) any liabilities, as shown on Cole National's most recent
consolidated balance sheet, of Cole National or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are
by their terms subordinated to the notes or any Guarantee of the notes)
that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases Cole National or such
Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Cole
National or any such Restricted Subsidiary from such transferee that are
contemporaneously, subject to ordinary settlement periods, converted by
Cole National or such Restricted Subsidiary into cash, to the extent of
the cash received in that conversion.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Cole National may apply those Net Proceeds at its option:
(1) to repay Senior Debt or Indebtedness of Cole National or a
Restricted Subsidiary of Cole National and to correspondingly permanently
reduce commitments with respect thereto;
(2) to acquire all or substantially all of the assets of, or a
majority of the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure relating to a Permitted Business; or
(4) to acquire other long-term assets that are used or useful in a
Permitted Business.
Pending the final application of any Net Proceeds, Cole National may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the second preceding paragraph will constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, Cole
National will (a) first, make an Excess Proceeds Offer (as defined in the 9 7/8%
Notes Indenture) with respect to any outstanding 9 7/8% Notes, (b) second, make
an Excess Proceeds Offer (as defined in the 8 5/8% Notes Indenture) with respect
to any outstanding 8 5/8% Notes, and (c) third, make an Asset Sale Offer to all
Holders of notes and all holders of other Indebtedness that is pari passu with
the notes containing provisions similar to those set forth in the indenture with
respect to offers to purchase or redeem with the proceeds of sales of assets to
purchase the maximum principal amount of notes and such other pari passu
Indebtedness that may be purchased out of the Excess Proceeds. The offer price
in any
63
Asset Sale Offer will be equal to 100% of principal amount plus accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase, and
will be payable in cash. If any Excess Proceeds remain after consummation of an
Asset Sale Offer, Cole National may use those Excess Proceeds for any purpose
not otherwise prohibited by the indenture. If the aggregate principal amount of
notes and other pari passu Indebtedness tendered into such Asset Sale Offer
exceeds the amount of Excess Proceeds, the trustee will select the notes and
such other pari passu Indebtedness to be purchased on a pro rata basis. Upon
completion of each Asset Sale Offer, the amount of Excess Proceeds will be reset
at zero.
Cole National will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sale
provisions of the indenture, Cole National will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the indenture by virtue of such
conflict.
The Senior Credit Facility prohibits Cole National from purchasing any
notes, and also provides that certain change of control or asset sale events
with respect to Cole National would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Debt to which Cole
National becomes a party may contain similar restrictions and provisions. In the
event a Change of Control or Asset Sale occurs at a time when Cole National is
prohibited from purchasing notes, Cole National could seek the consent of its
senior lenders to the purchase of notes or could attempt to refinance the
borrowings that contain such prohibition. If Cole National does not obtain such
a consent or repay such borrowings, Cole National will remain prohibited from
purchasing notes. In such case, Cole National's failure to purchase tendered
notes would constitute an Event of Default under the indenture which would, in
turn, constitute a default under such Senior Debt. In such circumstances, the
subordination provisions in the indenture would likely restrict payments to the
Holders of notes.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange,
on a pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of $1,000 or less may be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior to
a redemption date if the notice is issued in connection with a defeasance of the
notes or a satisfaction and discharge of the indenture. Notices of redemption
may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the Holder of notes
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
64
CERTAIN COVENANTS
RESTRICTED PAYMENTS
Cole National will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Cole National's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving Cole National or
any of its Restricted Subsidiaries) or to the direct or indirect holders of
Cole National's or any of its Restricted Subsidiaries' Equity Interests in
their capacity as such (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of Cole National or
dividends or distributions payable to Cole National or a Restricted
Subsidiary of Cole National);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving Cole National) any Equity Interests of Cole
National or any direct or indirect parent of Cole National;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes or any Guarantees of the notes, except a payment
of interest or principal at the Stated Maturity thereof or any payment to
Cole National with respect to Indebtedness owed solely to Cole National; or
(4) make any Restricted Investment (all such payments and other
actions set forth in these clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Triggering Default Event has occurred and is continuing or
would occur as a consequence of such Restricted Payment; and
(2) Cole National would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Cole National and its Restricted
Subsidiaries after the date of the indenture (excluding Restricted Payments
permitted by clauses (2), (3), (4), (6), (7) and (8) of the next succeeding
paragraph), is less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of Cole National for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after August 2, 1997 to the end of Cole
National's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (which amount as of February 2, 2002 was $24.4 million) (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus
(b) 100% of the aggregate net cash proceeds and the fair market
value (as determined in good faith by the Board of Directors of Cole
National) of Productive Assets received by Cole National since the date
of the indenture as a contribution to its common equity capital or from
the issue or sale of Equity Interests of Cole National (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of Cole National that have been converted into or exchanged
for such Equity Interests (other than Equity Interests (or Disqualified
Stock or debt securities) sold to a Subsidiary of Cole National);
provided that if the fair market value of such Productive Assets
received by Cole National is in excess of $20.0 million, then Cole
National must deliver to the trustee an opinion as to the value of
65
such consideration issued by an accounting, appraisal or investment
banking firm of national standing, plus
(c) to the extent that any Restricted Investment that was made
after the date of the indenture is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (i) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted Investment, plus
(d) 50% of the amount of any dividends paid in cash received by
Cole National or a Restricted Subsidiary of Cole National after the date
of the indenture from an Unrestricted Subsidiary of Cole National, to
the extent that the dividends were not otherwise included in
Consolidated Net Income of Cole National for the period, plus
(e) to the extent that any Unrestricted Subsidiary of Cole National
is redesignated as a Restricted Subsidiary after the date of the
indenture, the lesser of (i) the fair market value of Cole National's
Investment in that Subsidiary as of the date of the redesignation and
(ii) the initial amount of such Restricted Investment.
The preceding provisions will not prohibit (in the case of clauses (1), (5)
and (10) so long as no Default has occurred and is continuing or would be caused
thereby):
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the dividend
payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of Cole National or any
Guarantor or of any Equity Interests of Cole National in exchange for, or
out of the net cash proceeds of the substantially concurrent sale (other
than to a Restricted Subsidiary of Cole National) of, Equity Interests of
Cole National (other than Disqualified Stock); provided that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition will be excluded
from clause (3) (b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Cole National or any Guarantor with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Cole
National to the holders of its Equity Interests on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Cole National or the Parent or any current
or former Restricted Subsidiary of Cole National held by any current or
former employee, officer, director or consultant of Cole National (or any
of its Restricted Subsidiaries) under any management equity subscription
agreement, stock option agreement or other employee or management plan or
agreement or employment benefit plan; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $4.0 million;
(6) 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 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 Cole National and its Subsidiaries or to
the Parent's ownership thereof); provided, however, that the aggregate
dividend payment paid in each fiscal year pursuant to this clause (6) will
at no time exceed 0.25% of Cole National's "Net Revenue," as shown on Cole
National's audited consolidated statements of income for such fiscal year;
(7) payments to the Parent for income taxes pursuant to the Tax
Allocation Agreement;
66
(8) 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 Cole National and its
Subsidiaries or to the Parent's ownership thereof;
(9) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise
price thereof; and
(10) other Restricted Payments not to exceed $25.0 million in the
aggregate.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Cole National or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
assets or securities that are required to be valued by this covenant will be
determined by the Board of Directors. The Board of Directors' determination must
be based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if the fair market value exceeds
$10.0 million. Not later than the date of making any Restricted Payment, Cole
National will deliver to the trustee an officers' certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this "Restricted Payments" covenant were computed,
together with a copy of any fairness opinion or appraisal required by the
indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
Cole National will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt), and Cole National will not issue any Disqualified Stock and will not
permit any of its Restricted Subsidiaries to issue any shares of preferred stock
other than to Cole National; provided, however, that, so long as no Triggering
Default Event has occurred and is continuing, Cole National and any Guarantor
may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock if
the Fixed Charge Coverage Ratio for Cole National's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock or preferred stock is issued would have been at least
2.0 to 1, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been incurred
or the preferred stock or Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Cole National and any of its Restricted
Subsidiaries of Indebtedness and letters of credit under the Senior Credit
Facility in an aggregate principal amount at any one time outstanding under
this clause (1) (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of Cole National and its
Restricted Subsidiaries thereunder) not to exceed the greater of (a) $100.0
million less any permanent commitment reductions since the date of the
indenture associated with the application of Net Proceeds of Asset Sales or
(b) the sum of (x) 80% of consolidated accounts receivable of Cole National
and its Restricted Subsidiaries and (y) 50% of consolidated inventory of
Cole National and its Restricted Subsidiaries;
(2) the incurrence by Cole National and its Restricted Subsidiaries of
Existing Indebtedness;
(3) the incurrence by Cole National and any Guarantors of Indebtedness
represented by the notes to be issued on the date of the indenture and the
Guarantees of the notes, if any, and the exchange notes to be issued
pursuant to the registration rights agreement and the Guarantees of the
notes, if any, thereon;
(4) the incurrence by Cole National or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or
67
improvement of property, plant or equipment used in the business of Cole
National or such Restricted Subsidiary, in an aggregate principal amount,
including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (4),
not to exceed $15.0 million at any time outstanding;
(5) the incurrence by Cole National or any of the Guarantors of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clauses (2), (3),
(4), (5), (10), (11) or (12) of this paragraph;
(6) the incurrence by Cole National or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among Cole National
and any of its Restricted Subsidiaries; provided, however, that (i) any
subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than Cole National or a
Restricted Subsidiary of Cole National and (ii) any sale or other transfer
of any such Indebtedness to a Person that is not either Cole National or a
Restricted Subsidiary of Cole National; will be deemed, in each case, to
constitute an incurrence of such Indebtedness by Cole National or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (6);
(7) the incurrence by Cole National or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (a) interest rate risk with respect to any Indebtedness
that is permitted by the terms of the indenture to be outstanding or (b)
risk associated with fluctuations in foreign currency exchange rates;
(8) the guarantee by Cole National or any of the Guarantors of
Indebtedness of Cole National or a Restricted Subsidiary of Cole National
that was permitted to be incurred by another provision of this covenant;
(9) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness
or an issuance of Disqualified Stock for purposes of this covenant;
provided, in each such case, that the amount thereof is included in Fixed
Charges of Cole National as accrued;
(10) Indebtedness of Cole National or its Restricted Subsidiaries that
do not in the aggregate exceed $10.0 million in principal amount at any
time outstanding with respect to guarantees of obligations of franchisees
in a business related to the optical business of Cole National or any
Restricted Subsidiary of Cole National as conducted on the date of the
indenture;
(11) the incurrence by Cole National or any of the Guarantors of
additional Indebtedness or the issuance of Disqualified Stock in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred pursuant to this
clause (11), not to exceed $50.0 million;
(12) the incurrence of Indebtedness owing to any insurance company in
connection with the financing of insurance premiums permitted by the
insurance company in the ordinary course of business; and
(13) Indebtedness arising from agreements of Cole National or a
Restricted Subsidiary of Cole National providing for indemnification,
adjustment of purchase price, earn out or other similar obligations, in
each case, incurred or assumed in connection with the acquisition or
disposition of any business, assets or a Restricted Subsidiary of Cole
National, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of that business, assets or Restricted
Subsidiary of Cole National for the purpose of financing that acquisition;
provided that the maximum assumable liability in respect of all of this
Indebtedness shall at no time exceed the gross proceeds actually received
by Cole National and its Restricted Subsidiaries in connection with the
disposition.
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Notwithstanding any other provision of this covenant, the maximum amount of
Indebtedness that Cole National or any Restricted Subsidiary of Cole National
may incur pursuant to this covenant shall not be deemed to be exceeded solely as
a result of fluctuations in the exchange rates of currencies.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (13) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, Cole
National will be permitted to classify such item of Indebtedness on the date of
its incurrence, or later reclassify all or a portion of such item of
Indebtedness, in any manner that complies with this covenant. Indebtedness under
the Senior Credit Facility outstanding on the date on which notes are first
issued and authenticated under the indenture will be deemed to have been
incurred on such date in reliance on the exception provided by clause (1) of the
definition of Permitted Debt.
SALE AND LEASEBACK TRANSACTIONS
Cole National will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Cole National or any Restricted Subsidiary may enter into a sale and leaseback
transaction if:
(1) Cole National or that Restricted Subsidiary, as applicable, could
have (a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction under the Fixed Charge
Coverage Ratio test in the first paragraph of the covenant described above
under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the
covenant described above under the caption "-- Liens;"
(2) the gross cash proceeds of that sale and leaseback transaction are
at least equal to the fair market value, as determined in good faith by the
Board of Directors and set forth in an officers' certificate delivered to
the trustee, of the property that is the subject of that sale and leaseback
transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and Cole National applies the proceeds of such transaction in
compliance with, the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales."
NO SENIOR SUBORDINATED DEBT
Cole National will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt of Cole National and senior in any respect in right
of payment to the notes. No Guarantor will incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to the Senior Debt of such Guarantor and senior in
any respect in right of payment to such Guarantor's Guarantee of the notes.
LIENS
Cole National will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien of any kind securing Indebtedness that is pari passu or
subordinated in right of payment to the notes upon any of their property or
assets, now owned or hereafter acquired, unless all payments due under the
indenture and the notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by a Lien, in each case, except Permitted Liens.
LIMITATION ON CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
Cole National will not (1) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary (other than under the
Senior Credit Facility or a successor facility or under the terms of any
Designated Senior Debt) or (2) permit any of its Restricted Subsidiaries to
issue any Capital
69
Stock, other than to Cole National or a Wholly-Owned Restricted Subsidiary of
Cole National. The foregoing restrictions shall not apply to an Asset Sale
(other than the sale of Preferred Stock of a Restricted Subsidiary of Cole
National) made in compliance with "-- Repurchase at the Option of
Holders -- Asset Sales."
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
Cole National will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to Cole National or any of its Restricted Subsidiaries, or with respect to
any other interest or participation in, or measured by, its profits, or pay
any indebtedness owed to Cole National or any of its Restricted
Subsidiaries;
(2) make loans or advances to Cole National or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Cole National or any
of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and the Senior Credit
Facility as in effect on the date of the indenture and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of those agreements; provided that the
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than
those contained in those agreements on the date of the indenture;
(2) the indenture, the notes and any Guarantee of the notes;
(3) applicable law or regulation;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Cole National or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness or Capital Stock was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired;
provided that, in the case of Indebtedness, such Indebtedness was permitted
by the terms of the indenture to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on that property of the nature
described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
under the provisions of the covenant described above under the caption
"-- Liens" that limit the right of the debtor to dispose of the assets
subject to such Liens;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, assets sale agreements,
stock sale agreements and other similar agreements entered into in the
ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
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(12) Indebtedness (other than Permitted Refinancing Indebtedness)
incurred after the date of the indenture in accordance with the terms of
the Indenture; provided that the restrictions contained in the agreements
governing such Indebtedness are no more restrictive, taken as a whole, than
those contained in the agreements governing Indebtedness outstanding on the
date of the Indenture; and
(13) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (1) through (12) above; provided that the
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive, taken as
a whole, with respect to the dividend and other payment restrictions than
those contained in the dividend or other payment restrictions before the
amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Cole National may not, directly or indirectly: (1) consolidate or merge
with or into another Person (whether or not Cole National is the surviving
corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of Cole National and its
Subsidiaries taken as a whole, in one or more related transactions, to another
Person; unless:
(1) either: (a) Cole National is the surviving corporation; or (b) the
Person formed by or surviving any such consolidation or merger (if other
than Cole National) or to which such sale, assignment, transfer, conveyance
or other disposition has been made is a corporation organized or existing
under the laws of the United States, any state of the United States or the
District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than Cole National) or the Person to which such sale, assignment,
transfer, conveyance or other disposition has been made assumes all the
obligations of Cole National under the notes, the indenture and the
registration rights agreement pursuant to agreements reasonably
satisfactory to the trustee;
(3) immediately after such transaction, no Default or Event of Default
exists; and
(4) Cole National or the Person formed by or surviving any such
consolidation or merger (if other than Cole National), or to which such
sale, assignment, transfer, conveyance or other disposition has been made
will, on the date of such transaction after giving pro forma effect thereto
and any related financing transactions as if the same had occurred at the
beginning of the applicable four-quarter period, (a) have a Fixed Charge
Coverage Ratio equal to or greater than the Fixed Charge Coverage Ratio of
Cole National immediately before the transaction or (b) be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock."
In addition, Cole National may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Cole National and any of its
Wholly-Owned Restricted Subsidiaries.
TRANSACTIONS WITH AFFILIATES
Cole National will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable
to Cole National or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Cole National or
such Restricted Subsidiary with an unrelated Person; and
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(2) Cole National delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, a resolution of the Board of Directors set forth in an
officers' certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of
Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to Cole National of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement or other compensation-related
transaction, approved by an independent committee of the Board of Directors
of Cole National, entered into by Cole National or any of its Restricted
Subsidiaries in the ordinary course of business of Cole National or such
Restricted Subsidiary;
(2) transactions between or among Cole National and/or its
Wholly-Owned Restricted Subsidiaries;
(3) transactions with a Person that is an Affiliate of Cole National
solely because Cole National owns an Equity Interest in, or controls, such
Person;
(4) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of Cole National;
(5) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "-- Restricted Payments;"
(6) the Tax Allocation Agreement;
(7) Indebtedness incurred by Cole National to the Parent; provided
such Indebtedness has terms no more onerous than those contained in the
Senior Credit Facility;
(8) providing indemnity to current or former officers, directors,
employees or consultants of Cole National or any of its Subsidiaries as
determined in good faith by the Board of Directors of Cole National.
