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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended February 1, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
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Commission file number 1-12814
COLE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 34-1453189
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
5915 Landerbrook Drive, Mayfield Heights, Ohio 44124
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 449-4100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Class A Common Stock, $.001 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 27, 1997 was approximately $362,903,000, based upon the
last price reported for such date by the New York Stock Exchange.
As of March 27, 1997, 12,031,060 shares of the registrant's Class A common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 12, 1997 are incorporated herein by reference
into Part III.
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PART I
Item 1. Business
General
Cole National Corporation ("CNC") was incorporated as a Delaware
corporation in 1984. CNC, through the subsidiaries owned by its direct
subsidiary, Cole National Group, Inc. ("CNG"), is a leading provider of eyewear
products, optometric services and personalized gifts with over 3,100 retail
locations in 50 states, Canada and the Caribbean. References herein to the
"Company" include CNC and its direct and indirect subsidiaries and include its
predecessor companies, which have operated for more than 50 years, where
applicable. The Company's businesses are conducted through two principal
operating units: (i) Cole Optical, consisting of Cole Vision Corporation ("Cole
Vision") and Pearle, Inc. ("Pearle"), which was acquired on November 15, 1996;
and (ii) Cole Gift, consisting of Things Remembered Inc. ("Things Remembered")
and Cole Gift Centers, Inc. ("CGC"). Cole Optical is the largest optical retail
company in the United States in terms of number of locations and is the second
largest optical retailer in terms of sales volume. Cole Gift operates the only
two nationwide chains of gift stores offering "while you shop" gift
personalization, key duplicating, and related merchandise. The Company
differentiates itself from other specialty retailers by providing value-added
services at the point of sale at all of its retail locations.
Cole Optical
Pro forma for the Pearle acquisition, Cole Optical contributed 70% of the
Company's net revenue in fiscal 1996 with over 2,100 company-owned and
franchised locations throughout the United States, Canada and the Caribbean as
of February 1, 1997. When the integration and consolidation of Pearle is
complete, Cole Vision and Pearle will share management leadership, purchasing
power and corporate support functions and Cole Vision's managed vision care
programs will give participants access to a network of company-owned, franchised
and third-party optical locations.
Cole Vision
Cole Vision operates principally under the "Sears Optical", "Montgomery
Ward Vision Center" and "BJ's Optical Department" names. As of February 1, 1997,
Cole Vision operated 1,063 departments in 46 states, including 675 departments
on the premises of Sears department stores, 213 departments in Montgomery Ward
stores, 75 departments in BJ's Wholesale Club stores, 19 departments located in
three other retailers and 81 freestanding stores operated under the name "Sears
Optical." In November 1996, Cole Vision acquired 73 Sears Optical departments
and two freestanding Vision Club stores in Canada. Cole Vision departments are
generally operated under a lease or license arrangement through which the host
store collects the sales receipts, retains an agreed upon percentage of sales
and remits the remainder to Cole Vision on a weekly basis.
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Cole Vision optical departments are, in most cases, full-service retail
eyecare stores offering brand name and private label prescription eyeglasses,
contact lenses and accessories with an on-premises doctor of optometry who
performs complete eye examinations and prescribes eyeglasses and contact lenses.
Most Cole Vision optical departments, which are typically 1,000 square feet in
size, operate with a doctor of optometry, a department manager, and from one to
seven opticians depending on store sales volume. A majority of the doctors of
optometry are independent, as is often required by state law, with the remainder
being employed by Cole Vision. The independent doctors sublease space and
equipment from Cole Vision where permitted by law, or from the host, and retain
their examination fees.
Each of Cole Vision's optical departments is computer linked to Cole
Vision's five centralized manufacturing laboratories, which grind, cut and fit
lenses to order and ship them to the stores. Cole Vision provides next day
delivery on most of the eyewear it offers when requested by its customers. Cole
Vision purchases all of the frames and lenses used in its eyeglasses from
outside suppliers, both in the United States and several foreign countries.
Cole Vision conducts a variety of marketing and promotional efforts to
build and maintain its customer base. Cole Vision primarily uses newspaper,
direct mail, yellow pages and host advertising. Host advertising includes the
placement of promotional material within sales circulars or credit card billings
sent out by the host store to its customers. Cole Vision also promotes its next
day service as "Eyewear Express."
Managed Vision Care
In the last several years, Cole Vision has expanded its managed vision care
program that provides low cost, comprehensive eyecare benefits marketed directly
to employers, other employee benefit plan sponsors and insurance companies,
primarily under the name "Vision One." Vision One's basic program gives
employers the opportunity to offer their employees a group discount at the
managed vision care network with minimal direct cost to the employer. An
enhanced Vision One program allows employers to provide their employees with
prepaid eye examinations as well as pricing discounts or reimbursements. Cole
Vision expects to add the Pearle company-owned and franchise locations to its
managed vision care programs in fiscal 1997.
Pearle
At February 1, 1997, Pearle's operations consisted of 348 company-owned and
338 franchised stores located in 43 states, Canada, and the Caribbean. All
Pearle stores operate in either an "Express" or "Mainline" store format. Express
stores contain a full surfacing lab that can manufacture most glasses in
approximately one hour. Mainline stores can manufacture over 50% of
prescriptions on-site in approximately one hour. Other prescriptions are sent to
a nearby Express location or to the main laboratory in Dallas. The main
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laboratory generally is able to complete orders for next day delivery if
requested. At February 1, 1997, 268 of the company-owned stores and 121 of the
franchised stores were Express, with the balance being Mainline.
The Express stores typically are located in high traffic freestanding,
strip center and mall locations with most stores averaging 3,000 square feet.
The Express stores are usually staffed with two managers and a support staff of
four to eight people. Mainline stores have an average size of 1,700 square feet
and are also located in freestanding buildings, or in smaller strip or regional
centers. Mainline stores generally carry a smaller assortment of inventory than
Express stores and are usually staffed with one manager and two to three
associates. Most Pearle stores have a doctor of optometry on site with
approximately 80% leasing space from Pearle on an independent basis and the
remaining being direct employees of Pearle.
Pearle's marketing strategy employs a wide range of media at both the
national and local levels. The franchised and company-owned stores each
contribute a percentage of revenues to Pearle's marketing budget with
approximately half of Pearle's marketing expenditures devoted to television.
Pearle's brand positioning of high quality eyecare products and services has
been reinforced by an advertising and promotions program, which includes
Pearle's advertising slogan, Nobody Cares for Eyes More Than Pearle.
Pearle operates a warehouse facility in Dallas which inventories and
distributes a comprehensive product line including frames, eyeglass lenses,
contact lenses, optical supplies and eyewear accessories to company-owned and
franchised locations.
The Company also has a 20% equity interest in Pearle Trust B.V. which
operates 193 locations in the Netherlands and Belgium.
Franchise Operations
Pearle has maintained a franchise program since 1980. Most of the
franchised stores are single franchise operations, with no franchisee operating
more than five stores. With the proper financial approvals, a franchise purchase
can be financed through Pearle. Currently, Pearle offers financing over seven to
ten years at a rate of prime plus three points adjusted quarterly.
Each franchisee is required to enter into a Franchise Agreement requiring
payment of an initial franchise fee. The term of the typical franchise agreement
is equal to the earlier of ten years or the expiration or termination of the
underlying base lease. Royalty and advertising contributions typically are based
on a percentage of the franchisee's gross revenues from the retail operation
and/or non-surgical professional fee revenues. The total monthly advertising
contribution is distributed between Pearle's system-wide advertising fund and
the local co-op market advertising fund.
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Pearle has recently presented a new form of the Franchise Agreement to all
franchisees which would reduce the royalty and advertising fees they pay and
would, among other things, provide for the franchisee's participation in Cole
Vision's managed vision care programs.
Cole Gift
Cole Gift, pro forma for the Pearle acquisition, contributed approximately
30% of the Company's net revenue in fiscal 1996. As of February 1, 1997, Cole
Gift operated nearly 1,300 locations throughout the United States. Things
Remembered and CGC share management expertise, purchasing power, warehousing,
distribution systems and corporate support functions.
Things Remembered
As of February 1, 1997, Things Remembered operated 790 stores and kiosks
generally located in large, enclosed shopping malls located in 45 states. Each
location carries a wide assortment of engravable items and provides "while you
shop" personalization and engraving services for any occasion including holiday,
business and special occasion gift events. Things Remembered offers engraving
for items purchased at the store as well as for items purchased elsewhere.
Merchandise sold at Things Remembered stores consists of a broad assortment
of gift categories and items at prices generally ranging from $10 to $75. Things
Remembered's offering of gifts includes writing instruments, clocks, music
boxes, picture frames and albums, executive desk sets and accessories, ID
bracelets, glassware, lighters, keys and key rings, door knockers and Christmas
ornaments. Things Remembered features brand name merchandise as well as higher
margin private label merchandise.
At February 1, 1997, Things Remembered locations consisted of 447 stores
and 343 kiosks. The typical store consists of about 1,000 square feet, while
kiosks, which are units located in the center of the common mall area, are
typically 200 square feet in size.
In fiscal 1993, Things Remembered began a new retail concept by opening
five "personalization superstores" that combine engraved gifts with personalized
soft goods in a large store format. The Company utilizes computer-controlled
embroidery equipment for the personalization of merchandise such as throws,
sweaters, bathrobes, jackets, baseball caps, towels and baby blankets. At
February 1, 1997, a total of 83 personalization superstores were open averaging
approximately 2,200 square feet in size.
In fiscal 1995, Cole Gift established a central fulfillment facility with
computer-controlled embroidery equipment. In fiscal 1996, the Company added soft
goods to most of Things Remembered's other locations providing these stores with
personalization services from the central facility.
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CGC
As of February 1, 1997, CGC operated 501 leased locations in 44 states
including 455, 36 and nine locations in Sears, Venture and Montgomery Ward
stores, respectively, and one location in the store of another national
retailer. CGC stores are generally operated under a lease or license arrangement
under which the host store collects the sales receipts, retains an agreed upon
percentage of sales and remits the remainder to CGC on a weekly basis.
CGC locations sell gifts and gift engraving and other services similar to
those offered by Things Remembered, in addition to key duplicating and watch
repair services. As of February 1, 1997, 96 of the CGC locations in operation
were standard format shops occupying approximately 150 square feet. Since 1989,
CGC has also operated greeting card locations in Sears stores and combined them
with the CGC operations in such stores. Locations in this enhanced format, which
numbered 67 as of February 1, 1997, average approximately 1,000 square feet in
size. Over the last four years, 286 CGC locations have been converted to gift
centers. Gift centers, which occupy approximately 1,200 square feet of space,
typically carry a substantially expanded line of engravable and non-engravable
gifts along with greeting cards. In the fourth quarter of fiscal 1995, gift
centers began offering selected soft goods supported by the Cole Gift central
fulfillment operation. CGC also operates 52 key kiosks, of approximately 80
square feet in size, that provide key duplicating and key related products only.
In fiscal 1995, CGC opened the first "Personally Yours" department within
Sears. Personally Yours is a concept designed to generate additional customer
traffic and increase sales by offering personalization for hard and soft line
products for both CGC and Sears merchandise. In the first half of fiscal 1996,
CGC expanded this test by opening seven stores located in one metropolitan area.
General
Cole Gift locations are usually operated by one or two employees during
non-peak periods and up to 15 employees during the peak Christmas season.
Locations typically employ a store manager on a full-time basis and a full or
part-time assistant manager, while the balance of the employees are part-time
sales associates.
Nearly all Cole Gift locations are equipped with gift engravers and key
duplicating machines. Cole Gift has computerized engraving equipment in most
Things Remembered stores and kiosks. Many Things Remembered stores also have
equipment for etching glassware items. All Cole Gift locations are equipped with
point of sale terminals.
