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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

Commission file number 33-66342

COLE NATIONAL GROUP, INC.

(Exact name of registrant as specified in its charter)

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

      Securities registered pursuant to Section 12 (b) of the Act: None

      Securities registered pursuant to Section 12 (g) of the Act: None

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

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

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

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

      Documents incorporated by reference: None

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PART I

Item 1. Business

General

      Cole National Group, Inc. a wholly owned subsidiary of Cole National Corporation, was incorporated as a Delaware corporation in July 1993. Cole National Group is a leading provider of eyewear products, optometry services and personalized gifts with 2,722 retail locations in 50 states, Canada and the Caribbean. References herein to the “Company” include Cole National Group, its direct and indirect subsidiaries, and its predecessor companies. Cole National Group’s businesses are conducted through two principal operating units: Cole Vision and Things Remembered. Cole Vision consists of Cole Licensed Brands, Cole Managed Vision Care and Pearle. Cole National Group believes that, based on industry data, Cole Vision is one of the largest optical retail companies in the world. Things Remembered operates the only nationwide chain of personalized gift stores. Cole National Group differentiates itself from other specialty retailers by providing value-added services at the point of sale at all of its retail locations.

Cole Vision

      Cole Vision contributed 76% of Cole National Group’s net revenue in fiscal 1999 with 1,926 company-owned and franchised locations throughout the United States, Canada and the Caribbean as of January 29, 2000. The Cole Managed Vision Care programs provide vision care services giving participants access to a network of company-owned, franchised and third-party optical locations.

Cole Licensed Brands

      Cole Licensed Brands operates principally under the “Sears Optical”, “Target Optical” and “BJ’s Optical Department” names. As of January 29, 2000, Cole Licensed Brands operated 1,056 locations in 46 states and Canada, including 802 departments on the premises of Sears department stores, 93 departments in BJ’s Wholesale Club stores, 25 departments in Target stores, 134 freestanding stores operated under the name “Sears Optical” and two other locations. Retail locations are generally operated under a lease or license arrangement through which the host store collects the sales receipts, retains an agreed upon percentage of sales and remits the remainder to Cole Licensed Brands on a weekly basis.

      Cole Licensed Brands’ locations are, in most cases, full-service retail eyecare stores offering brand name and private label prescription eyeglasses, contact lenses and accessories, with an on-premises doctor of optometry who performs complete eye examinations and prescribes eyeglasses and contact lenses. Most optical departments, which are typically 1,000 square feet in size, operate with a doctor of optometry, a department manager, and from one to seven opticians depending on store sales volume. The majority of the doctors of optometry are independent, as is often required by state law, with the remainder being employed by Cole Licensed Brands. The independent doctors sublease space and equipment from Cole Licensed Brands where permitted by law, or from the host, and retain their examination fees.

      Each of the retail locations is computer linked to five centralized manufacturing laboratories, which grind, cut and fit lenses to order and ship them to the stores. The Canadian retail locations have manufacturing done at a centralized distribution center. Cole Licensed Brands provides next day delivery on most of the eyewear it offers when requested by its customers. All of the frames and lenses used in its eyeglasses are purchased from outside suppliers, both in the United States and several foreign countries.

      A variety of marketing and promotional efforts, primarily newspaper, direct mail, yellow pages and host advertising, are used to build and maintain its customer base. Host advertising includes the placement of promotional material within sales circulars or credit card billings sent out by the host store to its customers.

Pearle

      At January 29, 2000, Pearle’s operations consisted of 454 company-owned and 416 franchised stores located in 44 states, Canada, and the Caribbean. Most Pearle stores operate in either an “Express” or “Mainline” store format. Express stores contain a full surfacing lab that can manufacture most glasses in approximately one hour. Mainline stores can manufacture over 50% of prescriptions on-site in approximately one hour. Other prescriptions are sent to the laboratory in Dallas. At January 29, 2000, 290 of the company-owned stores and 148 of the franchised stores were Express, with the balance being Mainline.

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      The Express stores typically are located in high traffic freestanding, strip centers and mall locations with most stores averaging 3,000 square feet. The Express stores are usually staffed with two managers and a support staff of four to eight people. Mainline stores have an average size of 1,700 square feet and are also located in freestanding buildings, or in smaller strip or regional centers. Mainline stores generally carry a smaller assortment of inventory than Express stores and are usually staffed with one manager and two to three associates. Most Pearle stores have a doctor of optometry on site with approximately 80% leasing space from Pearle on an independent basis and the remaining being direct employees of Pearle.

      Pearle’s marketing strategy employs a wide range of media at both the national and local levels. The franchised and company-owned stores each contribute a percentage of revenues to Pearle’s marketing budget with approximately half of Pearle’s marketing expenditures devoted to television. Pearle’s brand positioning of high quality eyecare products and services has been reinforced by an advertising and promotions program, which includes Pearle’s advertising slogans, Nobody Cares More for Eyes More Than Pearle and The Doctor Is In.

      Pearle operates a warehouse facility in Dallas that inventories and distributes a comprehensive product line, including frames, eyeglass lenses, contact lenses, optical supplies and eyewear accessories to company-owned and franchised locations.

      Pearle has maintained a franchise program since 1980. Most of the franchised stores are single franchise operations, with no franchisee operating more than ten stores. With the proper financial approvals, a franchise purchase can be financed through Pearle. Currently, Pearle offers financing over periods up to ten years at variable interest rates ranging from prime plus one point to prime plus three points adjusted periodically.

      Each franchisee is required to enter into a franchise agreement requiring payment of an initial franchise fee. The term of the typical franchise agreement is equal to the earlier of ten years or the expiration or termination of the underlying base lease. Royalty and advertising contributions typically are based on a percentage of the franchisee’s gross revenues from the retail operation, excluding non-surgical professional fees and 3rd party revenues. The total monthly advertising contribution is distributed between Pearle’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.

