10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Exhibit 10.1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

X	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended August 4, 2001, or
	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from ________ to ________

Commission file number 1-12814

COLE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	34-1453189 (I.R.S. employer identification no.)
5915 Landerbrook Drive Mayfield Heights, Ohio (Address of principal executive offices)	44124 (Zip code)

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

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

As of August 31, 2001, 15,885,649 shares of the registrant’s common stock were outstanding.

COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED AUGUST 4, 2001
INDEX

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of August 4, 2001 and February 3, 2001		1
	Consolidated Statements of Operations for the 13 and 26 weeks ended August 4, 2001 and July 29, 2000		2
	Consolidated Statements of Cash Flows for the 26 weeks ended August 4, 2001 and July 29, 2000		3
	Notes to Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		6
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		10
PART II.	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders		11
Item 6.	Exhibits and Reports on Form 8-K		12

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

			August 4,			February 3,
			2001			2001
Assets
Current assets:
	Cash and cash equivalents		$	34,523		$	36,725
	Accounts receivable, less allowance for doubtful accounts of $6,534 and $7,348, respectively			38,720			40,505
	Current portion of notes receivable			4,366			5,097
	Inventories			130,346			122,238
	Refundable income taxes			547			1,237
	Prepaid expenses and other			15,553			15,188
	Deferred income tax benefits			2,207			2,177
		Total current assets		226,262			223,167
Property and equipment, at cost				284,164			275,241
	Less — accumulated depreciation and amortization			(154,796	)		(149,543	)
		Total property and equipment, net		129,368			125,698
Notes receivable, excluding current portion, less reserves for uncollectible amounts of $3,945 and $4,537, respectively				19,422			18,000
Deferred income taxes and other assets				78,748			75,460
Intangible assets, net				148,680			151,588
		Total assets	$	602,480		$	593,913
Liabilities and Stockholders’ Equity
Current liabilities:
	Current portion of long-term debt		$	207		$	452
	Accounts payable			56,801			56,505
	Accrued interest			6,418			6,736
	Accrued liabilities			81,827			76,646
	Accrued income taxes			5,301			3,458
		Total current liabilities		150,554			143,797
Long-term debt, net of discount and current portion				284,269			284,286
Other long-term liabilities				15,923			16,280
Stockholders’ equity				151,734			149,550
		Total liabilities and stockholders’ equity	$	602,480		$	593,913

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

1

COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)

		Thirteen Weeks Ended						Twenty-Six Weeks Ended
		August 4,			July 29,			August 4,			July 29,
		2001			2000			2001			2000
Net revenue		$	273,348		$	264,663		$	543,639		$	522,434
Costs and expenses:
	Cost of goods sold		90,684			87,981			177,800			174,309
	Operating expenses		163,354			159,624			329,452			317,967
	Depreciation and amortization		10,079			9,960			19,952			19,962
	Total costs and expenses		264,117			257,565			527,204			512,238
Operating income			9,231			7,098			16,435			10,196
Interest and other (income) expense:
	Interest expense		7,010			7,028			14,068			14,088
	Interest and other income		(1,024	)		(934	)		(2,311	)		(1,884	)
	Total interest and other (income) expense, net		5,986			6,094			11,757			12,204
Income (loss) before income taxes			3,245			1,004			4,678			(2,008	)
Income tax provision (benefit)			1,786			552			2,574			(1,104	)
Net income (loss)		$	1,459		$	452		$	2,104		$	(904	)
Earnings (loss) per share:
	Basic	$	0.09		$	0.03		$	0.13		$	(0.06	)
	Diluted	$	0.09		$	0.03		$	0.13		$	(0.06	)

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

2

COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

				Twenty-Six Weeks Ended
				August 4,			July 29,
				2001			2000
Cash flows from operating activities:
	Net income (loss)			$	2,104		$	(904	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization			19,952			19,962
		Non-cash interest, net			(234	)		(711	)
		Gain on sale of fixed assets			(683	)		—
		Increases (decreases) in cash resulting from changes in operating assets and liabilities:
			Accounts and notes receivable, prepaid expenses and other assets		3,261			2,981
			Inventories		(8,108	)		(16,354	)
			Accounts payable, accrued liabilities and other liabilities		5,247			9,274
			Accrued interest		(318	)		(369	)
			Accrued, refundable and deferred income taxes		2,648			(549	)
			Net cash provided by operating activities		23,869			13,330
Cash flows from investing activities:
	Purchases of property and equipment, net				(19,907	)		(17,598	)
	Proceeds from sale of fixed assets, net				4,712			—
	Systems development costs				(4,578	)		(3,851	)
	Investment in Pearle Europe, net				(6,446	)		(553	)
	Other, net				(176	)		(10	)
			Net cash used for investing activities		(26,395	)		(22,012	)
Cash flows from financing activities:
	Repayment of long-term debt				(312	)		(770	)
	Net proceeds from exercise of stock options				1,372			472
	Net issuance of notes receivable — stock options and awards				(340	)		(1,128	)
	Payment of deferred financing fees				—			(375	)
	Other, net				(396	)		(175	)
			Net cash provided by (used for) financing activities		324			(1,976	)
Cash and cash equivalents:
	Net decrease during the period				(2,202	)		(10,658	)
	Balance, beginning of the period				36,725			28,953
	Balance, end of the period			$	34,523		$	18,295

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

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COLE NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(1) Summary of Significant Accounting Policies

Basis of Presentation and Accounting Policies

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

     The accompanying consolidated financial statements have been prepared without audit and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although management believes that the disclosures herein are adequate to make the information not misleading. Results for interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended February 3, 2001.

     In the opinion of management, the accompanying financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of August 4, 2001 and the results of operations and cash flows for the 26 weeks ended August 4, 2001 and July 29, 2000.

Inventories

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

Cash Flows

     Net cash flows from operating activities reflect cash payments for income taxes and interest of $51,000 and $13,785,000 respectively, for the 26 weeks ended August 4, 2001, and $176,000 and $13,915,000, respectively, for the 26 weeks ended July 29, 2000.

Earnings Per Share

     Earnings per share for the 13 and 26 weeks ended August 4, 2001 and July 29, 2000 have been calculated based on the following weighted average number of common shares and equivalents outstanding:

	Thirteen Weeks				Twenty-six Weeks
	2001		2000		2001		2000
Basic		15,802,850		15,552,558		15,748,537		15,535,685
Diluted		16,243,001		15,594,899		16,019,867		15,535,685

4

COLE NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(1) Summary of Significant Accounting Policies (continued)

Total Other Comprehensive Income (Loss)

     Total other comprehensive income (loss) for the 13 and 26 weeks ended August 4, 2001 and July 29, 2000 is as follows (000’s omitted):

	Thirteen Weeks					Twenty-Six Weeks
	2001			2000		2001			2000
Net income (loss)	$	1,459		$	452	$	2,104		$	(904	)
Cumulative translation income (loss)		(82	)		1,141		(959	)		(672	)
Total comprehensive income (loss)	$	1,377		$	1,593	$	1,145		$	(1,576	)

(2) Segment Information

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

					Thirteen Weeks						Twenty-Six Weeks
					2001			2000			2001			2000
Net revenue:
	Cole Vision				$	200,714		$	190,548		$	417,095		$	397,663
		Things Remembered				72,634			74,115			126,544			124,771
			Consolidated net revenue		$	273,348		$	264,663		$	543,639		$	522,434
Operating income (loss):
	Cole Vision				$	1,403		$	(969	)	$	12,782		$	8,474
		Things Remembered				10,434			11,887			9,366			9,509
				Total segment operating income		11,837			10,918			22,148			17,983
	Unallocated amounts:
				Corporate expenses		(2,606	)		(3,820	)		(5,713	)		(7,787	)
	Consolidated operating income					9,231			7,098			16,435			10,196
	Interest and other income, net					(5,986	)		(6,094	)		(11,757	)		(12,204	)
	Income (loss) before income taxes				$	3,245		$	1,004		$	4,678		$	(2,008	)

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

     The following is a discussion of certain factors affecting the Company’s results of operations for the 13 and 26 week periods ended August 4, 2001 and July 29, 2000 (the Company’s second quarter and first six months, respectively) and its liquidity and capital resources. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this filing and the audited financial statements for the fiscal year ended February 3, 2001 included in the annual report on Form 10-K.