FUTURE SUBSIDIARY GUARANTEES
If any Restricted Subsidiary of Cole National guarantees any Indebtedness
of another Person (other than under the Senior Credit Facility or any Permitted
Guarantee), pledges any of its assets to secure any Indebtedness of another
Person or otherwise provides direct credit support for any Indebtedness of
another Person, in each case, then such Restricted Subsidiary will become a
Guarantor of the notes and execute a supplemental indenture and deliver an
opinion of counsel satisfactory to the trustee within 10 Business Days of the
date on which such Restricted Subsidiary so guarantees, pledges its assets or
otherwise provides direct credit support. In addition, Cole National may elect
that any Subsidiary of Cole National become a Guarantor. Each such Guarantee of
the notes will be subordinated to the prior payment in full of all Senior Debt
of such Guarantor.
The Guarantee of the notes of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way of
merger or consolidation) to a Person that is not (either before or after
giving effect to such transaction) a Subsidiary of Cole National, if the
sale or other disposition complies with the "Asset Sale" provisions of the
indenture; or
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(2) in connection with any sale of all of the Capital Stock of a
Guarantor to a Person that is not (either before or after giving effect to
such transaction) a Subsidiary of Cole National; provided, that such sale
shall be subject to the "Asset Sale" provisions of the indenture.
See "-- Repurchase at the Option of Holders -- Asset Sales."
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by Cole National and its
Restricted Subsidiaries in the Subsidiary properly designated will be deemed to
be an Investment made as of the time of the designation and will reduce the
amount available for (1) Restricted Payments under the first paragraph of the
covenant described above under the caption "-- Restricted Payments" or (2)
reduce the amount available for future investments under one or more clauses of
the definition of Permitted Investments, as determined by Cole National. That
designation will only be permitted if the Investment would be permitted at that
time and if the Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. The Board of Directors may redesignate any Unrestricted
Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a
Default. Upon any such redesignation or other designation as a Restricted
Subsidiary, such Subsidiary will become a Guarantor and execute a supplemental
indenture if so required under the covenant described above under the caption
"-- Future Subsidiary Guarantees."
PAYMENTS FOR CONSENT
Cole National will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any Holder of 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
and is paid to all Holders of the notes that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
Whether or not required by the Commission, so long as any notes are
outstanding, Cole National will furnish to the Holders of notes, within the time
periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if Cole National were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report on
the annual financial statements by Cole National's certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Cole National were required to file such reports.
If Cole National has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Cole
National and its Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of Cole National.
In addition, following the consummation of this exchange offer contemplated
by the registration rights agreement, attached as an exhibit to the registration
statement to which this prospectus is a part, whether or not required by the
Commission, Cole National will file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the Commission for public
availability within the time periods specified in the Commission's rules and
regulations (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, Cole
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National and the Subsidiary Guarantors have agreed that, for so long as any
notes remain outstanding, they will furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes whether or not prohibited by
the subordination provisions of the indenture;
(2) default in payment when due of the principal of, or premium, if
any, on the notes, whether or not prohibited by the subordination
provisions of the indenture;
(3) failure by Cole National or any of its Subsidiaries to comply with
the provisions described under the captions "-- Repurchase at the Option of
Holders -- Change of Control," or "-- Certain Covenants -- Merger,
Consolidation or Sale of Assets;"
(4) failure by Cole National or any of its Subsidiaries for 60 days
after written notice from the trustee or the Holders of at least 25% in
principal amount of notes then outstanding to comply with any of the other
agreements in the indenture;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Cole National or any of its Subsidiaries
(or the payment of which is guaranteed by Cole National or any of its
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the indenture, if that default (a) is caused by a
failure to pay at final maturity (within the grace period provided in such
Indebtedness) principal, interest or premium in an aggregate amount of $5.0
million or more with respect to such Indebtedness or (b) results in the
acceleration of any such Indebtedness aggregating $5.0 million 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;
(6) failure by Cole National or any of its Subsidiaries to pay final
judgments aggregating in excess of $10.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days;
(7) except as permitted by the indenture, any Guarantee of the notes
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any Guarantor,
or any Person acting on behalf of any Guarantor, shall deny or disaffirm
its obligations under its Guarantee; and
(8) certain events of bankruptcy or insolvency described in the
indenture with respect to Cole National or any of its Significant
Subsidiaries or any group of Subsidiaries that taken together would
constitute a Significant Subsidiary.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Cole National, any Restricted
Subsidiary that is a Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding notes will become due and payable immediately without further
action or notice. If any other Event of Default occurs and is continuing, the
trustee or the Holders of at least 25% in principal amount of the then
outstanding notes may declare all the notes to be due and payable immediately;
provided that so long as any Indebtedness permitted to be incurred under the
indenture as part of the Senior Credit Facility is outstanding, no acceleration
shall be effective until the earlier of (1) five business days after the giving
of written notice to Cole National and the administrative agent under the Senior
Credit Facility of the acceleration or (2) the acceleration of any Indebtedness
under the Senior Credit Facility.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may
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direct the trustee in its exercise of any trust or power. The trustee may
withhold from Holders of the notes notice of any continuing Default or Event of
Default if it determines that withholding notes is in their interest, except a
Default or Event of Default relating to the payment of principal or interest or
Liquidated Damages.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Liquidated Damages on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Cole National with the
intention of avoiding payment of the premium that Cole National would have had
to pay if Cole National then had elected to redeem the notes pursuant to the
optional redemption provisions of the indenture, an equivalent premium will also
become and be immediately due and payable to the extent permitted by law upon
the acceleration of the notes. If an Event of Default occurs prior to May 15,
2007, by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of Cole National with the intention of avoiding the prohibition on
redemption of the notes prior to May 15, 2007, then the premium specified in the
indenture will also become immediately due and payable to the extent permitted
by law upon the acceleration of the notes.
Cole National is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, Cole National is required to deliver to the trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, AFFILIATES AND
STOCKHOLDERS
No director, officer, employee, incorporator, Affiliate or stockholder of
Cole National or any Guarantor, solely by reason of this status, will have any
liability for any obligations of Cole National or the Guarantors under the
notes, the indenture, any Guarantees of the notes, or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
notes by accepting a note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the notes. The waiver may
not be effective to waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Cole National may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all obligations
of the Guarantors discharged with respect to their respective Guarantees of the
notes ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated Damages,
if any, on such notes when such payments are due from the trust referred to
below;
(2) Cole National's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Cole National's and the Guarantors' obligations in connection
therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Cole National may, at its option and at any time, elect to
have the obligations of Cole National and the Guarantors released with respect
to certain covenants that are described in the indenture ("Covenant Defeasance")
and thereafter any omission to comply with those covenants will not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default and Remedies" will no longer constitute an Event of Default with respect
to the notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Cole National must irrevocably deposit with the trustee, in trust,
for the benefit of the Holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination of cash in U.S.
dollars and non-callable Government Securities, in amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants or of a nationally recognized investment bank, to pay
the principal of, or interest and premium and Liquidated Damages, if any,
on the outstanding notes on the stated maturity or on the applicable
redemption date, as the case may be, and Cole National must specify whether
the notes are being defeased to maturity or to a particular redemption
date;
(2) in the case of Legal Defeasance, Cole National has delivered to
the trustee an opinion of counsel reasonably acceptable to the trustee
confirming that (a) Cole National has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the date
of the indenture, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such opinion
of counsel will confirm that, the Holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Cole National has delivered to
the trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on
the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or,
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91(st) day after the
date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which Cole National
or any of its Subsidiaries is a party or by which Cole National or any of
its Subsidiaries is bound;
(6) Cole National must deliver to the trustee an officers' certificate
stating that the deposit was not made by Cole National with the intent of
preferring the Holders of notes over the other creditors of Cole National
with the intent of defeating, hindering, delaying or defrauding creditors
of Cole National or others; and
(7) Cole National must deliver to the trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the indenture
or the notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer for, notes).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the notes (other
than the 30-day prior notice requirement described in the third paragraph
under the caption "-- Optional Redemption" and provisions relating to the
covenants described above under the caption "Repurchase at the Option of
Holders");
(3) reduce the rate of or change the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal
of, or interest or premium, or Liquidated Damages, if any, on the notes
(except a rescission of acceleration of the notes by the Holders of at
least a majority in aggregate principal amount of the notes and a waiver of
the payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of, or interest or premium or Liquidated Damages, if
any, on the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders");
(8) release any Guarantor from any of its obligations under its
Guarantee of the notes or the indenture, except in accordance with the
terms of the indenture; or
(9) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the
indenture relating to subordination that adversely affects the rights of the
Holders of the notes will require the consent of the Holders of at least 75% in
aggregate principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder of notes,
Cole National, the Guarantors and the trustee may amend or supplement the
indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Cole National's obligations to
Holders of notes in the case of a merger or consolidation or sale of all or
substantially all of Cole National's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of notes or that does not adversely affect the
legal rights under the indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect
or maintain the qualification of the indenture under the Trust Indenture
Act;
(6) to provide for the issuance of additional notes in accordance with
the limitations set forth in the indenture; or
(7) to allow any Guarantor to execute a supplemental indenture and/or
a Guarantee with respect to the notes.
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SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to Cole
National, have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the mailing of a
notice of redemption or otherwise or will become due and payable within
one year and Cole National or any Guarantor has irrevocably deposited or
caused to be deposited with the trustee as trust funds in trust solely
for the benefit of the Holders, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and non-
callable Government Securities, in amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on the notes not delivered to the trustee for
cancellation for principal, premium and Liquidated Damages, if any, and
accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on
the date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which Cole National or any Guarantor
is a party or by which Cole National or any Guarantor is bound;
(3) Cole National or any Guarantor has paid or caused to be paid all
sums payable by it under the indenture; and
(4) Cole National has delivered irrevocable instructions to the
trustee under the indenture to apply the deposited money toward the payment
of the notes at maturity or the redemption date, as the case may be.
In addition, Cole National must deliver an officers' certificate and an opinion
of counsel to the trustee stating that all conditions precedent to satisfaction
and discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Cole National or any Guarantor, the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to Cole National Group,
Inc., 5915 Landerbrook Drive, Mayfield Heights, Ohio 44124, Attention: Chief
Financial Officer.
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BOOK-ENTRY, DELIVERY AND FORM
The exchange notes will be issued in registered, global form in minimum
denominations of $1,000 and integral multiples of $1,000 in excess of $1,000.
The exchange notes initially will be represented by one or more notes in
registered, global form without interest coupons (the "Global Notes"). The
Global Notes will be deposited upon issuance with the trustee as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"-- Exchange of Global Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of notes in certificated
form.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. Cole National takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised Cole National that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
DTC has also advised Cole National that, pursuant to procedures established
by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other
owners of beneficial interest in the Global Notes).
Investors in the Global Notes who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes who
are not Participants may hold their interests therein indirectly through
organizations (including Euroclear and Clearstream) which are Participants in
such system. All interests in a Global Note, including those held through
Euroclear or Clearstream, may be subject to the procedures and requirements of
DTC. The laws of some states require that certain Persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such Persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants, the ability of a Person having
beneficial interests in a Global Note to pledge such interests to Persons that
do not participate in the DTC system, or
79
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the indenture. Under the terms of the indenture, Cole National and the
trustee will treat the Persons in whose names the notes, including the Global
Notes, are registered as the owners of the notes for the purpose of receiving
payments and for all other purposes. Consequently, neither Cole National, the
trustee nor any agent of Cole National or the trustee has or will have any
responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised Cole National that its current practice, upon receipt of
any payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the trustee or Cole National. Neither Cole
National nor the trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the notes, and Cole
National and the trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
DTC has advised Cole National that it will take any action permitted to be
taken by a Holder of notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the notes, DTC reserves the right
to exchange the Global Notes for legended notes in certificated form, and to
distribute such notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and may
discontinue such procedures at any time. Neither Cole National nor the trustee
nor any of their respective agents 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.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies Cole National that it is unwilling or unable to
continue as depositary for the Global Notes or (b) has ceased to be a
clearing agency registered under the Exchange Act and, in either case, Cole
National fails to appoint a successor depositary;
(2) Cole National, at its option, notifies the trustee in writing that
it elects to cause the issuance of the Certificated Notes; or
80
(3) there has occurred and is continuing a Default or Event of Default
with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless that legend is not required by applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes.
SAME DAY SETTLEMENT AND PAYMENT
Cole National will make, or cause to be made, payments in respect of the
notes represented by the Global Notes (including principal, premium, if any,
interest and Liquidated Damages, if any) by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. Cole
National will make all payments of principal, interest and premium and
Liquidated Damages, if any, with respect to Certificated Notes by wire transfer
of immediately available funds to the accounts specified by the Holders of the
Certificated Notes or, if no such account is specified, by mailing a check to
each such Holder's registered address. The notes represented by the Global Notes
are expected to be eligible to trade in the PORTAL market and to trade in DTC's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such notes will, therefore, be required by DTC to be settled in
immediately available funds. Cole National expects that secondary trading in any
Certificated Notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"8 5/8% Notes" means Cole National's 8 5/8% Senior Subordinated Notes due
2007.
"8 5/8% Notes Indenture" means the indenture relating to the 8 5/8% Notes.
"9 7/8% Notes" means Cole National's 9 7/8% Senior Subordinated Notes due
2006.
"9 7/8% Notes Indenture" means the indenture relating to the 9 7/8% Notes.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person was merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
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. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" have correlative
meanings.
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"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights; provided that the sale, conveyance or other disposition of all or
substantially all of the assets of Cole National and its Subsidiaries taken
as a whole will be governed by the provisions of the indenture described
above under the caption "-- Repurchase at the Option of Holders -- Change
of Control" and/or the provisions described above under the caption
"-- Certain Covenants -- Merger, Consolidation or Sale of Assets" and not
by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of Cole National's
Restricted Subsidiaries or the sale of Equity Interests in any of its
Subsidiaries.
Notwithstanding the preceding, none of the following items will be deemed
to be an Asset Sale:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than $5.0 million;
(2) a transfer of assets or other disposition between or among Cole
National and its Wholly-Owned Restricted Subsidiaries or between Cole
National and another Person if, after giving effect to such transaction,
the other Person becomes a Wholly-Owned Restricted Subsidiary of Cole
National;
(3) an issuance of Equity Interests by a Restricted Subsidiary to Cole
National or to another Wholly-Owned Restricted Subsidiary;
(4) the sale, lease, conveyance or other disposition of equipment,
inventory, accounts receivable or other assets in the ordinary course of
business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments;"
(7) the licensing or sublicensing of intellectual property or other
general intangibles and licenses, leases or subleases of other property in
the ordinary course of business and that do not materially interfere with
the business of Cole National and its Subsidiaries;
(8) bona fide foreclosures on assets;
(9) any sale, transfer or other disposition to any Person if, after
such sale, transfer or other disposition, such Person becomes a
Wholly-Owned Restricted Subsidiary; and
(10) any release of intangible claims or rights in connection with a
bona fide lawsuit, dispute or other controversy.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
82
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the
general partner of the partnership; and
(3) with respect to any other Person, the board or any committee of
such Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) marketable, direct obligations issued or guaranteed by the United
States of America, or by any governmental agency or political subdivision
thereof, maturing with 365 days of the date of purchase;
(2) 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 $250.0 million, or by any British, French, German, Japanese or Swiss
national banking institution having capital, surplus and undivided profits
aggregating at least $1.0 billion, in each case that is (a) rated at least
"A" by Standard & Poor's Corporation or at least "A-2" by Moody Investors
Service Inc., or (b) that is a party to the Senior Credit Facility;
(3) commercial paper maturing within 270 days after the issuance
thereof that has the highest credit rating of either of such rating
agencies;
(4) 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;
(5) 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;
(6) repurchase agreements and reverse repurchase agreements with
institutions described in clause (2) above that are fully secured by
obligations described in clause (1) above; and
(7) money market funds not exceeding 365 days in duration that invest
substantially all of such funds' assets in the terms described in the
preceding clauses (1) through (5).