The Company ships most of Cole Gift's store merchandise, other than
greeting cards, through its centralized distribution system at its warehouse in
Highland Heights, Ohio. The warehouse, which services both Things Remembered and
CGC, utilizes a computerized carousel system to automate the process of locating
merchandise needed to fill a store order.
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Host Relationships
The Company believes it has developed excellent relationships with the host
stores in which CGC and Cole Vision operate. The Company has maintained its
relationships with Sears and Montgomery Ward for over 40 years in the gift and
key business and over 35 years in the optical business. Of the Sears and
Montgomery Ward stores that offer optometric services, virtually all are
operated by Cole Vision. Although CGC's and Cole Vision's leases with their
major hosts are terminable by either party upon relatively short notice, neither
has ever had a lease terminated other than in connection with a store closing,
relocation or major remodeling.
Seasonality
The Company's business historically has been seasonal, with, on average,
approximately 30% of its net revenue and approximately 50% of its income from
operations generated in the fourth fiscal quarter because of the importance of
gift sales during the important Christmas retailing season. Although the Pearle
acquisition will moderate the seasonality of the Company due to relatively lower
levels of optical product sales during the Christmas holiday season, the
Company's business will remain seasonal.
Purchasing
The merchandise, supplies and component parts required for the various
products sold by the Company are purchased from a large number of suppliers and
manufacturers and are generally readily available. In most cases, such purchases
are not made under long-term contracts. In fiscal 1996, no single supplier or
manufacturer accounted for as much as 10% of total purchases.
Competition
The Company operates in highly competitive businesses. Cole Optical
competes with other optical companies, private ophthalmologists, optometrists
and opticians and a growing number of HMO's in a highly fragmented marketplace.
Pearle competes on the basis of its highly recognized brand name, one-hour
express service and by offering quality eyecare products. Cole Vision competes
primarily on the basis of the service it provides as well as price and product
quality, and the reputation of its host stores. The Company believes that Pearle
and Cole Vision, based on sales, rank second and third, respectively in United
States optical retailing sales. Although Cole Gift operates the only two
nationwide chains of gift stores offering "while you shop" gift engraving, key
duplicating, glass etching and monogramming, as well as related merchandise, it
competes with many other retailers that sell gift items. Cole Gift competes with
such other retailers primarily on the basis of the value-added point of sale
services that it provides as well as price and product quality. Some of the
Company's competitors have greater financial resources than the Company.
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Employees
As of February 1, 1997, the Company and its subsidiaries had approximately
8,600 full-time and 5,100 part-time employees. During October, November and
December, the Company employs additional full- and part-time employees. In
fiscal 1996, approximately 5,000 additional employees were employed during such
period. The hourly employees at Cole Gift's distribution center (approximately
80 employees in the aggregate) and approximately 140 employees at certain Pearle
store locations are represented by labor unions. The Company considers its
present labor relations to be satisfactory.
Item 2. Properties
The Company owns an office and warehouse in Highland Heights, Ohio that is
subject to a mortgage and leases its executive offices and another office in
Cleveland, Ohio. All of Cole Visions's and Cole Gift's retail locations are
leased or operated under a license with the host store, and none of the
individual retail locations is material to the Company's operations. Leases for
stores operated in Sears stores and freestanding stores operated under the name
"Sears Optical" are generally for terms of 90 days and five years, respectively.
Leases for Things Remembered stores and kiosks are generally for terms of ten
and five years, respectively. The Company believes that its relationships with
its lessors are generally good. The Company leases its five Cole Vision optical
laboratories, two of which are located in Knoxville, Tennessee; Memphis,
Tennessee; Salt Lake City, Utah; and Richmond, Virginia, pursuant to leases
expiring (including renewals at the option of the Company) in 1999, 2005, 2002,
2006 and 2002, respectively.
Pearle has 635 stores based in forty-three states. Pearle also has eighteen
stores in Canada and thirty-three stores in the Caribbean. Stores are located in
malls, strip centers and freestanding locations. Pearle leases most of its
retail stores under noncancellable operating leases with terms generally ranging
from five to ten years and which generally contain renewal options for
additional periods. Pearle also is the principal lessee on a majority of stores
operated by franchisees, who sublease the facilities from Pearle. Pearle owns
its Dallas Support Center, which comprises approximately 88,721 square feet of
office space and 147,336 square feet of laboratory and distribution facilities.
Pearle also owns a small headquarters and laboratory in Puerto Rico.
The Company has acquired the land to construct a new warehouse and
distribution facility for Cole Gift that is expected to improve distribution
efficiencies. The facility, which the Company expects will be completed in
fiscal 1997, will most likely be financed through a sale and lease-back
transaction or through conventional secured real estate financing. The Company
estimates the cost for this facility to be approximately $10 million.
Item 3. Legal Proceedings
The Company is subject to a variety of routine legal proceedings.
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Item 4. Submission of Matters to a Vote of Security-Holders
There were no matters submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended February 1, 1997.
Item 4A. Executive Officers of the Company
(a) The following persons are the executive officers of the Company who are not
members of the Company's Board of Directors, having been elected to their
respective offices by the Board of Directors of the Company to serve until
the election and qualification of their respective successors:
Name Age Office
---- --- ------
Joseph Gaglioti 51 Vice President and
Treasurer
Wayne L. Mosley 43 Vice President and
Controller
(b) The following is a brief account of the positions held with the Company
during the past five years by each of the above named executive officers of
the Company:
Mr. Gaglioti has been Vice President of the Company since 1992 and
Treasurer of the Company since 1991. He was Assistant Treasurer of the
Company and a subsidiary company that merged into the Company in September
1992 ("CNCD") from 1984 to 1991.
Mr. Mosley has been Vice President and Controller, Assistant Secretary
and Assistant Treasurer of the Company since 1992. Mr. Mosley served as
Vice President, Controller - Finance of CNCD from 1991 to 1992 and was
Chief Accounting Officer of CNCD from 1990 to 1991.
Information concerning Jeffrey A. Cole and Brian B. Smith, the
Company's executive officers who are also Directors, will be included in
the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders
(the "Proxy Statement").
On May 6, 1992, Child World, Inc. (Child World), a former subsidiary
of the Company, filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code. Immediately prior to the sale of Child World on June
27, 1991, Mr. Gaglioti was Assistant Treasurer of Child World.
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PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded on the New York Stock Exchange (NYSE)
under the symbol "CNJ".
The following table sets forth, for the fiscal periods indicated, the high
and low sales prices per share.
Fiscal 1996 Fiscal 1995
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Quarter High Low High Low
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First $17 5/8 $10 3/8 $ 9 7/8 $ 8 1/4
Second $21 5/8 $16 3/8 $11 7/8 $ 9 1/16
Third $25 1/4 $18 1/4 $13 $11 1/2
Fourth $28 5/8 $23 5/8 $14 1/8 $10 1/4
The Company's dividend policy for the foreseeable future is to retain
earnings to support its growth strategy. The Company did not pay dividends on
its Common Stock during the last two fiscal years.
As of March 28, 1997, there were 178 shareholders of record.
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Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction
with the Consolidated Financial Statements and the notes thereto and other
information contained elsewhere in this report (dollars in thousands except per
share amounts).
1996 1995 1994 1993 1992
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Net revenue $ 683,990 $ 577,091 $ 528,049 $ 472,888 $ 428,066
Income (loss) from operations (1) $ (12,361) $ 45,956 $ 42,964 $ 37,232 $ 31,897
Income (loss) from continuing
operations (1) $ (27,633) $ 13,758 $ 24,657 $ 13,072 $ 5,470
Income (loss) from continuing
operations per common share (1) $ (2.44) $ 1.32 $ 2.62 $ 2.47 $ 1.09
Weighted average shares
outstanding (000's) 11,333 10,415 9,395 5,283 5,004
Total assets $ 582,843 $ 300,781 $ 283,319 $ 257,944 $ 225,861
Working capital $ 51,845 $ 53,765 $ 49,612 $ 32,020 $ 1,897
Stockholders' equity (deficit)
at year end $ 19,718 $ 17,133 $ 3,306 $ (75,070) $(123,957)
Current ratio 1.24 1.57 1.54 1.34 1.02
Long-term obligations and
redeemable preferred stock $ 317,547 $ 181,903 $ 184,388 $ 238,299 $ 255,610
Number of stores at year end (2) 3,115 2,378 2,287 2,097 2,080
Comparable store sales growth 6.3% 3.4% 5.5% 9.4% (0.7)%
(1) Includes a $64,400 pre-tax charge for business integration and other
non-recurring items in 1996 primarily related to the acquisition of Pearle.
(2) Includes Pearle franchise locations.
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they begin.
For example, the fiscal year ended February 1, 1997 is referred to as "fiscal
1996." Fiscal 1996 consisted of a 52-week period. Fiscal 1995 and fiscal 1994
consisted of 53- and 52-week periods, respectively.
Results of Operations
The following is a discussion of the results of the Company's operations
for the three fiscal years ended February 1, 1997.
Fiscal 1996 Compared to Fiscal 1995
On November 15, 1996, the Company acquired certain assets and all of the
issued and outstanding common stock of Pearle, Inc. ("Pearle"). Immediately
following the acquisition, the Company sold Pearle Holdings B.V., Pearle's
European operations, to Pearle Trust B.V. The Company has a 20% common equity
interest in Pearle Trust B.V. which operates 193 stores in the Netherlands and
Belgium. A significant portion of the purchase price was financed by a
subsidiary of the Company, Cole National Group, Inc. ("CNG"), by the issuance of
$150.0 million of 9.875% Senior Subordinated Notes due 2006 (the "Notes"). The
acquisition of Pearle has been accounted for under the purchase method of
accounting. Accordingly, Pearle's results of operations have been included in
the Company's consolidated statement of operations since the date of
acquisition. For the eleven-week period, Pearle operated at approximately a
break-even level with net revenue of $58.3 million reflecting the relatively
lower level of optical retail sales during the holiday season. At February 1,
1997, the Pearle system included 348 company-operated optical stores and 338
franchised locations in the United States, Canada and the Caribbean. See Notes 2
and 3 of the Notes to Consolidated Financial Statements for further discussion
of the Pearle acquisition. Except as otherwise indicated, the following
discussion of net revenue, gross profit and operating expenses relates to the
Company on an historical basis without giving effect to the Pearle acquisition.
Net revenue increased 8.4% to $625.7 million in fiscal 1996 from $577.1
million in fiscal 1995. The increase in consolidated revenue was due to a
comparable store sales increase of 6.3% and to the opening of additional Cole
Gift and Cole Vision units including 75 optical locations in Canada as a result
of the acquisition of AOCO Limited in November 1996. This was partially offset
by one less week of sales in fiscal 1996 compared to fiscal 1995 and the closing
of 95 low-volume Cole Gift departments. Comparable store sales increased 10.7%
at Cole Vision primarily as a result of successful eyewear promotions and growth
in the managed vision care program. Comparable store sales increased 1.4% at
Cole Gift benefiting from the roll-out of monogrammed softgoods and the
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introduction of new merchandise. At February 1, 1997, the Company had 3,115
specialty service retail locations including the Pearle company-operated stores
and 338 franchised locations, versus 2,378 at the end of the prior year.
Gross profit increased to $429.4 million in fiscal 1996 from $394.2 million
in fiscal 1995. Gross margins for fiscal 1996 and fiscal 1995 were 68.6% and
68.3%, respectively. The increase in gross margin percentage was the result of
lower product costs, improved optical lab productivity and a higher level of
personalization in the sales mix at Things Remembered. In fiscal 1997, the
Company's consolidated gross margin is expected to decline from its historical
levels as Pearle has a lower gross margin than the Company due to the higher
costs of in-store laboratories and lower margin wholesale sales to franchised
stores partially offset by franchise royalties, fees and interest income on
franchise notes receivable which have no corresponding cost of goods sold.
