-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K8a7VLeCnCafz6Cg16qlEbeuXhG/xXsazPzCWbzksi1rPACywNNE2A4gvmUnoZv4 910mFkHK3qT/rjAUWEG0mA== 0000950152-03-005647.txt : 20030519 0000950152-03-005647.hdr.sgml : 20030519 20030516215905 ACCESSION NUMBER: 0000950152-03-005647 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20030201 FILED AS OF DATE: 20030519 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLE NATIONAL CORP /DE/ CENTRAL INDEX KEY: 0000769644 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 341453189 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12814 FILM NUMBER: 03709546 BUSINESS ADDRESS: STREET 1: 5915 LANDERBROOK DR CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 BUSINESS PHONE: 4404494100 MAIL ADDRESS: STREET 1: 5915 LANDERBROOK DRIVE STREET 2: SUITE 300 CITY: CLEVELAND STATE: OH ZIP: 44124 FORMER COMPANY: FORMER CONFORMED NAME: CNC HOLDING CORP/DE DATE OF NAME CHANGE: 19920703 10-K 1 l00460ae10vk.txt COLE NATIONAL CORPORATION 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, 2003, 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 34-1453189 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 5915 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 449-4100 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- 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 YES |X| 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. | | INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE ACT). YES |X| NO |_|. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE REGISTRANT AS OF AUGUST 3, 2002 WAS APPROXIMATELY $215,012,455, BASED UPON THE LAST PRICE REPORTED FOR SUCH DATE BY THE NEW YORK STOCK EXCHANGE. AS OF MAY 12, 2003, 16,192,769 SHARES OF THE REGISTRANT'S 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 25, 2003 ARE INCORPORATED HEREIN BY REFERENCE INTO PART III. TABLE OF CONTENTS
Part I Page Item 1. Business ................................................................................. 1 2. Properties ............................................................................... 4 3. Legal Proceedings ....................................................................... 4 4. Submission of Matters to a Vote of Security Holders ...................................... 5 4a. Executive Officers of Cole National Corporation .......................................... 5 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................... 6 6. Selected Financial Data .................................................................. 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 10 7A. Quantitative and Qualitative Disclosures About Market Risk ............................... 24 8. Financial Statements and Supplementary Data .............................................. 25 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 25 Part III Item 10. Directors and Executive Officers of the Registrant ....................................... 25 11. Executive Compensation ................................................................... 26 12. Security Ownership of Certain Beneficial Owners and Management ........................... 26 13. Certain Relationships and Related Transactions ........................................... 26 14. Controls and Procedures .................................................................. 26 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 27 Signatures ............................................................................... 28 Certifications ........................................................................... 29 Exhibit Index ............................................................................ X-1
FORWARD LOOKING STATEMENTS The Company's expectations and beliefs concerning the future contained in this document are 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 potential adverse consequences of the restatement of the Company's financial statements, including those resulting from litigation or government investigations, restrictions or curtailment of the Company's credit facility and other credit situations, costs and other effects associated with the California litigation, the timing and achievement of improvements in the operations of the optical business, the results of Things Remembered, which is highly dependent on the fourth quarter holiday season, the nature and extent of disruptions of the economy from terrorist activities or major health concerns and from governmental and consumer responses to such situations, the actual utilization of Cole Managed Vision funded eyewear programs, 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 relationships with host stores and franchisees, the mix of goods sold, pricing and other competitive factors, and the seasonality of the Company's business. PART I ITEM 1. BUSINESS GENERAL Cole National Corporation was incorporated as a Delaware corporation in 1984 as a successor to companies that began operations approximately 60 years ago. Cole National Corporation, primarily through the subsidiaries owned by its direct subsidiary, Cole National Group, Inc., is a leading provider of vision care products and services, including managed vision care programs, and personalized gifts with 2,944 retail locations in 50 states, Canada and the Caribbean. References herein to the "Company" include Cole