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
83
properties or assets of Cole National and its Restricted Subsidiaries taken
as a whole to any "person" (as that term is used in Section 13(d)(3) of the
Exchange Act) other than a Permitted Holder;
(2) the adoption of a plan relating to the liquidation or dissolution
of Cole National or the Parent;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than a Permitted Holder, becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the Voting
Stock of Cole National or the Parent, measured by voting power rather than
number of shares;
(4) the first day on which a majority of the members of the Board of
Directors of Cole National or the Parent are not Continuing Directors; or
(5) the first day on which the Parent ceases to own 80% of the
outstanding Voting Stock of Cole National.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any net loss realized by such Person or any of
its Restricted Subsidiaries in connection with an Asset Sale, to the extent
such loss was deducted in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net of the effect of all payments made or received pursuant
to Hedging Obligations), to the extent that any such expense was deducted
in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business,
in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash expenses
of, a Restricted Subsidiary of Cole National will be added to Consolidated Net
Income to compute Consolidated Cash Flow of Cole National only to the extent
that a corresponding amount would be permitted at the date of determination to
be dividended to Cole National by such Restricted Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
84
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of dividends
or distributions paid in cash to the specified Person or a Wholly-Owned
Restricted Subsidiary of the Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded;
(4) the cumulative effect of a change in accounting principles will be
excluded;
(5) the Net Income (but not loss) of any Unrestricted Subsidiary will
be excluded, whether or not distributed to the specified Person or one of
its Subsidiaries; and
(6) extraordinary, unusual and non-recurring gains, charges and losses
will be excluded.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Cole National or the Parent who:
(1) was a member of such Board of Directors on the date of the
indenture; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Senior Credit Facility; and
(2) after payment in full of all Obligations under the Senior Credit
Facility, any other Senior Debt permitted under the indenture the principal
amount of which is $25.0 million or more and that has been designated by
Cole National as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder of the Capital Stock, in whole or in part, on or prior to the date that
is 91 days after the date on which the notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to require Cole
National to repurchase such Capital Stock upon the occurrence of a change of
control or an asset sale will not constitute Disqualified Stock if the terms of
such Capital Stock provide that Cole National may not repurchase or redeem any
such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
85
"Existing Indebtedness" means Indebtedness of Cole National and its
Restricted Subsidiaries (other than Indebtedness under the Senior Credit
Facility) in existence on the date of the indenture, until such amounts are
repaid and commitments are permanently reduced.
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net of the effect of all payments made or received pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries (other than
Permitted Guarantees, except to the extent called on) or secured by a Lien
on assets of such Person or one of its Restricted Subsidiaries, whether or
not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of Cole National (other than
Disqualified Stock) or to Cole National or a Restricted Subsidiary of Cole
National, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the specified
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
repays, repurchases or redeems any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems preferred stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated and on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment, repurchase or redemption
of Indebtedness, or such issuance, repurchase or redemption of preferred stock,
and the use of the proceeds therefrom as if the same had occurred at the
beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions and dispositions that have been made by the specified
Person or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on
or prior to the Calculation Date will be given pro forma effect as if they
had occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period will be calculated on a
pro forma basis in accordance with Regulation S-X under the Securities Act,
but without giving effect to clause (3) of the proviso set forth in the
definition of Consolidated Net Income;
(2) if since the beginning of the reference period any Person (that
subsequently became a Restricted Subsidiary of Cole National or was merged
with or into Cole National or any Restricted Subsidiary of Cole National
since the beginning of that period) has made any acquisitions and
dispositions including through mergers or consolidations and including any
related financing transactions that would have
86
required adjustment pursuant to this definition, then the Fixed Charge
Coverage Ratio will be calculated giving pro forma effect thereto (as
described in paragraph (1) above) for the reference period as if the
acquisition or disposition had occurred at the beginning of the applicable
four-quarter period;
(3) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, will be excluded; and
(4) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, will be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each Restricted Subsidiary of Cole National that
executes a Guarantee of the notes in accordance with the provisions of the
indenture, and its successors and assigns.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates; and
(3) agreements entered into solely for the purpose of fixing or
hedging the risks associated with fluctuations in foreign currency exchange
rates,
in each case, in reasonable relation to the Person's business and not for
speculative purposes.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price
of any property, except any such balance that constitutes an accrued
expense or trade payable or other accrued liabilities arising in the
ordinary course of business; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the
87
specified Person (whether or not such Indebtedness is assumed by the specified
Person) and, to the extent not otherwise included, the Guarantee by the
specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any
interest on the Indebtedness that is more than 30 days past due, in the
case of any other Indebtedness.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. Investments
shall exclude (1) extensions of trade credit on commercially reasonably terms in
accordance with normal trade practices and (2) the repurchase of securities of
any Person by such Person. If Cole National or any Restricted Subsidiary of Cole
National sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of Cole National such that, after giving effect
to any such sale or disposition, such Person is no longer a Restricted
Subsidiary of Cole National, Cole National will be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of Cole National's Investments in such Restricted Subsidiary that were not
sold or disposed of in an amount determined as provided in the final paragraph
of the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments." The acquisition by Cole National or any
Restricted Subsidiary of Cole National of a Person that holds an Investment in a
third Person will be deemed to be an Investment by Cole National or such
Restricted Subsidiary in such third Person in an amount equal to the fair market
value of the Investments held by the acquired Person in such third Person in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale; or (b) the disposition of any securities by such Person or any
of its Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (or loss), together with any related
provision for taxes on such extraordinary gain (or loss).
"Net Proceeds" means the aggregate cash proceeds received by Cole National
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result of the Asset Sale, taxes paid or payable as a result of the
Asset Sale, in each case, after taking into account any available tax credits or
deductions and any tax sharing arrangements, and amounts required to be applied
to the repayment of Indebtedness, other than Senior Debt secured by a Lien on
the asset or assets that were the subject of such Asset Sale and any
88
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"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 Debt.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Cole National nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or both
any holder of any other Indebtedness (other than the notes) of Cole
National or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment of the Indebtedness to be
accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of Cole National or any
of its Restricted Subsidiaries.
"Obligations" means any principal, 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), penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing, securing or otherwise entered into in connection
with any Indebtedness.
"Parent" means Cole National Corporation, a Delaware corporation and Cole
National's sole stockholder, or any successor entity thereto pursuant to a
merger or consolidation that results in the voting securities of Parent being
held immediately after the merger or consolidation by the same holders (other
than those that exercise statutory dissenters' rights) that held the voting
securities of Parent immediately before the merger or consolidation and which
merger or consolidation is solely for the purpose of reincorporating Parent in
another State of the United States.
"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 Debt.
"Permitted Business" means any business in which Cole National and its
Subsidiaries were engaged on the date of the indenture, and any business
reasonably related or complementary thereto.
"Permitted Guarantees" means Guarantees of obligations of franchisees for
Indebtedness permitted pursuant to clause (10) under the definition of Permitted
Debt under the heading "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock," and any Guarantees of obligations of franchisees
for Indebtedness in existence on the date of the indenture, together with any
renewals or extensions thereof or modifications or supplements thereto.
"Permitted Holder" means (a) Jeffrey A. Cole, (b) any employee stock
ownership plan or "group" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) in which employees of the Parent or its Subsidiaries beneficially
own at least 25% of the common stock of Cole National or the Parent owned by
such group, (c) the Parent, and (d) any Person that is controlled by one or more
of the Persons set forth in (a) through (c) above.
"Permitted Investments" means:
(1) any Investment in Cole National or in a Wholly-Owned Restricted
Subsidiary of Cole National or in any Guarantor;
(2) any Investment in Cash Equivalents;
89
(3) any Investment by Cole National or any Restricted Subsidiary of
Cole National in a Person, if as a result of such Investment:
(a) such Person becomes a Wholly-Owned Restricted Subsidiary of
Cole National and, if required under the covenant described above under
the caption "-- Certain Covenants -- Future Subsidiary Guarantees", a
Guarantor;
(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, Cole National or a Restricted Subsidiary of Cole
National that, if required under the covenant described above under the
caption "-- Certain Covenants -- Future Subsidiary Guarantees", is a
Guarantor; or
(c) at the time of such Investment, such Person becomes a
Guarantor;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Cole National;
(6) any Investments received in compromise of obligations of such
persons incurred in the ordinary course of trade creditors or customers
that were incurred in the ordinary course of business, including pursuant
to any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of any trade creditor or customer;
(7) Hedging Obligations;
(8) reasonable and customary loans made to employees in connection
with their relocation;
(9) Investments made by Cole National or any Restricted Subsidiary of
Cole National in franchises in a business related to the optical business
of Cole National as conducted on the date of the indenture; provided that,
immediately after giving pro forma effect to such Investment, Cole National
could incur $1.00 of additional Indebtedness (other than Permitted Debt)
under the covenant described above under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock";
provided, however, that if Cole National may not incur $1.00 of additional
Indebtedness, but otherwise satisfies the requirement of this clause (9),
Cole National may make Investments in such franchises in an amount not to
exceed $7.5 million 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;
(10) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (10) that are at any time
outstanding not to exceed $15.0 million, without giving effect to any
reduction for any writedown or writeoff of such Investment or reduction to
the extent credit has already been given under paragraph 3(c), 3(d) or 3(e)
of the covenant described above under the caption "Certain
Covenants -- Restricted Payments";
(11) Investments in securities of trade creditors or customers
received pursuant to a plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers; and
(12) extensions of trade credit in the ordinary course of business.
"Permitted Liens" means:
(1) Liens of Cole National and any Guarantor securing Senior Debt that
was permitted by the terms of the indenture to be incurred;
(2) Liens in favor of Cole National or any of its Restricted
Subsidiaries;
90
(3) Liens on property of a Person existing at the time such Person is
merged with or into or acquired by or consolidated with Cole National or
any Restricted Subsidiary of Cole National; provided that such Liens were
in existence prior to the contemplation of such merger or consolidation or
acquisition and do not extend to any assets other than those of the Person
merged with or into or acquired by or consolidated with Cole National or
the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition of the
property by Cole National or any Restricted Subsidiary of Cole National;
provided that such Liens were in existence prior to the contemplation of
such acquisition and do not extend to any assets other than those of the
Person merged into or consolidated with Cole National or the Restricted
Subsidiary;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant entitled
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as is required in
conformity with GAAP has been made therefor;
(9) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries;
(10) Liens securing Hedging Obligations;
(11) other Liens securing obligations incurred in the ordinary course
of business, which obligations do not exceed $5.0 million in the aggregate
at any one time outstanding;
(12) judgment Liens not giving rise to an Event of Default;
(13) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customer duties in connection with the
importation of goods;
(14) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, governmental
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(15) Liens imposed by law, such as carriers', landlords',
warehouseman's and mechanics' Liens, in each case, for sums not yet due or
being contested in good faith through diligent proceedings;
(16) Liens securing Indebtedness of a Restricted Subsidiary of Cole
National owing solely to Cole National or any Guarantor to the extent such
Indebtedness is permitted to be incurred in accordance with the covenant
described under "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock";
(17) Liens on specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations with respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(18) Liens arising from Uniform Commercial Code financing statement
filings regarding operating leases entered into by Cole National and its
Restricted Subsidiaries in the ordinary course of business;
91
(19) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses, rights-of-way, sewers,
electric lines, telegraph and telephone lines and other similar purposes,
or zoning, building or other restrictions or any similar laws, ordinances,
orders, rules or regulations as to the use of real properties or Liens
incidental to the conduct of the business of such Person or to the
ownership of its properties that do not in the aggregate materially
adversely affect the value of said properties or materially impair their
use in the operation of the business of such Person;
(20) licenses, leases and subleases entered into in the ordinary
course of business and consistent with past practice; and
(21) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof.
"Permitted Refinancing Indebtedness" means any Indebtedness of Cole
National or any Guarantor, or any Permitted Debt of any Restricted Subsidiary of
Cole National that is not a Guarantor, issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Cole National or any Guarantor, or any Permitted
Debt of any such Restricted Subsidiary (in each case, other than intercompany
Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest on the
Indebtedness and the amount of all expenses and premiums incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the Holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Cole National, the
Guarantor or by the Restricted Subsidiary that is not a Guarantor who is
the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Productive Assets" means (1) long-term assets that are used or useful in a
Permitted Business or (2) a majority of the Voting Stock of any Person engaged
in a Permitted Business that becomes a Restricted Subsidiary.
"Qualified Equity Offering" means an offering by Cole National or the
Parent of shares of its common stock (however designated and whether voting or
non-voting) and any and all rights, warrants on 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, Cole National will only be able to redeem notes as set forth in the
first paragraph of the covenant described above under the caption "-- Optional
Redemption" to the extent the net proceeds of such Qualified Equity Offering are
contributed to Cole National as common equity.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
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"Senior Credit Facility" means that certain Credit Agreement, dated as of
November 15, 1996, as amended, by and among Cole Vision Corporation, Things
Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service
Corporation, as borrowers, Canadian Imperial Bank of Commerce, as administrative
agent, and the several banks and other financial institutions party thereto,
providing for up to $75.0 million of revolving credit borrowings and other
extensions of credit, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, increased, renewed, refunded, replaced or
refinanced from time to time.
"Senior Debt" means:
(1) all Indebtedness of Cole National or any Subsidiary outstanding
under the Senior Credit Facility and all Hedging Obligations of Cole
National or any Subsidiary;
(2) any other Indebtedness of Cole National or any Guarantor permitted
to be incurred under the terms of the indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is
subordinated to any Senior Debt or on a parity with or subordinated in
right of payment to the notes or any Guarantee of the notes; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or
owing by Cole National;
(2) any intercompany Indebtedness of Cole National or any of its
Subsidiaries to Cole National, any of its Subsidiaries or any of its
Affiliates (other than the Parent);
(3) any trade payables; or
(4) the portion of any Indebtedness (other than that under the Senior
Credit Facility described in clause (1) above) that is incurred in
violation of the indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation, association
or other business entity is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
"Tax Allocation Agreement" means the Tax Allocation Agreement, dated as of
August 23, 1985, as amended, between the Parent and its subsidiaries, including
Cole National, as the same may be amended or extended from time to time;
provided that no such amendment may create greater additional liability of Cole
National and its Subsidiaries than existing as of the date of the indenture
under such agreement.
"Triggering Default Event" means a Default or Event of Default described in
clauses (1), (2), (3), (5), (6), (7) or (8) under the caption "-- Events of
Default and Remedies" or any breach or violation of the covenants contained
under the captions entitled "-- Certain Covenants -- Incurrence of Indebtedness
and
93
Issuance of Preferred Stock," "-- Certain Covenants -- Restricted Payments,"
"-- Certain Covenants -- No Senior Subordinated Debt," "-- Certain
Covenants -- Liens," "-- Certain Covenants -- Sale and Leaseback Transactions,"
"-- Certain Covenants -- Dividend and Other Payment Restrictions Affecting
Subsidiaries," "-- Certain Covenants -- Transactions with Affiliates,"
"-- Repurchase at the Option of Holders -- Asset Sales," "-- Certain
Covenants -- Limitation on Capital Stock of Restricted Subsidiaries,"
"-- Certain Covenants -- Payments for Consent," "-- Certain Covenants -- Future
Subsidiary Guarantees," "-- Certain Covenants -- Designation of Restricted and
Unrestricted Subsidiaries" or certain other covenants as set forth in the
indenture.
"Unrestricted Subsidiary" means any Subsidiary of Cole National that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Cole National or any Restricted Subsidiary of Cole
National unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to Cole National or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of Cole National;
(3) is a Person with respect to which neither Cole National nor any of
its Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Cole National or any of its
Restricted Subsidiaries; and
(5) has at least one director on its Board of Directors that is not a
director or executive officer of Cole National or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of Cole National or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Cole National as an Unrestricted
Subsidiary will be evidenced to the trustee by filing with the trustee a
certified copy of the Board Resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary
will be deemed to be incurred by a Restricted Subsidiary of Cole National as of
such date and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," Cole
National will be in default of such covenant. The Board of Directors of Cole
National may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation will be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of Cole National of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
will only be permitted if (1) such Indebtedness is permitted under the covenant
described above under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period; and (2) no Default or Event of Default would be in existence
following such designation. Upon any such designation as a Restricted
Subsidiary, such Subsidiary will become a Guarantor and execute a supplemental
indenture if so required under the covenant described above under the caption
"-- Certain Covenants -- Future Subsidiary Guarantees."
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
94
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly-Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
will at the time be owned by such Person or by one or more Wholly-Owned
Restricted Subsidiaries of such Person and one or more Wholly-Owned Restricted
Subsidiaries of such Person.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income and
estate tax considerations relating to the exchange, ownership and disposition of
the exchange notes by holders thereof, but does not purport to be a complete
analysis of all the potential tax considerations relating thereto. This summary
is based upon the provisions of the Internal Revenue Code of 1986, as amended,
Treasury Regulations promulgated under the Internal Revenue Code, and
administrative rulings and judicial decisions as of the date hereof. These
authorities may be changed, perhaps with retroactive effect, so as to result in
United States federal income and estate tax consequences different from those
set forth below. We have not sought any ruling from the Internal Revenue Service
or an opinion of counsel with respect to the statements made and the conclusions
reached in the following summary, and we cannot assure you that the Internal
Revenue Service will agree with such statements and conclusions.
This summary assumes that the exchange notes are held as capital assets and
holders hold the exchange notes from their initial issuance. This summary does
not address the tax considerations arising under the laws of any foreign, state
or local jurisdiction. In addition, this discussion does not address all tax
considerations that may be applicable to holders' particular circumstances or to
holders that may be subject to special tax rules, including, without limitation:
- holders subject to the alternative minimum tax;
- banks, insurance companies, or other financial institutions;
- tax-exempt organizations;
- dealers in securities or commodities;
- traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
- United States holders (as defined below) whose "functional currency" is
not the United States dollar;
- persons that will hold the exchange notes as a position in a hedging
transaction, "straddle," "conversion transaction" or other risk reduction
transaction; or
- persons deemed to sell the notes under the constructive sale provisions
of the Internal Revenue Code.