Operating expenses increased 8.2% to $359.8 million in fiscal 1996 from
$332.5 million the prior year. As a percentage of revenue, operating expenses
decreased to 57.5% in fiscal 1996 from 57.6% in fiscal 1995. Operating expenses
increased primarily due to higher advertising expenditures, payroll costs and
store occupancy expenses, partly offset by one less week in fiscal 1996.
Advertising expenditures at Cole Vision were increased for optical promotions to
encourage continued sales growth above last year's successful promotions.
Payroll costs increased because of more higher-volume retail units open in 1996,
including an increased number of Things Remembered personalization superstores,
and additional payroll to support increased sales. Store occupancy expenses
increased primarily as a result of the increased number of Things Remembered
personalization superstores and higher percentage rents caused by increased
comparable store sales. Fiscal 1996 depreciation and amortization expense of
$17.6 million was $1.9 million more than fiscal 1995 reflecting an increase in
capital expenditures.
In the fourth quarter of fiscal 1996, the Company recorded a $64.4 million
pre-tax charge for certain unusual and non-recurring items. Such charge was
primarily related to the acquisition of Pearle and included costs incurred
related to the integration and consolidation of Pearle into the Company's
operations, as well as certain other non-recurring charges. See Note 3 of the
Notes to Consolidated Financial Statements for further discussion of the
business integration and other non-recurring charges.
Income from operations excluding the charge for non-recurring items
increased 13.2% to $52.0 million in fiscal 1996 from $46.0 million the prior
year. The increase was primarily attributable to increased revenue, higher gross
margin and improved leveraging of operating expenses.
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Net interest expense for fiscal 1996 of $22.0 million was $0.6 million more
than that of the prior year. This increase was primarily due to $3.4 million of
additional interest expense related to the financing of the Pearle acquisition
offset by decreases in interest expense due to the retirement of $5.0 million of
11.25% Senior Notes due 2001 (the "Senior Notes") in November 1995, the purchase
and subsequent retirement of $15.1 million of Senior Notes in the second quarter
of fiscal 1996, the elimination of working capital borrowings and increased
interest income from an increase in temporary cash investments.
The income tax benefit of $6.8 million for fiscal 1996 includes a $20.0
million income tax benefit related to the charge for business integration and
other non-recurring items. The effective income tax rate on income excluding the
charge for business integration and other non-recurring items was 44.0% in
fiscal 1996 and 1995. This rate reflects the significant impact of
non-deductible amortization of goodwill in both years. A more complete
discussion of income taxes is included in Note 9 of the Notes to Consolidated
Financial Statements.
The net loss in fiscal 1996 of $28.3 million included a $0.7 million
extraordinary loss, net of an income tax benefit of $0.5 million, recorded in
the second quarter in connection with the early extinguishment of debt
representing the payment of premiums, the write-off of unamortized discount and
other costs associated with purchasing the debt.
Fiscal 1995 Compared to Fiscal 1994
Net revenue increased 9.3% to $577.1 million in fiscal 1995 from $528.0
million in fiscal 1994. The increase in consolidated revenue was due to a
comparable store sales increase of 3.4%, sales for the 53rd week of
approximately $9.3 million and additional Things Remembered and Cole Vision
units open in fiscal 1995. Comparable store sales increased primarily as a
result of successful eyewear promotions and growth in the managed vision care
program at Cole Vision and expanded gift and softgoods merchandise at Things
Remembered locations. Fourth quarter comparable store sales were even with last
year as the retail industry in general experienced a very difficult Christmas
season and severe weather conditions in many major markets. At February 3, 1996,
the Company operated 2,378 specialty service retail locations versus 2,287 at
the end of the prior year. The net increase in retail units includes the
acquisition by Cole Vision on May 21, 1995, of 59 optical departments located in
BJ's Wholesale Club stores and the sale of the Company's 39 Sunspot fashion
sunglass kiosks as of April 29, 1995.
Gross profit increased to $394.2 million in fiscal 1995 from $363.3 million
in fiscal 1994. Gross margins for fiscal 1995 and fiscal 1994 were 68.3% and
68.8%, respectively. The decrease in gross margin percentage was primarily due
to an increase in the sales of lower margin optical products, including
disposable contact lenses, and a lower mix of higher margin merchandise,
-13-
15
primarily keys, at Cole Gift Centers. Gross margin in the fourth quarter of
fiscal 1995, however, improved to 67.1% from 66.9% in fiscal 1994, benefiting
from fiscal 1994 and 1995 investments aimed at increasing optical laboratory
capacity and production efficiency and from reduced material costs for
spectacles.
Operating expenses increased 8.8% to $332.5 million in fiscal 1995 from
$305.5 million the prior year. As a percentage of revenue, operating expenses
decreased to 57.6% in fiscal 1995 from 57.8% in fiscal 1994. Operating expenses
increased primarily because of higher payroll costs, store occupancy expenses
and advertising expense due, in part, to the 53rd week. The higher payroll costs
were also the result of more retail units in fiscal 1995 and additional payroll
to support the higher level of sales. Partially offsetting the payroll increases
were savings from outsourcing the Company's data processing operations in fiscal
1995. Store occupancy expense increased because of the increased number of
retail units and higher percentage rents due to increased comparable store
sales. Advertising costs increased primarily as a result of additional efforts
to support eyewear promotions. Also included in operating expense in fiscal 1995
was a $0.2 million provision for the closing of approximately 90 low volume
leased key and gift departments in the first quarter of fiscal 1996. Fiscal 1995
depreciation and amortization expense of $15.7 million was $0.8 million more
than fiscal 1994 reflecting an increase in capital expenditures that began in
the latter part of fiscal 1993.
Income from operations increased 7.0% to $46.0 million in fiscal 1995 from
$43.0 million the prior year. The increase was primarily attributable to the
increased revenue. The lower gross margin percentage was partially offset by
improved leveraging of operating expenses.
Net interest expense for fiscal 1995 of $21.4 million was $1.8 million less
than that of the prior year. This decrease was primarily due to retirement of
debt in connection with the Company's initial public offering of its common
stock (the "IPO") on April 18, 1994 and the retirement of $5.0 million of its
Senior Notes in November 1995 along with higher interest income.
The income tax provision of $10.8 million for fiscal 1995 represents an
effective tax rate of 44.0%. This rate reflects the significant impact of
non-deductible amortization of goodwill. The income tax benefit of $4.9 million
in fiscal 1994 included the effects of utilizing all of the Company's net
operating loss carryforwards and the reversal of a valuation allowance on net
deferred tax assets in the fourth quarter of fiscal 1994.
Net income in fiscal 1994 of $24.7 million included a loss on early
extinguishment of debt of $0.9 million to reflect the payment of premiums, the
write-off of unamortized debt discount and other costs associated with retiring
the debt in connection with the IPO.
-14-
16
Liquidity and Capital Resources
The Company's primary source of liquidity is funds provided from operations
of its wholly owned subsidiaries. In addition, CNG's operating subsidiaries have
available to them working capital commitments of $75.0 million, reduced by
commitments under letters of credit, under a credit facility put in place at the
time of the Pearle acquisition (the "Credit Facility"). The Credit Facility
replaced a $50.0 million revolving credit facility. There were no working
capital borrowings outstanding during fiscal 1996 and the maximum amount
outstanding during fiscal 1995 was $3.5 million.
The Credit Facility contains covenants restricting the ability of the
Company's operating subsidiaries to, among other things, pay dividends or make
other restricted payments to the Company or CNG. The Credit Facility permits
CNG's subsidiaries to pay dividends to CNG to the extent necessary to permit CNG
to pay all interest and principal on the Senior Notes and the Notes when due.
During the second quarter of fiscal 1996, the Company completed a public
offering of 1,437,500 shares of its common stock at an offering price of $19.25
per share. The net proceeds from the offering were $26.2 million. A portion of
the net proceeds was used to purchase in the open market $15.1 million of Senior
Notes plus accrued interest thereon.
Issuance of the Notes by CNG in connection with the Pearle acquisition and
the retirement of $15.1 million of Senior Notes will result in a net increase in
annual interest expense in fiscal 1997 compared to fiscal 1996 of approximately
$11.0 million including amortization of the discount on the Notes and related
deferred financing costs.
At year end, the Company had outstanding $165.8 million of Senior Notes and
$150.0 million of Notes. The Senior Notes and the Notes are unsecured and mature
October 1, 2001 and December 31, 2006, respectively, with no earlier scheduled
redemption or sinking fund payment. The Senior Notes bear interest at a rate of
11.25% per annum, payable semi-annually on each April 1 and October 1. The Notes
bear interest at a rate of 9.875% per annum, payable semi-annually on each June
30 and December 31, commencing June 30, 1997. The indentures pursuant to which
the Senior Notes and the Notes were issued contain certain optional and
mandatory redemption features and other financial covenants, including
restrictions on the ability of CNG to pay dividends or make other restricted
payments to the Company. The indentures permit dividend payments to the Company
of one-half of CNG's consolidated net income, provided that no default or event
of default has occurred under the indentures and that CNG has met a specified
fixed charge coverage ratio test. The indentures also permit payments to the
Company for certain tax obligations and for administrative expenses of the
Company not to exceed 0.25% of net revenue. See Note 5 of the Notes to
Consolidated Financial Statements.
-15-
17
The Company has no significant principal payment obligations under any of
its outstanding indebtedness until the CNG Notes mature in 2001. The ability of
the Company and its subsidiaries to satisfy that obligation will be primarily
dependent upon future financial and operating performance of the subsidiaries
and upon the Company's ability to renew or refinance borrowings or to raise
additional equity capital.
Cash balances at year end were $73.1 million compared to $29.3 million at
February 3, 1996. Operations generated net cash of $84.7 million in fiscal 1996,
$36.5 million in fiscal 1995 and $15.6 million in fiscal 1994. The $48.2 million
increase in cash provided by operations in fiscal 1996 compared to fiscal 1995
was primarily attributable to an increase in accounts payable and accrued
liabilities of $35.2 million excluding amounts related to the non-recurring
charge, increased income from operations of $6.1 million excluding the
non-recurring charge, increased depreciation and amortization expense of $4.4
million and increased accrued income taxes. Accrued income taxes at February 1,
1997 includes $15.0 million of taxes due on the sale of Pearle's European
business that were reimbursed to the Company by the seller in connection with
the Pearle acquisition. These cash flow increases were partly offset by an
increase in inventories of $3.6 million versus a $2.5 million reduction in
fiscal 1995. The $64.4 million charge for business integration and other
non-recurring items recorded in fiscal 1996 had little effect on the change in
cash flow for fiscal 1996 since most of the items were either non-cash or were
accrued at year end. The total cash outlay related to this charge is expected to
be approximately $41.1 million ($21.1 million after tax), of which $2.9 million
has been paid as of February 1, 1997. The remaining amount is expected to be
incurred within the next 12 to 18 months, except for certain lease costs which
may be incurred over the remaining life of the leases.
The $20.9 million increase in cash provided by operations in fiscal 1995
compared to fiscal 1994 was primarily due to a $2.5 million reduction in
inventory, despite a 9.3% increase in revenue, compared to an $8.7 million
increase in inventory the prior year. Also, income from operations in fiscal
1995 was higher by $3.0 million and interest expense was lower by $1.8 million
than in fiscal 1994.
Net capital additions were $23.5 million, $19.8 million and $18.5 million
in fiscal 1996, 1995 and 1994, respectively. In addition, the Company used
$157.4 million for the purchases of Pearle and AOCO Limited and $6.1 million for
the investment in Pearle Trust B.V. in fiscal 1996, $0.8 million for the
purchase of the BJ's Wholesale Club optical departments in fiscal 1995 and $4.7
million for the purchase of 107 Montgomery Ward optical departments in fiscal
1994. The majority of the capital additions were for store fixtures, equipment
and leasehold improvements for new stores and the remodeling of existing stores.