     Fiscal years end on the Saturday closest to January 31 and are identified according to the calendar year in which they begin. For example, the fiscal year ended February 3, 2001 is referred to as “fiscal 2000.” The current fiscal year, which will end February 2, 2002, is referred to as “fiscal 2001.”

Results of Operations

     The following table sets forth certain operating information for the second quarter and first six months of fiscal 2001 and fiscal 2000 (dollars in millions):

			Second Quarter									First Six Months
			2001			2000			Change			2001			2000			Change
Net revenue:
	Cole Vision		$	200.7		$	190.6			5.3	%	$	417.1		$	397.6			4.9	%
	Things Remembered			72.6			74.1			(2.0	)		126.5			124.8			1.4
		Total net revenue	$	273.3		$	264.7			3.3	%	$	543.6		$	522.4			4.1	%
Gross margin			$	182.7		$	176.7			3.4	%	$	365.8		$	348.1			5.1	%
Operating expenses				163.4			159.6			2.3			329.4			317.9			3.6
Depreciation and amortization				10.1			10.0			1.2			20.0			20.0			(0.1	)
		Operating income	$	9.2		$	7.1			30.1	%	$	16.4		$	10.2			61.2	%
Percentage of net revenue:
	Gross margin			66.8	%		66.8	%		—			67.3	%		66.6	%		0.7
	Operating expenses			59.7			60.3			(0.6	)		60.6			60.8			(0.2	)
	Depreciation and amortization			3.7			3.8			(0.1	)		3.7			3.8			(0.1	)
		Operating income		3.4	%		2.7	%		0.7			3.0	%		2.0	%		1.0
Number of retail locations at the end of the period:
	Cole Licensed Brands			1,224			1,106
	Pearle company-owned			435			446
	Pearle franchised			416			425
		Total Cole Vision		2,075			1,977
	Things Remembered			780			788
		Total Cole National		2,855			2,765

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     The increases in consolidated net revenue for the second quarter and first six months were primarily attributable to increases in comparable store sales at Cole Vision, an increase in the number of Target Optical locations and additional managed vision care revenue. The second quarter revenue increase at Cole Vision was partially offset by a sales decrease at Things Remembered caused by the general slowdown in mall traffic and the calendar shift that benefited first quarter of fiscal 2001 as it ended one week closer to Mother’s Day, an important gift giving occasion. Changes in comparable store sales by business compared to the same periods a year ago were:

		Second Quarter			First Six Months
Cole Licensed Brands (U.S.)			1.6	%		3.3	%
Pearle U.S. company-owned			3.5	%		2.3	%
	Total Cole Vision		1.8	%		2.2	%
Things Remembered			(1.6	%)		(0.8	%)
	Total Cole National		0.8	%		1.4	%
Pearle U.S. franchise stores			(0.2	%)		(1.1	%)
Pearle U.S. chain-wide			1.5	%		0.5	%

     At Cole Licensed Brands, the second quarter and first six months comparable store sales increases primarily reflect an increase in the average spectacle selling price. Comparable store sales for the second quarter increased despite the fact that this year’s National Eye Exam Month promotion at Sears Optical will run exclusively in the third quarter rather than beginning in the second quarter as it did last year. At Pearle company-owned stores, the second quarter comparable store sales increase was driven by the average spectacle selling price and an increase in the number of transactions. For the first six months, company-owned comparable store sales were primarily driven by an increase in average spectacle selling price that was due, in part, to not repeating a “50% off frame” promotion that ran during the entire first quarter of fiscal 2000. At Things Remembered, comparable store sales for the first six months decreased, in part, from not repeating February 2000’s aggressive merchandise clearance promotion and from the general slowdown in mall traffic. However, average selling price increased as a result of sales of new merchandise at higher average unit retails, more personalization and not repeating last year’s February promotion.

     The gross margin dollar increase for the second quarter resulted from increased net revenue and gross margin rate at Cole Vision partially offset by decreased net revenue and gross margin rate at Things Remembered. The gross margin dollar increase for the first six months resulted from improvements in net revenue and gross margin rate at both Cole Vision and Things Remembered. The gross margin rate at Cole Vision improved 0.4 and 0.8 percentage points for the second quarter and first six months of fiscal 2001 compared to the same periods last year. The primary causes for the improvement were the increased average spectacle selling price and the additional revenue from managed vision care. The gross margin rate at Things Remembered decreased 0.5 percentage points in the second quarter of fiscal 2001 compared to the same period last year as a result of various promotional activities undertaken to stimulate sales. The gross margin rate for the first six months improved 0.4 percentage points reflecting the improvement in average selling price due in part to not repeating last year’s first quarter aggressive clearance promotion.

     The increases in operating expenses for the second quarter and first six months were primarily due to costs incurred to support the increases in net revenue and the Target Optical expansion. Operating expenses as a percentage of net revenue decreased by 0.6 and 0.2 percentage points in the second quarter and first six months compared to the same periods last year. The second quarter improvement was a result of leveraging non-store overhead and Cole Vision’s advertising expense, as well as improved efficiencies in the cost per managed vision care claim processed. Partially offsetting these gains were a 1.2 percentage point increase in payroll costs and a 0.2 percentage point increase in store occupancy costs due to the Target Optical expansion and additional payroll costs incurred for training, improving customer satisfaction and selling. Excluding a

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$1.8 million first quarter severance charge in fiscal 2000, operating expenses as a percentage of net revenue for the first six months were essentially flat to last year.

     The increase in operating income for the second quarter was primarily attributable to the increases in net revenues and gross margin rates at Cole Vision and the improvement in operating expense leverage. For the first six months, the increase in operating income resulted from increases in net revenue and gross margin rates at both Cole Vision and Things Remembered and the severance charge included in fiscal 2000 results. During the first six months of fiscal 2001, 60 Target Optical locations were opened, bringing the total number to 177. The Company’s profit improvement for the second quarter and first six months was achieved after absorbing the increased losses from the continued expansion of Target Optical.

     The decrease in six month interest and other (income) expense, net, was primarily the result of a $0.7 million first quarter gain from the sale of a Dallas facility no longer needed for Pearle’s operations. An income tax provision (benefit) was recorded in the first six months of fiscal 2001 and fiscal 2000 using the Company’s estimated annual effective tax rate of 55%.