If a partnership holds exchange notes, the tax treatment of a partner in
the partnership will generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a partnership holding our
exchange notes, you should consult your tax advisor regarding the tax
consequences of the ownership and disposition of the exchange notes.
THIS SUMMARY OF CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. YOU ARE URGED TO CONSULT YOUR
TAX ADVISOR WITH RESPECT TO THE APPLICATION OF UNITED STATES FEDERAL INCOME AND
ESTATE TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY TAX
95
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
CONSEQUENCES TO UNITED STATES HOLDERS
The following is a summary of the United States federal income tax
consequences that will apply to you if you are a United States holder of the
exchange notes. Certain consequences to "non-United States holders" of the
exchange notes are described under " -- Consequences to Non-United States
Holders" below. "United States holder" means a beneficial owner of an exchange
note that is:
- a citizen or resident of the United States, as determined for federal
income tax purposes;
- a corporation created or organized in or under the laws of the United
States or any political subdivision of the United States;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust that (1) is subject to the supervision of a court within the
United States and the control of one or more United States persons or (2)
has a valid election in effect under applicable Treasury Regulations to
be treated as a United States person.
Payments of Interest
Stated interest on the exchange notes will generally be taxable to you as
ordinary income at the time it is paid or accrues in accordance with your method
of accounting for tax purposes.
Disposition of Exchange Notes
Upon the sale, exchange, redemption or other disposition of an exchange
note, you generally will recognize gain or loss equal to the difference between
(i) the sum of cash plus the fair market value of all other property received on
such disposition (except to the extent such cash or property is attributable to
accrued but unpaid interest, which is treated as interest as described above)
and (ii) your adjusted tax basis in the exchange note. A United States holder's
adjusted tax basis in an exchange note generally will equal the cost of the
exchange note to such holder reduced by any principal payments received by such
holder.
Gain or loss recognized on the disposition of an exchange note generally
will be capital gain or loss, and will be long-term capital gain or loss if, at
the time of such disposition, the United States holder's holding period for the
note is more than 12 months. The maximum federal long-term capital gain rate is
20% for noncorporate United States holders and 35% for corporate United States
holders. The deductibility of capital losses by United States holders is subject
to limitations.
Consequences of the Exchange Offer
Because the exchange notes will not differ materially in kind or extent
from the outstanding notes, your exchange of outstanding notes for exchange
notes will not constitute a taxable disposition of the outstanding notes for
United States federal income tax purposes. As a result, you will not recognize
income, gain or loss on such exchange, your holding period for the exchange
notes will generally include the holding period for the notes so exchanged, your
adjusted tax basis in the exchange notes will generally be the same as your
adjusted tax basis in the outstanding notes so exchanged, and the federal income
tax consequences associated with owning the outstanding notes will continue to
apply to the exchange notes.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of principal and interest on and the proceeds of certain sales of
exchange notes unless you are an exempt recipient. A backup withholding tax will
apply to such payments if you fail to provide your taxpayer identification
number or
96
certification of exempt status or have been notified by the Internal Revenue
Service that payments to you are subject to backup withholding.
Any amounts withheld under the backup withholding rules will generally be
allowed as a refund or a credit against your United States federal income tax
liability provided the required information is properly furnished to the
Internal Revenue Service on a timely basis.
CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a summary of the United States federal tax consequences
that will apply to you if you are a non-United States holder of exchange notes.
The term "non-United States holder" means a beneficial owner of a note that is
not a United States holder.
Special rules may apply to certain non-United States holders such as
"controlled foreign corporations," "passive foreign investment companies" and
"foreign personal holding companies." Such entities should consult their own tax
advisors to determine the United States federal, state, local and other tax
consequences that may be relevant to them.
Payment of Interest
The 30% United States federal withholding tax should not apply to any
payment to you of interest on an exchange note provided that:
- you do not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock that are entitled to
vote within the meaning of section 871(h)(3) of the Internal Revenue
Code;
- you are not a controlled foreign corporation that is related to us
through stock ownership;
- you are not a bank whose receipt of interest on an exchange note is
described in section 881(c)(3)(A) of the Internal Revenue Code; and
- (a) you provide your name and address, and certify, under penalties of
perjury, that you are not a United States person (which certification may
be made on an Internal Revenue Service Form W-8BEN) or (b) a securities
clearing organization, bank, or other financial institution that holds
customers' securities in the ordinary course of its business holds the
exchange note on your behalf and certifies, under penalties of perjury,
that it has received Internal Revenue Service Form W-8BEN from you or
from another qualifying financial institution intermediary, and provides
a copy of the Internal Revenue Service Form W-8BEN. If the exchange notes
are held by or through certain foreign intermediaries or certain foreign
partnerships, such foreign intermediaries or partnerships must also
satisfy the certification requirements of applicable Treasury
Regulations.
If you cannot satisfy the requirements described above, payments of
interest will be subject to the 30% United States federal withholding tax,
unless you provide us with a properly executed (1) Internal Revenue Service Form
W-8BEN claiming an exemption from or reduction in withholding under the benefit
of an applicable tax treaty or (2) Internal Revenue Service Form W-8ECI stating
that interest paid on the note is not subject to withholding tax because it is
effectively connected with your conduct of a trade or business in the United
States.
If you are engaged in a trade or business in the United States and interest
on an exchange note is effectively connected with the conduct of that trade or
business, you will be required to pay United States federal income tax on that
interest on a net income basis (although exempt from the 30% withholding tax
provided the certification requirement described above is met) in the same
manner as if you were a United States person as defined under the Internal
Revenue Code, except as otherwise provided by an applicable tax treaty. In
addition, if you are a foreign corporation, you may be subject to a branch
profits tax equal to 30% (or lower applicable treaty rate) of your earnings and
profits for the taxable year, subject to adjustments, that are effectively
connected with your conduct of a trade or business in the United States. For
this purpose, interest will be included in the earnings and profits of such
foreign corporation.
97
Sale, Exchange or Other Taxable Disposition of the Exchange Notes
Any gain realized upon the sale, exchange or other taxable disposition of
an exchange note (except with respect to accrued and unpaid interest, which
would be taxable as described above) generally will not be subject to United
States federal income tax unless:
- that gain is effectively connected with your conduct of a trade or
business in the United States;
- you are an individual who is present in the United States for 183 days or
more in the taxable year of that disposition, and certain other
conditions are met; or
- you are subject to Internal Revenue Code provisions applicable to certain
United States expatriates.
United States Federal Estate Tax
The United States federal estate tax will not apply to the exchange notes
owned by you at the time of your death, provided that (1) you do not own
actually or constructively 10% or more of the total combined voting power of all
classes of our voting stock (within the meaning of the Internal Revenue Code and
the Treasury Regulations) and (2) interest on the note would not have been, if
received at the time of your death, effectively connected with your conduct of a
trade or business in the United States.
Information Reporting and Backup Withholding
The amount of interest paid to you on the exchange note and the amount of
tax withheld, if any, will generally be reported to you and the Internal Revenue
Service. You will generally not be subject to backup withholding with respect to
payments that we make to you provided that you have made appropriate
certifications as to your foreign status, or you otherwise establish an
exemption. The certification of foreign status described above under
" -- Payments of Interest" is generally effective to establish exemption from
backup withholding.
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 resales of exchange notes received in
exchange for outstanding notes where such outstanding notes were acquired as a
result of market-making activities or other trading activities. We have agreed
that, for a period of 180 days from the date upon which the exchange offer is
consummated, subject to a blackout period, or such shorter period in some
circumstances, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until October 6, 2002, all dealers effecting transactions in the
exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. 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 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 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
98
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 consummation of the exchange offer,
subject to a blackout period, or such shorter period in some circumstances, we
will promptly provide sufficient copies of this prospectus and any amendment or
supplement to the prospectus to any broker-dealer that requests such documents.
We have agreed to pay all expenses incident to the exchange offer and we will
indemnify certain holders of the notes against certain liabilities, including
certain liabilities under the Securities Act.
LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed upon for
us by Jones, Day, Reavis & Pogue, Cleveland, Ohio.
EXPERTS
The audited financial statements of Cole National Group, Inc. included in
this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report, which is included herein. Arthur
Andersen has not consented to the inclusion of their report in this prospectus,
and we have dispensed with the requirement to file their consent in reliance
upon Rule 437a of the Securities Act. Under most circumstances a registrant must
obtain and file the consent of its accountants contemporaneously with the filing
of any registration statement that includes audited financial statements. By
granting such a consent, accounting firms become exposed to liability under
Section 11(a) of the Securities Act for any untrue statements of material fact
in, or omissions of material facts from, the registration statement. Investors
who bring a successful claim under Section 11(a) of the Securities Act are
entitled to recessionary damages. Because we are filing this registration
statement without the consent of Arthur Andersen, investors will not be able to
pursue claims against Arthur Andersen under Section 11(a) of the Securities Act.
OTHER MATTERS
On March 14, 2002, our former independent public accountant, Arthur
Andersen LLP, was indicted on federal obstruction of justice charges arising
from the government's investigation of Enron Corp. On June 15, 2002, Arthur
Andersen LLP was found guilty of these charges. See "Risk Factors -- There may
be risks related to our previous use of Arthur Andersen LLP, our former
independent public accountants."
Effective June 13, 2002, our Board of Directors, based on the
recommendation of its Audit Committee, determined to replace Arthur Andersen LLP
as its independent auditor and to appoint Deloitte & Touche LLP to serve as its
new independent auditors for fiscal 2002. This determination followed the
decision by our parent's Board of Directors to seek proposals from independent
public accounting firms to audit the consolidated financial statements of Cole
National Corporation and its subsidiaries, including us. We utilized Arthur
Andersen LLP as our predecessor independent auditor with respect to our
financial statements through the first quarter of fiscal 2002.
The audit reports of Arthur Andersen LLP on our consolidated financial
statements for the fiscal years ended February 2, 2002 and February 3, 2001 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal years ended February 2, 2002 and February 3, 2001, and
the subsequent interim period through June 13, 2002, there were no disagreements
between us and Arthur Andersen LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports.
99
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within our fiscal years ended February 2, 2002 and
February 3, 2001 or the subsequent interim period through June 13, 2002.
During the fiscal years ended February 2, 2002 and February 3, 2001, and
the subsequent interim period through June 13, 2002, neither we nor anyone on
our behalf consulted with Deloitte & Touche LLP regarding any of the matters or
events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are required to file reports and other information with the Securities
and Exchange Commission. These reports and other information are available for
reading and copying at the SEC Public Reference Room at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-
800-SEC-0330 for further information on the Public Reference Room. The SEC
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the SEC.
We will provide without charge, upon written or oral request, a copy of any
or all of the documents which are incorporated by reference into this
prospectus. Requests should be directed to: Cole National Group, Inc. Attention:
Senior Vice President -- Business Development, General Counsel and Secretary,
5915 Landerbrook Drive, Mayfield Heights, Ohio 44124, telephone number: (440)
449-4100.
100
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of February 2, 2002 and
February 3, 2001.......................................... F-3
Consolidated Statements of Operations for the 52 weeks ended
February 2, 2002, the 53 weeks ended February 3, 2001 and
the 52 weeks ended January 29, 2000....................... F-4
Consolidated Statements of Cash Flows for the 52 weeks ended
February 2, 2002, the 53 weeks ended February 3, 2001 and
the 52 weeks ended January 29, 2000....................... F-5
Consolidated Statements of Stockholder's Equity and
Comprehensive Income for the 52 weeks ended February 2,
2002, the 53 weeks ended February 3, 2001 and the 52 weeks
ended January 29, 2000.................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets as of May 4, 2002 and February
2, 2002 (unaudited)....................................... F-20
Consolidated Statements of Operations for the Thirteen Weeks
ended May 4, 2002 and May 5, 2001 (unaudited)............. F-21
Consolidated Statements of Cash Flows for the Thirteen Weeks
ended May 4, 2002 and May 5, 2001 (unaudited)............. F-22
Notes to Consolidated Financial Statements (unaudited)...... F-23
</Table>
F-1
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 as of February 2, 2002 and
February 3, 2001, and the related consolidated statements of operations, cash
flows and stockholder's equity and comprehensive income for each of the three
years in the period ended February 2, 2002. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Cole National Group, Inc. and
Subsidiaries as of February 2, 2002 and February 3, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended February 2, 2002 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 19, 2002.
F-2
COLE NATIONAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
FEBRUARY 2, FEBRUARY 3,
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 63,656 $ 36,725
Accounts receivable, less allowance for doubtful accounts
of $4,008 in 2001 and $7,348 in 2000................... 39,544 40,429
Current portion of notes receivable....................... 2,825 4,272
Inventories............................................... 111,098 122,238
Refundable income taxes................................... 502 571
Prepaid expenses and other................................ 22,613 16,154
Deferred income tax benefits.............................. 430 2,009
--------- ---------
Total current assets................................... 240,668 222,398
Property and equipment, at cost............................. 291,148 284,794
Less -- accumulated depreciation and amortization......... (169,851) (161,775)
--------- ---------
Total property and equipment, net...................... 121,297 123,019
Notes receivable, excluding current portion, less allowance
for doubtful accounts of $5,209 in 2001 and $4,537 in
2000...................................................... 3,899 6,573
Deferred income tax benefits and other assets............... 49,371 57,422
Intangible assets, net...................................... 146,544 151,588
--------- ---------
Total assets........................................... $ 561,779 $ 561,000
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 54 $ 49
Accounts payable.......................................... 57,242 55,644
Payable to affiliates, net................................ 73,548 81,789
Accrued interest.......................................... 6,130 6,337
Accrued liabilities....................................... 78,725 76,620
Accrued income taxes...................................... 546 502
--------- ---------
Total current liabilities.............................. 216,245 220,941
Long-term debt, net of discount and current portion......... 274,318 274,262
Other long-term liabilities................................. 12,040 11,506
Stockholder's equity:
Common stock.............................................. -- --
Paid-in capital........................................... 195,676 195,162
Accumulated other comprehensive loss...................... (1,198) (658)
Accumulated deficit....................................... (135,302) (140,213)
--------- ---------
Total stockholder's equity............................. 59,176 54,291
--------- ---------
Total liabilities and stockholders equity.............. $ 561,779 $ 561,000
========= =========
</Table>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
FIFTY-TWO FIFTY-THREE FIFTY-TWO
WEEKS ENDED WEEKS ENDED WEEKS ENDED
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------- ----------- -----------
Net revenue............................................ $1,101,333 $1,076,420 $1,037,581
Costs and expenses:
Cost of goods sold................................... 364,752 358,030 364,580
Operating expenses................................... 694,450 678,456 633,162
Goodwill and tradename amortization.................. 5,769 5,840 5,279
---------- ---------- ----------
Total costs and expenses.......................... 1,064,971 1,042,326 1,003,021
---------- ---------- ----------
Operating income....................................... 36,362 34,094 34,560
Interest and other (income) expense:
Interest expense..................................... 27,553 28,402 27,405
Interest and other income............................ (1,632) (541) (722)
---------- ---------- ----------
Total interest and other (income) expense, net.... 25,921 27,861 26,683
---------- ---------- ----------
Income before income taxes............................. 10,441 6,233 7,877
Income tax provision................................... 5,530 4,350 3,737
---------- ---------- ----------
Net income............................................. $ 4,911 $ 1,883 $ 4,140
========== ========== ==========
</Table>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
FIFTY-TWO FIFTY-THREE FIFTY-TWO
WEEKS ENDED WEEKS ENDED WEEKS ENDED
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income........................................... $ 4,911 $ 1,883 $ 4,140
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 39,445 37,351 38,485
Non-cash interest, net............................ 1,205 1,150 1,050
Gain on sale of fixed assets...................... (683) -- --
Deferred income tax provision..................... 818 2,528 3,239
Increases (decreases) in cash resulting from
changes assets and liabilities:
Accounts and notes receivable, prepaid
expenses................................... (1,519) (3,826) 4,871
Inventories.................................. 10,929 (5,724) 3,367
Accounts payable, accrued liabilities and
other liabilities.......................... 3,228 (369) (32,481)
Accrued interest............................. (207) 247 (126)
Accrued, refundable and deferred income
taxes...................................... 7,292 433 1,559
-------- -------- --------
Net cash provided by operating activities.... 65,419 33,673 24,104
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net............. (35,122) (35,030) (25,877)
Net proceeds from sale and sale/leasebacks of fixed
assets............................................ 12,481 -- --
Systems development costs............................ (6,875) (8,444) (13,639)
Acquisitions of businesses, net of cash acquired..... (747) -- (2,956)
Other, net........................................... (728) 127 338
-------- -------- --------
Net cash used for investing activities.......... (30,991) (43,347) (42,134)
-------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt.......................... (42) (576) (409)
Advances from (to) affiliates, net................... (7,360) 18,971 (3,848)
Payment of deferred financing fees................... -- (422) (281)
Other, net........................................... (95) (527) 464
-------- -------- --------
Net cash provided by (used for) financing
activities................................... (7,497) 17,446 (4,074)
-------- -------- --------
Cash and cash equivalents:
Net increase (decrease) during the period............ 26,931 7,772 (22,104)
Balance, beginning of the period..................... 36,725 28,953 51,057
-------- -------- --------
Balance, end of the period........................... $ 63,656 $ 36,725 $ 28,953
======== ======== ========
</Table>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
FEBRUARY 2, 2002 FEBRUARY 3, 2001 JANUARY 29, 2000
---------------- ---------------- ----------------
Common Stock:
Balance at beginning of period................ $ -- $ -- $ --
Balance at end of period...................... -- -- --
--------- --------- ---------
Paid-in Capital:
Balance at beginning of period................ 195,162 195,162 195,139
Tax benefit of stock option exercises......... 514 -- 23
--------- --------- ---------
Balance at end of period...................... 195,676 195,162 195,162
--------- --------- ---------
Accumulated Deficit:
Balance at beginning of period................ (140,213) (142,096) (146,236)
Net income.................................... 4,911 1,883 4,140
--------- --------- ---------
Balance at end of period...................... (135,302) (140,213) (142,096)
--------- --------- ---------
Accumulated Other Comprehensive Loss:
Balance at beginning of period................ (658) (117) (657)
Other comprehensive income (loss)............. (540) (541) 540
--------- --------- ---------
Balance at end of period...................... (1,198) (658) (117)
--------- --------- ---------
Total Stockholder's Equity...................... $ 59,176 $ 54,291 $ 52,949
========= ========= =========
Comprehensive Income:
Net income.................................... $ 4,911 $ 1,883 $ 4,140
Cumulative translation adjustment............. (540) (541) 540
--------- --------- ---------
Total comprehensive income.................... $ 4,371 $ 1,342 $ 4,680
========= ========= =========
</Table>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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.