For fiscal 1997, the Company expects to continue to expand the number of stores
as well as remodel and relocate stores. The Company currently estimates
-16-
18
capital expenditures in fiscal 1997 will exceed $30.0 million including Pearle.
The Company has acquired land and is constructing a new warehouse and
distribution facility for Cole Gift that is expected to improve distribution
efficiencies. The facility, which the Company expects will be completed in
fiscal 1997, is expected to be financed through a sale and lease-back
transaction or through conventional secured real estate financing. The Company
estimates the cost of this facility to be approximately $10 million.
The Company believes that funds provided from operations along with funds
available under the Credit Facility will provide adequate sources of long-term
liquidity to allow the Company's operating subsidiaries to continue to expand
the number of stores.
Forward-Looking Information
Certain sections of this report contain forward-looking statements.
Forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the Company. All forward-looking
statements involve risk and uncertainty.
The Company operates in a highly competitive environment, and its future
liquidity, financial condition and operating results may be materially affected
by a variety of factors, some of which may be beyond the control of the Company,
including risks associated with the integration of Pearle, the Company's ability
to select and stock merchandise attractive to customers, economic and weather
factors affecting consumer spending, operating factors, including manufacturing
quality of optical and engraved goods, affecting customer satisfaction, the
Company's relationships with host stores and franchisees, the mix of goods sold,
pricing and other competitive factors, and the seasonality of the Company's
business.
Item 8. Financial Statements and Supplementary Data
Information required by this item appears on pages F-1 through F-22 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
The information required by this item as to Directors will be included in
the Company's Proxy Statement under the caption "Election
-17-
19
of Directors" and is incorporated herein by reference. The information required
by this item as to executive officers who are not Directors is included in Item
4A in Part I of this report.
Item 11. Executive Compensation
The information required by this item will be included in the Company's
Proxy Statement under the caption "Compensation of Executive Officers" and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this item will be included in the Company's
Proxy Statement under the caption "Beneficial Ownership of Common Stock" and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be included in the Company's
Proxy Statement under the caption "Compensation Committee Interlocks, Insider
Participation and Certain Transactions" and is incorporated herein by reference.
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 consolidated financial statements and the related financial statement
schedules filed as part of this Form 10-K are located as set forth in the index
on page F-1 of this report.
(a)(3) Exhibits
See Exhibit Index on pages X-1 through X-8.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year ended February 1, 1997:
On November 19, 1996, the Company filed a report on Form 8-K announcing
completion of the acquisition of certain assets and all of the outstanding
common stock of Pearle, Inc. (Pearle) from the Pillsbury Company on November 15,
1996.
On December 2, 1996, the Company filed a report on Form 8-K reporting the
Pearle transaction including the filing of Exhibits.
-18-
20
On December 19, 1996, the Company filed a report on Form 8-K/A
amending its report on Form 8-K filed on November 19, 1996 to include (i)
audited financial statements for Pearle, Inc. for the years ended September 30,
1996, 1995 and 1994 and (ii) pro forma financial information for Cole National
Corporation and Subsidiaries for the fiscal year ended February 3, 1996 and 39
weeks ended November 2, 1996.
-19-
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Public Accountants F - 2
Consolidated Balance Sheets at February 1, 1997 and
February 3, 1996 F - 3
Consolidated Statements of Operations for the 52 weeks
ended February 1, 1997, the 53 weeks ended February 3,
1996 and the 52 weeks ended January 28, 1995 F - 4
Consolidated Statements of Cash Flows for the 52 weeks
ended February 1, 1997, the 53 weeks ended February 3,
1996 and the 52 weeks ended January 28, 1995 F - 5
Consolidated Statements of Stockholders' Equity for the
52 weeks ended February 1, 1997, the 53 weeks ended
February 3, 1996 and the 52 weeks ended January 28, 1995 F - 6
Notes to Consolidated Financial Statements F - 7
Schedules included herein:
Page
----
Report of Independent Public Accountants on Financial
Statement Schedule F - 23
Schedule I - Condensed Financial Information of Registrant F - 24
All financial statement schedules not included have been omitted because they
are not applicable or because the required information is otherwise furnished.
F-1
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF COLE NATIONAL CORPORATION:
We have audited the accompanying consolidated balance sheets of Cole
National Corporation (a Delaware corporation) and Subsidiaries (the Company) as
of February 1, 1997 and February 3, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended February 1, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cole
National Corporation and Subsidiaries as of February 1, 1997 and February 3,
1996 and the results of their operations and their cash flows for each of the
three years in the period ended February 1, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 19, 1997.
F-2
23
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
February 1, February 3,
1997 1996
---------- ----------
Assets
Current assets:
Cash and temporary cash investments $ 73,141 $ 29,260
Accounts receivable, less allowance for
doubtful accounts of $3,068 in 1996 and
$-0- in 1995 39,660 18,589
Current portion of notes receivable 6,060 --
Inventories 119,236 84,794
Prepaid expenses and other 7,378 5,892
Deferred income tax benefits 24,948 9,872
---------- ----------
Total current assets 270,423 148,407
Property and equipment, at cost 216,575 157,050
Less - accumulated depreciation and
amortization (100,918) (90,909)
---------- ----------
Total property and equipment, net 115,657 66,141
Other assets:
Notes receivable, excluding current
portion 27,951 --
Deferred income taxes and other 29,504 5,070
Intangible assets, net 139,308 81,163
---------- ----------
Total assets $ 582,843 $ 300,781
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,336 $ 705
Accounts payable 62,379 29,273
Accrued interest 9,630 7,050
Accrued liabilities 123,263 51,638
Accrued income taxes 21,970 5,976
---------- ----------
Total current liabilities 218,578 94,642
Long-term debt, net of discount and
current portion 317,547 181,903
Other long-term liabilities 27,000 7,103
Stockholders' equity:
Preferred stock -- --
Common stock 12 10
Paid-in capital 131,238 99,827
Foreign currency translation adjustment (606) --
Notes receivable-stock option exercise (1,024) (1,117)
Accumulated deficit (109,902) (81,587)
---------- ----------
Total stockholders' equity 19,718 17,133
---------- ----------
Total liabilities and
stockholders' equity $ 582,843 $ 300,781
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
24
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
February 1, February 3, January 28,
1997 1996 1995
---------- ---------- ----------
Net revenue $ 683,990 $ 577,091 $ 528,049
Costs and expenses:
Cost of goods sold 221,304 182,934 164,723
Operating expenses 390,518 332,471 305,470
Depreciation and amortization 20,129 15,730 14,892
Business integration and other
non-recurring charges 64,400 -- --
---------- ---------- ----------
Total costs and expenses 696,351 531,135 485,085
---------- ---------- ----------
Income (loss) from operations (12,361) 45,956 42,964
Interest expense (23,735) (22,149) (23,680)
Interest income 1,704 761 464
---------- ---------- ----------
Income (loss) before income
taxes and extraordinary item (34,392) 24,568 19,748
Income tax provision (benefit) (6,759) 10,810 (4,909)
---------- ---------- ----------
Income (loss) before
extraordinary item (27,633) 13,758 24,657
Extraordinary loss on
early extinguishment of debt (682) -- (917)
---------- ---------- ----------
Net income (loss) $ (28,315) $ 13,758 $ 23,740
========== ========== ==========
Earnings (loss) per common share:
Income (loss) before
extraordinary item $ (2.44) $ 1.32 $ 2.62
Extraordinary loss (.06) -- (.10)
---------- ---------- ----------
Net income (loss) $ (2.50) $ 1.32 $ 2.52
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
25
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
February 1, February 3, January 28,
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (28,315) $ 13,758 $ 23,740
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary loss on
early extinguishment of debt 682 -- 917
Non-recurring charges 23,292 -- --
Depreciation and amortization 20,129 15,730 14,892
Non-cash interest expense 440 454 469
Deferred income taxes (16,194) 4,495 (10,153)
Change in assets and liabilities net
of effects from acquisitions:
Increase in accounts and notes
receivable, prepaid expenses and
other assets (3,967) (4,905) (4,610)
Decrease (increase) in inventories (3,582) 2,452 (8,723)
Increase (decrease) in accounts
payable, accrued liabilities,
and other liabilities 73,382 3,095 (1,252)
Increase (decrease) in accrued
interest 2,580 115 (2,451)
Increase in accrued income taxes 16,256 1,332 2,807
---------- ---------- ----------
Net cash provided by
operating activities 84,703 36,526 15,636
---------- ---------- ----------
Cash flows from financing activities:
Repayment of long-term debt (17,105) (5,406) (56,859)
Payment of deferred financing fees (6,066) -- (100)
Net proceeds from sale of common stock 26,202 -- 54,540
Proceeds from long-term debt, net 148,875 -- --
Other 664 69 96
---------- ---------- ----------
Net cash provided (used) by
financing activities 152,570 (5,337) (2,323)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net (23,469) (19,832) (18,527)
Acquisitions of businesses, net of cash
acquired (157,426) (800) (4,675)
Investment in Pearle Trust B.V. (6,102) -- --
Systems development costs (3,820) (755) (1,295)
Other, net (2,575) (272) 10
---------- ---------- ----------
Net cash used by
investing activities (193,392) (21,659) (24,487)
---------- ---------- ----------
Cash and temporary cash investments:
Net increase (decrease) during
the period 43,881 9,530 (11,174)
Balance, beginning of the period 29,260 19,730 30,904
---------- ---------- ----------
Balance, end of the period $ 73,141 $ 29,260 $ 19,730
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
26
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Foreign
Currency Notes
Trans- Receivable Total
lation Stock Accum- Stock-
Common Paid-In Adjust- Option ulated holders'
Stock Capital ment Exercise Deficit Equity
--------- --------- --------- --------- --------- ---------
Balance, January 29, 1994 $ 5 $ 45,140 $ -- $ (1,130) $(119,085) $ (75,070)
--------- --------- --------- --------- --------- ---------
Net income -- -- -- -- 23,740 23,740
Proceeds from initial public
offering 5 54,535 -- -- -- 54,540
Exercise of stock options -- 74 -- -- -- 74
Repayment of notes
receivable -- -- -- 22 -- 22
--------- --------- --------- --------- --------- ---------
Balance, January 28, 1995 10 99,749 -- (1,108) (95,345) 3,306
--------- --------- --------- --------- --------- ---------
Net income -- -- -- -- 13,758 13,758
Exercise of stock options -- 78 -- (9) -- 69
--------- --------- --------- --------- --------- ---------
Balance, February 3, 1996 10 99,827 -- (1,117) (81,587) 17,133
--------- --------- --------- --------- --------- ---------
Net loss -- -- -- -- (28,315) (28,315)
Net proceeds from sale
of common stock 1 26,201 -- -- -- 26,202
Stock options granted -- 4,153 -- -- -- 4,153
Exercise of stock options 1 1,057 -- (49) -- 1,009
Repayment of notes receivable -- -- -- 142 -- 142
Effect of foreign
currency translation -- -- (606) -- -- (606)
--------- --------- --------- --------- --------- ---------
Balance, February 1, 1997 $ 12 $ 131,238 $ (606) $ (1,024) $(109,902) $ 19,718
========= ========= ========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
27
COLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Presentation -
The consolidated financial statements include the accounts of Cole
National Corporation (CNC), its wholly owned Subsidiaries, including Cole
National Group, Inc. (CNG), and CNG's wholly owned subsidiaries
(collectively, the Company). CNG's subsidiaries include Pearle, Inc.
(Pearle) which was acquired on November 15, 1996 (see Note 2). All
significant intercompany transactions have been eliminated in
consolidation.