Liquidity and Capital Resources

     The Company’s primary source of liquidity is funds provided from operations of its operating subsidiaries. In addition, its wholly owned subsidiary, Cole National Group, Inc., and its operating subsidiaries have a working capital commitment ranging from $50.0 million to $75.0 million based on Cole National Group’s current debt leverage ratio as described in the credit facility. As of August 4, 2001, the total commitment was $75.0 million and availability under the credit facility totaled $64.5 million, after reduction for commitments under outstanding letters of credit. There were no working capital borrowings outstanding at any time during the first six months of fiscal 2001 or the first six months of fiscal 2000. Cole National Group and its principal operating subsidiaries were in compliance with all credit facility covenants at August 4, 2001.

     Operations for the first six months provided $23.9 million of cash in fiscal 2001 compared to $13.3 million in fiscal 2000. The primary reasons for the $10.6 million increase in cash provided by operations were the changes in operating assets and liabilities during the first six months of fiscal 2001 as compared to fiscal 2000. A decreased use of funds for inventories, an increase in funds provided from improved earnings and additional funds provided by the change in accrued, refundable and deferred income taxes versus a year ago were partially offset by less funds provided by accounts payable and accrued liabilities in fiscal 2001 versus last year.

     Cash used for investing activities included capital additions of $19.9 million and $17.6 million for the first six months of fiscal 2001 and fiscal 2000, respectively. The majority of capital expenditures were for store fixtures, equipment and leasehold improvements for new stores including the Target Optical expansion and the remodeling of existing stores. Net proceeds from the sale of the Dallas facility in the first quarter provided $4.7 million of cash flow in fiscal 2001. Investments in systems development costs totaled $4.6 million and $3.9 million in the first six months of fiscal 2001 and fiscal 2000, respectively. The Company’s net investment in Pearle Europe used $6.4 million and $0.6 million in the first six months of fiscal 2001 and fiscal 2000, respectively. The investment in fiscal 2001 was made in connection with Pearle Europe’s acquisition of a leading optical retail chain in Portugal during the second quarter of fiscal 2001.

     The Company believes that funds provided from operations, along with funds available under the credit facility, will provide adequate sources of liquidity to allow its operating subsidiaries to continue to expand the number of stores and to fund capital expenditures and systems development costs.

8

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This standard requires that companies stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The new standard generally will be effective for the Company in the first quarter of fiscal 2002. The Company is in the process of quantifying the impact of adopting each of the provisions of SFAS 142.

     Upon adoption of SFAS 142, the Company expects to stop amortizing goodwill and tradenames. Based upon the current level of these assets, this would reduce annual amortization expense by approximately $5.7 million. Because a substantial portion of the goodwill amortization is nondeductible for tax purposes, the impacts of stopping goodwill and tradename amortization would be to reduce the Company’s annual effective tax rate and to increase its annual net income.

     The FASB has also issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141) and No. 143 “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 141 changes the accounting for business combinations by, among other things, prohibiting the use of the pooling of interests method. SFAS 143 provides guidance for legal obligations arising from the retirement of long-lived assets. Neither of these standards is expected to have a material affect on the Company’s financial position or operations.

9

Forward-Looking Information

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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PART II — OTHER INFORMATION

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

     On June 14, 2001 the Company held its annual meeting of stockholders. At that meeting, the stockholders elected seven directors to serve until the next annual meeting of stockholders, confirmed the appointment of Arthur Andersen LLP as independent auditors of the Company for the fiscal year ending February 2, 2002, and approved amendments to the Company’s Management Incentive Bonus Plan and its Employee Stock Purchase Plan.

     Of the total eligible votes of 15,695,229, stockholders cast votes of 14,664,119 or 93.43% of the total eligible votes. The votes cast for the aforementioned matters were as follows:

     1) Election of Directors

					Abstentions
					and/or Broker
	For		Withheld		Non-votes
Jeffrey A. Cole		14,577,410		86,709		0
Timothy F. Finley		14,580,489		83,630		0
Irwin W. Gold		14,582,339		81,780		0
Peter V. Handal		14,578,977		85,142		0
Larry Pollock		14,578,707		85,412		0
Charles A. Ratner		14,578,144		85,975		0
Walter J. Salmon		14,582,224		81,895		0

     2) Confirmation of Independent Auditors

					Abstentions
					and/or Broker
	For		Withheld		Non-votes
Arthur Andersen LLP		14,639,349		15,211		9,559

     3) Approval of amendments to, and reauthorization of, the Management Incentive Bonus Program.

				Abstentions
				and/or Broker
For		Withheld		Non-votes
	11,459,438		1,268,566		13,374

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Item 4. Submission of Matters to a Vote of Security Holders (continued)

     4) Approval of amendments to the Employee Stock Purchase Plan.

				Abstentions
				and/or Broker
For		Withheld		Non-votes
	14,552,965		93,057		18,097

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits. The following Exhibits are filed herewith and made a part hereof:
10.1	Management Incentive Bonus Program (Amended and Restated as of March 29, 2001)
10.2	1999 Employee Stock Purchase Plan (Amended and Restated effective June 14, 2001)
(b)	Reports on Form 8-K
	The Company filed a report on Form 8-K on June 22, 2001, which attached a press release regarding the election of Melchert Frans Groot to the Board of Directors.

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SIGNATURE

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

COLE NATIONAL CORPORATION

By:	/s/William P. Lahiff, Jr.
	William P. Lahiff, Jr. Senior Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer)

Date: September 18, 2001

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COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED AUGUST 4, 2001

EXHIBIT INDEX

Exhibit
Number	Description
10.1*	Management Incentive Bonus Program (Amended and Restated as of March 29, 2001)
10.2	1999 Employee Stock Purchase Plan (Amended and Restated effective June 14, 2001), incorporated by reference to Exhibit C of Cole National Corporation’s definitive Proxy Statement filed May 10, 2001 (File No. 1-12814)

      * Filed herewith.