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 February 2, 2002 is referred to as "fiscal 2001." Fiscal 2001 and fiscal
1999 each consisted of 52-week periods, fiscal 2000 consisted of a 53-week
period.
NATURE OF OPERATIONS
The Company is a specialty service retailer operating in both host and
nonhost environments, whose primary lines of business are eyewear products and
services and personalized gifts. The Company sells its products through 2,477
company-owned retail locations and 440 franchised locations in 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 has two reportable segments: Cole Vision and
Things Remembered (see Note 8).
INVENTORIES
Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market.
PROPERTY AND DEPRECIATION
The policy is to provide depreciation using the straight-line method over a
period which is sufficient to amortize the cost of the asset over its useful
life or lease term.
The estimated useful lives for depreciation purposes are:
<Table>
Buildings and improvements.................................. 5 to 40 years
Equipment................................................... 3 to 10 years
Furniture and fixtures...................................... 2 to 10 years
Leasehold improvements...................................... 2 to 20 years
</Table>
Property and equipment, at cost, consist of the following at February 2,
2002 and February 3, 2001 (000's omitted):
<Table>
<Caption>
2001 2000
-------- --------
Land and buildings.......................................... $ 2,408 $ 13,322
Furniture, fixtures and equipment........................... 182,420 173,060
Leasehold improvements...................................... 106,320 98,412
-------- --------
Total property and equipment.............................. $291,148 $284,794
======== ========
</Table>
F-7
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
STORE OPENING EXPENSES
Store opening expenses are charged to operations in the period the expenses
are incurred.
NOTES RECEIVABLE
The Company's notes receivable are primarily from Pearle's franchisees
throughout the United States. The franchise notes are collateralized by
inventory, equipment, and leasehold improvements at each location, generally
bear interest at the prime rate plus 3.0%, 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 2, 2002 and
February 3, 2001 (000's omitted):
<Table>
<Caption>
2001 2000
-------- --------
Goodwill.................................................... $103,552 $107,360
Tradenames.................................................. 42,992 44,228
-------- --------
$146,544 $151,588
======== ========
</Table>
Goodwill is being amortized on a straight-line basis over periods from 5 to
40 years, based on management's assessment of the estimated useful life, and is
presented net of accumulated amortization of $50,723,000 and $46,194,000 at
February 2, 2002 and February 3, 2001, respectively. Amortization of goodwill in
fiscal 2001, 2000 and 1999 was $4,533,000, $4,580,000 and $4,043,000,
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 2,
2002, the assets are realizable and the amortization periods are appropriate.
Tradenames acquired in connection with the Pearle acquisition in 1996 are
being amortized on a straight-line basis over 40 years and are presented net of
accumulated amortization of $6,467,000 and $5,231,000 at February 2, 2002 and
February 3, 2001, respectively. Amortization of tradenames in fiscal 2001, 2000
and 1999 was $1,236,000, $1,260,000 and $1,236,000, respectively.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). This statement requires that goodwill and certain intangible assets
deemed to have indefinite useful lives will no longer be amortized, but instead,
will be subject to annual reviews for impairment. The Company will apply these
rules of accounting for its goodwill and tradenames beginning in the first
quarter of fiscal 2002. The Company is in the process of quantifying the impact
of adopting each of the provisions of SFAS 142.
OTHER LONG-TERM 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. At February 2, 2002 and February 3, 2001,
deferred financing costs net of accumulated amortization were $4,980,000 and
$6,082,000, respectively. Amortization of financing costs in fiscal 2001, 2000
and 1999 was $1,102,000, $1,054,000 and $965,000, respectively.
Direct costs to develop or obtain internal use software, including internal
costs, are capitalized in other assets and amortized over the estimated useful
life of the software using the straight-line method. Amortization periods range
from two to seven years, and begin when the software is placed in service. At
F-8
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
February 2, 2002 and February 3, 2001, these costs, net of accumulated
amortization, were $34,352,000 and $36,370,000, respectively. Amortization of
systems development costs in fiscal 2001, 2000 and 1999 was $7,614,000,
$7,695,000 and $6,703,000, respectively.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, goodwill and other
intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
total of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and the carrying value of the asset.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist primarily of certain employee benefit
obligations, deferred lease credits and other lease-related obligations,
deferred revenue and other obligations not expected to be paid within 12 months.
Deferred lease credits are amortized on a straight-line basis over the life of
the applicable lease.
CAPITAL STOCK
At February 2, 2002 and February 3, 2001, there were 1,100 shares of common
stock, par value $.01 per share, authorized, issued and outstanding.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiary are
translated to United States dollars at the rates of exchange on the balance
sheet date. Income and expense items are translated at average monthly rates of
exchange. Translation adjustments are presented as a component of accumulated
other comprehensive loss within stockholder's equity.
NET 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, other revenues from franchisees such as royalties based on
sales, interest income on notes receivable and initial franchise fees, and
capitation and other fees associated with Cole Vision's managed vision care
business.
Franchise revenues based on sales by franchisees are accrued as earned.
Initial franchise fees are recorded as revenue 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
Net advertising production costs and other advertising costs are expensed
as incurred, a portion of which are reimbursed by franchisees based on a
percentage of their sales. Advertising expense is summarized as follows (000's
omitted):
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Gross advertising expense............................. $ 86,364 $ 89,329 $ 88,525
Less: Franchise contribution.......................... (20,486) (20,562) (19,930)
-------- -------- --------
Net advertising expense............................... $ 65,878 $ 68,767 $ 68,595
======== ======== ========
</Table>
F-9
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
EARNINGS PER SHARE
Earnings per share and weighted average number of common shares outstanding
data for 2001, 2000 and 1999 have been omitted as the presentation of such
information, considering the Company is a wholly owned subsidiary of Cole
National Corporation, is not meaningful.
CASH FLOWS
For purposes of reporting cash flows, all temporary cash investments which
have original maturities of three months or less are considered 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>
2001 2000 1999
------- ------- -------
Income taxes............................................ $ 1,049 $ 844 $ 623
Interest................................................ 26,555 27,007 26,229
</Table>
No dividends were declared during fiscal 2001, 2000 or 1999.
USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) ACQUISITION AND DISPOSITION OF BUSINESSES
The Company made the following acquisition, which has been accounted for
under the purchase method of accounting, including any contingent payments that
may be made in the future. Pro forma financial results have not been presented
for this acquisition, as it did not have a material effect on results of
operations.
In October 1999, the Company acquired MetLife's managed vision care
benefits business. The business consisted of vision care contracts with
approximately 250 institutional customers and generated approximately $15.0
million of revenue annually. The purchase price paid to date totals $3.3
million, with additional amounts contingently due upon certain conditions being
met over the four years following the date of purchase.
In fiscal 1999, the Company closed 150 optical departments in Montgomery
Ward stores resulting in a pretax loss of $2.0 million, consisting primarily of
inventory and fixed asset write-offs. Annual revenues in fiscal 1999 for the
Ward's Optical Departments were $21.2 million.
F-10
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
(3) LONG-TERM DEBT
Long-term debt at February 2, 2002 and February 3, 2001 is summarized as
follows (000's omitted):
<Table>
<Caption>
2001 2000
-------- --------
9 7/8% Senior Subordinated Notes:
Face value................................................ $150,000 $150,000
Unamortized discount...................................... (682) (785)
-------- --------
Total 9 7/8% Senior Subordinated Notes................. 149,318 149,215
8 5/8% Senior Subordinated Notes............................ 125,000 125,000
Capital lease obligations................................... 54 96
-------- --------
274,372 274,311
Less current portion........................................ (54) (49)
-------- --------
Net long-term debt.......................................... $274,318 $274,262
======== ========
</Table>
On August 22, 1997, the Company issued $125.0 million of 8 5/8% Senior
Subordinated Notes that mature in 2007 with no earlier scheduled redemption or
sinking fund payments. Interest on the 8 5/8% notes is payable semi-annually on
February 15 and August 15.
On November 15, 1996, the Company issued $150.0 million of 9 7/8% Senior
Subordinated Notes that mature in 2006 with no earlier scheduled redemption or
sinking fund payments. Interest on the 9 7/8% notes is payable semi-annually on
June 30 and December 31.
The 8 5/8% notes and the 9 7/8% notes are general unsecured obligations of
the Company, subordinated in right of payment to senior indebtedness of the
Company and senior in right of payment to any current or future subordinated
indebtedness of the Company.
The indentures pursuant to which the 8 5/8% notes and the 9 7/8% notes were
issued restrict dividend payments to Cole National Corporation to 50% of the
Company's net income after October 31, 1993, plus amounts due to Cole National
Corporation under a tax sharing agreement and for administrative expenses of
Cole National Corporation not to exceed 0.25% of the Company'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 2, 2002.
At February 2, 2002 the fair value of long-term debt was approximately
$266.8 million compared to a carrying value of $274.4 million. The fair value
was estimated primarily by using quoted market prices. The Company has no
significant principal payment obligations under its outstanding indebtedness
until the 9 7/8% notes mature in 2006.
(4) CREDIT FACILITY
The operating subsidiaries of the Company have a working capital commitment
ranging from $50.0 million to $75.0 million based on the Company's current debt
leverage ratio described in the credit facility. This credit facility extends
until January 31, 2003. Borrowings under the credit facility presently bear
interest based on leverage ratios at a rate equal to, at the option of the
principal operating subsidiaries of the Company, either (a) the Eurodollar Rate
plus 2.5% or (b) 1.5% 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 1.0% and (iii) the federal funds rate plus 0.5%.
The Company pays a commitment fee of between 0.375% and
F-11
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
0.75% per annum on the total unused portion of the facility based on the
percentage of revolving credit commitments used. Cole National Corporation, the
Company's parent, guarantees this credit facility.
The credit facility requires the principal operating subsidiaries of Cole
National Group to comply with various operating covenants that restrict
corporate activities, including covenants restricting the ability of the
subsidiaries to incur additional indebtedness, pay dividends, prepay
subordinated indebtedness, dispose of certain investments or make acquisitions.
The credit facility also requires the Company to comply with certain financial
covenants, including covenants regarding minimum interest coverage, maximum
leverage and consolidated net worth. The Company and its principal operating
subsidiaries were in compliance with these covenants at February 2, 2002.
The credit facility restricts dividend payments to the Company to amounts
needed to pay interest on the 9 7/8% notes and the 8 5/8% notes, and certain
amounts related to taxes, along with up to $8.0 million plus 0.25% of the
Company's consolidated net revenue annually for other direct expenses of Cole
National Corporation or the Company.
No borrowings under the credit facility were outstanding as of February 2,
2002 and February 3, 2001, or at anytime during fiscal 2001. The maximum amount
of borrowings outstanding during fiscal 2000 was $20.2 million.
(5) STOCK COMPENSATION AND WARRANTS
Cole National Corporation has various stock-based compensation plans in
which key employees of the Company are eligible to participate.
The Company applies APB Opinion 25 and related Interpretations in
accounting for Cole National Corporation's stock-based compensation plans. Had
compensation cost for Cole National Corporation's stock-based compensation plans
been determined based on the fair value at the dates of awards consistent with
the method of SFAS No. 123, the Company's net income would have been $3,703,000
in fiscal 2001, $489,000 in fiscal 2000 and $2,583,000 in fiscal 1999,
respectively.
For SFAS No. 123 purposes, the fair value of each option granted was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions: risk-free interest rates of 4.8%, 6.2% and 5.9% for
grants in fiscal 2001, 2000 and 1999, respectively, volatility of 47-49%, 45-47%
and 39-45% in fiscal 2001, 2000 and 1999, respectively, and expected lives of
six years for options granted in all fiscal years. The weighted average fair
value of options granted during fiscal 2001, 2000 and 1999 at the date of grant
were $6.31, $3.59 and $4.58, respectively. The fair value of each share granted
under the Employee Stock Purchase Plan was similarly estimated using the
following assumptions: risk-free interest rate of 2.7%, 6.0% and 5.2% in fiscal
2001, 2000 and 1999, respectively, volatility of 49%, 46-47% and 42% in fiscal
2001, 2000 and 1999, respectively, and expected lives of 5 to 6 months. The
weighted average fair value of purchase plan shares granted during fiscal 2001,
2000 and 1999 was $2.93, $2.11 and $1.63, respectively. The effects of applying
SFAS No. 123 in the pro forma disclosure above are not necessarily indicative of
future amounts.
(6) INCOME TAXES
The Company is included in the consolidated federal income tax returns of
Cole National Corporation and has been charged (credited) an amount equal to the
taxes that would have been payable by it if it were a corporation filing a
separate return.
F-12
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
The income tax provision reflected in the accompanying consolidated
statements of operations for fiscal 2001, 2000 and 1999 are detailed below
(000's omitted):
<Table>
<Caption>
2001 2000 1999
------- ------- -------
Current payable:
Federal................................................ $ 3,885 $ 860 $ --
State and local........................................ 784 972 824
Foreign................................................ 43 89 339
------- ------- -------
4,712 1,921 1,163
------- ------- -------
Deferred:
Federal................................................ 895 2,002 8,199
Foreign................................................ (77) 427 (179)
Tax benefit of net operating loss carryforward......... -- -- (5,446)
------- ------- -------
818 2,429 2,574
------- ------- -------
Income tax provision................................... $ 5,530 $ 4,350 $ 3,737
======= ======= =======
</Table>
The income tax provision differs from the federal statutory rate as follows
(000's omitted):
<Table>
<Caption>
2001 2000 1999
------- ------- -------
Tax provision at statutory rate.......................... $ 3,654 $ 2,182 $ 2,757
Tax effect of:
Amortization of goodwill............................ 1,252 1,252 1,230
State income taxes, net of federal tax benefit...... 510 632 536
Decrease in valuation allowance..................... -- -- (669)
Other, net.......................................... 114 284 (117)
------- ------- -------
Income tax provision.............................. $ 5,530 $ 4,350 $ 3,737
======= ======= =======
</Table>
F-13
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
The income tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax assets and deferred tax
liabilities at February 2, 2002 and February 3, 2001 are as follows (000's
omitted):
<Table>
<Caption>
2001 2000
-------- --------
Deferred tax assets:
Employee benefit accruals................................. $ 316 $ 1,738
Other non-deductible accruals............................. 3,267 6,200
State and local taxes..................................... 599 818
Net operating loss carryforwards.......................... 1,859 3,025
Intangibles............................................... 4,387 4,446
Inventory reserves........................................ 2,187 3,665
Bad debt reserves......................................... 1,677 1,657
Other..................................................... 2,101 2,297
-------- --------
Total deferred tax assets................................. 16,393 23,846
Valuation allowance....................................... (1,141) (1,141)
-------- --------
Net deferred tax assets.............................. 15,252 22,705
-------- --------
Deferred tax liabilities:
Depreciation and amortization............................. (3,261) (4,750)
Other..................................................... (3,948) (2,856)
-------- --------
Total deferred tax liabilities....................... (7,209) (7,606)
-------- --------
Net deferred tax assets.............................. $ 8,043 $ 15,099
======== ========
</Table>
At February 2, 2002, the Company had approximately $14.2 million of tax net
operating loss carryforwards in the United States that expire in the years 2005
through 2019. Of that amount, $5.3 million resulted from the Company's
acquisition of American Vision Centers ("AVC"). Due to the change in ownership
requirements of the Internal Revenue Code, utilization of AVC's net operating
loss is limited to $0.3 million per year. A valuation allowance of $1.1 million
has been established to reduce the deferred tax asset related to the net
operating loss to the amount that will likely be realized. The Company's balance
sheet reflects an amount due from its parent for the benefit the parent will
receive on the U.S. consolidated federal income tax return as a result of the
net operating losses generated by the Company.