Cole Managed Vision Care

      Cole Vision’s managed vision care programs provide comprehensive eyecare benefits marketed directly to large employers, HMO’s and other organizations. It’s Vision One discount program gives plan sponsors the opportunity to offer their members a group discount at locations within Cole’s managed vision care network with minimal direct cost to the plan sponsor. It also offers enhanced programs to plan sponsors to provide their members with prepaid eye examinations, as well as pricing discounts or funded materials benefits.

      Cole Managed Vision Care’s network has over 4,700 points of service, including virtually all Cole Vision company-owned retail locations, approximately 92% of franchised locations, 650 locations in a nationwide chain store’s optical departments, 640 independent full service providers, and 1,600 exam-only providers. Cole Managed Vision Care generated approximately 35% of Cole Vision’s revenues in fiscal 1999.

Things Remembered

      Things Remembered contributed 24% of Cole National Group’s net revenue in fiscal 1999. As of January 29, 2000, Things Remembered operated 796 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, business and special occasion gift events. Things Remembered offers engraving for items purchased at the store as well as for items purchased elsewhere.

      Merchandise sold at Things Remembered stores consists of a broad assortment of gift categories and items at prices generally ranging from $10 to $75. Things Remembered’s offering of gifts includes writing instruments, clocks, music boxes, picture frames and albums, executive desk sets and accessories, ID bracelets, glassware, lighters, keys and key rings, door knockers and Christmas ornaments. Things Remembered features brand name merchandise as well as higher margin private label merchandise. At some locations, computer-controlled embroidery equipment is utilized for the personalization of merchandise such as throws, sweaters, bathrobes, jackets, baseball caps, towels and baby blankets. These

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softgoods are also available in most of Things Remembered’s other locations with personalization services provided from a central fulfillment facility.

      At January 29, 2000, Things Remembered locations consisted of 437 stores and 359 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 non-peak 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 as part-time sales associates.

      Nearly all locations are equipped with computerized engravers and key duplicating machines. Many 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 fill a store order.

Host Relationships

      Cole National Group believes it has developed excellent relationships with the host stores in which Cole Licensed Brands operates. Cole National Group has maintained its relationships in the optical business with Sears for over 35 years. Approximately 90% of the Sears stores and all of the BJ’s Wholesale and Target stores that offer optometric services are operated by Cole Licensed Brands. Although leases with major hosts are terminable by either party 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.

Purchasing

      The merchandise, supplies and component parts required for the various products sold by Cole National Group are purchased from a large number of suppliers and manufacturers and are generally readily available. In most cases, such purchases are not made under long-term contracts. Cole National Group believes that the loss of any one supplier or manufacturer should not have a material adverse effect on its operations.

Competition

      Cole National Group operates in highly competitive businesses. Cole Vision competes with other optical companies, private ophthalmologists, optometrists and opticians and a growing number of HMOs in a highly fragmented marketplace on the basis of the patient service it provides, as well as price and product quality. In addition, Pearle competes on the basis of its highly recognized brand name and one-hour express service. Cole National Group believes that, based on industry data, Cole Vision is one of the largest optical retail companies in the world. Although Things Remembered operates the only nation-wide chain of gift stores offering “while you shop” gift engraving, key duplicating, glass etching and monogramming, as well as related merchandise, it competes with many other retailers that sell gift items. Things Remembered competes with such other retailers primarily on the basis of the value-added point of sale services, as well as price and product quality. Some of Cole National Group’s competitors have greater financial resources than Cole National Group.

Employees

      As of January 29, 2000, Cole National Group and its subsidiaries had approximately 9,000 full-time and 3,800 part-time employees. During October, November and December, Cole National Group employs additional full- and part-time employees. In fiscal 1999, approximately 3,500 additional employees were employed during such period. Approximately 130 employees at certain Pearle locations are represented by labor unions. Cole National Group considers its present labor relations to be satisfactory.

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Item 2. Properties

      Cole National Group leases an office in Highland Heights, Ohio, and leases its executive offices and an office in Cleveland, Ohio.

      During fiscal 1998, Cole National Corporation purchased a building in Twinsburg, Ohio, which comprises approximately 175,000 square feet of office space. All of Cole Vision’s home office functions moved to this facility during fiscal 1998.

      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 stores and freestanding stores operated under the name “Sears Optical” are generally for terms of 90 days and five years, respectively.

      Pearle leases most of its retail stores under non-cancelable operating leases with terms generally ranging from five to ten years and which generally contain renewal options for additional periods. Pearle is the principal lessee on a majority of stores operated by franchisees who sublease the facilities from Pearle.

      Cole Vision leases five optical laboratories, located in Knoxville, Tennessee (two labs); Memphis, Tennessee; Salt Lake City, Utah; and Richmond, Virginia, pursuant to leases expiring (including renewals at the option of Cole Vision) in 2002, 2005, 2002, 2001 and 2013, respectively. In 1999, Cole Vision entered into an agreement to lease a facility in Columbus, Ohio, which comprises approximately 43,000 square feet of space. This facility consists of an optical laboratory, a distribution center and a general office space. Cole Vision also leases a home office, lab and distribution center facility for its Canadian operations pursuant to leases expiring in 2000.

      Pearle owns its Dallas Support Center, which comprises 88,721 square feet of office space and 147,336 square feet of laboratory and distribution facilities. Pearle also owns a small headquarters and laboratory in Puerto Rico.

      Leases for Things Remembered stores and kiosks are generally for terms of ten and five years, respectively. During the first quarter of fiscal 1999, Things Remembered moved its home office functions to the leased facility in Highland Heights, Ohio. In fiscal 1997, a 210,000 square foot warehouse and distribution facility was constructed for Things Remembered. On December 31, 1998, Things Remembered entered into an agreement with a third party for the sale and leaseback of this distribution center that expires in 2013 and includes three options to renew the lease for five-year terms.