14 EX-10.1 3 l90387aex10-1.txt EXHIBIT 10.1 1 Exhibit 10.1 COLE NATIONAL CORPORATION MANAGEMENT INCENTIVE BONUS PROGRAM ARTICLE I The Program and Its Purpose Section 1.1 ADOPTION OF PROGRAM. This Management Incentive Bonus Program (herein referred to as the "Program") is hereby adopted, effective as of March 17, 1996, to provide for the operation of the Program on and after such date. Section 1.2 PURPOSE. The purpose of the Program is (a) to provide an annual incentive to senior managers of the Company to improve the Company's operating results, (b) to offer opportunities for equity ownership in the Company in order to promote retention of such senior managers and (c) to make the Company's overall compensation program competitive with similar companies. ARTICLE II Definitions Section 2.1 DEFINITIONS. For purposes of the Program, the following terms shall be as set forth below. "Award" means the payment earned by a Participant as such payment is determined as set forth in Article VI. "Base Salary" means, for any Fiscal Year, the Participant's base salary as it has been approved as of the Performance Goals Date for such Fiscal Year, or if the Participant's employment with the Company commences after the Performance Goals Date but prior to November 1 of such Fiscal Year or if the Participant is promoted into a position of substantially greater responsibilities after the Performance Goals Date but prior to November 1 of such Fiscal Year, the Participant's base salary at the commencement of such employment or as effective upon such promotion. "Board" means the Board of Directors of the Company as it may be constituted from time to time. "Change in Control" means the occurrence of any of the following events: (a) the Company merges into itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving or resulting corporation immediately after such transaction are directly or indirectly 2 beneficially owned in the aggregate by the former stockholders of the Company immediately prior to such transaction; (b) all or substantially all the assets accounted for on the Consolidated Balance Sheet of the Company are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly or indirectly beneficially held in the aggregate by the former stockholders of the Company immediately prior to such transaction or series of transactions; (c) a person, within the meaning of Section 3(a)(9) or 13(d)(3) (as in effect on the date hereof) of the Exchange Act of 1934), becomes the beneficial owner (as defined in Rule 13d-3 of Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934) of (i) 15% or more but less than 35% of the voting power of the then-outstanding voting securities of the Company without the prior approval of the Board, or (ii) 35% or more of the voting power of the then-outstanding voting securities of the Company; provided, however, that the foregoing does not apply to any such acquisition that is made by (w) any Subsidiary of the Company; (x) any employee benefit plan of the Company or any Subsidiary; or (y) any person or group of which employees of the Company or of any Subsidiary control a greater than 25% interest unless the Board of Directors of the Company determines that such person or group is making a "hostile acquisition"; or (d) a majority of the members of the Board of Directors of the Company or of any Subsidiary are not Continuing Directors, where a "Continuing Director" is any member of the Board of Directors of the Company or, with respect to the Subsidiary, of such Subsidiary who (x) was a member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary on the date hereof or (y) was nominated for or elected to such Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. "Committee" means the Compensation Committee of the Board as it may be constituted from time to time. "Common Stock" means the Class A Common Stock, $.001 par value per share, of the Company, or any other class of shares subsequently denominated as common stock. "Company" means Cole National Corporation, a Delaware corporation, or any successor organization. "Covered Employee" means a Participant who is a "Covered Employee" within the meaning of Section 162(m) of the Code. 3 "Disability" means a mental or physical condition which, in the opinion of the Committee, renders a Participant unable or incompetent to carry out the job responsibilities which such Participant held or the duties to which such Participant was assigned at the time the disability was incurred, and which is expected to be permanent or for an indefinite duration. "Eligible Employee" has the meaning ascribed to such term in Section 3.1 hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fiscal Year" means a fiscal year of the Company. "Participant" means an employee to whom an award is granted pursuant to the Program. "Performance Goals" has the meaning ascribed to such term in Section 5.1 hereof. "Performance Goals Date" means the date on which the Committee establishes the Performance Goals for a Fiscal Year in accordance with Section 5.2. "Program" means this Management Incentive Bonus Program. "Retirement" means retirement from active employment with the Company and each Subsidiary under any retirement plan maintained by the Company. "Subsidiary" means a corporation, company or other entity (i) more than 50 percent of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but more than 50 percent of whose ownership interest representing the right generally to make decisions for such other entity is, now or hereafter, owned or controlled, directly or indirectly, by the Company. ARTICLE III Eligibility and Participation Section 3.1 ELIGIBILITY. All senior management employees of the Company or any Subsidiary who are designated by the Committee as eligible employees for the Program (an "Eligible Employee") are eligible to participate in the Program. Section 3.2 PARTICIPATION. (a) DESIGNATION. The Committee shall, in its sole discretion, designate for a Fiscal Year which employees, if any, will participate in the Program for such Fiscal Year. Each Eligible Employee approved for participation will be notified of the selection as soon after approval as is practicable and shall become a Participant upon acceptance by him or her of such selection. 4 (b) PARTICIPATION FOR EMPLOYEES HIRED AFTER COMMENCEMENT OF FISCAL YEAR. An Eligible Employee whose employment with the Company commences after the first day of a Fiscal Year but prior to November 1 of such Fiscal Year and who remains actively employed through the end of the Fiscal Year may, at the Committee's discretion, participate in the Program for the Fiscal Year on a pro rata basis. An Eligible Employee whose employment with the Company commences after October 31 of a particular year may not participate in the Program for the Fiscal Year in which such employment commences. (c) NO RIGHT TO PARTICIPATE. No Participant or Eligible Employee has or at any time will have any right to be selected for current or future participation in the Program. ARTICLE IV Plan Administration Section 4.1 RESPONSIBILITY. The Committee has total and exclusive responsibility to control, operate, manage and administer the Program in accordance with its terms. Section 4.2 AUTHORITY OF THE COMMITTEE. The Committee has and will have all the authority that may be necessary or helpful to enable it to discharge its responsibilities with respect to the Program. Without limiting the generality of the foregoing, the Committee has the exclusive right to (a) interpret the Program, (b) determine eligibility for participation in the Program, (c) decide all questions concerning eligibility for and the amount of Awards payable under the Program, (d) establish and administer the Performance Goals and certify whether, and to what extent, they are attained, (e) construe any ambiguous provision of the Program, (f) correct any default, (g) supply any omission, (h) reconcile any inconsistency, (i) issue administrative guidelines as an aid to administer the Program, (j) make regulations for carrying out the Program and to make changes in such regulations as they from time to time deem proper, and (k) decide any and all questions arising in the administration, interpretation and application of the Program. Section 4.3 DISCRETIONARY AUTHORITY. The Committee shall have full discretionary authority in all matters related to the discharge of its responsibilities and the exercise of its authority under the Program including, without limitation, its construction of the terms of the Program and its determination of eligibility for participation and Awards under the Program. It is the intent of the Company in establishing the Program that the decisions of the Committee and its action with respect to the Program will be final, binding and conclusive upon all persons having or claiming to have any right or interest in or under the Program. Section 4.4 SECTION 162(m) OF THE CODE. With regard to all Covered Employees, the Program shall for all purposes be interpreted and construed in accordance with Section 162(m) of the Code. Section 4.5 DELEGATION OF AUTHORITY. Only the Committee may select and grant Awards to Participants who are Covered Employees. Except for such limitation and to the extent 5 otherwise prohibited by law, the Committee may delegate some or all of its authority under the Program to any person or persons provided that any such delegation be in writing. ARTICLE V Performance Measurement Section 5.1 DEFINITION OF PERFORMANCE GOALS. The performance criteria for a Fiscal Year (the "Performance Goals") will be based on: operating profits (including, but not limited to, cash flow, EBIT or EBITDA), net profits, earnings per share, profit return ratios and margins, revenues, shareholder return and/or value, stock price and working capital. Performance Goals may be measured solely on a corporate, subsidiary, business unit, or comparable store basis; or a combination thereof. Further, Performance Goals may reflect absolute performance, a relative comparison of entity performance to the performance of a peer group of entities, growth or a selected external measure of the selected Performance Goal. Profits, earnings and revenues used for any Performance Goal measurement may exclude: gains or losses on operating asset sales or dispositions; asset write-downs; litigation or claim disputes or settlements; accruals for historic environmental obligations; effect of changes in tax law or rate on deferred tax liabilities; accruals for reorganization and restructuring programs; uninsured catastrophic