No provision of United States federal and state income taxes has been
provided for the undistributed earnings of the Company's foreign subsidiaries
because those earnings are considered to be indefinitely reinvested. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both United States income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable.
(7) RETIREMENT PLANS
The Company maintains a noncontributory defined benefit pension plan that
covers employees who have met eligibility service requirements and are not
members of certain collective bargaining units. The pension plan calls for
benefits to be paid to eligible employees at retirement based primarily upon
years of service and their compensation levels near retirement.
F-14
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
The Company's policy is to fund amounts necessary to keep the pension 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.
In January 2002, the Company approved a plan freeze for all participants
except for participants who are age 50 with 10 years of benefit service as of
March 31, 2002. These participants will have their average pay frozen as of
March 31, 2002, and covered compensation frozen as of December 31, 2001, but
their benefit service will continue to grow. The plan freeze resulted in a
curtailment gain of $3,443,000 that reduced the plan's actuarial unrecognized
net loss at December 31, 2001.
Pension expense for fiscal 2001, 2000 and 1999 includes the following
components (000's omitted):
<Table>
<Caption>
2001 2000 1999
------- ------- -------
Service cost -- benefits earned during the period........ $ 1,639 $ 1,398 $ 1,636
Interest cost on the projected benefit obligation........ 2,122 1,882 1,733
Less:
Return on plan assets:
Actual.............................................. 483 (359) (2,205)
Deferred............................................ (3,203) (2,086) (9)
------- ------- -------
(2,720) (2,445) (2,214)
Amortization of transition asset over 17.9 years......... (179) (179) (179)
Prior service cost....................................... 25 28 28
------- ------- -------
Net pension expense.................................... $ 887 $ 684 $ 1,004
======= ======= =======
</Table>
The following sets forth changes in the benefit obligation and the plan
assets during the year and reconciles the funded status of the pension plan with
the amounts recognized in the consolidated balance sheets (000's omitted):
<Table>
<Caption>
2001 2000
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of period................. $ 25,200 $ 22,660
Service cost.............................................. 1,639 1,398
Interest cost............................................. 2,122 1,882
Actuarial loss............................................ 3,149 633
Effects of curtailment.................................... (3,443) --
Benefits paid............................................. (1,056) (1,011)
Expenses paid............................................. (372) (362)
-------- --------
Benefit obligation at end of period.................... $ 27,239 $ 25,200
======== ========
</Table>
F-15
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
<Table>
<Caption>
2001 2000
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year............ $ 26,077 $ 25,410
Actual return of plan assets.............................. (483) 359
Employer contributions.................................... 4,696 1,681
Benefits paid............................................. (1,056) (1,011)
Expenses paid............................................. (372) (362)
-------- --------
Fair value of plan assets at end of year............... $ 28,862 $ 26,077
======== ========
Reconciliation of funded status:
Benefit obligation at end of period....................... $ 27,239 $ 25,200
Fair value of plan assets, primarily money market and
equity mutual funds.................................... 28,862 26,077
-------- --------
Funded status............................................. 1,623 877
Unrecognized prior service cost........................... -- 25
Net unrecognized loss..................................... 3,671 762
Unamortized transition (asset) obligation................. (519) (698)
-------- --------
Pension asset included in prepaid expenses and other... $ 4,775 $ 966
======== ========
</Table>
The weighted average discount rate used to measure the projected benefit
obligation was 7.9% for fiscal 2001 and 8.4% for fiscal 2000, the rate of
increase in future compensation levels was 5.0% and the expected long-term rate
of return on plan assets was 9.5%.
The Company has a defined contribution plan, including features under
Section 401(k) of the Internal Revenue Code, which provides retirement benefits
to its employees. Eligible employees may contribute up to 17% of their
compensation to the plans. In the United States, the Company provides for a
mandatory company match of 10% of employee contributions, and may also make a
discretionary matching contribution for each plan year equal to such dollar
amount or percentage of employee contributions as determined by the Company's
Board of Directors. In Puerto Rico, the Company provides for a mandatory match
of 50% of the first 6.0% of employee contributions. The Company also has a
deferred compensation plan for executives and other senior management which
generally allows deferral of income without regard to limitations imposed by the
Company's 401(k) plan. The Company makes a contribution of its common stock
equal to 10% of the participant's deferrals. Total company matches of $785,000,
$726,000 and $659,000 were recorded as expense for 2001, 2000 and 1999,
respectively.
The Company has several Supplemental Executive Retirement Plans that
provide for the payment of retirement benefits to participating executives
supplementing amounts payable under the Company's noncontributory defined
benefit pension plan. The first plan is an excess benefit plan designed to
replace benefits that would otherwise have been payable under the pension plan
but that were limited as a result of certain tax law changes. Benefits payable
under this plan are also subject to the Retirement Plan freeze discussed above.
The second plan is a defined contribution plan under which participants receive
an annual credit based on a percentage of base salary, subject to vesting
requirements. The third plan is a defined benefit plan designed to provide
additional retirement benefits for certain management and highly compensated
employees. Expenses for these plans for fiscal 2001, 2000 and 1999 were
$689,000, $619,000 and $696,000, respectively.
The Company provides no additional significant post retirement or post
employment benefits.
F-16
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
(8) SEGMENT INFORMATION
The Company has two reportable segments: Cole Vision and Things Remembered.
Most of Cole Vision's revenue is provided by sales of prescription eyewear,
accessories and services through its Cole Licensed Brands and Pearle retail
locations. Cole Vision's revenue is also provided by sales of merchandise to
franchisees and other outside customers, by royalties based on sales, interest
income on notes receivable and initial franchise fees from franchisees and by
fees from managed vision care programs. The Cole Licensed Brands and Pearle
business units have been aggregated in accordance with SFAS No. 131 based on the
similarity of their economic characteristics, nature of products, services and
production processes, types of customers, distribution methods and regulatory
environment. Things Remembered's revenue is provided by sales of engravable gift
merchandise, personalization and other services primarily through retail stores
and kiosks. The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies (see Note 1).
The reportable segments are strategic business units that offer different
products and services. They are managed separately as each business requires
different technology and marketing strategies. Performance is evaluated based on
operating income from operations before interest, income taxes, and nonrecurring
or unusual charges. Cole Vision is subject to various state regulations related
to the dispensing of prescription eyewear, its relationship with the doctors of
optometry and other matters.
Reported segment revenue, depreciation and amortization, income or loss,
with reconciliations to consolidated amounts are as follows (000's omitted):
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Net revenue:
Cole Vision.................................... $ 829,287 $ 800,561 $ 778,995
Things Remembered.............................. 272,046 275,859 258,586
---------- ---------- ----------
Consolidated net revenue.................. $1,101,333 $1,076,420 $1,037,581
========== ========== ==========
Depreciation and amortization:
Cole Vision.................................... $ 25,404 $ 24,820 $ 26,266
Things Remembered.............................. 11,352 10,260 10,916
---------- ---------- ----------
Total segment depreciation and
amortization........................... 36,756 35,080 37,182
Corporate................................... 2,689 2,271 1,303
---------- ---------- ----------
Consolidated depreciation and
amortization........................... $ 39,445 $ 37,351 $ 38,485
========== ========== ==========
Income or loss:
Cole Vision.................................... $ 22,999 $ 20,755 $ 17,915
Things Remembered.............................. 23,403 25,811 22,706
---------- ---------- ----------
Total segment profit...................... 46,402 46,566 40,621
Unallocated amounts:
Corporate expenses........................ (10,040) (12,472) (6,061)
---------- ---------- ----------
Consolidated operating income.................. 36,362 34,094 34,560
Interest and other expense, net................ (25,921) (27,861) (26,683)
---------- ---------- ----------
Income before income taxes..................... $ 10,441 $ 6,233 $ 7,877
========== ========== ==========
</Table>
F-17
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
Reported segment assets, expenditures for capital additions and systems
developments costs and acquisitions of businesses, with reconciliations to
consolidated amounts, are as follows (000's omitted):
<Table>
<Caption>
2001 2000 1999
--------- --------- ---------
Segment assets:
Cole Vision...................................... $ 401,837 $ 423,709 $ 418,687
Things Remembered................................ 140,787 141,484 141,511
--------- --------- ---------
Total segment assets.......................... 542,624 565,193 560,198
Elimination of intercompany receivables.......... (47,385) (43,949) (52,917)
Corporate cash and temporary cash investments.... 50,650 26,416 21,024
Other corporate assets........................... 15,890 13,340 59,966
--------- --------- ---------
Consolidated assets........................... $ 561,779 $ 561,000 $ 588,271
========= ========= =========
Expenditures for capital additions and systems
development costs:
Cole Vision...................................... $ 27,410 $ 31,857 $ 33,728
Things Remembered................................ 12,751 11,457 5,709
--------- --------- ---------
Total segment expenditures.................... 40,161 43,314 39,437
Corporate........................................ 1,836 160 79
--------- --------- ---------
Consolidated expenditures..................... 41,997 43,474 39,516
========= ========= =========
Expenditures for acquisitions of businesses, net of
cash acquired Cole Vision........................ $ 747 $ -- $ 2,956
========= ========= =========
</Table>
Revenue from external customers of each group of similar products and
services is as follows (000's omitted):
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Sales of optical products and services........... $ 749,314 $ 733,410 $ 724,546
Royalties, interest income and initial fees from
franchises..................................... 20,109 21,653 22,361
Fees from managed vision care programs........... 59,864 45,498 32,088
---------- ---------- ----------
Total Cole Vision net revenue.................. 829,287 800,561 778,995
Retail sales of gift merchandise and services.... 272,046 275,859 258,586
---------- ---------- ----------
Consolidated net revenue....................... $1,101,333 $1,076,420 $1,037,581
========== ========== ==========
</Table>
The Company operates primarily in the United States. Net revenue
attributable to Cole Vision's Canadian operations was $29.9 million, $31.3
million and $28.6 million in fiscal 2001, 2000 and 1999, respectively.
Long-lived assets located in Canada at February 2, 2002, February 3, 2001 and
January 29, 2000 totaled $3.0 million, $3.4 million and $3.1 million,
respectively.
(9) COMMITMENTS
The Company leases a substantial portion of its equipment and 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
F-18
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
leases covering retail store locations, additional rents are payable based on
store sales. In addition, Cole Vision 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 2001, 2000 and 1999 (000's omitted):
<Table>
<Caption>
2001 2000 1999
--------- --------- ---------
Occupancy costs based on sales..................... $ 56,652 $ 54,854 $ 52,623
All other rental expense........................... 102,173 96,924 96,084
Sublease rental income............................. (19,719) (21,354) (21,672)
--------- --------- ---------
Total rental expense, net........................ $ 139,106 $ 130,424 $ 127,035
========= ========= =========
</Table>
At February 2, 2002, future minimum lease payments and sublease income
receipts under noncancellable leases are as follows (000's omitted):
<Table>
<Caption>
OPERATING LEASES
---------------------
PAYMENTS RECEIPTS
--------- ---------
2002........................................................ $ 76,483 $ (10,565)
2003........................................................ 67,836 (7,997)
2004........................................................ 59,535 (6,557)
2005........................................................ 48,129 (4,750)
2006........................................................ 37,346 (3,201)
2007 and thereafter......................................... 92,900 (5,520)
--------- ---------
Total future minimum lease payments......................... $ 382,229 $ (38,590)
========= =========
</Table>
In fiscal 2001, under a sale and leaseback agreement, the Company received
approximately $5.7 million, net of related costs, from the sale of its Cole
Vision lab and distribution facility in Dallas, Texas and leased it back under a
fifteen-year lease agreement with four five-year renewal options. The
transaction produced a gain of approximately $0.6 million that was deferred and
is being amortized over the fifteen-year lease period.
In fiscal 2000, under a sale and leaseback agreement, the Company received
approximately $13.8 million, net of related costs, from the sale of its Cole
Vision office facility in Twinsburg, Ohio and leased it back under an
eighteen-year lease agreement with two ten-year renewal options. The transaction
produced a gain of approximately $4.8 million that was deferred and is being
amortized over the eighteen-year initial lease period.
In the ordinary course of business, the Company is involved in various
legal proceedings. The Company is of the opinion that the ultimate resolution of
these matters will not have a material adverse effect on the results of
operations, liquidity or financial position of the Company.
F-19
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
MAY 4, FEBRUARY 2,
2002 2002
--------- -----------
Assets
Current assets:
Cash and cash equivalents................................. $ 62,560 $ 63,656
Accounts receivable, less allowances of $5,494 and $4,008,
respectively........................................... 46,199 39,544
Current portion of notes receivable....................... 2,795 2,825
Inventories............................................... 118,832 111,098
Refundable income taxes................................... 472 502
Prepaid expenses and other................................ 21,712 22,613
Deferred income tax benefits.............................. 500 430
--------- ---------
Total current assets................................. 253,070 240,668
Property and equipment, at cost............................. 293,604 291,148
Less -- accumulated depreciation and amortization......... (172,998) (169,851)
--------- ---------
Total property and equipment, net.................... 120,606 121,297
Notes receivable, excluding current portion, less allowances
of $4,218 and $5,209, respectively........................ 3,921 3,899
Deferred income taxes and other assets...................... 48,441 49,371
Intangible assets, net...................................... 146,549 146,544
--------- ---------
Total assets......................................... 572,587 561,779
========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Current portion of long-term debt......................... $ 44 $ 54
Account payable........................................... 60,752 57,242
Payable to affiliates, net................................ 74,393 73,548
Accrued interest.......................................... 7,436 6,130
Accrued liabilities....................................... 80,475 78,725
Accrued income taxes...................................... 907 546
--------- ---------
Total current liabilities............................ 224,007 216,245
Long-term debt, net of discount and current portion......... 274,346 274,318
Other long-term liabilities................................. 12,046 12,040
Stockholder's equity........................................ 62,188 59,176
--------- ---------
Total liabilities and stockholder's equity............. $ 572,587 $ 561,779
========= =========
</Table>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-20
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
THIRTEEN WEEKS ENDED
---------------------
MAY 4, MAY 5,
2002 2001
--------- ---------
Net revenue................................................. $290,109 $270,291
Costs and expenses:
Cost of goods sold........................................ 95,648 87,722
Operating expenses........................................ 182,949 173,276
Goodwill and tradename amortization....................... -- 1,462
-------- --------
Total costs and expenses............................... 278,597 262,460
-------- --------
Operating income............................................ 11,512 7,831
Interest and other (income) expense:
Interest expense.......................................... 6,993 6,901
Interest and other income................................. (298) (936)
-------- --------
Total interest and other (income) expense, net......... 6,695 5,965
-------- --------
Income before income taxes.................................. 4,817 1,866
Income tax provision........................................ 1,927 1,306
-------- --------
Net income.................................................. $ 2,890 $ 560
======== ========
</Table>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-21
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
THIRTEEN WEEKS ENDED
---------------------
MAY 4, MAY 5,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income................................................ $ 2,890 $ 560
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 8,958 9,309
Noncash interest expense............................... 309 305
Gain on sale of fixed assets........................... -- (683)
Increases (decreases) in cash resulting from changes in
operating assets and liabilities:
Accounts and notes receivable, prepaid expenses and
other assets........................................ (5,666) 4,301
Inventories.......................................... (7,682) (7,546)
Accounts payable, accrued liabilities and other
liabilities......................................... 5,234 (5,656)
Accrued interest..................................... 1,306 977
Accrued, refundable and deferred income taxes........ 317 929
------- -------
Net cash provided by operating activities......... 5,666 2,496
------- -------
Cash flows from investing activities:
Purchases of property and equipment, net.................. (6,348) (5,933)
Net proceeds from sale of fixed assets.................... -- 4,712
Systems development costs................................. (1,228) (2,107)
Other, net................................................ (95) (105)
------- -------
Net cash used for investing activities............ (7,671) (3,433)
------- -------
Cash flows from financing activities:
Repayment of long-term debt............................... (11) (10)
Advances from (to) affiliates, net........................ 881 (94)
Other, net................................................ 39 (200)
------- -------
Net cash provided by (used for) financing
activities....................................... 909 (304)
------- -------
Cash and cash equivalents:
Net decrease during the period............................ (1,096) (1,241)
Balance, beginning of period.............................. 63,656 36,725
------- -------
Balance, end of period.................................... $62,560 $35,484
======= =======
</Table>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-22
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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
February 2, 2002.
In the opinion of management, the accompanying financial statements contain
all adjustments (consisting only of normal recurring accruals) necessary to
present fairly Cole National Group, Inc.'s financial position as of May 5, 2001
and the results of operations and cash flows for the 13 weeks ended May 4, 2002
and May 5, 2001.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories.
Cash Flows
Net cash flows from operating activities reflect net cash payments for
income taxes and payments for interest of $127,000 and $5,628,000, respectively,
for the 13 weeks ended May 4, 2002, and $380,000 and $5,620,000, respectively,
for the 13 weeks ended May 5, 2001.