National Corporation, its direct and indirect subsidiaries, and its predecessor companies. The Company's retail vision locations do business primarily under the names "Pearle Vision", "Sears Optical", "Target Optical" and "BJ's Optical" and its managed vision care programs are offered primarily through Cole Managed Vision. Collectively these businesses are referred to herein as "Cole Vision." Personalized gifts are offered through retail locations, e-commerce and catalogs by Things Remembered. The Company believes that, based on industry data, it is the third largest retail optical company in the United States and operates the only nationwide chain of personalized gift stores. The Company differentiates itself from other specialty retailers by providing value-added services at the point of sale at all of its retail locations. The Company also holds approximately a 21% interest in Pearle Europe B.V., which operates 1,157 retail optical locations in the Netherlands, Belgium, Germany, Austria, Italy, Poland, Portugal, Estonia, Sweden, Finland and Russia. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports available, free of charge, through its website, http://www.colenational.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. COLE VISION Cole Vision contributed 76% of the Company's net revenue in fiscal 2002 with 2,174 company-owned and franchised retail locations throughout the United States, Canada, and the Caribbean as of February 1, 2003. Cole Managed Vision programs provide vision care benefits to participants through access to a network of company-owned, franchised and third-party optical locations. COLE LICENSED BRANDS Cole Licensed Brands operates principally under the "Sears Optical", "Target Optical" and "BJ's Optical" names. As of February 1, 2003, Cole Licensed Brands operated 1,310 retail locations in 47 states and Canada, including 826 departments on the premises of Sears department stores, 117 freestanding Sears Optical stores, 126 departments in BJ's Wholesale Club stores, and 241 departments in Target stores. Retail locations are generally operated under a lease or license arrangement through which the host store collects the sales receipts, retains an agreed upon percentage of sales and remits the remainder on a weekly or monthly basis. 1 Locations are, in most cases, retail eyecare stores offering brand name and private label prescription eyeglasses, contact lenses and accessories, which make available services of a doctor of optometry who performs complete eye examinations and prescribes eyeglasses and contact lenses. Most optical departments, which are typically 1,000 square feet in size, operate with a department manager and support staff of one to seven associates depending on store sales volume. In a majority of the stores, eye examination services are available from independent doctors of optometry, as is often required by state law, and from doctors of optometry employed by Cole Licensed Brands. Each of the United States retail locations is computer-linked to six centralized laboratory facilities, which grind, cut and fit lenses to order and ship them to the stores. The Canadian retail locations are served by a centralized laboratory located near Toronto. Next-day delivery is provided on most eyewear when requested by customers. All of the frames and most lenses used in eyeglasses are purchased from outside suppliers, both in the United States and several foreign countries. A variety of marketing and promotional efforts, primarily host advertising, newspaper, direct mail, magazine, television and yellow pages are used to build and maintain the customer base for each of the Cole Licensed Brands stores. Host advertising includes the placement of promotional material within sales circulars or credit card billings sent out by the host store to its customers. The Company believes it has developed excellent relationships with the host stores in which Cole Licensed Brands operates. The Company has maintained its relationships in the optical business with Sears for over 40 years. Although leases and licenses with major hosts are terminable upon relatively short notice, Cole Licensed Brands has never had a lease terminated other than in connection with a store closing, relocation or major remodeling. PEARLE Pearle Vision (Pearle) operates 400 company-owned and 464 franchised stores located in 45 states, Canada, and the Caribbean. Most Pearle stores operate in either an "Express" or "Mainline" store format. Express stores contain a full surfacing lab that can produce most glasses in approximately one hour. Mainline stores can produce over 50% of prescriptions on-site in approximately one hour. Other prescriptions are sent to Pearle's central laboratory in Dallas, Texas. At February 1, 2003, 274 of the company-owned stores and 135 of the franchised stores were Express, with most of the balance being Mainline. The Express stores typically are located in high-traffic freestanding strip centers or mall locations with most stores averaging 3,000 square feet. The Express stores are usually staffed with a manager and a support staff of four to eight associates. Mainline stores have an average size of 1,700 square feet and are also located in freestanding buildings, or in smaller strip or regional centers. Mainline stores are usually staffed with a manager and two or three associates. Most Pearle stores make exams available by on-site doctors of optometry with approximately 80% leasing space from Pearle on an independent basis. Most of the remaining doctors are direct employees of Pearle. In California, eye exams are provided by doctors of optometry, employed by Pearle Vision Care, Inc., a licensed health care service plan. 