property losses; the cumulative effect of changes in accounting principles; and any extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30, and/or in management's discussion and analysis of financial performance appearing in the Company's annual report to shareholders for the applicable year. Section 5.2 ESTABLISHMENT OF PERFORMANCE GOALS. The Committee will, on or before the 90th day of the Fiscal Year, establish (a) the Performance Goals and (b) if more than one Performance Goal is established, the weighting of the Performance Goals. Section 5.3 ADJUSTMENTS TO PERFORMANCE GOALS. The Committee may at any time during the first 90 days of a Fiscal Year, or, subject to the second paragraph of this Section 5.3, at any time thereafter in its sole and absolute discretion, adjust or modify the calculation of a Performance Goal for such Fiscal Year in order to prevent the dilution or enlargement of the rights of Participants (a) in the event or in anticipation of any unusual or extraordinary corporate items, transaction, event or development; (b) in recognition or in anticipation of any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to or in anticipation of changes in applicable laws, regulations, accounting principles or business conditions; and (c) in view of the Committee's assessment of the business strategy of the Company, performance of comparable organizations, economic and business conditions, and any other circumstances deemed relevant. Notwithstanding the foregoing, to the extent the exercise of such authority after the first 90 days of a Fiscal Year would cause the Awards granted to the Covered Employees for the Fiscal Year to fail to qualify as "performance-based compensation" under Section 162(m) of the Code, then such authority shall only be exercised with respect to those Participants who are not Covered Employees. 6 ARTICLE VI Awards Section 6.1 POTENTIAL. On or before the 90th day of each Fiscal Year the Committee shall establish a written schedule of the amount of an Award that will be payable to a Participant under the Program. The amount of an Award will be expressed as a percentage of Base Salary, ranging from 0% to 100%, depending upon the level of attainment of the Performance Goals for such Fiscal Year. Section 6.2 CALCULATION AND APPROVAL. As soon as practicable after the Company's financial results for the Fiscal Year have been approved by the Board, the Committee will certify in writing the attainment of the Performance Goals established for the Fiscal Year and will calculate the Award, if any, payable to each Participant under the schedule established pursuant to Section 6.1 hereof. If a Participant's Base Salary is adjusted after the Performance Goals Date for the Fiscal Year, such Participant's Award shall be prorated as of the date of adjustment. Section 6.3 FORM. Awards may, at the Committee's sole discretion, be paid in cash, Common Stock or a combination thereof, and be subject to such terms, conditions, restrictions and limitations (including, but not limited to, restrictions on transferability and vesting) as the Committee may determine, provided that such terms, conditions, restrictions and limitations are not inconsistent with the terms of the Program. For purposes of the Program, the payment of an Award in shares of Common Stock will be based on the average of the closing price of the Common Stock on the New York Stock Exchange for the 30 trading days prior to the last day of the Fiscal Year to which the Award relates. Section 6.4 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT, DISABILITY OR DEATH. If (a) a Participant's employment is terminated during a Fiscal Year by reason of Retirement, Disability or death, and (b) the Participant has been a Participant in the Program for at least three months of such Fiscal Year, the Participant will be eligible to receive a prorated Award for the Fiscal Year in which such termination of employment occurs. Section 6.5 OTHER TERMINATIONS OF EMPLOYMENT. Except as provided in Sections 6.4 and 6.6 hereof, if a Participant's employment is terminated prior to the end of a Fiscal Year, the Participant's participation in the Program shall end, and the Participant shall not be entitled to any Award for such Fiscal Year. Section 6.6 CHANGE IN CONTROL. In the event of a Change in Control, notwithstanding anything contained herein to the contrary, the Company shall pay each Participant who is participating in the Program at the time of such Change in Control a lump sum cash payment equal to the maximum Award that could be paid hereunder to each Participant for the Fiscal Year in which the Change in Control occurs. Further, all terms, conditions, restrictions and limitations in effect on any outstanding Award shall immediately lapse on the date of such Change in Control, and any unvested Award shall automatically become one hundred percent (100%) immediately vested. For purposes of this Program, the Committee has and will have the sole discretion to determine whether and the date on which a Change in Control occurred. 7 Section 6.7 LIMITATIONS. Notwithstanding any provision herein to the contrary except Section 6.6 hereof: (a) no Award will be paid for a Fiscal Year in which performance fails to attain or exceed the minimum level for any of the Performance Goals; and (b) no Award for a Fiscal Year shall exceed $1,500,000. Section 6.8 PAYMENT OF AWARDS BY PARTICIPANT'S EMPLOYER. The payment of any Awards under this Program may be made to a Participant by the Subsidiary that employs the Participant or by the Company. ARTICLE VII Miscellaneous Section 7.1 EMPLOYMENT. Nothing in this Program will interfere with or limit in any way the right of the Company or a Subsidiary to terminate a Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or a Subsidiary. Section 7.2 NONASSIGNABILITY. No Award under this Program may be subject in any manner to alienation, anticipation, sale, transfer (except by will or the laws of descent and distribution), assignment, pledge or encumbrance, nor may any Award be payable to anyone other than the Participant to whom it was granted (other than by will or the laws of descent and distribution). Section 7.3 LAWS GOVERNING. This Program is to be construed in accordance with and governed by the laws of the State of Ohio. Section 7.4 WITHHOLDING TAXES. The Company will deduct from all payments under this Program any federal, state or other taxes required by law to be withheld with respect to such payments. Section 7.5 PROGRAM BINDING ON COMPANY AND SUCCESSORS. This Program will be binding upon and inure to the benefit of the Company, its successors and assigns and each Participant and his or her beneficiaries, heirs, executors, administrators and legal representatives. Section 7.6 AMENDMENT AND TERMINATION. The Committee may suspend or terminate this Program at any time or without prior notice. In addition, the Committee may, from time to time and with or without prior notice, amend this Program in any manner but may not without stockholder approval adopt any amendment that would require the vote of the stockholders of the Company pursuant to Section 16 of the Exchange Act or Section 162(m) of the Code. Section 7.7 REGULATORY APPROVALS AND LISTINGS. Notwithstanding anything contained herein to the contrary, the Company will have no obligation to issue or deliver certificates of Common Stock evidencing Awards or any other Award resulting in the payment of Common Stock prior to (a) the obtaining of any approval from any governmental agency that the 8 Company, in its sole discretion, determines to be necessary or advisable, (b) the admission, if required, of such shares to listing on the stock exchange on which the Common Stock may be listed and (c) the completion of any registration or other qualification of said shares under any state or federal law or ruling of any governmental body which the Company, in its sole discretion, deems necessary or advisable. Section 7.8 COMPLIANCE WITH SECTION 162(m). If any provision of the Program would cause the Awards granted to a Covered Employee not to constitute qualified "performance-based compensation" under Section 162(m) of the Code, that provision, insofar as it pertains to the Covered Employee, shall be severed from, and shall be deemed not to be part of this Program, but the other provisions hereof shall remain in full force and effect. 10-Q 4 l90387ae10-q_pdf.pdf COLE NATIONAL CORP.-PDF COURTESY COPY OF 10-Q begin 644 l90387ae10-q_pdf.pdf M)5!$1BTQ+C(-)>+CS],-"CF4@.#<-+TEN9F\@-S`@,"!2(`TO M4F]O="`W,B`P(%(@#2]09O31O:@,#6!Q58B4SS1&\ M4"LRXA(OMU5(F."ZA@M;5JF7<)B)KK12VBK:(IWRQ=6X,-UK1A#G8BNQ)5M;-"],U5VCZ->R,C79PT3G90`#0T=' M`P,;B&`!$0P:'1T0,48P%T@"^0P<8`X#B,,H`22$P,HXX`18,0=,*\@X0AX& MFF;(P+@99"H/$(N`O5W$P,L8P,#2I[+@*FO"=`6^!R?ZF'(++P9V30AI\F"; MK7MPPXD#0&4``08`;B5S\0UE;F1S=')E86T-96YD;V)J#3@V(#`@;V)J#3(Y M-2`-96YD;V)J#3'0@72`-+T9O;G0@/#P@+T8R(#7!E("]4>7!E,2`-+T9I7!E("]&;VYT1&5S8W)I<'1O M"!;("TQ-C@@+3(Q."`Q,#`P(#@Y."!= M(`TO1F]N=$YA;64@+TU-2$]'1"M4:6UE7!H96XO=2]Q=6]T961B M;')I9VA<#70O2"]F+VYI;F4O22]9+W8O<&5R:6]D+UHO:"]0+THO8V]L;VXO M1B]W+V1O;&QA5P-+WIE"]#+W,O82]7+V,O1%P-+V-O;6UA+VPO="]E:6=H="]8 M+V4O1R]H>7!H96XO=2](+VYI;F4O9B])+W!E2]Z97)O+TTO;B]O;F4O02]K+T\O='=O+VTO<75O M=&5R:6=H="]1+W@O=&AR964O;R]P87)E;FQE9G0O4B]+*0TO1F]N=$9I;&4S M(#@T(#`@4B`-/CX@#65N9&]B:@TW.2`P(&]B:@T\/"`O3&5N9W1H(#$R-CD@ M/CX@#7-T&AI8FET M&AI8FET(#$P+C$I5&H*150*,"`P(#$@4D<*-3,N-S,@.#$V+C4W M(&T*,3$S+C0Y(#@Q-BXU-R!L"E,*96YDAO(278+P3SD^QX%F"=[3D.1M[Y('BWNY]:T^R5?A[@^%W MM!'"Z0EP7I2O5\2D:541DHO2SL)G2^:[+ M%L_Y@$L_HNL'='61RA3J4*4T($6;J(S52E?'A:DU\6J-/%&IF">5RF)BI!L_ M=-!*-RJU2HW.7/TXJE2EE%2/U6<.C$E7BF5^4CE<0IG MM4:J,O.TNT.U*H5*KE$IM7]P/\K\>/VS;`PW'[,$S(K`;$78-$?,$\,^=\14 M&):$8?D8MM[L&$9@)&;$U^$'\1OX.XM*BP<6+XD)Q$Q"2S00)LL0RTH2(X/) M(H%8L%O0*F2%S5:V5O%6+\9M'?>#M-?V?C;5-O:V1I$`E&\ MJ&,"-T$[$9M8/-$TR7W2WR<-BCW$ARB*"J6:[3+MWM*!=)O]2OO,R3,FETQ^ MX!#D<,OQ,\=&1Q,C9ZY(UDEZG'R=LIW>3]%-R9>*I")#/?_FE+BM0M_W6R,( MAG944/_AE_-Y-!#"X!:OPSN*K6ZK_(34$**RMLA6,3.?!@UO85&3D!J=&WCU MU6YN+[(7[#EU4_52LJCQJ?"_Y3]?!B$#V-HF1/>Q<,#,[,CNTU4A"RNT>AZ] M_F+(V6O,R>*[H\?8)C1*4Z.W%1W1JYCI;GNCLED1'V]H@-+&8V6I:64[) MR,M`#X#S;YRY?U5>26XYFUU1FMLBZ:RO**OF"O/1ZW<69+O`S-L*SVA%8N4_ M'P["G.[*?:FIM[GBY**,/0RR=$?6[JQ(RWM!+L(`$P\!IVBA-E!5;W@OV@9K M*/FI^SOFH7]9HB9J;TA8\_XZXZ&"@B*VX&!10:'$:,S)3$[=M5K.B;2F94EX M^Q,"VDW+:.3L[(QF(4\&L>=67EG)7@CH]OHVIO28`UH!N`'4KQDPOACLN\'^ M3H/M3X@+R(L&Y^?/S;9X,L!&]6[K99775]_W/Y.>Z@`K$&Y`ZND,,LY>+MO` MBN`$[SS&Z!X_ZGW\.$G<`^]10"6UA]+W\)1YZ(S#NKKJ0\7GS[&U]09#1V.! 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EX-10.1