Item 3. Legal Proceedings

      From time to time during the ordinary course of business, the Company is threatened with, or may become a party to a variety of legal actions and other proceedings incidental to its business.

Item 4. Submission of Matters to a Vote of Security-Holders

      Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

      The Registrant is a wholly owned subsidiary of Cole National Corporation and has no equity securities that trade.

      The covenants in certain debt instruments to which Cole National Group and certain of its subsidiaries are parties restrict the ability of Cole National Group and such subsidiaries to make distributions to Cole National Corporation or Cole National Group, respectively. A credit facility to which Cole National Group and its subsidiaries are parties permits payment of dividends by Cole National Group’s subsidiaries to Cole National Group annually of up to $8.0 million plus 0.25% of the net annual sales of Cole National Group’s subsidiaries to meet expenses of Cole National Group or Cole National Corporation, together with amounts necessary to pay principal and interest on Cole National Group’s 8-5/8% Senior Subordinated Notes due 2007 and 9-7/8% Senior Subordinated Notes due 2006 and to meet tax obligations. In addition, dividends of up to $20.0 million are permitted to repurchase the 8-5/8% Notes and/or 9-7/8% Notes.

      So long as no default or event of default has occurred under the indentures relating to the 8-5/8% Notes and/or the 9-7/8% Notes and Cole National Group has met a specified fixed charge coverage ratio test, payments of dividends to Cole National Corporation of amounts contributed by Cole National Corporation to the equity of Cole National Group subsequent to September 30, 1993, plus up to one-half of the consolidated net income of Cole National Group since October 31, 1993 are permitted. No dividends were paid during 1999 or 1998.

Item 6. Selected Financial Data

      Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

      Fiscal years end on the Saturday closest to January 31. Fiscal years are identified according to the calendar year in which they begin. For example, the fiscal year ended January 29, 2000 is referred to as “fiscal 1999.” Fiscal 1999, 1998, and 1997 each consisted of 52-week periods.

      Cole National Group has two reportable segments: Cole Vision, which accounted for 76% of total revenue, and Things Remembered, which accounted for 24% of total revenue. 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. Things Remembered’s revenue is provided by sales of engravable gift merchandise and personalization and other services primarily through retail stores and kiosks. See Note 10 to Consolidated Financial Statements for further discussion of reportable segments.

      In December 1999, Cole National Group closed 150 optical departments in Montgomery Ward stores. Charges related to the write-off of inventory, fixed assets and other closing costs totaling $2.0 million are included in cost of sales and operating expenses in fiscal 1999.

      On January 13, 1998, Cole National Group announced the closing of its Cole Gift Centers business that included 445 key duplicating, greeting card and gift departments on the premises of hosts’ stores. Cole Gift Centers has been accounted for as a discontinued operation in the accompanying financial statements. Accordingly, the results of operations and loss on disposition of Cole Gift Centers have been excluded from the results of continuing operations. See Note 4 of the Notes to Consolidated Financial Statements for further discussion of discontinued operations.

      On August 5, 1997, Cole National Corporation contributed to Cole National Group all of the issued and outstanding common stock of American Vision Centers, Inc. (“AVC”), which Cole National Corporation had acquired for approximately $28.9 million in cash, including debt assumed. The acquisition was accounted for using the purchase method of accounting. Accordingly, AVC’s results of operations, which included 80 company-owned optical stores and 75 franchised locations at January 31, 1998, have been included in the consolidated statements of operations since the date of contribution. For the six-month period ended January 31, 1998, AVC’s net revenue was approximately $25.0 million. See Notes 2 and 3 of the Notes to Consolidated Financial Statements for further discussion of this acquisition.

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Results of Operations

      The following is a discussion of the results of continuing operations for the three fiscal years ended January 29, 2000. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K. The following table sets forth certain operating information for each period (dollars in millions):

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Fiscal 1999 Compared to Fiscal 1998

      The softness in consolidated net revenue for fiscal 1999 was primarily attributable to the decrease in consolidated comparable store sales at Cole Vision. Sales at Cole Licensed Brands have been negatively impacted by a competitive promotional environment. Licensed Brands’ response, which began at the end of the second quarter, produced an improvement in the second half sales trend as comparable store sales were nearly flat to last year. Sales this year at Pearle have also been impacted by the competitive promotional environment and Pearle’s focus, earlier in the year, on long-term, brand-building in its advertising campaign, as well as operating and systems issues that the Company is addressing. Pearle refocused its marketing efforts to become more promotional beginning in the second quarter. Pearle achieved some improvement in comparable store sales trends during the fourth quarter. Pearle comparable store sales for the fourth quarter of fiscal 1999 were a negative 3.0% as compared to a full-year comparable store sales of negative 5.5%. The sales decrease at Cole Vision reflected a lower average selling price for spectacles and contact lenses due primarily to more promotional pricing. At Things Remembered, the comparable store sales increase reflected increased sales of additional personalization and new merchandise at higher average unit retails, along with the benefits from marketing directly to its existing customer base. The total number of transactions at Things Remembered was slightly behind a year ago. During the fiscal year, the Company (including franchised locations) opened a total of 115 new locations and closed 277 locations, including 150 optical departments at Montgomery Ward stores.

      The gross profit improvement in fiscal 1999 compared to fiscal 1998 was primarily attributable to increased revenue at Things Remembered and inventory markdowns at Pearle in 1998, partially offset by lower revenue at Cole Vision. Excluding the 1998 inventory markdowns at Pearle, gross margin at Cole Vision declined 0.5 percentage points to 64.6% in fiscal 1999 and consolidated margins were 66.2% and 66.3% in fiscal 1999 and 1998, respectively. The lower gross margin at Cole Vision was primarily due to the impact of more promotional pricing and lower margins on contact lenses. In addition, the integration of new manufacturing and merchandise/inventory management systems with Pearle’s existing warehouse management system resulted in manufacturing and distribution inefficiencies that led to increased costs and lost sales in the third and fourth quarters of fiscal 1999. Progress has been made to date in bringing the system up to pre-installation expectations, however some continuing inefficiencies are expected to have a negative impact on fiscal 2000. Gross margin at Things Remembered improved 0.4 percentage points to 71.4% in fiscal 1999, benefiting from increased sales of additional personalization and higher margins from new products.