Total Other Comprehensive Income
Total other comprehensive income for the 13 weeks ended May 4, 2002 and May
5, 2001 is as follows (000's omitted):
<Table>
<Caption>
13 WEEKS ENDED
---------------
MAY 4, MAY 5,
2002 2001
------ ------
Net income.................................................. $2,890 $560
Cumulative translation gain (loss).......................... 122 (209)
------ ----
Total other comprehensive income............................ $3,012 $351
====== ====
</Table>
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted Financial Accounting Standard Board Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
in the first quarter of fiscal 2002. This statement
F-23
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
requires that goodwill and certain intangible assets deemed to have indefinite
lives will no longer be amortized, but instead, will be subject to reviews for
impairment annually, or more frequently if certain indicators arise. With the
adoption of this statement, the Company ceased amortization of goodwill and
tradenames as of February 3, 2002. The Company is in the process of completing
the required transitional impairment testing of goodwill.
The following table presents the first quarter results of the Company on a
comparable basis (000's omitted, except per share amounts):
<Table>
<Caption>
13 WEEKS ENDED
---------------
MAY 4, MAY 5,
2002 2001
------ ------
Net income:
Reported net income....................................... $2,890 $ 560
Goodwill amortization..................................... -- 1,153
Tradename amortization.................................... -- 309
Related tax adjustment.................................... -- (25)
------ ------
Adjusted net income....................................... $2,890 $1,997
====== ======
</Table>
The net carrying amount of intangible assets at May 4, 2002, by business
segment, was $124,218,000 at Cole Vision and $22,331,000 at Things Remembered.
The change in the net carrying amount of intangible assets for the 13 weeks
ended May 4, 2002, was due to currency impact on goodwill at Cole Vision.
(3) SEGMENT INFORMATION
Information on the Company's reportable segments is as follows (000's
omitted):
<Table>
<Caption>
13 WEEKS ENDED
-------------------
MAY 4, MAY 5,
2002 2001
-------- --------
Net revenue:
Cole Vision............................................... $236,656 $216,381
Things Remembered......................................... 53,453 53,910
-------- --------
Consolidated net revenue............................... $290,109 $270,291
======== ========
Operating income (loss):
Cole Vision............................................... $ 15,136 $ 11,380
Things Remembered......................................... (1,364) (1,068)
-------- --------
Total segment operating income......................... $ 13,772 $ 10,312
Unallocated amounts:
Corporate expenses..................................... (2,260) (2,481)
-------- --------
Consolidated operating income............................. 11,512 7,831
Interest and other income, net............................ (6,695) (5,965)
-------- --------
Income before income taxes................................ $ 4,817 $ 1,866
======== ========
</Table>
F-24
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(4) SUBSEQUENT EVENTS
On May 22, 2002, the Company issued $150.0 million of 8 7/8% senior
subordinated notes due 2012. These notes are unsecured and mature on May 15,
2012. Interest on the notes is payable semi-annually on each May 15 and November
15, commencing November 15, 2002.
The indenture pursuant to which the 8 7/8% notes were issued contains
certain optional and mandatory redemption features and other financial covenants
similar to those in the indentures for the Company's 8 5/8% and previously
outstanding 9 7/8% notes.
Net proceeds from the 8 7/8% note offering, together with cash on hand,
were used to retire $150.0 million of 9 7/8% senior subordinated notes due 2006
and pay premiums and other costs associated with retiring those notes. The
Company anticipates that its second quarter results will include an
extraordinary loss on early extinguishment of debt of approximately $7.6
million, net of an income tax benefit of approximately $4.1 million,
representing the payment of premiums and other costs of retiring the notes and
the write-offs of unamortized discount and deferred financing fees.
In connection with the 8 7/8% note offering, the Company and its operating
subsidiaries amended their existing credit facility to, among other things,
extend its term to May 31, 2006, provide a working capital commitment of $75.0
million and reduce borrowing rates. Borrowings under the amended credit facility
presently bear interest at a rate equal to, at the option of the principal
operating subsidiaries, either (a) the Eurodollar Rate plus 2.25% or (b) 1.25%
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 1.0% and
(iii) the federal funds rate plus 0.5%. The Company pays a commitment fee of
between 0.50% and 0.75% per annum on the unused portion of the facility based on
the percentage of revolving credit commitments used.
The amended credit facility, which is guaranteed by Cole National
Corporation and Cole National Group, has customary operating and financial
covenants similar to those in the Company's previous credit agreement as
described in the Company's annual reports on Form 10-K.
F-25
$150,000,000
[COLE LOGO]
8 7/8% Senior Subordinated Notes
due 2012
---------------------------
PROSPECTUS
July , 2002
---------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
Until October 6, 2002, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Seventh of Cole National's Certificate provides that Cole National
will indemnify its officers, directors and each person who is or was serving or
who had agreed to serve at the request of the Board of Directors or an officer
of Cole National as an employee or agent of Cole National or as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the full extent permitted by the General
Corporation Law of the State of Delaware (the "DGCL") or any other applicable
laws as from time to time may be in effect and that Cole National may enter into
agreements which provide for indemnification greater or different from that
provided in the Certificate. In addition, Cole National has provided in Article
Sixth of its Certificate that no director will be personally liable to Cole
National or its stockholders for or with respect to any acts or omissions in the
performance of his or her duties as a director, to the full extent permitted by
the DGCL or any other applicable laws as from time to time may be in effect. The
Certificate further provides that any repeal or modification of Article Seventh
or Article Sixth will not adversely affect the right or protection existing
under such provision prior to such repeal or modification.
Subsection (a) of the Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
under standards similar to those set forth in the paragraph above, except that
no indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
that despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to be indemnified for
such expenses which the court shall deem proper.
Section 145 further provides that, to the extent that a director or officer
of a corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of Section
145, or in defense of any claim, issue or matter therein, he will be indemnified
against expenses including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that any indemnification under subsections (a) and
(b) of Section 145 (unless ordered by a court) will be made by a corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of Section 145; that expenses incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it is ultimately determined that he is not entitled to be indemnified by the
corporation; that indemnification provided for by Section 145 will not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that a corporation is empowered to purchase and maintain insurance on behalf
of any person who is or was a
II-1
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as an officer, employee or agent of another
corporation or enterprise against any liability asserted against him and
incurred by him in such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against such
liability under Section 145.
Our parent has entered into indemnity agreements (the "Indemnity
Agreements") with the current Directors and executive officers of Cole National
and expects to enter into similar agreements with any Director or those
executive officers designated by the Board of Directors of Cole National elected
or appointed in the future at the time of their election or appointment.
Pursuant to the Indemnity Agreements, our parent will indemnify a Director
or officer of Cole National (the "Indemnitee") if the Indemnitee is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that the Indemnitee is or was a Director or officer of Cole
National, or is or was serving at the request of Cole National in certain
capacities with another entity, against any and all costs, charges and expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the Indemnitee in connection with the defense or settlement of such
proceeding. Indemnity is available to the Indemnitee unless it proved by clear
and convincing evidence that the Indemnitee's action or failure to act was not
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of Cole National.
The Indemnity Agreements mandate advancement of expenses to the Indemnitee
if the Indemnitee provides our parent with a written promise that (i) he has
reasonably incurred or will reasonably incur actual expenses in defending an
actual civil, criminal, administrative, or investigative action, suit,
proceeding or claim and (ii) he will repay such amount if it is ultimately
determined that he is not entitled to be indemnified by our parent. In addition,
the Indemnity Agreements provide various procedures and presumptions in favor of
the Indemnitee's right to receive indemnification under the Indemnity Agreement.
Under our parent's Director and Officer Liability Insurance Policy, each
director and certain officers of Cole National are insured against certain
liabilities which might arise in connection with their respective positions with
Cole National.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a list of all exhibits filed as a part of
this registration statement on Form S-4, including those incorporated by
reference.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.1(i) Certificate of Incorporation of Cole National Group,
incorporated by reference to Exhibit 3.1(i) to Cole National
Group's Registration Statement on Form S-1 (Registration No.
33-66342)
3.2(ii) By-Laws of Cole National Group, incorporated by reference to
Exhibit 3.2(ii) to Cole National Group's Registration
Statement on Form S-1 (Registration No. 33-66342)
4.1 Indenture dated August 22, 1997, between Cole National
Group, Inc. and Norwest Bank Minnesota, National
Association, as Trustee, relating to the 8 5/8% Senior
Subordinated Notes Due 2007, incorporated by reference to
Exhibit 4.4 of Cole National Group, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-34963)
4.2 Indenture dated May 22, 2002, between Cole National Group,
Inc. and Wells Fargo Bank Minnesota, N.A., as trustee,
relating to the 8 7/8% Senior Subordinated Notes Due 2012
(the form of such notes are included in the Indenture),
incorporated by reference to Exhibit 10.2 of Cole National
Group, Inc.'s Quarterly Report or Form 10-Q for the quarter
ended May 4, 2002 (File No. 33-66342)
4.3 Cole National Group by this filing agrees, upon request, to
file with the Commission the instruments defining the rights
of holders of long-term debt of Cole National Group and its
subsidiaries where the total amount of securities authorized
thereunder does not exceed 10% of the total assets of Cole
National Group and its subsidiaries on a consolidated basis
</Table>
II-2
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.4*** Registration Rights Agreement dated May 22, 2002, by and
between Cole National Group, Inc. and Lehman Brothers Inc.,
CIBC World Markets Corp. and McDonald Investments Inc., as
initial purchasers relating to the 8 7/8% Senior
Subordinated Notes due 2012
5.1*** Opinion of Jones, Day, Reavis & Pogue
10.1 Lease Agreement (Knoxville) dated as of November 28, 1979 by
and between Tommy Hensley, as agent for the real property of
Mrs. Don Siegel and Cole Vision Corporation, as amended and
supplemented, incorporated by reference to Exhibit 10.15 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.2 Lease Agreement (Memphis) dated as of October 2, 1991 by and
between Shelby Distribution Park and Cole Vision
Corporation, incorporated by reference to Exhibit 10.16 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.3 Lease Agreement (Richmond) dated as of April 23, 1982 by and
between Daniel, Daniel & Daniel and Cole Vision Corporation,
as amended and supplemented, incorporated by reference to
Exhibit 10.17 to Cole National Group's Registration
Statement on Form S-1 (Registration No. 33-66342)
10.4 Lease for Multi-Tenancy Space (Salt Lake) dated as of
October 30, 1981 by and between East Centennial Joint
Venture and Cole Vision Corporation, as amended and
supplemented, incorporated by reference to Exhibit 10.18 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.5 Form of Lease Agreement Finite 19518 dated as of December
29, 1988 between Sears, Roebuck and Co. and Cole Vision
Corporation, incorporated by reference to Exhibit 10.23 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.6 Lease Agreement (Knoxville) dated as of April 11, 1995 by
and between Richard T. Fox and Cole Vision Corporation,
incorporated by reference to Exhibit 10.29 to Cole National
Corporation's Annual Report on Form 10-K for the period
ended February 3, 1996 (File No. 1-12814)
10.7 Form of Indemnification Agreement for Directors of Cole
National Group, incorporated by Reference to Exhibit 10.19
to Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.8 Form of Indemnification Agreement for Officers of Cole
National Group, incorporated by reference to Exhibit 10.20
to Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.9 Form of License Agreement (Optical), incorporated by
reference to Exhibit 10.24 to Cole National Group's
Registration Statement on Form S-1 (Registration No.
33-66342)
10.10 Form of License/Lease Agreement (Optical), incorporated by
reference to Exhibit 10.25 to Cole National Group's
Registration Statement on Form S-1 (Registration No.
33-66342)
10.11 Agreement for the Allocation of Federal Income Tax Liability
and Benefits among Members of the Parent Group dated August
23, 1985, as amended, incorporated by reference to Exhibit
10.26 to Cole National Group's Registration Statement on
Form S-1 (Registration No. 33-66342)
10.12 Assignment and Assumption Agreement dated as of September
30, 1993 between Cole National Corporation and Cole National
Group, incorporated by reference to Exhibit 10.24 to Cole
National Corporation's Annual Report on Form 10-K for the
period ended February 3, 1996 (File No. 1-12814)
10.13 Lease agreement (Salt Lake) dated as of November 1, 1996 by
and between Gibbons Realty Company and Cole Vision
Corporation, incorporated by reference to Exhibit 10.01 of
Cole National Corporation's quarterly report of Form 10-Q
for the period ended November 2, 1996 (File No. 1-12814)
10.14 Cole National Group Guarantee and Cash Collateral Agreement,
dated as of November 15, 1996, by Cole National Group and
Cole National Corporation, incorporated by reference to
Exhibit 99.3 of Cole National Corporation's Report on Form
8-K, filed with the Commission on December 2, 1996 (File No.
1-12814)
</Table>
II-3
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.15 Guarantee and Collateral Agreement, dated as of November 15,
1996, by Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service
Corporation and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 99.4 of Cole National
Corporation's Report on Form 8-K, filed with the Commission
on December 2, 1996 (File No. 1-12814)
10.16* Cole National Group, Inc. 1999 Supplemental Retirement
Benefit Plan dated as of December 17, 1998, incorporated by
reference to Exhibit 10.51 to Cole National Corporation's
Annual Report on Form 10-K for the period ended January 30,
1999 (File No. 1-12814)
10.17* Amended and Restated Instrument Designating Participants of
the Cole National Group, Inc. 1999 Supplemental Retirement
Benefit Plan dated January 25, 2002, incorporated by
reference to Exhibit 10.39 to Cole National Corporation's
Annual Report on Form 10-K for the period ended February 2,
2002 (File No. 1-12814)
10.18* Cole National Group, Inc. Deferred Compensation Plan
effective as of February 1, 1999, incorporated by reference
to Exhibit 10.53 to Cole National Corporation's Annual
Report on Form 10-K for the period ended January 30, 1999
(File No. 1-12814)
10.19* Amendment No. 1, dated as of December 17, 1998, to the Cole
National Group, Inc. Supplemental Pension Plan, incorporated
by reference to Exhibit 10.54 to Cole National Corporation's
Annual Report on Form 10-K for the period ended January 30,
1999 (File No. 1-12814)
10.20* Employment Agreement entered into as of December 17, 1998 by
and among Cole National Corporation, Cole National Group,
Inc., Cole Vision Corporation, Pearle Inc., Things
Remembered, Inc. and Jeffrey A. Cole, incorporated by
reference to Cole National Corporation's Annual Report on
Form 10-K in the period ended January 30, 1999 (File No.
1-12814)
10.21* Instrument Designating Participant of the Cole National
Group, Inc. 1999 Supplemental Retirement Benefit Plan dated
January 1, 2000, incorporated by reference to Exhibit 10.66
to Cole National Corporation's Annual Report on Form 10-K
for the period ended February 3, 2001 (File No. 1-12814)
10.22* Addendum to Employment Agreement dated June 4, 1999 among
Jeffrey A. Cole, Cole National Corporation and certain of
its subsidiaries, incorporated by reference to Exhibit 10.67
to Cole National Corporation's Annual Report on Form 10-K
for the period ended February 3, 2001 (File No. 1-12814)
10.23* Amendment No. 1 to the Cole National Group, Inc. Deferred
Compensation Plan for Senior Executives and other Senior
Management, dated January 25, 2002 incorporated by reference
to Exhibit 10.63 to Cole National Corporation's Annual
Report on Form 10-K for the period ended February 2, 2002
(File No. 1-12814)
10.24* Amendment No. 2 to the Cole National Group, Inc.
Supplemental Pension Plan, dated January 25, 2002
incorporated by reference to Exhibit 10.64 to Cole National
Corporation's Annual Report on Form 10-K for the period
ended February 2, 2002 (File No. 1-12814)
10.25* Amendment No. 2 to the Cole National Group, Inc.
Supplemental Retirement Benefit Plan, dated January 25, 2002
incorporated by reference to Exhibit 10.66 to Cole National
Corporation's Annual Report on Form 10-K for the period
ended February 2, 2002 (File No. 1-12814)
10.26* Amendment No. 1 to the Cole National Group, Inc. 1999
Supplemental Retirement Benefit Plan, dated January 25, 2002
incorporated by reference to Exhibit 10.67 to Cole National
Corporation's Annual Report on Form 10-K for the period
ended February 2, 2002 (File No. 1-12814)
10.27*** Amended and Restated Credit Agreement dated May 23, 2002,
among Cole Vision Corporation, Things Remembered, Inc., and
Pearle, Inc. and Canadian Imperial Bank of Commerce, is
incorporated by reference to Exhibit 10.1 to Cole National
Group Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 4, 2002 (File No. 33-66342)
12.1*** Ratio of Earnings to Fixed Charges
21.1*** Subsidiaries
23.1** Consent of Arthur Andersen LLP
23.2*** Consent of Jones Day, Reavis & Pogue (included in Exhibit
5.1)
</Table>
II-4
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
24.1*** Power of Attorney.
25.1*** Statement of Eligibility under the Trust Indenture Act of
1939 on Form T-1
99.1**** Letter of Transmittal
99.2**** Notice of Guaranteed Delivery
99.3**** Letter regarding Exchange Offer
99.4**** Letter to Depository Trust Company Participants
</Table>
- ---------------
* Reflects management contract or other compensatory arrangement required to
be filed under Item 601 of Regulation S-K.
** Omitted in reliance upon Rule 437a of the Securities Act.
*** Previously filed.
**** Filed herewith.
(b) Financial Statement Schedules:
Report of Independent Public Accountants on the Financial Statement
Schedules
Schedule I -- Condensed Financial Information of Registrant
Schedule II -- Valuation and Qualifying Accounts
II-5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Cole National Group, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States the consolidated financial statements of Cole National Group,
Inc. and Subsidiaries included in Form 10-K, and have issued our report thereon
dated March 19, 2002. Our audits were made for the purpose of forming an opinion
on those statements taken as a whole. The financial statement schedules are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the consolidated financial statements. These schedules have been subjected to
the auditing procedures applied in the audits of the consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the consolidated
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 19, 2002.