   1
                                                                    Exhibit 10.1

                            COLE NATIONAL CORPORATION

                       MANAGEMENT INCENTIVE BONUS PROGRAM


                                    ARTICLE I

                           The Program and Its Purpose

         Section 1.1 ADOPTION OF PROGRAM. This Management Incentive Bonus
Program (herein referred to as the "Program") is hereby adopted, effective as of
March 17, 1996, to provide for the operation of the Program on and after such
date.

         Section 1.2 PURPOSE. The purpose of the Program is (a) to provide an
annual incentive to senior managers of the Company to improve the Company's
operating results, (b) to offer opportunities for equity ownership in the
Company in order to promote retention of such senior managers and (c) to make
the Company's overall compensation program competitive with similar companies.

                                   ARTICLE II

                                   Definitions

         Section 2.1 DEFINITIONS. For purposes of the Program, the following
terms shall be as set forth below.

         "Award" means the payment earned by a Participant as such payment is
determined as set forth in Article VI.

         "Base Salary" means, for any Fiscal Year, the Participant's base salary
as it has been approved as of the Performance Goals Date for such Fiscal Year,
or if the Participant's employment with the Company commences after the
Performance Goals Date but prior to November 1 of such Fiscal Year or if the
Participant is promoted into a position of substantially greater
responsibilities after the Performance Goals Date but prior to November 1 of
such Fiscal Year, the Participant's base salary at the commencement of such
employment or as effective upon such promotion.

         "Board" means the Board of Directors of the Company as it may be
constituted from time to time.

         "Change in Control" means the occurrence of any of the following
events:

         (a)      the Company merges into itself, or is merged or consolidated
                  with, another corporation and as a result of such merger or
                  consolidation less than 51% of the voting power of the
                  then-outstanding voting securities of the surviving or
                  resulting corporation immediately after such transaction are
                  directly or indirectly


   2

                  beneficially owned in the aggregate by the former stockholders
                  of the Company immediately prior to such transaction;

         (b)      all or substantially all the assets accounted for on the
                  Consolidated Balance Sheet of the Company are sold or
                  transferred to one or more corporations or persons, and as a
                  result of such sale or transfer less than 51% of the voting
                  power of the then-outstanding voting securities of such
                  corporation or person immediately after such sale or transfer
                  is directly or indirectly beneficially held in the aggregate
                  by the former stockholders of the Company immediately prior to
                  such transaction or series of transactions;

         (c)      a person, within the meaning of Section 3(a)(9) or 13(d)(3)
                  (as in effect on the date hereof) of the Exchange Act of
                  1934), becomes the beneficial owner (as defined in Rule 13d-3
                  of Securities and Exchange Commission pursuant to the
                  Securities Exchange Act of 1934) of (i) 15% or more but less
                  than 35% of the voting power of the then-outstanding voting
                  securities of the Company without the prior approval of the
                  Board, or (ii) 35% or more of the voting power of the
                  then-outstanding voting securities of the Company; provided,
                  however, that the foregoing does not apply to any such
                  acquisition that is made by (w) any Subsidiary of the Company;
                  (x) any employee benefit plan of the Company or any
                  Subsidiary; or (y) any person or group of which employees of
                  the Company or of any Subsidiary control a greater than 25%
                  interest unless the Board of Directors of the Company
                  determines that such person or group is making a "hostile
                  acquisition"; or

         (d)      a majority of the members of the Board of Directors of the
                  Company or of any Subsidiary are not Continuing Directors,
                  where a "Continuing Director" is any member of the Board of
                  Directors of the Company or, with respect to the Subsidiary,
                  of such Subsidiary who (x) was a member of the Board of
                  Directors of the Company or, with respect to a Subsidiary, of
                  such Subsidiary on the date hereof or (y) was nominated for or
                  elected to such Board of Directors with the affirmative vote
                  of a majority of the Continuing Directors who were members of
                  such Board of Directors at the time of such nomination or
                  election.