      The unfavorable leverage in operating expenses for the fiscal year was primarily attributable to a 0.8 percentage point increase in payroll costs, a 1.4 percentage point increase in managed vision care costs and a 0.4 percentage point increase in net advertising expenditures. The unfavorable payroll leverage was primarily due to the comparable store sales decrease at Cole Vision and staffing increases in managed vision care, partly offset by payroll leverage gains on the sales increase at Things Remembered. The increase in managed vision care expenses was primarily attributable to growth in call and claims volumes associated with increases in sponsor-funded programs. The unfavorable advertising leverage was due to increased advertising at Cole Licensed Brands in response to the competitive pricing environment, partly offset by reduced spending at Pearle. Depreciation and amortization expense increases were attributable to increases in amortization of systems development and software plus certain charges to recognize asset impairments in accordance with Statement of Financial Accounting Standards (SFAS) No. 121.

      The decrease in income from operations was primarily the result of the decrease in net revenue and the increases in operating expenses and depreciation and amortization. Interest and other income includes the recognition of $6.0 million of income in the third quarter of fiscal 1998 from a nontaxable cash settlement with the former owner of Pearle. Excluding the Pearle settlement, net interest and other expense in fiscal 1999 decreased slightly from fiscal 1998.

      Net interest expense and other income for fiscal 1999 of $26.7 million increased $5.6 million compared to fiscal 1998. The increase was primarily attributable to the recognition of $6.0 million of other income in the third quarter of fiscal 1998 from cash received in the non-taxable settlement of certain contingencies related to several claims against and indemnifications from the former owner of Pearle. Excluding this settlement, interest and other income increased by $0.4 million, offset by a slight increase in interest expense.

      The effective income tax rate was 47.4% in fiscal 1999. The income tax provision for fiscal 1998 includes $7.4 million of income tax benefits related to the charges for restructuring and other unusual items. The effective rate on income excluding these charges and the $6.0 million settlement included in other income was 41.0% in fiscal 1998. The

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effective income tax rates reflect the significant impact of non-deductible amortization of goodwill in both years. A more complete discussion of income taxes is included in Note 8 of the Notes to Consolidated Financial Statements.

Fiscal 1998 Compared to Fiscal 1997

      Net revenue increased 6.8% to $1.1 billion in fiscal 1998 from $996.2 million in fiscal 1997. The increase in revenue was primarily attributable to the inclusion in fiscal 1998 of additional Cole Vision units, including the AVC stores acquired in August 1997, and a consolidated comparable store sales increase of 3.1% . The consolidated comparable store sales increase in fiscal 1998 reflected a comparable store sales increase of 1.6% at Cole Vision and 7.4% at Things Remembered. The Cole Vision comparable store sales increase resulted from a 2.9% increase at Cole Licensed Brands partially offset by a 1.5% decrease at Pearle. The Cole Vision sales increase reflected an increase in the number of transactions due to more locations, as the average selling price was essentially flat between years. The Pearle comparable store sales were impacted by a weaker than expected reception to marketing and merchandising programs implemented in the first quarter, as well as increased competitive pressures in the optical business and what the Company perceives may be a general softening in the retail optical market. At Things Remembered, the comparable store sales growth reflected increased sales of additional personalization and new products increasing the average transaction amount, while the number of transactions in fiscal 1998 was similar to fiscal 1997. At January 30, 1999, the Company had 2,884 retail locations including 818 Things Remembered stores, 1,186 Licensed Brands locations and 880 Pearle stores, of which 409 were franchised locations, compared to 2,833 retail locations at January 31, 1998.

      Gross profit increased to $700.1 million in fiscal 1998 from $655.3 million in fiscal 1997. The gross profit increase was primarily attributable to the increased revenue at both Cole Vision and Things Remembered, partially offset by $5.2 million of inventory markdowns at Pearle in connection with restructuring its operations. Excluding the inventory markdowns, gross margins were 66.3% and 65.8% in fiscal 1998 and fiscal 1997, respectively. Gross margin at Things Remembered improved to 71.0% in fiscal 1998 from 68.7% the prior year with most of the improvement from increased personalization sales. At Cole Vision, gross margins were 64.9% in both fiscal 1998 and fiscal 1997.

      Operating expenses increased 9.3% to $607.0 million in fiscal 1998 from $555.2 million in fiscal 1997. As a percentage of revenue, operating expenses were 57.1% in fiscal 1998 compared to 55.8% in fiscal 1997. The unfavorable expense leverage was attributable to a 0.6 percentage point increase in managed vision care expenses, a 0.6 percentage point increase in information service costs including $2.4 million incurred in connection with the Company’s Year 2000 Readiness Program (see Year 2000 below for additional information) and a 0.5 percentage point increase in advertising expenditures, partially offset by a 0.4 percentage point leverage gain on store occupancy costs. The increase in managed vision care expenses was primarily the result of increased administrative costs necessary to handle the growth in call and claims volume. The increase in advertising expenditures as a percentage of revenue was mainly due to inefficient advertising efforts at Cole Vision, a result of the optical market conditions mentioned above and the unexpected weakness of Pearle’s first quarter marketing and merchandising programs. Store occupancy expenses increased as a result of more locations and higher percentage rents caused by increased comparable store sales but gained leverage from the strong comparable store sales increase at Things Remembered. Payroll costs also increased primarily because of more retail units open in 1998 and additional payroll to support increased sales, maintaining leverage of last year. Fiscal 1998 depreciation and amortization expense of $32.8 million was $3.7 million more than fiscal 1997 reflecting a $2.4 million increase in amortization of systems development costs and the AVC acquisition.