The Company is a specialty service retailer operating in both host and
non-host environments. The Company's primary lines of business are eyewear
products and services and personalized gifts. Eyewear products and
services and personalized gifts represented approximately 60% and 40%,
respectively, of sales in 1996 and 50% of sales each in 1995 and 1994. With
the acquisition of Pearle, eyewear products and services are expected to
comprise over 70% of the Company's net revenue in 1997.
The Company sells its products through over 2,777 company-owned retail
locations and 338 franchised locations in all 50 states, Canada, and the
Caribbean, and differentiates itself from other specialty retailers by
providing value-added services at the point of sale at all of its retail
locations. The Company considers its operations to be in one business
segment.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they
begin. Fiscal years 1996 and 1994 consisted of 52 weeks while fiscal year
1995 consisted of 53 weeks.
Inventories -
The Company's inventories are valued at the lower of first-in,
first-out (FIFO) cost or market.
Property and Depreciation -
The Company's policy is to provide depreciation using the
straight-line method over a period which is sufficient to amortize the cost
of the asset during its useful life or lease term, whichever is shorter.
F-7
28
The estimated useful lives for depreciation purposes are:
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
Property and equipment, at cost, consist of the following as of
February 1, 1997 and February 3, 1996 (000's omitted):
1997 1996
-------- --------
Land and buildings $ 10,604 $ 3,615
Furniture, fixtures and equipment 148,116 116,968
Leasehold improvements 57,855 36,467
-------- --------
Total property and equipment $216,575 $157,050
======== ========
Store Opening Expenses -
Store opening expenses are charged to operations in the year the store
is opened, which is generally the year the expense is incurred.
Notes Receivable -
The Company's notes receivable are primarily from Pearle's franchisees
throughout the U.S. and are collateralized by inventory, equipment, and
leasehold improvements at each location. The notes generally bear interest
at the prime rate plus 3% and require monthly payments of principal and
interest over periods of up to ten years.
Intangible Assets -
Intangible assets, net consist of the following at February 1, 1997
and February 3, 1996 (000's omitted):
1997 1996
-------- --------
Tradenames $ 49,198 $ --
Goodwill 90,110 81,163
-------- --------
$139,308 $ 81,163
======== ========
Tradenames acquired in connection with the Pearle acquisition are
being amortized on a straight-line basis over 40 years and are presented
net of accumulated amortization of $262,000 at February 1, 1997.
Goodwill is being amortized on a straight-line basis over 40 years and
is presented net of accumulated amortization of $30,609,000 and $29,640,000
at February 1, 1997 and February 3, 1996, respectively. Management
regularly evaluates its accounting for goodwill considering primarily such
factors as historical profitability, current operating profits and cash
flows. The Company believes that, at February 1, 1997, the asset is
realizable and the amortization period is still appropriate.
F-8
29
Other Assets -
Financing costs incurred in connection with obtaining long-term debt
are capitalized in other assets and amortized over the life of the related
debt using the effective interest method.
Other Long-Term Liabilities -
Other long-term liabilities consist primarily of certain employee
benefit obligations, deferred lease credits and other lease-related
obligations not expected to be paid within 12 months and deferred income
taxes. Deferred lease credits are amortized on a straight-line basis over
the life of the applicable lease.
Cash Flows -
For purposes of reporting cash flows, the Company considers all
temporary cash investments, which have original maturities of three months
or less, to be cash equivalents. The carrying amounts of cash and cash
equivalents approximate fair value due to the short maturity of those
instruments.
Net cash flows from operating activities reflect cash payments for
income taxes and interest as follows (000's omitted):
1996 1995 1994
-------- -------- --------
Income taxes $ 5,300 $ 4,265 $ 2,249
Interest $ 20,834 $ 21,580 $ 24,662
During 1996 and 1995, non-cash financing activities included incurring
$2,504,000 and $3,192,000, respectively, in capital lease obligations.
Revenues -
Revenues include sales of goods and services to retail customers at
company-operated stores, sales of merchandise inventory to franchisees and
other outside customers, and other revenues from franchisees such as
royalties based on sales, interest income on notes receivable and initial
franchise fees. Other revenues from franchisees totaled $4.0 million in
fiscal 1996.
Franchise revenues based on sales by franchisees are accrued as
earned. Initial franchise fees are recorded as income when all material
services or conditions relating to the sale of the franchises have been
substantially performed or satisfied by the Company and when the related
store begins operations.
Advertising -
The Company expenses advertising production costs and advertising
costs as incurred. Advertising expense was approximately $33,630,000;
$23,560,000 and $20,370,000 for 1996, 1995 and 1994, respectively. The
Company has certain commitments to purchase advertising in fiscal 1997
approximating $8,000,000.
F-9
30
Foreign Currency Translation -
The assets and liabilities of the Company's foreign subsidiaries and
its investment in Pearle Trust B.V. 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
gains or losses are included in the foreign currency translation adjustment
component of stockholders' equity.
Capital Stock -
At February 1, 1997 and February 3, 1996, there were 11,965,473 and
10,430,185, respectively, shares of common stock, par value $.001 per share
(the Common Stock), outstanding. At February 1, 1997, there were 24,000,000
and 1,000,000 authorized shares of Common Stock and undesignated preferred
stock, respectively.
Earnings Per Share -
Earnings per share for 1996, 1995 and 1994 have been calculated based
on 11,333,453; 10,415,047 and 9,395,319, respectively, weighted average
number of common shares outstanding. The impact of stock options and
warrants has not been included in the calculation of earnings per share as
the effect of their exercise is not material or is antidilutive.
In fiscal 1997 the Company will adopt Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". This statement
simplifies the standards for computing earnings per share and makes them
comparable to international earnings per share. The adoption of this
standard will not impact the Company's results of operations, financial
position or cash flows.
Asset Impairment -
In the first quarter of 1996 the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Adoption of this standard did not have a
material impact on the Company's results of operations, financial position
or cash flows. During the fourth quarter of 1996, due to the Pearle
acquisition and operating results, the Company recorded a provision for
impairment (see Note 3).
Reclassifications -
Certain 1995 and 1994 amounts have been reclassified to conform with
the 1996 presentation.
(2) Acquisitions of Businesses
On November 15, 1996, the Company purchased, for an aggregate purchase
price of $219.7 million, including the costs of acquisition, certain assets
and all of the issued and outstanding common stock of Pearle. Pearle
consisted of 346 company-operated optical stores and 340 franchised
locations in the United States, Canada and the Caribbean and 193 locations
in the Netherlands and Belgium. For its most recent fiscal year ended
F-10
31
September 30, 1996, Pearle reported annual net revenue of $366.0 million
including $63.8 million from its European operations.
Immediately following the acquisition, the Company sold Pearle
Holdings B.V., Pearle's European operations, to Pearle Trust B.V. (Pearle
B.V.) for approximately $62 million. No gain or loss was recorded on this
transaction. The Company has a 20% common equity interest in Pearle B.V.,
12.5% redeemable preferred stock of $1.8 million and a 10% shareholder loan
receivable of $3.9 million. The Company's investment in Pearle B.V. is
being accounted for under the equity method of accounting.
The Pearle acquisition was accounted for under the purchase method of
accounting. The results of operations of Pearle have been included in the
consolidated financial statements since the date of acquisition. The
purchase price was allocated to the assets acquired and liabilities assumed
based upon their relative fair values as of the closing date. This resulted
in an excess of purchase price over net assets acquired of $20.2 million.
The relative fair values of the assets acquired and liabilities assumed
were based upon valuations and other studies and included tradenames of
$49.5 million, unfavorable leasehold interests of $7.5 million, accruals
for involuntary severance and termination benefits of $4.4 million and
other purchase price adjustments. As of February 1, 1997, approximately
$175,000 of severance and termination benefits were paid and charged
against these liabilities.
The purchase price allocation is substantially complete but is subject
to adjustment, should actual costs differ from the recorded amounts. Such
adjustments, if made within one year from the date of acquisition, will be
recorded as adjustments to goodwill. Thereafter, any cost incurred in
excess of the liability recorded will be included in the determination of
net income.
On a pro forma basis, if the Pearle acquisition had taken place at the
beginning of the respective periods, the unaudited consolidated net
revenues would have been $933.8 million for fiscal 1996 and $873.7 million
for fiscal 1995. After giving effect to certain pro forma adjustments,
including adjustments to reflect the amortization of tradenames and
goodwill, the elimination of transactions between Pearle and its former
parent, the elimination of Pearle's provision for impairment of intangible
assets and related costs which resulted from the acquisition, increased
interest expense and reduced interest income associated with acquisition
funding and the estimated related income tax effects, pro forma net loss in
fiscal 1996 would have improved by $1.8 million or $0.16 per share and pro
forma net income in 1995 would have decreased by $11.6 million or $1.11 per
share from the amounts reported. Anticipated efficiencies from the
consolidation of the Company and Pearle have not been reflected in these
amounts because their realization cannot be assured.
The unaudited pro forma results have been prepared for informational
purposes only and should not be considered indicative of the actual results
of operations which would have occurred had the acquisition been in effect
at the beginning of the periods indicated, and do not purport to be
indicative of results of operations which may occur in the future.
The Company also made the following acquisitions, each of which has
been accounted for under the purchase method of accounting. In November
F-11
32
1996, the Company acquired all of the issued and outstanding stock of AOCO
Limited, which operates 73 Sears Optical Departments and two freestanding
Vision Club stores in Canada, for a purchase price of $2.6 million. In May
1995, the Company acquired the assets of 59 optical departments located in
BJ's Wholesale Clubs for a purchase price of $1.1 million. In January 1994,
the Company acquired the assets of 107 leased optical departments within
Montgomery Ward stores for a purchase price of $4.7 million. Pro forma
financial results have not been presented for these acquisitions as they
did not have a material effect on the Company's results of operations.
(3) Business Integration and Other Non-recurring Charges
In the fourth quarter of fiscal 1996, the Company recorded a $64.4
million pre-tax charge for certain unusual and non-recurring items. Such
charge was primarily related to the acquisition of Pearle and included
costs incurred related to the integration and consolidation of Pearle into
the Company's operations, as well as certain other non-recurring charges.
The charge included $17.6 million for store and other facility closings,
$21.6 million related to computer systems, $9.4 million for asset
impairment and $15.8 million of other charges. Total cash outlay related to
these charges is approximately $41.1 million, of which $2.9 million has
been paid as of February 1, 1997. The remaining amount is expected to be
incurred within the next 12 to 18 months, except for certain lease costs
which may be incurred over the remaining life of the leases. Although the
Company currently does not anticipate that there will be additional
non-recurring charges in the future, as the integration and consolidation
of Pearle is completed, additional costs may be incurred that will be
charged against operating income at that time.
Subsequent to the effective date of the Pearle acquisition, the
Company identified certain unprofitable Pearle stores which it intends to
close in fiscal 1997. At certain other on-going retail locations, a
decision was made to close the in-store labs and supply these locations
from other facilities. In addition, the Company decided to retain Pearle's
distribution and central lab facilities, but to close Pearle's home office
facility in Dallas, Texas. The charge for store and other facilities
closings consists primarily of the remaining noncancellable term of
operating leases and other obligations remaining on these facilities
subsequent to their estimated date of closing along with the loss on fixed
assets.
In fiscal 1995, the Company entered into a ten-year agreement to
outsource its systems integration needs and data processing operations. Due
to the Pearle acquisition, the Company has reassessed its system
requirements and decided to terminate its outsourcing agreement and install
new systems utilizing the resources of internal and external systems
integrators. The Company and the outsourcing entity have agreed in
principle to the terms of the termination arrangement. The settlement cost
of terminating the outsourcing agreement, as well as other related costs,
have been accrued as of February 1, 1997. Hardware and software costs
directly related to the development and installation of new systems which
will benefit future operations have been and will be capitalized as
incurred.