         "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.

         "Committee" means the Compensation Committee of the Board as it may be
constituted from time to time.

         "Common Stock" means the Class A Common Stock, $.001 par value per
share, of the Company, or any other class of shares subsequently denominated as
common stock.

         "Company" means Cole National Corporation, a Delaware corporation, or
any successor organization.

         "Covered Employee" means a Participant who is a "Covered Employee"
within the meaning of Section 162(m) of the Code.


   3

         "Disability" means a mental or physical condition which, in the opinion
of the Committee, renders a Participant unable or incompetent to carry out the
job responsibilities which such Participant held or the duties to which such
Participant was assigned at the time the disability was incurred, and which is
expected to be permanent or for an indefinite duration.

         "Eligible Employee" has the meaning ascribed to such term in Section
3.1 hereof.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Fiscal Year" means a fiscal year of the Company.

         "Participant" means an employee to whom an award is granted pursuant to
the Program.

         "Performance Goals" has the meaning ascribed to such term in Section
5.1 hereof.

         "Performance Goals Date" means the date on which the Committee
establishes the Performance Goals for a Fiscal Year in accordance with Section
5.2.

         "Program" means this Management Incentive Bonus Program.

         "Retirement" means retirement from active employment with the Company
and each Subsidiary under any retirement plan maintained by the Company.

         "Subsidiary" means a corporation, company or other entity (i) more than
50 percent of whose outstanding shares or securities (representing the right to
vote for the election of directors or other managing authority) are, or (ii)
which does not have outstanding shares or securities (as may be the case in a
partnership, joint venture or unincorporated association), but more than 50
percent of whose ownership interest representing the right generally to make
decisions for such other entity is, now or hereafter, owned or controlled,
directly or indirectly, by the Company.


                                   ARTICLE III

                          Eligibility and Participation

         Section 3.1 ELIGIBILITY. All senior management employees of the Company
or any Subsidiary who are designated by the Committee as eligible employees for
the Program (an "Eligible Employee") are eligible to participate in the Program.

         Section 3.2 PARTICIPATION.

                  (a) DESIGNATION. The Committee shall, in its sole discretion,
         designate for a Fiscal Year which employees, if any, will participate
         in the Program for such Fiscal Year. Each Eligible Employee approved
         for participation will be notified of the selection as soon after
         approval as is practicable and shall become a Participant upon
         acceptance by him or her of such selection.

   4

                  (b) PARTICIPATION FOR EMPLOYEES HIRED AFTER COMMENCEMENT OF
         FISCAL YEAR. An Eligible Employee whose employment with the Company
         commences after the first day of a Fiscal Year but prior to November 1
         of such Fiscal Year and who remains actively employed through the end
         of the Fiscal Year may, at the Committee's discretion, participate in
         the Program for the Fiscal Year on a pro rata basis. An Eligible
         Employee whose employment with the Company commences after October 31
         of a particular year may not participate in the Program for the Fiscal
         Year in which such employment commences.

                  (c) NO RIGHT TO PARTICIPATE. No Participant or Eligible
         Employee has or at any time will have any right to be selected for
         current or future participation in the Program.

                                   ARTICLE IV

                               Plan Administration

         Section 4.1 RESPONSIBILITY. The Committee has total and exclusive
responsibility to control, operate, manage and administer the Program in
accordance with its terms.

         Section 4.2 AUTHORITY OF THE COMMITTEE. The Committee has and will have
all the authority that may be necessary or helpful to enable it to discharge its
responsibilities with respect to the Program. Without limiting the generality of
the foregoing, the Committee has the exclusive right to (a) interpret the
Program, (b) determine eligibility for participation in the Program, (c) decide
all questions concerning eligibility for and the amount of Awards payable under
the Program, (d) establish and administer the Performance Goals and certify
whether, and to what extent, they are attained, (e) construe any ambiguous
provision of the Program, (f) correct any default, (g) supply any omission, (h)
reconcile any inconsistency, (i) issue administrative guidelines as an aid to
administer the Program, (j) make regulations for carrying out the Program and to
make changes in such regulations as they from time to time deem proper, and (k)
decide any and all questions arising in the administration, interpretation and
application of the Program.

         Section 4.3 DISCRETIONARY AUTHORITY. The Committee shall have full
discretionary authority in all matters related to the discharge of its
responsibilities and the exercise of its authority under the Program including,
without limitation, its construction of the terms of the Program and its
determination of eligibility for participation and Awards under the Program. It
is the intent of the Company in establishing the Program that the decisions of
the Committee and its action with respect to the Program will be final, binding
and conclusive upon all persons having or claiming to have any right or interest
in or under the Program.

         Section 4.4 SECTION 162(m) OF THE CODE. With regard to all Covered
Employees, the Program shall for all purposes be interpreted and construed in
accordance with Section 162(m) of the Code.

         Section 4.5 DELEGATION OF AUTHORITY. Only the Committee may select and
grant Awards to Participants who are Covered Employees. Except for such
limitation and to the extent

   5

otherwise prohibited by law, the Committee may delegate some or all of its
authority under the Program to any person or persons provided that any such
delegation be in writing.

                                    ARTICLE V

                             Performance Measurement

         Section 5.1 DEFINITION OF PERFORMANCE GOALS. The performance criteria
for a Fiscal Year (the "Performance Goals") will be based on: operating profits
(including, but not limited to, cash flow, EBIT or EBITDA), net profits,
earnings per share, profit return ratios and margins, revenues, shareholder
return and/or value, stock price and working capital. Performance Goals may be
measured solely on a corporate, subsidiary, business unit, or comparable store
basis; or a combination thereof. Further, Performance Goals may reflect absolute
performance, a relative comparison of entity performance to the performance of a
peer group of entities, growth or a selected external measure of the selected
Performance Goal. Profits, earnings and revenues used for any Performance Goal
measurement may exclude: gains or losses on operating asset sales or
dispositions; asset write-downs; litigation or claim disputes or settlements;
accruals for historic environmental obligations; effect of changes in tax law or
rate on deferred tax liabilities; accruals for reorganization and restructuring
programs; uninsured catastrophic property losses; the cumulative effect of
changes in accounting principles; and any extraordinary non-recurring items as
described in Accounting Principles Board Opinion No. 30, and/or in management's
discussion and analysis of financial performance appearing in the Company's
annual report to shareholders for the applicable year.