      Fiscal 1998 included a $13.1 million pretax charge for restructuring and other unusual items, including the inventory markdowns at Pearle, and fiscal 1997 included an $8.0 million pretax charge for non-recurring items related to the integration of AVC into the Company’s operations. See Restructuring, Business Integration and Other Unusual Charges below.

      Operating income, excluding the charges for restructuring, business integration and other unusual charges from each year, decreased 7.8% to $65.5 million in fiscal 1998 from $71.0 million the prior year, as improved sales and earnings at Things Remembered and Cole Licensed Brands were more than offset by the disappointing results at Pearle.

      Net interest expense and other income for fiscal 1998 of $21.1 million decreased $7.4 million compared to fiscal 1997. The decrease was primarily attributable to the recognition of $6.0 million of other income in the third quarter of fiscal 1998 from cash received in the nontaxable settlement of certain contingencies related to several claims against and indemnifications from the former owner of Pearle, and lower interest expense following the purchase and

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retirement of $150.9 million of 11-1/4% Senior Notes in connection with a tender offer in September 1997, partially offset by additional interest expense on $125.0 million of 8-5/8% Senior Subordinated Notes issued in August 1997.

      The income tax provisions for fiscal 1998 and 1997 included $3.9 million and $3.4 million, respectively, of income tax benefits related to the charges for restructuring and other unusual items. The effective tax rate on income excluding these charges and the $6.0 million settlement included in other income was 41.3% in fiscal 1998 and 43.2% in fiscal 1997. This rate reflects the significant impact of non-deductible amortization of goodwill in both years. A more complete discussion of income taxes is included in Note 8 of Notes to Consolidated Financial Statements.

      Net income increased to $19.3 million in fiscal 1998 from a net loss of $6.6 million the prior year. The net loss in fiscal 1997 included a $14.0 million loss, net of an income tax benefit of $8.5 million, related to the operations and closing of Cole Gift Centers and a $12.2 million extraordinary loss, net of an income tax benefit of $7.5 million, recorded in the third quarter of fiscal 1997 in connection with the early extinguishment of debt. The loss on early extinguishment of debt represented the tender premium, write-off of related unamortized debt discount and other costs associated with redemption of the 11-1/4% Senior Notes.

Restructuring, Business Integration and Other Unusual Charges

      In the fourth quarter of fiscal 1996, the Company recorded a $61.1 million pretax charge primarily related to its acquisition of Pearle, which included costs related to the integration and consolidation of Pearle into the Company’s operations, as well as other unusual charges. The charge included $15.8 million for store closings, $1.8 million for other facility closings, $21.6 million related to computer systems, which included the settlement costs of terminating an outsourcing agreement, $6.1 million for the write-off of goodwill pursuant to Statement of Financial Accounting Standards (SFAS) No. 121 and $15.8 of other unusual charges. The other charges related to employee matters, including severance and hiring costs, costs associated with developing and implementing a new franchise agreement, and compensation costs associated with accelerated vesting of a stock option grant to executives.

      In connection with the 1996 business integration charge, management developed a plan, approved by the Board of Directors, that among other things identified 29 Pearle stores that would be closed and 112 in-store labs that would be taken out of stores. This plan consisted of a store-by-store analysis of profitability, size, lease term and type of lab. In addition, the Company decided to retain Pearle’s distribution and central lab facilities, but close the home office facility in Dallas, Texas. The Company’s intent was to close the stores, on average, over a six month period and labs, on average, over an eighteen month period following February 1, 1997. The estimated costs of closure, primarily related to lease obligations and impairment of fixed assets, were determined based upon management’s and Pearle’s past experience in closing stores and represented a portion of the remaining noncancellable term of the operating leases after the expected closing dates. The estimate assumed the Company would be able to avoid certain lease penalty provisions through negotiations with landlords. This resulted in an accrual of $12.9 million being recorded pursuant to EITF No. 94-3 as part of the original charge discussed above.

      The Company, whose integration efforts were initially focused primarily on the new franchise agreement, closed one store in each of the first and second quarters of fiscal 1997. The Company then acquired AVC in August 1997, and recorded an additional $8.0 million integration charge in fiscal 1997, which included costs of closing an additional 12 stores, six in-store labs, the AVC central lab and the AVC home office, transitional costs incurred to change the brand identity to Pearle and duplicate costs incurred through fiscal year end in connection with the consolidation of the AVC home office functions.

      The expected benefits of these business integration activities included a stronger franchise network and reductions in (1) home office personnel and occupancy costs, (2) purchasing costs for materials, (3) manufacturing costs upon the completion of the removal of full in-store labs and closing of the AVC lab, and (4) operating losses upon closure of certain unprofitable stores. The consolidation of Pearle’s home office and purchasing functions was substantially completed in fiscal 1997, with the exception of lab systems, which were completed in fiscal 1999. The consolidation of AVC functions, including the shutdown of its central lab, was completed by the third quarter of fiscal 1998.

      Negotiations with various landlords throughout fiscal 1997 proved more difficult than originally anticipated. Also, due to other priorities of integrating Pearle and the acquisition of AVC in mid-fiscal 1997, the original plan was not fully implemented by the end of fiscal 1997. At the end of fiscal 1997 management reaffirmed its intent to close the remaining 27 stores and convert the 112 lab locations as soon as practicable. The estimated cost of closure was revised

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to equal the remaining lease liability assuming, on average, stores would be closed six months after January 31, 1998. This revised estimate did not differ materially from the previously established accrual and therefore no adjustment to the reserve was required. Had management’s original plan corresponded to only the actual stores closed prior to January 31, 1998, the restructuring charges would have been reduced by $9.1 million and $1.6 million for the fiscal years ended February 1, 1997 and January 31, 1998, respectively.