Following the Pearle acquisition and in light of current year
operating results, the Company reviewed the strategic direction of certain
F-12
33
other operations. In accordance with SFAS No. 121, the Company determined
that the goodwill associated with portions of its gift and optical
businesses would not be recoverable as the carrying values of these
businesses exceeded fair value, as measured by projected future discounted
cash flows.
The other charges include costs related to employee matters, including
duplicate costs incurred through fiscal year end and costs related to
hiring employees in connection with the consolidation of the Pearle home
office functions, and other costs of management realignment. In addition,
the other charges include incremental travel and professional fees incurred
in connection with the integration of Pearle, along with costs of
developing and implementing a new franchise agreement. Also, in February
1996, the Board of Directors granted stock options to executive officers at
a share price equal to the market price of the common stock on the date of
grant, which were subject to stockholder approval. The increase in the
price of the common stock between the grant date and the date of
stockholder approval resulted in $4.2 million of compensation expense. The
options as approved contained accelerated vesting provisions if the common
stock price rose to certain levels, which were reached in the fourth
quarter of fiscal 1996. Because future periods will not benefit by this
plan, the Company recognized the full costs of the plan as expense.
(4) Public Offerings
On April 18, 1994, the Company completed an initial public offering
(IPO) of five million shares of Common Stock at a price to the public of
$12.00 per share. Net proceeds from the IPO were $54.5 million and were
used to retire outstanding debt (see Note 5).
In 1996, the Company completed a public offering of 1,437,500 shares
of Common Stock at a price to the public of $19.25 per share. The net
proceeds from the offering were $26.2 million. A portion of the proceeds
were used to purchase $15.1 million of 11.25% Senior Notes (the Senior
Notes), plus accrued interest thereon (see Note 5).
F-13
34
(5) Long-Term Debt
Long-term debt at February 1, 1997 and February 3, 1996 is summarized
as follows (000's omitted):
1997 1996
---------- ----------
7.5% Obligation in connection
with Industrial Revenue Bonds $ 338 $ 506
11.25% Senior Notes:
Face value 165,838 181,000
Unamortized discount (1,455) (1,834)
---------- ----------
Total 11.25% Senior Notes 164,383 179,166
9.875% Senior Subordinated Notes:
Face value 150,000 --
Unamortized discount (1,111) --
---------- ----------
Total 9.875% Senior Subordinated Notes 148,889 --
Capital lease obligations (see Note 11) 5,273 2,936
---------- ----------
318,883 182,608
Less current portion (1,336) (705)
---------- ----------
Net long-term debt $ 317,547 $ 181,903
========== ==========
The Senior Notes mature October 1, 2001 with no earlier scheduled
redemption or sinking fund payments. Interest on the Senior Notes is
payable semi-annually on each April 1 and October 1.
On November 15, 1996, CNG issued $150 million of 9.875% Senior
Subordinated Notes (the Notes) due in 2006. The Notes were used by the
Company to finance a portion of the Pearle acquisition (see Note 2).
Interest on the Notes is payable semi-annually in arrears on December 31
and June 30 commencing June 30, 1997.
The Senior Notes and the Notes are general unsecured obligations of
CNG, subordinated in right of payment to senior indebtedness of CNG and
senior in right of payment to any current or future subordinated
indebtedness of CNG.
The indentures pursuant to which the Senior Notes and the Notes were
issued restrict dividend payments to the Company to 50% of CNG's net income
after October 31, 1993, plus amounts due to the Company under a tax sharing
agreement and for administrative expenses of the Company not to exceed
0.25% of CNG's net revenue. The indentures also contain certain optional
and mandatory redemption features and other financial covenants. The
Company was in compliance with these covenants at February 1, 1997.
Proceeds from the IPO were used to retire $4.0 million of the Senior
Notes and $50.0 million of other notes during the first quarter of fiscal
1994. The Company recorded an extraordinary loss of $0.9 million, net of an
income tax benefit of $0.5 million, representing the payment of premiums,
the write-off of unamortized discount and other costs associated with
retiring this debt.
F-14
35
A portion of the proceeds from the Company's 1996 stock offering was
used to purchase $15.1 million of the Senior Notes. The Company recorded an
extraordinary loss of $0.7 million, net of an income tax benefit of $0.5
million, representing the payment of premiums, the write-off of unamortized
discount and other costs associated with retiring this debt.
The agreement in connection with the Industrial Revenue Bonds provides
for repayment of the obligation in annual installments of $168,750 through
1998. The Industrial Revenue Bonds are secured by office and distribution
facilities with a net book value of $1,646,000 at February 1, 1997.
At February 1, 1997, the fair value of the Company's long-term debt
was approximately $346.7 million compared to a carrying value of $318.9
million. The fair value was estimated primarily by using quoted market
prices.
(6) Credit Facility
Concurrent with the Pearle acquisition, the principal operating
subsidiaries of CNG (the Borrowers) entered into a Credit Facility. The
Credit Facility replaced, concurrent with the issuance of the Notes, the
existing revolving credit facility.
The Credit Facility provides the Borrowers with a four-year revolving
line of credit of up to the lesser of a "borrowing base" or $75 million. Up
to $30 million of the Credit Facility is available for the issuance of
letters of credit. Borrowings under the Credit Facility initially bear
interest at a rate equal to, at the option of the Borrowers, either (a) the
Eurodollar Rate plus 1.25% or (b) 0.25% plus the highest of (i) the prime
rate, (ii) the three-week moving average of the secondary market rates for
three-month certificates of deposit plus 1% and (iii) the federal funds
rate plus 0.5%. The Company pays a commitment fee of 0.375% per annum on
the total unused portion of the facility. Additionally, the Credit Facility
requires the Borrowers to comply with various operating covenants that
restrict corporate activities, including covenants restricting the
Borrowers' ability to incur additional indebtedness, pay dividends, prepay
subordinated indebtedness, dispose of certain investments or make
acquisitions. The Credit Facility also requires the Borrowers to comply
with certain financial covenants, including covenants regarding minimum
interest coverage, maximum leverage and consolidated net worth. The
Borrowers were in compliance with these covenants at February 1, 1997.
The Credit Facility restricts dividend payments to CNG to amounts
needed to pay interest on the Senior Notes and the Notes, and certain
amounts related to taxes, along with up to $8.0 million plus 0.25% of the
Company's net revenue annually for other direct expenses of CNC or CNG. In
addition, dividends of up to $20.0 million are permitted to repurchase the
Senior Notes and/or the Notes.
The maximum amount of short-term borrowings outstanding during 1995
was $3.5 million. No amounts were outstanding as of February 1, 1997 or
February 3, 1996, or at any time during fiscal 1996.
F-15
36
(7) Stock Options and Warrants
The Company had stock options outstanding at February 1, 1997 under
the 1992, the 1993 and the 1996 Management Stock Option Plans (the 1992,
1993 and 1996 Plans), the 1993 Option Agreements granting options to
non-employee Directors (the 1993 Option Agreements) and the 1994
non-qualified Stock Option Plan for non-employee Directors (the 1994 Plan).
The Company is authorized to issue to key employees up to 555,556; 600,000
and 884,000 shares of Common Stock under the 1992, 1993 and 1996 Plans,
respectively. The Company is also authorized to issue to non-employee
Directors of the Company up to 22,500 and 100,000 shares of Common Stock
under the 1993 Option Agreements and the 1994 Plan, respectively. Options
generally become exercisable over a three-, four- or five-year period from
the date of grant and expire ten years from the date of grant.
A summary of the status of the Company's stock option plans as of
January 28, 1995, February 3, 1996 and February 1, 1997, and changes during
each of the fiscal years is presented below:
1994 1995 1996
--------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at
beginning of
year 813,922 $ 13.88 668,554 $ 9.14 749,297 $ 9.76
Granted 5,000 12.63 123,100 11.34 804,000 13.87
Exercised (24,775) 3.00 (25,066) 3.11 (97,787) 6.08
Canceled (125,593) 18.31 (17,291) 6.93 (11,722) 10.19
---------- ---------- ----------
Outstanding at
end of year 668,554 9.14 749,297 9.77 1,443,788 12.29
========== ========== ==========
Exercisable at
end of year 273,772 6.73 385,646 8.37 508,530 9.86
Weighted-average
fair value of
options granted
during the year $ 5.11 $ 10.87
F-16
37
A summary of information about stock options outstanding
at February 1, 1997, is presented below:
Options Outstanding Options Exercisable
------------------------------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of of Contractual Exercise of Exercise
Exercise Prices Shares Life Price Shares Price
--------------- --------- --------- --------- --------- ---------
$3.00 93,848 5.6 years $ 3.00 93,848 $ 3.00
$ 9.75 to $13.69 1,208,940 8.1 11.15 414,682 11.41
$24.88 to $28.63 141,000 10.0 28.25 -- --
--------- ---------
$ 3.00 to $28.63 1,443,788 8.1 12.29 508,530 9.86
========= =========
At February 1, 1997, there were 115,006 shares available for future
grant under the 1992, 1993 and 1996 Plans and 92,500 shares available for
future grant under the 1994 Plan.
During 1994, the Company offered holders of options under the 1993
Plan the opportunity to exchange a portion of their existing vested and
unvested stock options for a reduced number of new options under the 1993
Plan with adjusted exercise prices and vesting schedules. The result was to
reduce the aggregate number of options outstanding under the 1993 Plan, to
extend the vesting schedule for the repriced options from four to five
years and to reduce the maximum exercise price from $27.00 per share to
$12.25 per share.
Payment for certain options exercised between 1993 and 1996 has been
made by executing promissory notes, of which $1,024,000 were outstanding at
February 1, 1997. The promissory notes are secured by the shares of common
stock acquired and payable five years from the date of exercise at interest
rates ranging from 5.33% to 6.37%.
At February 1, 1997, there were warrants outstanding to purchase
173,678 shares of common stock. Of these, warrants to purchase 2,625 shares
are exercisable at $1.00 per share and expire in 2000. Warrants to purchase
92,104 shares are exercisable at $24.70 per share and expire on May 7,
1997. Warrants to purchase 78,949 shares are exercisable at $49.40 per
share and expire on March 6, 1999.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its stock option plans in fiscal
1994 and fiscal 1995. Compensation cost that has been charged against
income for its stock-based plans in fiscal 1996 was $4.2 million as
discussed in Note 3. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the dates of
awards under those plans consistent with the method of SFAS No. 123, the
Company's net loss and loss per share in fiscal 1996 would have been
increased to $30,234,000 and $2.67, respectively, and its net income and
earnings per share in fiscal 1995 would have been reduced to $13,617,000
and $1.31, respectively.
F-17
38
The fair value of each option grant in fiscal 1995 and 1996 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: risk-free interest rates of 6.4% and 6.2%
for grants in fiscal 1995 and 1996, respectively, and expected lives of six
years and volatility of 33% for options granted in both fiscal years.
Because the SFAS No. 123 method of accounting has not been applied to
options prior to January 29, 1995, the resulting pro forma expense may not
be representative of that to be expected in the future.
(8) Stockholders' Equity
In August 1995, the Company's Board of Directors approved a
Stockholders' Rights Plan. The Rights Plan provides for the distribution of
one Right for each outstanding share of the Company's Common Stock held of
record as of the close of business on September 1, 1995 or that thereafter
become outstanding prior to the earlier of the Final Expiration Date of the
Rights or the first date upon which the Rights become exercisable. Each
Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock,
without par value, at a price of $40.00, subject to adjustment. The Rights
are only exercisable if a person or group buys or announces a tender offer
for 15% or more of the Company's Common Stock. In the event such a
transaction occurs, Rights that are beneficially owned by all other persons
would be adjusted and such holders would thereafter have the right to
receive, upon exercise thereof at the then current exercise price of the
Right, that number of shares of Common Stock (or, under certain
circumstances, an economically equivalent security of the Company) having a
market value of two times the exercise price of the Right. The Rights will
expire on August 31, 2005, unless extended or unless the Rights are earlier
redeemed by the Company in whole, but not in part, at a price of $0.01 per
Right, or exchanged.