         Section 5.2 ESTABLISHMENT OF PERFORMANCE GOALS. The Committee will, on
or before the 90th day of the Fiscal Year, establish (a) the Performance Goals
and (b) if more than one Performance Goal is established, the weighting of the
Performance Goals.

         Section 5.3 ADJUSTMENTS TO PERFORMANCE GOALS. The Committee may at any
time during the first 90 days of a Fiscal Year, or, subject to the second
paragraph of this Section 5.3, at any time thereafter in its sole and absolute
discretion, adjust or modify the calculation of a Performance Goal for such
Fiscal Year in order to prevent the dilution or enlargement of the rights of
Participants (a) in the event or in anticipation of any unusual or extraordinary
corporate items, transaction, event or development; (b) in recognition or in
anticipation of any other unusual or nonrecurring events affecting the Company,
or the financial statements of the Company, or in response to or in anticipation
of changes in applicable laws, regulations, accounting principles or business
conditions; and (c) in view of the Committee's assessment of the business
strategy of the Company, performance of comparable organizations, economic and
business conditions, and any other circumstances deemed relevant.

         Notwithstanding the foregoing, to the extent the exercise of such
authority after the first 90 days of a Fiscal Year would cause the Awards
granted to the Covered Employees for the Fiscal Year to fail to qualify as
"performance-based compensation" under Section 162(m) of the Code, then such
authority shall only be exercised with respect to those Participants who are not
Covered Employees.

   6

                                   ARTICLE VI

                                     Awards

         Section 6.1 POTENTIAL. On or before the 90th day of each Fiscal Year
the Committee shall establish a written schedule of the amount of an Award that
will be payable to a Participant under the Program. The amount of an Award will
be expressed as a percentage of Base Salary, ranging from 0% to 100%, depending
upon the level of attainment of the Performance Goals for such Fiscal Year.

         Section 6.2 CALCULATION AND APPROVAL. As soon as practicable after the
Company's financial results for the Fiscal Year have been approved by the Board,
the Committee will certify in writing the attainment of the Performance Goals
established for the Fiscal Year and will calculate the Award, if any, payable to
each Participant under the schedule established pursuant to Section 6.1 hereof.
If a Participant's Base Salary is adjusted after the Performance Goals Date for
the Fiscal Year, such Participant's Award shall be prorated as of the date of
adjustment.

         Section 6.3 FORM. Awards may, at the Committee's sole discretion, be
paid in cash, Common Stock or a combination thereof, and be subject to such
terms, conditions, restrictions and limitations (including, but not limited to,
restrictions on transferability and vesting) as the Committee may determine,
provided that such terms, conditions, restrictions and limitations are not
inconsistent with the terms of the Program. For purposes of the Program, the
payment of an Award in shares of Common Stock will be based on the average of
the closing price of the Common Stock on the New York Stock Exchange for the 30
trading days prior to the last day of the Fiscal Year to which the Award
relates.

         Section 6.4 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT, DISABILITY OR
DEATH. If (a) a Participant's employment is terminated during a Fiscal Year by
reason of Retirement, Disability or death, and (b) the Participant has been a
Participant in the Program for at least three months of such Fiscal Year, the
Participant will be eligible to receive a prorated Award for the Fiscal Year in
which such termination of employment occurs.

         Section 6.5 OTHER TERMINATIONS OF EMPLOYMENT. Except as provided in
Sections 6.4 and 6.6 hereof, if a Participant's employment is terminated prior
to the end of a Fiscal Year, the Participant's participation in the Program
shall end, and the Participant shall not be entitled to any Award for such
Fiscal Year.

         Section 6.6 CHANGE IN CONTROL. In the event of a Change in Control,
notwithstanding anything contained herein to the contrary, the Company shall pay
each Participant who is participating in the Program at the time of such Change
in Control a lump sum cash payment equal to the maximum Award that could be paid
hereunder to each Participant for the Fiscal Year in which the Change in Control
occurs. Further, all terms, conditions, restrictions and limitations in effect
on any outstanding Award shall immediately lapse on the date of such Change in
Control, and any unvested Award shall automatically become one hundred percent
(100%) immediately vested. For purposes of this Program, the Committee has and
will have the sole discretion to determine whether and the date on which a
Change in Control occurred.

   7

         Section 6.7 LIMITATIONS. Notwithstanding any provision herein to the
contrary except Section 6.6 hereof:

                  (a)      no Award will be paid for a Fiscal Year in which
                           performance fails to attain or exceed the minimum
                           level for any of the Performance Goals; and

                  (b)      no Award for a Fiscal Year shall exceed $1,500,000.

         Section 6.8 PAYMENT OF AWARDS BY PARTICIPANT'S EMPLOYER. The payment of
any Awards under this Program may be made to a Participant by the Subsidiary
that employs the Participant or by the Company.

                                   ARTICLE VII

                                  Miscellaneous

         Section 7.1 EMPLOYMENT. Nothing in this Program will interfere with or
limit in any way the right of the Company or a Subsidiary to terminate a
Participant's employment at any time, nor confer upon any Participant any right
to continue in the employ of the Company or a Subsidiary.

         Section 7.2 NONASSIGNABILITY. No Award under this Program may be
subject in any manner to alienation, anticipation, sale, transfer (except by
will or the laws of descent and distribution), assignment, pledge or
encumbrance, nor may any Award be payable to anyone other than the Participant
to whom it was granted (other than by will or the laws of descent and
distribution).

         Section 7.3 LAWS GOVERNING. This Program is to be construed in
accordance with and governed by the laws of the State of Ohio.

         Section 7.4 WITHHOLDING TAXES. The Company will deduct from all
payments under this Program any federal, state or other taxes required by law to
be withheld with respect to such payments.

         Section 7.5 PROGRAM BINDING ON COMPANY AND SUCCESSORS. This Program
will be binding upon and inure to the benefit of the Company, its successors and
assigns and each Participant and his or her beneficiaries, heirs, executors,
administrators and legal representatives.

         Section 7.6 AMENDMENT AND TERMINATION. The Committee may suspend or
terminate this Program at any time or without prior notice. In addition, the
Committee may, from time to time and with or without prior notice, amend this
Program in any manner but may not without stockholder approval adopt any
amendment that would require the vote of the stockholders of the Company
pursuant to Section 16 of the Exchange Act or Section 162(m) of the Code.

         Section 7.7 REGULATORY APPROVALS AND LISTINGS. Notwithstanding anything
contained herein to the contrary, the Company will have no obligation to issue
or deliver certificates of Common Stock evidencing Awards or any other Award
resulting in the payment of Common Stock prior to (a) the obtaining of any
approval from any governmental agency that the

   8

Company, in its sole discretion, determines to be necessary or advisable, (b)
the admission, if required, of such shares to listing on the stock exchange on
which the Common Stock may be listed and (c) the completion of any registration
or other qualification of said shares under any state or federal law or ruling
of any governmental body which the Company, in its sole discretion, deems
necessary or advisable.

         Section 7.8 COMPLIANCE WITH SECTION 162(m). If any provision of the
Program would cause the Awards granted to a Covered Employee not to constitute
qualified "performance-based compensation" under Section 162(m) of the Code,
that provision, insofar as it pertains to the Covered Employee, shall be severed
from, and shall be deemed not to be part of this Program, but the other
provisions hereof shall remain in full force and effect.