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 a significant amount 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 long-standing advertising slogan: "Nobody Cares for Eyes More Than Pearle". Pearle operates a central lab and distribution center in Dallas, Texas that inventories and distributes a comprehensive product line, including frames, eyeglass lenses, contact lenses, optical supplies and eyewear accessories, to company-owned and franchised locations. Pearle has maintained a franchise program since 1980. Most of the franchised stores are single store franchise operations, with no franchisee operating more than ten stores. Each franchisee must enter into a franchise agreement requiring payment of an initial franchise fee. The term of the typical franchise agreement is equal to the lesser of ten years or the term of the underlying base lease. Royalty and advertising contributions typically have been based on a percentage of the franchisee's gross revenues from the retail operation, excluding nonsurgical professional fees. The total monthly advertising contribution is distributed to Pearle's system-wide advertising fund and the local co-op market advertising fund. Franchisees are generally eligible to participate in Cole Vision's managed vision care programs. In fiscal 2002, 17 new franchise locations were opened, 13 company-operated locations were sold to franchisees, 2 franchise locations were converted to corporate stores and 4 franchise locations closed. 2 COLE MANAGED VISION Recognizing the role that managed health care would play in the coming years, Cole Vision Corporation created Cole Managed Vision (CMV) to bring its own unique capabilities to the vision benefit marketplace, and to provide an additional source of customers for the Company's owned and franchised retail locations. Since then, CMV has been developing, marketing, and administering group vision benefit programs for employers, health plans and associations nationwide. Today, CMV manages funded benefits for more than 13 million participants, and discount benefits for more than 80 million participants. Managed vision care participants comprise approximately one third of Cole Vision's retail customers. THINGS REMEMBERED Things Remembered contributed 24% of the Company's net revenue in fiscal 2002. As of February 1, 2003, Things Remembered operated 770 stores and kiosks located in large, enclosed shopping malls located in 48 states. Each location carries a wide assortment of engraveable items and provides "while you shop" personalization services for any occasion including holiday, wedding, business recognition and other special occasion gift events. Engraving is offered for items purchased at the store as well as for items purchased elsewhere. Customers can purchase Things Remembered's broad gift assortment through its catalogs (1-800-274-7367) and its e-commerce site, http://www.thingsremembered.com. Merchandise sold at Things Remembered stores and through the catalog and internet consists of a broad selection of moderately priced gift categories and items at prices generally ranging from $15 to $150. The gift offerings include writing instruments, desk accessories such as desk sets, recognition plaques and awards; women's gifts which include sterling jewelry, jewelry boxes, and keepsake boxes; men's gifts which include barware, valet boxes, and leather goods; gifts for newborns and children including baby cups, rattles and jewelry as well as apparel and quilts. Gifts for the home include glassware, clocks, frames, albums, doorknockers and a special assortment of holiday gifts such as ornaments and other collectible items. Things Remembered features brand name merchandise as well as higher margin private label merchandise. At some locations computer-controlled embroidery equipment is utilized for the personalization of merchandise, such as throws, pillows, polo shirts, bathrobes, jackets, canvas totes and baby blankets. These soft goods are also available in most of Things Remembered's other locations with personalization services provided from a central fulfillment facility. At February 1, 2003, Things Remembered locations consisted of 472 stores and 298 kiosks. The typical store consists of about 1,300 square feet, while kiosks, which are units generally located in the center of the common mall area, are typically 200 square feet. Things Remembered locations are usually operated by one or two employees during nonpeak periods and up to 15 employees during the peak fourth quarter holiday season. Locations typically employ a store manager on a full-time basis, an assistant store manager on a full-time or part-time basis, and the balance of employees as part-time sales associates. Nearly all locations are equipped with computerized engravers and key duplicating machines. Most stores also have equipment for etching glassware items. All locations are equipped with point-of-sale terminals. Most of the Things Remembered's store merchandise is shipped through its centralized warehouse and distribution facility located near Youngstown, Ohio. The warehouse utilizes a computerized carousel system to automate the process of locating merchandise needed to fulfill store orders. The warehouse also has systems and support capabilities to fulfill e-commerce and catalog orders within 72 hours. 