(9) Income Taxes
Income tax provision (benefit) for fiscal 1996, 1995 and 1994 is
detailed below (000's omitted):
1996 1995 1994
-------- -------- --------
Currently payable -
Federal $ 7,408 $ 4,518 $ 3,228
State and local 2,027 1,797 2,016
-------- -------- --------
9,435 6,315 5,244
-------- -------- --------
Deferred -
Federal (16,194) 3,361 (766)
Utilization of net operating
loss carryforwards -- 1,134 4,859
Change in valuation allowance -- -- (14,246)
-------- -------- --------
(16,194) 4,495 (10,153)
-------- -------- --------
Income tax provision (benefit) $ (6,759) $ 10,810 $ (4,909)
======== ======== ========
F-18
39
The income tax provision (benefit) reflected in the accompanying
consolidated statements of operations differs from the federal statutory
rate as follows (000's omitted):
1996 1995 1994
-------- -------- --------
Tax provision (benefit) at
statutory rate $(12,038) $ 8,599 $ 6,912
Tax effect of -
State income taxes, net of
federal tax benefit 1,318 1,168 1,310
Amortization of goodwill 936 900 901
Non-recurring charges 2,666 -- --
Change in valuation allowance -- -- (14,246)
Other, net 359 143 214
-------- -------- --------
Tax provision (benefit) $ (6,759) $ 10,810 $ (4,909)
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and deferred tax liabilities
at February 1, 1997 and February 3, 1996 are as follows (000's omitted):
1997 1996
-------- --------
Deferred tax assets:
Employee benefit accruals $ 6,137 $ 3,375
Business integration accruals 13,373 --
Other non-deductible accruals 15,066 3,959
State and local taxes 1,277 1,108
Tax credit and net operating
loss carryforwards -- 1,990
Intangibles 6,148 --
Other 8,569 1,252
-------- --------
Total deferred tax assets 50,570 11,684
-------- --------
Deferred tax liabilities:
Depreciation and amortization (5,543) (5,225)
Other (5,535) (836)
-------- --------
Total deferred tax liabilities (11,078) (6,061)
-------- --------
Net deferred taxes $ 39,492 $ 5,623
======== ========
Accrued income taxes at February 1, 1997 includes $15.0 million of
taxes due on the sale of Pearle Holdings B.V. that were reimbursed to the
Company by the seller in connection with the Pearle acquisition.
(10) Retirement Plans
The Company maintains a noncontributory defined benefit pension plan
(the Retirement Plan) that covers employees who have met eligibility
service requirements and are not members of certain collective bargaining
units. The Retirement Plan calls for benefits to be paid to eligible
employees at retirement based primarily upon years of service with the
Company and their compensation levels near retirement.
The Company's policy is to fund amounts necessary to keep the
Retirement Plan in full force and effect, in accordance with the Internal
Revenue Code and the Employee Retirement Income Security Act of 1974.
F-19
40
Actuarial present values of benefit obligations are determined using the
projected unit credit method.
Pension expense for fiscal 1996, 1995 and 1994 includes the following
components (000's omitted):
1996 1995 1994
-------- -------- --------
Service cost - benefits earned
during the period $ 646 $ 528 $ 581
Interest cost on the projected
benefit obligation 1,467 1,369 1,292
Less:
Return on plan assets -
Actual (1,669) (1,138) 178
Deferred 477 11 (1,294)
-------- -------- --------
(1,192) (1,127) (1,116)
Amortization of transition
asset over 17.9 years (179) (179) (179)
-------- -------- --------
Net pension expense $ 742 $ 591 $ 578
======== ======== ========
The following sets forth the funded status of the Retirement Plan at
December 31, 1996 and 1995 based upon the actuarial present values of
benefit obligations (000's omitted):
1996 1995
-------- --------
Accumulated benefit obligations:
Vested $ 17,605 $ 17,147
Nonvested 238 291
-------- --------
Total $ 17,843 $ 17,438
======== ========
Projected benefit obligation
for service rendered to date $ 19,046 $ 19,030
Fair value of plan assets,
primarily money market and
equity mutual funds 16,774 13,849
-------- --------
Plan assets less than projected
benefit obligation (2,272) (5,181)
Unrecognized prior service cost 140 168
Net unrecognized loss 1,252 2,983
Unamortized transition asset (1,416) (1,595)
-------- --------
Pension liability included
in accrued liabilities $ (2,296) $ (3,625)
======== ========
The weighted average discount rate used to measure the projected
benefit obligation was 8.0% in 1996 and 7.75% in 1995. For both years, the
rate of increase in future compensation levels was 5.0% and the expected
long-term rate of return on plan assets was 9.5%.
The Company has a defined contribution plan, including features under
Section 401(k) of the Internal Revenue Code, which provides retirement
benefits to its employees. Eligible employees may contribute up to 15% of
their compensation to the plan. There is no mandatory matching of employee
F-20
41
contributions by the Company, but discretionary matches of $327,000,
$164,000 and $164,000 were recorded for 1996, 1995 and 1994, respectively.
The Company also has a contributory profit-sharing plan for Pearle
employees meeting certain service requirements as defined in the plan. The
Company's contribution to the plan consists of a minimum matching
contribution plus an additional performance contribution. Profit sharing
expense amounted to $229,000 in 1996.
During fiscal 1994, the Company established two Supplemental Executive
Retirement Plans which will provide for the payment of retirement benefits
to participating executives supplementing amounts payable under the
Company's Retirement Plan. The first plan is an excess benefit plan
designed to replace benefits that would otherwise have been payable under
the Retirement Plan but that were limited as a result of certain tax law
changes. The second plan is a defined contribution plan under which
participants will receive an annual credit based on a percentage of base
salary, subject to vesting requirements. Expense for these plans for fiscal
1996, 1995 and 1994 was $468,000, $447,000 and $413,000, respectively.
(11) Commitments
The Company leases a substantial portion of its facilities including
laboratories, office and warehouse space, and retail store locations. These
leases generally have initial terms of up to 10 years and often contain
renewal options. Certain of the store locations have been sublet to
franchisees. In most leases covering retail store locations, additional
rents are payable based on store sales. In addition, the Company operates
departments in various host stores paying occupancy costs solely as a
percentage of sales under agreements containing short-term cancellation
clauses. Generally, the Company is required to pay taxes and normal
expenses of operating the premises for laboratory, office, warehouse and
retail store leases; the host stores pay these expenses for departments
operated on a percentage-of-sales basis. The following amounts represent
rental expense for fiscal 1996, 1995 and 1994 (000's omitted):
1996 1995 1994
-------- -------- --------
Occupancy costs based on sales $ 53,152 $ 50,218 $ 47,198
All other rental expense 45,365 32,697 30,003
Sublease rental income (5,935) (1,510) (1,455)
-------- -------- --------
$ 92,582 $ 81,405 $ 75,746
======== ======== ========
During 1996 and 1995, the Company entered into leases for equipment
which have been accounted for as capital leases. At February 1, 1997 and
February 3, 1996, property under capital leases consisted of $5,696,000 and
$3,192,000 in equipment with accumulated amortization of $397,000 and
$37,000, respectively.
F-21
42
At February 1, 1997, future minimum lease payments and sublease income
receipts under noncancellable leases, and the present value of future
minimum lease payments for capital leases are as follows (000's omitted):
Operating Leases
Capital ----------------------
Leases Payments Receipts
-------- -------- --------
1997 $ 1,497 $ 66,887 $ 13,528
1998 1,494 58,641 11,503
1999 1,499 50,277 9,202
2000 1,295 37,386 6,655
2001 353 26,797 4,112
2002 and thereafter -- 65,157 6,152
-------- -------- --------
Total future minimum lease payments 6,138 $305,145 $ 51,152
======== ========
Amount representing interest (865)
--------
Present value of future minimum
lease payments $ 5,273
========
(12) Quarterly Results of Operations (Unaudited)
The Company's business is seasonal, with approximately 30% of its
revenue and approximately 50% of its income from operations generated in
the fourth fiscal quarter which contains the important Christmas selling
season.
The following is a summary of quarterly financial data for the 52
weeks ended February 1, 1997 and the 53 weeks ended February 3, 1996. The
fourth quarter of fiscal 1996 includes a $64.4 million pre-tax charge for
business integration and other non-recurring charges (see Note 3). The
fourth quarter of fiscal 1995 consisted of 14 weeks; all other quarters
consisted of 13 weeks (000's omitted, except per share amounts):
Quarter Ended
---------------------------------------------
May 4, Aug. 3, Nov. 2, Feb. 1,
1996 1996 1996 1997
--------- --------- --------- ---------
Net revenue $ 142,890 $ 153,465 $ 146,702 $ 240,933
Gross margin 98,390 106,065 101,929 156,302
Income (loss) before
extraordinary loss 980 5,177 1,173 (34,963)
Net income (loss) 980 4,495 1,173 (34,963)
Earnings (loss) per share:
Income (loss) before
extraordinary loss .09 .47 .10 (2.93)
Net income (loss) .09 .41 .10 (2.93)
Quarter Ended
---------------------------------------------
Apr. 29, July 29, Oct. 28, Feb. 3,
1995 1995 1995 1996
--------- --------- --------- --------
Net revenue $ 125,254 $ 138,099 $ 138,646 $ 175,092
Gross margin 86,530 94,758 95,465 117,404
Net income (loss) (27) 3,766 229 9,790
Earnings per share .00 .36 .02 .94
F-22
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE
To Cole National Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in this Form 10-K and have issued
our report thereon dated March 19, 1997. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The financial statement
schedule is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the consolidated financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the consolidated financial statements and, in our opinion, fairly states 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, 1997.
F-23
44
Schedule I
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
================================================================================
Cole National Corporation
Condensed Balance Sheets
February 1, 1997 and February 3, 1996
(Dollars in millions)
1997 1996
------ ------
Assets:
Receivable from subsidiaries $ 65.3 $ 14.4
Investment in subsidiaries (36.1) 2.8
Note receivable Pearle Trust B.V 3.5 --
Investment in Pearle Trust B.V 1.9 --
Interest receivable .2 --
Property and equipment, net 4.7 2.4
------ ------
Total assets $ 39.5 $ 19.6
====== ======
Liabilities and Stockholders' Equity:
Accounts payable and accrued expenses $ 15.2 $ .2
Long-term debt 4.1 2.1
Deferred income taxes .5 .2
Stockholders' equity 19.7 17.1
------ ------
Total liabilities and stockholders' equity $ 39.5 $ 19.6
====== ======
F-24
45
Schedule I
(continued)
Cole National Corporation
Condensed Statements of Operations and Cash Flows
52 Weeks Ended February 1, 1997, 53 Weeks Ended February 3, 1996 and 52 Weeks
Ended January 28, 1995 (Dollars in millions)
February 1, February 3, January 28,
1997 1996 1995
------ ------ ------
Revenue:
Dividends from subsidiaries $ 15.4 $ 13.5 $ --
Services to affiliates .6 .3 .1
------ ------ ------
Total revenue 16.0 13.8 .1
Operating expenses (.8) (.3) (.1)
Interest income (expense) .8 -- (1.4)
------ ------ ------
Pre-tax income (loss) 16.0 13.5 (1.4)
Income tax (expense) benefit (.3) -- 1.2
------ ------ ------
Income (loss) before equity in
undistributed earnings (loss)
of subsidiaries and
extraordinary item 15.7 13.5 (.2)
Equity in undistributed
earnings (loss)
of subsidiaries (43.4) .3 24.7
------ ------ ------
Income (loss) before
extraordinary item (27.7) 13.8 24.5
Extraordinary loss (.6) -- (.8)
------ ------ ------
Net income (loss) (28.3) 13.8 23.7
------ ------ ------
Adjustments to reconcile net
income (loss) to cash provided
(used) by operations 43.9 (13.2) (27.2)
------ ------ ------
Net cash provided (used) by
operating activities 15.6 .6 (3.5)
------ ------ ------
Financing activities:
Repayment of long-term debt (.3) (.3) (51.2)
Proceeds from sale of common
stock 26.2 -- 54.5
Cash contributed to subsidiaries -- (.3) --
Proceeds from stock option
exercises .6 -- .2
------ ------ ------
Net cash provided (used) by
financing activities 26.5 (.6) 3.5
------ ------ ------
Investing activities:
Advances to affiliates (35.0) -- --
Purchase of CNG Notes (16.1) -- --
Proceeds from sale of CNG Notes 14.9 -- --
Investment in Pearle Trust B.V (6.0) -- --
Repayment of notes receivable .1 -- --
------ ------ ------
Net cash used by investing
activities (42.1) -- --
------ ------ ------
Net change in cash -- -- --
Cash, beginning of period -- -- --
------ ------ ------
Cash, end of period $ -- $ -- $ --
====== ====== ======
F-25
46
Schedule I
(continued)
Note to Condensed Financial Information of Registrant
================================================================================
The accompanying financial information of Cole National Corporation (CNC)
is as of February 1, 1997 and February 3, 1996 and for the 52 weeks ended
February 1, 1997, the 53 weeks ended February 3, 1996 and the 52 weeks ended
January 28, 1995. CNC is a holding company for its wholly-owned subsidiaries,
including Cole National Group, Inc. (CNG) and consisted of no other operations.