      Of the facilities originally identified for closing, five stores were closed in the first quarter and one store was closed in the second quarter of fiscal 1998, and 17 full service labs were closed in the third quarter of fiscal 1998.

      In the third quarter of fiscal 1998, several consultants were retained to help assess various aspects of Cole National Group’s optical operations. As a result, in the fourth quarter of 1998, the original restructuring plan was revised and a net pretax charge of $13.1 million was recorded, related to further restructuring of its Pearle business along with other unusual charges. The net pretax charge consisted of charges associated with the restructuring of $13.9 million, a reversal of previously established restructuring accruals of $12.3 million and other unusual charges totaling $11.5 million.

      The restructuring charge of $13.9 million relates to changes made to the Pearle operating model and structure of the home office organization. Consultants conducted market research and helped develop and implement changes to Pearle’s marketing message, merchandise offerings and presentation, store locations, organizational structure and other operational opportunities. In addition, home office facilities and personnel, including Cole Managed Vision Care administration and systems were relocated and consolidated into one central facility. The results of these efforts resulted in charges for inventory writedowns related to products that will no longer be carried, severance and hiring costs primarily related to home office organizational changes, consolidation of the home office facilities, including the write-off of fixed assets at the old facilities, consultant fees and changing the Pearle brand message through signing, production and other costs. The charge related to the inventory writedown has been reflected in cost of sales in accordance with EITF No. 96-9.

      As part of the revised plan, which was approved by the Board of Directors in March 1999, it was determined that certain stores originally identified for closure would either remain open or be closed at a much lower cost than originally estimated. The plan was to close 26 stores, of which nine were identified in the original store closing plan, over the next 12 months and remove surfacing equipment from full service labs of 226 stores over the next six to eighteen months. As a result of the revised plan, the expected cost of closure was estimated to approximate $1.0 million, requiring a reversal of $12.3 million of the previous accrual. The primary reasons for the significant reduction in the accrual were the passage of time of not closing stores earlier, many of the stores now will be closed at the end of their lease terms, and the shift in strategy in that only surfacing equipment would be removed from full-service stores as opposed to the original plan of completely removing labs.

      In the fourth quarter of fiscal 1999, the Company determined that it no longer planned to remove any labs from Pearle stores. Since there were no costs accrued at January 30, 1999 related to closing of any in-store labs, this revision had no effect on the restructuring reserves in fiscal 1999. At the end of fiscal 1999, $0.1 million of the reserve relating to facilities relocations was reserved into income.

      For the restructuring charges recorded in 1996, 1997 and 1998 and 2000 approximately $29.4 million represented non-cash charges and $41.2 million represented cash outlays through January 29, 2000, including a total of $10.6 million that had been incurred and paid during the respective periods that each charge was initially recorded. At January 29, 2000, there were no balances remaining in the restructure reserves.

      The unusual charges in fiscal 1998 related to the writeoff of $8.8 million associated with the abandonment in the fourth quarter of previously capitalized system development costs (including $1.9 million of incurred costs that will be paid in the first half of fiscal 1999) and $2.7 million primarily related to restricted stock issued to two senior executive officers.

      Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information regarding the restructuring, business integration and other unusual charges.

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Year 2000

      During fiscal 1999, Cole National Group completed the implementation of its Year 2000 Readiness Program. As a result, no significant systems interruptions or business losses were experienced in fiscal 1999 or to date in fiscal 2000.

      Management estimates the total cost of the Year 2000 Readiness Program was $4.2 million, including approximately $1.0 million of new hardware and software that has been capitalized. The remaining $3.2 million was expensed as incurred (approximately $2.4 million in fiscal 1998 and $0.8 million in fiscal 1999). These costs include only external costs as internal costs, which consist primarily of payroll-related costs of employees, were not tracked separately for the Year 2000 Readiness Program.

New Accounting Pronouncements

      In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (as amended by SFAS No. 137). SFAS No. 133 must first be applied in the first quarter of fiscal years that begin after June 15, 2000 (the first quarter of fiscal 2001 for the Company) and in general requires that entities recognize all derivative financial instruments as assets or liabilities, measured at fair value, and include in earnings the changes in the fair value of such assets and liabilities in either operations or comprehensive income (loss). The Company does not presently utilize derivative instruments, either for hedging or other purposes, and therefore it is expected that the adoption of the requirements of SFAS No. 133 will not impact the Company’s financial statements.

Recent Developments and Forward-Looking Information

      In March 2000, the Company launched the reorganization of the operating structure of its optical business. It is believed that an essential ingredient to improved sales and profitability of the Company’s vision segment is the creation of distinct organizations that are dedicated to serving the needs of their respective customers. Pearle and Licensed Brands will be managed as independent business units, each of which has been strengthened by the addition of merchandising, manufacturing, distribution and finance responsibilities.

      The Company expects results in the first two quarters of fiscal 2000 to be below last year from continuing softness of sales at Pearle as well as start up expenses associated with the opening of an increased number of Target Optical stores. The first quarter of fiscal 2000 will also be impacted by severance costs incurred as a result of a personnel reduction at Cole Vision in March 2000. On a full year basis, it is expected that the severance costs incurred will be offset by savings due to the headcount reductions.

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

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

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

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Item 8. Financial Statements and Supplementary Data

      Information required by this Item appears on pages F-1 through F-24 of this Form 10-K and is incorporated herein by reference. Other financial statements and schedules are filed herewith as “Financial Statement Schedules” pursuant to Item 14.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

PART III

Item 10. Directors and Executive Officers of the Registrant

      Information required by this Item has been omitted pursuant to General Instruction I of Form 10-K.

Item 11. Executive Compensation

      Information required by this Item has been omitted pursuant to General Instruction I of Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      Information required by this Item has been omitted pursuant to General Instruction I of Form 10-K.