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. The Company believes that the loss of any one supplier or manufacturer would not have a material adverse effect on its operations. COMPETITION The Company operates in highly competitive businesses. Cole Vision competes with other optical companies, private ophthalmologists, optometrists and opticians and HMOs and other managed vision care companies in a highly fragmented marketplace on the basis of the services it provides, as well as price and product quality. In addition, Pearle competes on the basis of its highly recognized brand name, superior customer service and large merchandise assortment. The Company believes that, based on industry data, Cole Vision is the third largest optical retail company in the United States. Although Things Remembered 3 operates the only nationwide chain of gift stores offering "while you shop" gift engraving, key duplicating, glass etching and monogramming, as well as related merchandise, it competes with many other retailers that sell gift items. Things Remembered competes with such other retailers primarily on the basis of the value-added point of sale services, as well as price and product quality. Some competitors have greater financial resources than the Company. EMPLOYEES As of February 1, 2003, the Company and its subsidiaries had approximately 9,418 full-time employees. This full-time work force is supplemented by 6,098 part-time and seasonal employees. Approximately 134 Pearle employees are represented by labor unions. The Company considers its present labor relations to be satisfactory. SEGMENT INFORMATION Information for the Company's two reportable segments and geographical information are contained in Note 11 of the Notes to Consolidated Financial Statements. ITEM 2. PROPERTIES In June 2001, the Company completed a third party sale and leaseback of its office headquarters located in Twinsburg, Ohio, which comprises approximately 175,000 square feet of office space. The lease expires in 2019 and includes two options to renew for ten-year terms. Cole Vision's home office functions are located in this facility. The Company expects to fully relocate its executive offices, which are currently located in leased space in Mayfield Heights, Ohio, to the Twinsburg facility during 2003. All Cole Licensed Brands retail locations are leased or operated under a license with the host store, and none of the individual retail locations are material to operations. Leases for departments operated in Sears and Target stores are terminable upon relatively short notice. Freestanding stores operated under the name "Sears Optical" are leased for terms which average five years. The leases for departments operated in BJ's Wholesale Club stores expire in April 2006. Cole Licensed Brands leases six optical laboratory facilities, located in Columbus, Ohio; Knoxville, Tennessee (two); Memphis, Tennessee; Salt Lake City, Utah; and Richmond, Virginia, pursuant to leases expiring (including renewal options) between 2005 and 2017. Pearle leases most of its retail stores under noncancelable operating leases with terms generally ranging from five to ten years and which generally contain renewal options for additional periods. Pearle is the principal lessee on a majority of stores operated by franchisees who sublease the facilities from Pearle. In January 2002, Pearle completed a sale and leaseback of its Dallas, Texas Support Center, which comprises approximately 129,000 square feet of laboratory and distribution facilities. The lease expires in 2017 and includes four options to renew for five-year terms. An adjoining office facility, no longer used for operations, was sold in April 2001. Pearle also owns a small headquarters and a laboratory facility in Puerto Rico. Cole Vision also leases a home office, an optical laboratory and a distribution facility for its Canadian operations pursuant to leases expiring in 2004. The Company expects to close its Canadian optical laboratory and distribution facility in June 2003, and move those operations to the United States. Leases for Things Remembered stores and kiosks are generally for terms of ten and five years, respectively. Things Remembered's home office functions are located in a 50,000 square foot leased facility in Highland Heights, Ohio. The lease expires (including renewal options) in 2007. Things Remembered leases its 210,000 square foot warehouse and distribution facility located near Youngstown, Ohio. The lease expires in 2013 and includes three options to renew for five-year terms. ITEM 3. LEGAL PROCEEDINGS From time to time during the ordinary course of business, the Company may be threatened with, or may become a party to, a variety of legal actions and other proceedings incidental to its business. A complaint was filed in the Superior Court of California, county of San Diego against Cole National Corporation, its affiliates and certain of its officers by the Attorney General of the State of