This financial information should be read in connection with the
Consolidated Financial Statements and notes thereto of Cole National Corporation
and Subsidiaries, contained on pages elsewhere in this Form 10-K.
F-26
47
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.
COLE NATIONAL CORPORATION
May 1, 1997 By: /s/Wayne L. Mosley
----------------------------------------
Wayne L. Mosley
Vice President and Controller
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.
* Chairman and Chief May 1, 1997
- ----------------------------- Executive Officer and
Jeffrey A. Cole Director (Principal
Executive Officer and
Principal Financial
Officer)
* President and Director May 1, 1997
- -----------------------------
Brian B. Smith
/s/Wayne L. Mosley Vice President and May 1, 1997
- ----------------------------- Controller (Principal
Wayne L. Mosley Accounting Officer)
* Director May 1, 1997
- -----------------------------
Timothy F. Finley
* Director May 1, 1997
- -----------------------------
Irwin N. Gold
* Director May 1, 1997
- -----------------------------
Peter V. Handal
* Director May 1, 1997
- -----------------------------
Charles A. Ratner
* 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 the Company and which are being filed
herewith with the Securities and Exchange Commission on behalf of such
officers and directors.
/s/Wayne L. Mosley
- ---------------------------------
Wayne L. Mosley, Attorney-in-Fact
S-1
48
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.2(ii) Amended and Restated By-Laws of the Company,
incorporated by reference to Exhibit 3.2(ii) of
Cole National Corporation's Annual Report on Form
10-K for the year ended February 3, 1996 (File No.
1-12814).
3.3 Certificate of Designations of Series A Junior
Participating Preferred Stock, incorporated by
reference to Exhibit 3.3 of Cole National
Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
4.1 Indenture dated as of September 30, 1993 between
CNG and Norwest Bank Minnesota, N.A., as trustee,
relating to the 11 1/4% Senior Notes due 2001 (the
form of which Senior Note is included in such
Indenture), incorporated by reference to Exhibit
4.1 of Cole National Corporation's Annual Report
on Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
4.2 The Company by this filing agrees, upon request,
to file with the Commission the instruments
defining the rights of holders of long-term debt
of the Company and its subsidiaries where the
total amount of securities authorized thereunder
does not exceed 10% of the total assets of the
Company and its subsidiaries on a consolidated
basis.
4.3 Rights Agreement dated as of August 22, 1995 by
and between the Company and National City Bank as
Rights Agent, incorporated by reference to Exhibit
4.3 of Cole National Corporation's Annual Report
on Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
X-1
49
Exhibit
Number Description
- ------ -----------
4.4 Indenture dated November 15, 1996, by and among
Cole National Group, Inc. and Norwest Bank
Minnesota, National Association, as trustee,
relating to the 9 7/8% Senior Subordinated Notes
due 2006 (the form of which Senior Subordinated
Note is included in such Indenture), incorporated
by reference to Exhibit 4.1 of Cole National
Corporation's Report on Form 8-K, filed with the
Commission on December 2, 1996 (File No. 1-12814).
10.1* Employment Agreement entered into as of April 1,
1996 by and among the Company, Cole National
Group, Inc., Cole Gift Centers, Inc., Cole Vision
Corporation, Things Remembered, Inc. and Jeffrey
A. Cole, incorporated by reference to Exhibit 10.1
of Cole National Corporation's Annual Report on
Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
10.2* Employment Agreement entered into as of April 1,
1996 by and among the Company, Cole National
Group, Cole Gift Centers, Inc., Cole Vision
Corporation, Things Remembered, Inc. and Brian B.
Smith, incorporated by reference to Exhibit 10.2
of Cole National Corporation's Annual Report on
Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
10.3* Agreement dated March 27, 1993 between the Company
and Joseph Gaglioti regarding termination of
employment, incorporated by reference to Exhibit
10.8 to CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.4* Agreement dated April 9, 1993 between the Company
and Wayne L. Mosley regarding termination of
employment, incorporated by reference to Exhibit
10.9 to CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
X-2
50
Exhibit
Number Description
- ------ -----------
10.5* 1992 Management Stock Option Plan, including forms
of Nonqualified Stock Option Agreement (Time
Vesting) and Nonqualified Stock Option Agreement
(Performance Option), as amended, and forms of
promissory notes and pledge agreements,
incorporated by reference to Exhibit 10.11 to
CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.6* Cole National Corporation 1993 Management Stock
Option Plan, including forms of Nonqualified Stock
Option Agreement (1993 Time Vesting) and form of
secured promissory notes and stock pledge
agreement, incorporated by reference to Exhibit
10.29 to CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.7* Form of Option Agreement for Directors of the
Company, incorporated by reference to Exhibit
10.41 to the Company's Registration Statement on
Form S-1 (Registration No. 33-74228).
10.8* Nonqualified Stock Option Plan for Non-employee
Directors, incorporated by reference to Exhibit
10.45 to the Company's Registration Statement on
Form S-1 (Registration No. 33-74228).
10.9* Form of Nonqualified Stock Option Agreement for
Non-employee Directors, incorporated by reference
to Exhibit 10.9 of Cole National Corporation's
Annual Report on Form 10-K for the year ended
February 3, 1996 (File No. 1-12814).
10.10* Cole National Corporation 1996 Management Stock
Option Plan, including forms of Nonqualified Stock
Option Agreement (1996 Time Vesting), incorporated
by reference to Exhibit 10.10 of Cole National
Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
X-3
51
Exhibit
Number Description
- ------ -----------
10.11* Management Bonus Programs, incorporated by
reference to Exhibit 10.14 to CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.12* Management Bonus Plan, incorporated by reference
to Exhibit 10.30 to CNG's Registration Statement
on Form S-1 (Registration No. 33-89996).
10.21* Executive Life Insurance Plan of the Company,
incorporated by reference to Exhibit 10.12 to
CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.22* Medical Expense Reimbursement Plan of the Company
effective as of February 1, 1992, incorporated by
reference to Exhibit 10.13 to CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.23 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
CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.24 Assignment and Assumption Agreement dated as of
September 30, 1993 between the Company and CNG,
incorporated by reference to Exhibit 10.24 of Cole
National Corporation's Annual Report on Form 10-K
for the year ended February 3, 1996 (File No.
1-12814).
10.25 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
CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
X-4
52
Exhibit
Number Description
- ------ -----------
10.26 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 CNG's Registration Statement
on Form S-1 (Registration No. 33-66342).
10.27 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 CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.28 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 CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.29 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 of Cole National Corporation's Annual Report
on Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
10.30 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 CNG's Registration
Statement on Form S-1 (Registration No. 33-66342).
10.31 Master License Agreement dated as of October 2,
1986, between Montgomery Ward & Co., Incorporated
and Cole Vision Corporation, as amended,
incorporated by reference to Exhibit 10.21 to
CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
X-5
53
Exhibit
Number Description
- ------ -----------
10.32 Master License Agreement dated as of June 12,
1986, between Montgomery Ward & Co., Incorporated
and Bay Cities Optical Company, as amended,
incorporated by reference to Exhibit 10.22 to
CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.33 Form of License Agreement (Optical), incorporated
by reference to Exhibit 10.24 to CNG's
Registration Statement on Form S-1 (Registration
No. 33-66342).
10.34 Form of License/Lease Agreement (Optical),
incorporated by reference to Exhibit 10.25 to
CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.37 Form of Indemnification Agreement for Directors of
the Company, incorporated by reference to Exhibit
10.19 to CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.38 Form of Indemnification Agreement for Officers of
the Company, incorporated by reference to Exhibit
10.20 to CNG's Registration Statement on Form S-1
(Registration No. 33-66342).
10.39* Supplemental Retirement Benefit Plan of the
Company, incorporated by reference to Exhibit
10.38 to the Company's Registration Statement on
Form S-1 (Registration No. 33-74228).
10.40* Supplemental Pension Plan of the Company,
incorporated by reference to Exhibit 10.48 to the
Company's Registration Statement on Form S-1
(Registration No. 33-74228).
10.41 Warrant Agreement dated as of March 6, 1992
between the Company and the purchasers named
therein, incorporated by reference to Exhibit
10.35 to the Company's Registration Statement on
Form S-1 (Registration No. 33-74228).
X-6
54
Exhibit
Number Description
- ------ -----------
10.42 Warrant Agreement dated as of September 25, 1990
between the Company and the purchasers named
therein, incorporated by reference to Exhibit
10.36 to the Company's Registration Statement on
Form S-1 (Registration No. 33-74228).
10.43 Equity Registration Rights Agreement dated as of
March 6, 1992 by and among the Company, Apollo
Investment Fund, L.P., Land Free Investment
Limited, former holders of the 13-1/4%
Subordinated Debentures named therein, Jeffrey A.
Cole, the stockholders named therein, The
Prudential Life Insurance Company of America and
Executive Life Insurance Company, incorporated by
reference to Exhibit 10.33 to the Company's
Registration Statement on Form S-1 (Registration
No. 33-74228).
10.44 Consent and Amendment to Equity Registration
Rights Agreement by and among the Company and the
stockholders named therein, incorporated by
reference to Exhibit 10.44 to the Company's
Registration Statement on Form S-1 (Registration
No. 33-74228).
10.45 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 Corporations
Quarterly Report on Form 10-Q for the period ended
November 2, 1996 (File No. 1-12814).
10.46 Credit Agreement, dated as of November 15, 1996,
among 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 99.1 of Cole National Corporation's Report
on Form 8-K, filed with the Commission on December
2, 1996 (File No. 1-12814).
X-7
55
Exhibit
Number Description
- ------ -----------
10.47 CNG Guarantee and Cash Collateral Agreement, dated
as of November 15, 1996, by the Company 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).
10.48 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).
10.49** License agreement (Gift Centers and Key
Departments) dated as of March 16, 1995, between
Sears, Roebuck and Co. and Cole Gift Centers,
Inc., as amended.
21 Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP.
24 Power(s) of Attorney.
27 Financial Data Schedule.
* Reflects management contract or other compensatory arrangement required to
be filed as an exhibit pursuant to Item 14(c) of this Form 10-K.
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF
THIS EXHIBIT, AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.