Item 13. Certain Relationships and Related Transactions

      Information required by this Item has been omitted pursuant to General Instruction I of Form 10-K.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) and (2)		Financial Statements and Financial Statement Schedules The financial statements and financial statement schedules filed as part of this Form 10-K for Cole National Group and its consolidated subsidiaries are located as set forth in the index on page F-1.
(a)(3)		Exhibits See Exhibit Index on pages X-1 through X-4.
(b)		Reports on Form 8-K Report on Form 8-K dated November 24, 1999

Supplemental information to be furnished with reports filed pursuant to Section 15(d) of the Act by Registrants which have not registered securities pursuant to Section 12 of the Act.

      No annual report or proxy statement covering Cole National Group’s last fiscal year has been or will be circulated to security holders.

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SIGNATURES

      Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

•

The undersigned, by signing his name hereto, does sign and execute this report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors of Cole National Group, Inc. and which are being filed herewith with the Securities and Exchange Commission on behalf of such officers and directors.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

All financial statement schedules not included have been omitted because they are not applicable or because the required information is otherwise furnished.

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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 January 29, 2000 and January 30, 1999, and the related consolidated statements of operations, stockholder’s equity and comprehensive income (loss) and cash flows for each of the three years in the period ended January 29, 2000. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cole National Group, Inc. and Subsidiaries as of January 29, 2000 and January 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2000 in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Cleveland, Ohio
March 23, 2000.

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

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

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)

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

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

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

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)

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

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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. Fiscal years 1999, 1998 and 1997 each consisted of 52-week periods.
	Nature of Operations -
	The Company is a specialty service retailer operating in both host and non-host environments, whose primary lines of business are eyewear products and services and personalized gifts. Cole National Group sells its products through 2,306 company-owned retail locations and 416 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 10).
	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:

	Property and equipment, at cost, consist of the following at January 29, 2000 and January 30, 1999 (000’s omitted):

	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%, and require monthly payments of principal and interest over periods of up to ten years.

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	Intangible Assets -

	Intangible assets, net, consist of the following at January 29, 2000 and January 30, 1999 (000’s omitted):

	Tradenames acquired in connection with the Pearle acquisition are being amortized on a straight-line basis over 40 years and are presented net of accumulated amortization of $3,972,000 and $2,735,000 at January 29, 2000 and January 30, 1999, respectively.
	Goodwill is being amortized on a straight-line basis over periods from 10 to 40 years, based on management’s assessment of the estimated useful life, and is presented net of accumulated amortization of $41,615,000 and $37,880,000 at January 29, 2000 and January 30, 1999, respectively. Management regularly evaluates its accounting for goodwill considering primarily such factors as historical profitability, current operating profits and cash flows. The Company believes that, at January 29, 2000, the assets are realizable and the amortization periods are still appropriate.
	Other Assets -
	Financing costs incurred in connection with obtaining long-term debt are capitalized in other assets and amortized over the life of the related debt using the effective interest method.
	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 a straight-line method. Amortization periods range from two to seven years, and begin when the software is placed in service. At January 29, 2000 and January 30, 1999, these costs, net of accumulated amortization, were $38,127,000 and $34,267,000, respectively.
	Valuation of Long-Lived Assets -
	Long-lived assets, such as property, plant 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 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 January 29, 2000 and January 30, 1999, 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 subsidiaries 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 income within stockholder’s equity.

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	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 its managed vision care business.
	Franchise revenues based on sales by franchisees are accrued as earned. Initial franchise fees are recorded as income when all material services or conditions relating to the sale of the franchises have been substantially performed or satisfied by the Company and when the related store begins operations.
	Advertising -
	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):

	Earnings Per Share -
	Earnings per share and weighted average number of common shares outstanding data for 1999, 1998 and 1997 have been omitted as the presentation of such information, considering Cole National Group is a wholly owned subsidiary of Cole National Corporation, is not meaningful.
	Cash Flows -
	For purposes of reporting cash flows, Cole National Group considers all temporary cash investments, which have original maturities of three months or less, to be cash equivalents. The carrying amounts of cash and cash equivalents approximate fair value due to the short maturity of those instruments.
	Net cash flows from operating activities reflect cash payments for income taxes and interest as follows (000’s omitted):

	During fiscal 1999, 1998 and 1997, non-cash financing activities included incurring $- 0 -, $77,000 and $622,000, respectively, in capital lease obligations.
	During 1997, in connection with the tender offer described in Note 5, Cole National Corporation made a capital contribution to Cole National Group in the amount of $42,347,000. This contribution was recorded as a decrease to payable to affiliates.
	No dividends were declared during fiscal 1999 or 1998.
	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.

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	Reclassifications -
	Certain prior year amounts have been reclassified to conform with the current year presentation.

(2)

Acquisitions and Dispositions of Businesses

	The Company made the following acquisitions, each of 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 these acquisitions, as they did not have a material effect on results of operations.
	During the third quarter of fiscal 1999, the Company acquired MetLife’s managed vision care benefits business. The business consists of vision care contracts with approximately 250 institutional customers and generates approximately $15.0 million of revenue annually. The initial purchase price totaled $2.0 million, with additional amounts contingently due upon certain conditions being met over the next four years.
	In fiscal 1998, the Company acquired ten Buckeye Optical stores in Columbus, Ohio, and all of the issued and outstanding common stock of Management Associates, Inc., whose operations consisted of four 20/20 Eyecare stores located in Las Vegas, Nevada. The total purchase price for these acquisitions was $7.2 million.
	On August 5, 1997, Cole National Corporation contributed to Cole National Group all of the issued and outstanding common stock of American Vision Centers, Inc. (AVC), whose operations consisted of 79 company-owned and 85 franchised optical stores, which Cole National Corporation had acquired for an aggregate purchase price of approximately $28.9 million, including debt assumed. The purchase price was allocated to the assets acquired and liabilities assumed based upon their relative fair values as of the closing date. This resulted in an excess of purchase price over net assets acquired of $20.0 million. The relative fair values of the assets acquired and liabilities assumed included unfavorable leasehold interests of $3.4 million, accruals for involuntary severance and termination benefits of $0.5 million, write-off of deferred assets of $1.4 million and deferred tax assets of $7.5 million.
	In the fourth quarter of fiscal 1999, the Company announced its plan to close the 150 optical departments in Montgomery Ward stores. The closings, which were completed by the end of fiscal 1999, resulted in a pretax loss of $2.0 million, consisting primarily of inventory and fixed asset write-offs. The after tax cash cost of the closings was not significant. Annual revenues in fiscal 1999 for the Ward’s Optical Departments were $21.2 million.