II-6
SCHEDULE I
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COLE NATIONAL GROUP, INC.
CONDENSED BALANCE SHEETS
FEBRUARY 2, 2002 AND
FEBRUARY 3, 2001
(Dollars in millions)
<Table>
<Caption>
2001 2000
------ ------
Assets:
Cash........................................................ $ 50.7 $ 26.4
Deferred income tax benefits................................ -- 2.5
Investment in subsidiaries.................................. 387.0 391.8
Property and equipment, net................................. 6.0 3.6
Other....................................................... 12.8 9.0
------ ------
Total assets.............................................. $456.5 $433.3
====== ======
Liabilities and stockholder's equity:
Accounts payable and accrued expenses....................... $ 15.4 $ 13.5
Deferred income taxes....................................... 3.0 --
Payable to affiliates....................................... 99.8 85.9
Long-term debt.............................................. 274.4 274.4
Other long-term liabilities................................. 4.7 5.2
Stockholder's equity........................................ 59.2 54.3
------ ------
Total liabilities and stockholder's equity................ $456.5 $433.3
====== ======
</Table>
II-7
COLE NATIONAL GROUP, INC. SCHEDULE I
CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS (CONTINUED)
52 WEEKS ENDED FEBRUARY 2, 2002,
53 WEEKS ENDED FEBRUARY 3, 2001 AND
52 WEEKS ENDED JANUARY 29, 2000
(Dollars in millions)
<Table>
<Caption>
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------- ----------- -----------
Revenue -- services to affiliates.......................... $29.7 $16.4 $10.4
Operating expenses......................................... 29.8 14.3 10.4
Interest expense........................................... (0.5) 0.3 0.1
----- ----- -----
Pre-tax income (loss)...................................... 0.4 1.8 (0.1)
Income tax benefit......................................... (0.8) (0.4) (0.9)
----- ----- -----
Income before equity in undistributed earnings of
subsidiaries and extraordinary items..................... 1.2 2.2 0.8
Equity in undistributed earnings (loss) of subsidiaries.... 3.7 (0.4) 3.7
----- ----- -----
Net income................................................. 4.9 1.8 4.5
Adjustments to reconcile net income to cash provided by
(used for) operating activities.......................... 9.5 6.8 (7.1)
----- ----- -----
Net cash provided by (used for) operating
activities.......................................... 14.4 8.6 (2.6)
----- ----- -----
Investing activities:
Purchases of property and equipment net.................. (3.4) -- --
Systems development costs................................ (1.0) (1.8) (2.1)
Other, net............................................... -- 0.2 --
----- ----- -----
Net cash used for investing activities................ (4.4) (1.6) (2.1)
----- ----- -----
Financing activities:
Repayment of long-term debt.............................. (0.1) (0.4) (0.3)
Advances from (to) affiliates............................ 13.9 (0.8) (9.0)
Payment of financing fees................................ -- (.4) (0.3)
Other, net............................................... 0.5 -- 0.6
----- ----- -----
Net cash provided by (used for) financing
activities.......................................... 14.3 (1.6) (9.0)
----- ----- -----
Net change in cash......................................... 24.3 5.4 (13.7)
Cash, beginning of period.................................. 26.4 21.0 34.7
----- ----- -----
Cash, end of period........................................ $50.7 $26.4 $21.0
===== ===== =====
</Table>
II-8
SCHEDULE I
(CONTINUED)
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The accompanying financial information of Cole National Group, Inc., a
wholly-owned subsidiary of Cole National Corporation, is as of February 2, 2002
and February 3, 2001 and for the 52 weeks ended February 2, 2002 and January 29,
2000 and the 53 weeks ended February 3, 2001. Cole National Group is a holding
company for its wholly-owned subsidiaries, Things Remembered, Inc., Cole Vision
Corporation and Pearle, Inc., except for expenses associated with Cole National
Group's corporate offices, consisted of no other operations.
This financial information should be read in connection with the Notes to
Consolidated Financial Statements of Cole National Group, Inc. and Subsidiaries,
contained elsewhere in this registration statement.
II-9
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
52 WEEKS ENDED FEBRUARY 2, 2002
53 WEEKS ENDED FEBRUARY 3, 2001 AND
52 WEEKS ENDED JANUARY 29, 2000
(Dollars in millions)
<Table>
<Caption>
CHARGED
(REVERSALS)
BALANCE AT TO COST BALANCE
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ----------- ----------- ----------- ----------
FEBRUARY 2, 2002
Allowance for doubtful accounts......... $7.3 $ 0.1 $ (3.4)(A) $4.0
Franchise note allowance for doubtful
accounts.............................. 4.5 1.6 (0.9)(A) .2
FEBRUARY 3, 2001
Allowance for doubtful accounts......... $7.6 $ 4.6 $ (4.9)(A) $7.3
Franchise allowance for uncollectable
notes................................. 4.2 0.8 (0.5)(A) 4.5
JANUARY 29, 2000
Allowance for doubtful accounts......... $7.2 $ 4.3 $ (3.9)(A) $7.6
Franchise note allowance for doubtful
accounts.............................. 5.2 0.3 (1.3)(A) 4.2
Restructuring --
1998 Charge............................. $6.1 $(0.1) $ (6.0) $ --
1996 Charge............................. 1.0 -- (1.0) --
</Table>
- ---------------
(A) Receivable balances written off, net of recoveries
Reserve balances presented in the Notes to Consolidated Financial
Statements are not presented in this schedule.
II-10
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; provided, however, that paragraphs
(1)(i) and (1)(ii) do not apply if the registration statement
is on Form S-3 or Form S-8, and the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the
SEC by the registrant pursuant to Sections 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
SEC such indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one
II-11
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, in the State of Ohio, on July 3, 2002.
Cole National Group, Inc.
By: /s/ THOMAS T. S. KAUNG
--------------------------------------
Thomas T. S. Kaung
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated:
<Table>
<Caption>
NAME TITLE DATE
---- ----- ----
* Chairman, Chief Executive Officer and July 3, 2002
- ------------------------------------------------ Director (Principal Executive Officer)
Jeffrey A. Cole
* President, Chief Operating Officer July 3, 2002
- ------------------------------------------------ and Director
Larry Pollock
* Vice President, Accounting and Report July 3, 2002
- ------------------------------------------------ (Principal Accounting Officer)
Tracy L. Burmeister
/s/ THOMAS T. S. KAUNG Executive Vice President and Chief July 3, 2002
- ------------------------------------------------ Financial Officer (Principal Financial
Thomas T. S. Kaung Officer)
* Director July 3, 2002
- ------------------------------------------------
Timothy F. Finley
* Director July 3, 2002
- ------------------------------------------------
Irwin N. Gold
* Director July 3, 2002
- ------------------------------------------------
Melchert F. Groot
* Director July 3, 2002
- ------------------------------------------------
Peter V. Handal
* Director July 3, 2002
- ------------------------------------------------
Charles A. Ratner
* Director July 3, 2002
- ------------------------------------------------
Walter J. Salmon
</Table>
* The undersigned, by signing his name hereto, does sign and execute this
amendment no. 1 to the Registration Statement on Form S-4 pursuant to a Power
of Attorney executed on behalf of the above-indicated officers and directors
of the registrant and filed herewith as exhibit 24.1 on behalf of the
registrant.
By: /s/ THOMAS T. S. KAUNG
------------------------------------
Thomas T. S. Kaung, Attorney-in-Fact
II-13
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.1(i) Certificate of Incorporation of Cole National Group,
incorporated by reference to Exhibit 3.1(i) to Cole National
Group's Registration Statement on Form S-1 (Registration No.
33-66342)
3.2(ii) By-Laws of Cole National Group, incorporated by reference to
Exhibit 3.2(ii) to Cole National Group's Registration
Statement on Form S-1 (Registration No. 33-66342)
4.1 Indenture dated August 22, 1997, between Cole National
Group, Inc. and Norwest Bank Minnesota, National
Association, as Trustee, relating to the 8 5/8% Senior
Subordinated Notes Due 2007, incorporated by reference to
Exhibit 4.4 of Cole National Group, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-34963)
4.2 Indenture dated May 22, 2002, between Cole National Group,
Inc. and Wells Fargo Bank Minnesota, N.A., as trustee,
relating to the 8 7/8% Senior Subordinated Notes Due 2012
(the form of such notes are included in the Indenture),
incorporated by reference to Exhibit 10.2 of Cole National
Group, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 4, 2002 (File No. 33-66342)
4.3 Cole National Group by this filing agrees, upon request, to
file with the Commission the instruments defining the rights
of holders of long-term debt of Cole National Group and its
subsidiaries where the total amount of securities authorized
thereunder does not exceed 10% of the total assets of Cole
National Group and its subsidiaries on a consolidated basis
4.4*** Registration Rights Agreement dated May 22, 2002, by and
between Cole National Group, Inc. and Lehman Brothers Inc.,
CIBC World Markets Corp. and McDonald Investments Inc., as
initial purchasers relating to the 8 7/8% Senior
Subordinated Notes due 2012
5.1*** Opinion of Jones, Day, Reavis & Pogue
10.1 Lease Agreement (Knoxville) dated as of November 28, 1979 by
and between Tommy Hensley, as agent for the real property of
Mrs. Don Siegel and Cole Vision Corporation, as amended and
supplemented, incorporated by reference to Exhibit 10.15 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.2 Lease Agreement (Memphis) dated as of October 2, 1991 by and
between Shelby Distribution Park and Cole Vision
Corporation, incorporated by reference to Exhibit 10.16 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.3 Lease Agreement (Richmond) dated as of April 23, 1982 by and
between Daniel, Daniel & Daniel and Cole Vision Corporation,
as amended and supplemented, incorporated by reference to
Exhibit 10.17 to Cole National Group's Registration
Statement on Form S-1 (Registration No. 33-66342)
10.4 Lease for Multi-Tenancy Space (Salt Lake) dated as of
October 30, 1981 by and between East Centennial Joint
Venture and Cole Vision Corporation, as amended and
supplemented, incorporated by reference to Exhibit 10.18 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.5 Form of Lease Agreement Finite 19518 dated as of December
29, 1988 between Sears, Roebuck and Co. and Cole Vision
Corporation, incorporated by reference to Exhibit 10.23 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.6 Lease Agreement (Knoxville) dated as of April 11, 1995 by
and between Richard T. Fox and Cole Vision Corporation,
incorporated by reference to Exhibit 10.29 to Cole National
Corporation's Annual Report on Form 10-K for the period
ended February 3, 1996 (File No. 1-12814)
10.7 Form of Indemnification Agreement for Directors of Cole
National Group, incorporated by Reference to Exhibit 10.19
to Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.8 Form of Indemnification Agreement for Officers of Cole
National Group, incorporated by reference to Exhibit 10.20
to Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342)
10.9 Form of License Agreement (Optical), incorporated by
reference to Exhibit 10.24 to Cole National Group's
Registration Statement on Form S-1 (Registration No.
33-66342)
</Table>
II-14
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.10 Form of License/Lease Agreement (Optical), incorporated by
reference to Exhibit 10.25 to Cole National Group's
Registration Statement on Form S-1 (Registration No.
33-66342)
10.11 Agreement for the Allocation of Federal Income Tax Liability
and Benefits among Members of the Parent Group dated August
23, 1985, as amended, incorporated by reference to Exhibit
10.26 to Cole National Group's Registration Statement on
Form S-1 (Registration No. 33-66342)
10.12 Assignment and Assumption Agreement dated as of September
30, 1993 between Cole National Corporation and Cole National
Group, incorporated by reference to Exhibit 10.24 to Cole
National Corporation's Annual Report on Form 10-K for the
period ended February 3, 1996 (File No. 1-12814)
10.13 Lease agreement (Salt Lake) dated as of November 1, 1996 by
and between Gibbons Realty Company and Cole Vision
Corporation, incorporated by reference to Exhibit 10.01 of
Cole National Corporation's quarterly report of Form 10-Q
for the period ended November 2, 1996 (File No. 1-12814)
10.14 Cole National Group Guarantee and Cash Collateral Agreement,
dated as of November 15, 1996, by Cole National Group and
Cole National Corporation, incorporated by reference to
Exhibit 99.3 of Cole National Corporation's Report on Form
8-K, filed with the Commission on December 2, 1996 (File No.
1-12814)
10.15 Guarantee and Collateral Agreement, dated as of November 15,
1996, by Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service
Corporation and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 99.4 of Cole National
Corporation's Report on Form 8-K, filed with the Commission
on December 2, 1996 (File No. 1-12814)
10.16* Cole National Group, Inc. 1999 Supplemental Retirement
Benefit Plan dated as of December 17, 1998, incorporated by
reference to Exhibit 10.51 to Cole National Corporation's
Annual Report on Form 10-K for the period ended January 30,
1999 (File No. 1-12814)
10.17* Amended and Restated Instrument Designating Participants of
the Cole National Group, Inc. 1999 Supplemental Retirement
Benefit Plan dated January 25, 2002, incorporated by
reference to Exhibit 10.39 to Cole National Corporation's
Annual Report on Form 10-K for the period ended February 2,
2002 (File No. 1-12814)
10.18* Cole National Group, Inc. Deferred Compensation Plan
effective as of February 1, 1999, incorporated by reference
to Exhibit 10.53 to Cole National Corporation's Annual
Report on Form 10-K for the period ended January 30, 1999
(File No. 1-12814)
10.19* Amendment No. 1, dated as of December 17, 1998, to the Cole
National Group, Inc. Supplemental Pension Plan, incorporated
by reference to Exhibit 10.54 to Cole National Corporation's
Annual Report on Form 10-K for the period ended January 30,
1999 (File No. 1-12814)
10.20* Employment Agreement entered into as of December 17, 1998 by
and among Cole National Corporation, Cole National Group,
Inc., Cole Vision Corporation, Pearle Inc., Things
Remembered, Inc. and Jeffrey A. Cole, incorporated by
reference to Cole National Corporation's Annual Report on
Form 10-K in the period ended January 30, 1999 (File No.
1-12814)
10.21* Instrument Designating Participant of the Cole National
Group, Inc. 1999 Supplemental Retirement Benefit Plan dated
January 1, 2000, incorporated by reference to Exhibit 10.66
to Cole National Corporation's Annual Report on Form 10-K
for the period ended February 3, 2001 (File No. 1-12814)
10.22* Addendum to Employment Agreement dated June 4, 1999 among
Jeffrey A. Cole, Cole National Corporation and certain of
its subsidiaries, incorporated by reference to Exhibit 10.67
to Cole National Corporation's Annual Report on Form 10-K
for the period ended February 3, 2001 (File No. 1-12814)
10.23* Amendment No. 1 to the Cole National Group, Inc. Deferred
Compensation Plan for Senior Executives and other Senior
Management, dated January 25, 2002 incorporated by reference
to Exhibit 10.63 to Cole National Corporation's Annual
Report on Form 10-K for the period ended February 2, 2002
(File No. 1-12814)
</Table>
II-15
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.24* Amendment No. 2 to the Cole National Group, Inc.
Supplemental Pension Plan, dated January 25, 2002
incorporated by reference to Exhibit 10.64 to Cole National
Corporation's Annual Report on Form 10-K for the period
ended February 2, 2002 (File No. 1-12814)
10.25* Amendment No. 2 to the Cole National Group, Inc.
Supplemental Retirement Benefit Plan, dated January 25, 2002
incorporated by reference to Exhibit 10.66 to Cole National
Corporation's Annual Report on Form 10-K for the period
ended February 2, 2002 (File No. 1-12814)
10.26* Amendment No. 1 to the Cole National Group, Inc. 1999
Supplemental Retirement Benefit Plan, dated January 25, 2002
incorporated by reference to Exhibit 10.67 to Cole National
Corporation's Annual Report on Form 10-K for the period
ended February 2, 2002 (File No. 1-12814)
10.27*** Amended and Restated Credit Agreement dated May 23, 2002,
among Cole Vision Corporation, Things Remembered, Inc., and
Pearle, Inc., and Canadian Bank of Commerce, is incorporated
by reference to Exhibit 10.1 to Cole National Group Inc.'s
Quarterly Report on Form 10-Q for the quarter ended May 4,
2002 (File No. 33-66342)
12.1*** Ratio of Earnings to Fixed Charges
21.1*** Subsidiaries
23.1** Consent of Arthur Andersen LLP
23.2*** Consent of Jones Day, Reavis & Pogue (included in Exhibit
5.1)
24.1*** Power of Attorney.
25.1*** Statement of Eligibility under the Trust Indenture Act of
1939 on Form T-1
99.1**** Letter of Transmittal
99.2**** Notice of Guaranteed Delivery
99.3**** Letter regarding Exchange Offer
99.4**** Letter to Depository Trust Company Participants
</Table>
- ---------------
* Reflects management contract or other compensatory arrangement required to
be filed under Item 601 of Regulation S-K.
** Omitted in reliance upon Rule 437a of the Securities Act.
*** Previously filed.
**** Filed herewith.
II-16