(3)

Restructuring and Other Unusual Items

In the fourth quarter of fiscal 1998, the Company began implementation of a restructuring plan and recorded a net pretax charge of $13.1 million, related to restructuring its Pearle business along with other unusual charges. The net pretax charge consisted of charges associated with the restructuring of $13.9 million, a reversal of previously established restructuring accruals of $12.3 million and other unusual charges totaling $11.5 million. The restructuring charge of $13.9 million relates to changes made to the Pearle operating model and structure of the home office organization. These changes resulted in charges for inventory write-downs related to products that will no longer be carried, severance and hiring costs primarily related to home office organizational changes, consolidation of the home office facilities, including the write-off of fixed assets at the old facilities, consultant fees and changing the Pearle brand message through signing, production and other costs. The charge related to the inventory write-down ($5.2 million) has been included in cost of sales in fiscal 1998.

Additionally, Cole National Group had recorded restructuring and other non-recurring charges of $8.0 million and $61.1 million in fiscal 1997 and 1996, respectively. These charges consisted primarily of costs of integrating and consolidating the recent acquisitions of both AVC and Pearle, including costs of store and other facility closings, a computer system termination fee and related asset impairment costs. The accrual established in fiscal 1996 was based in part upon the closure of certain stores and in-store labs. As part of the revised restructuring plan discussed above, it was determined that certain stores originally planned to be closed would either remain open or be closed at a much lower cost than originally estimated. In addition, management determined that, while it still planned to reduce the number of full service labs, the lease costs and equipment to be removed from the stores would be less than originally anticipated. The 1998 plan identified 26 stores to be closed and 226 stores from which surfacing equipment would be removed. As a result, $12.3 million of previously established accruals have been reversed into income as a restructuring credit.

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	The following summarizes the major components of the restructuring charges recorded in fiscal 1996, 1997 and 1998, along with cash and non-cash charges against the reserves (in millions):

											Charges to Reserve												Charges to Reserve
							Remaining				1997								Remaining				1998
			Original				Reserve								Non-				Reserve								Non-
			Charge				at 2/1/97				Cash				Cash				at 1/31/98				Cash				Cash				Reversal
1996 Charge
Store and other facilities closing			$	17.6			$	17.4			$	(0.6	)		$	(0.2	)		$	16.6			$	(0.4	)		$	(5.7	)		$	(9.5	)
Computer systems				21.6				17.1				(12.6	)			—				4.5				(4.0	)			(0.5	)			—
Asset impairment				6.1				—				—				—				—				—				—				—
Other				15.8				4.2				(3.5	)			—				0.7				(0.2	)			—				(0.5	)
Total			$	61.1			$	38.7			$	(16.7	)		$	(0.2	)		$	21.8			$	(4.6	)		$	(6.2	)		$	(10.0	)
1997 Charge
Store and other facilities closing			$	2.5							$	—			$	—			$	2.5			$	(0.4	)		$	—			$	(2.1	)
Severance				0.9								(0.1	)			—				0.8				(1.0	)			—				0.2
Operating costs and losses				1.7								(1.6	)			(0.1	)			—				—				—				—
	Marketing and brand conversion			1.5								(0.6	)			—				0.9				(0.7	)			—				(0.2	)
Other				1.4								(0.8	)			—				0.6				(0.2	)			(0.2	)			(0.2	)
Total			$	8.0							$	(3.1	)		$	(0.1	)		$	4.8			$	(2.3	)		$	(0.2	)		$	(2.3	)
1998 Charge
Facilities relocations			$	2.6																			$	(0.5	)		$	(0.5	)		$	—
Inventory				5.2																				—				(5.2	)			—
Marketing and brand conversion				2.3																				(0.2	)			—				—
Professional fees				1.9																				(0.8	)			(0.1	)			—
Severance/hiring				1.9																				(0.5	)			—				—
Total			$	13.9																			$	(2.0	)		$	(5.8	)		$	—

[Additional columns below]

[Continued from above table, first column(s) repeated]

							Charges to Reserve
			Remaining				1999								Remaining
			Reserve												Reserve
			at 1/30/99				Cash				Reversal				at 1/29/00
1996 Charge
Store and other facilities closing			$	1.0			$	(1.0	)		$	—			$	—
Computer systems				—				—				—				—
Asset impairment				—				—				—				—
Other				—				—				—				—
Total			$	1.0			$	(1.0	)		$	—			$	—
1997 Charge
Store and other facilities closing			$	—			$	—			$	—			$	—
Severance				—				—				—				—
Operating costs and losses				—				—				—				—
	Marketing and brand conversion			—				—				—				—
Other				—				—				—				—
Total			$	—			$	—			$	—			$	—
1998 Charge
Facilities relocations			$	1.6			$	(1.5	)		$	(0.1	)		$	—
Inventory				—				—				—				—
Marketing and brand conversion				2.1				(2.1	)			—				—
Professional fees				1.0				(1.0	)			—				—
Severance/hiring				1.4				(1.4	)			—				—
Total			$	6.1			$	(6.0	)		$	(0.1	)		$	—