California on February 14, 2002 and amended on February 22, 2002. The case, State of California v. Cole National Corporation, et al., alleges claims for various statutory violations related to the operation of 24 Pearle Vision Centers in California. The claims include untrue or misleading 4 advertising, illegal dilation fees, unlawful advertising of eye exams, maintaining an optometrist on or near the premises of a registered dispensing optician, unlawful advertising of an optometrist, unlicensed practice of optometry, and illegal relationships between dispensing opticians, optical retailers and optometrists. The action seeks unspecified damages, restitution and injunctive relief. Although the State of California obtained a preliminary injunction to enjoin certain advertising practices and the charging of dilation fees in July 2002, the terms of the injunction have not had and are not expected to have a material effect on the Company's operations. In addition, both the State and the Company have appealed the preliminary injunction. Although we believe we are in compliance with California law and intend to continue to defend the issues raised in the case vigorously, the case is in its early stages and we cannot predict with certainty its outcome or costs. A class action complaint was filed on August 14, 2002 in the Superior Court of San Francisco, California, against Things Remembered by a purported class of approximately 200 employees of Things Remembered alleging that the members of the putative class were improperly denied overtime compensation in violation of California law. The action sought unspecified damages, interest, restitution, as well as declaratory and injunctive relief and attorneys' fees. On February 3, 2003, Things Remembered and the plaintiffs reached an agreement to resolve the lawsuit for $562,500. The settlement is subject to court approval. A class action complaint was filed on December 6, 2002 in the United States District Court for the Northern District of Ohio against the Company and certain present and former officers and directors by a purported class of shareholders of the Company, alleging claims for various violations of federal securities laws related to the Company's publicly reported revenues and earnings. The action, which proposes a class period of March 23, 1999 through November 26, 2002 and names the Company and certain present and former officers and directors, seeks unspecified compensatory damages, punitive damages "where appropriate", costs, expenses and attorneys fees. Following the announcement in November 2002 of the restatement of the Company's financial statements, the Securities and Exchange Commission began an inquiry into the Company's previous accounting. Cole National Group, Inc. has been named as a defendant, along with numerous other retail companies, in patent infringement litigation in the United States District Court for the District of Arizona, known as Lemelson Medical, Education & Research Foundation, Limited Partnerships v. CompUSA, Inc. et. al., No. Civ. 00-0663, which challenges the defendants' use of bar code technology in their retail operations. Cole National Group, Inc. is participating in a common defense with a number of other defendants. A stay of the proceedings has been sought and was granted, in deference to prior pending declaratory judgment suits brought by the manufacturers and suppliers of the implicated technology seeking to declare the patents in suit not infringed, invalid and unenforceable. Cole National Group, Inc. likewise intends to oppose the allegations and claims against it. See Note 15 of Notes to Consolidated Financial Statements for further discussion of these legal proceedings. 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, 2003. ITEM 4A. EXECUTIVE OFFICERS OF COLE NATIONAL CORPORATION (a) The following persons are the executive officers of Cole National Corporation who are not members of its Board of Directors, who have been elected to their respective offices by the Board of Directors to serve until the election and qualification of their respective successors:
Name Age Office ----------------- --- ------------------------------------------- Lawrence E. Hyatt 48 Executive Vice President and Chief Financial Officer Leslie D. Dunn 58 Senior Vice President - Business Development, General Counsel and Secretary Joseph Gaglioti 57 Vice President and Treasurer Ann M. Holt 46 Senior Vice President, Corporate Controller and Principal Accounting Officer
5 (b) The following is a brief account of the positions held during the past five years by each of the above named executive officers: Mr. Hyatt has been Executive Vice President and Chief Financial Officer since July 15, 2002. Prior to joining the Company, he was with PSINet, Inc. as Chief Financial and Restructuring Officer since 2000; with HMS Host Corporation as Chief Financial Officer since 1999; with Sodexho Marriott Services, Inc. and its predecessor company as Chief Financial Officer since 1989. Ms. Dunn has been Senior Vice President-Business Development, General Counsel and Secretary since September 1997. Prior to joining the Company, she had been a partner in the law firm of Jones Day Reavis & Pogue since 1985. Mr. Gaglioti has been Vice President since 1992 and Treasurer since 1991. Mr. Gaglioti joined the Company in 1981. Ms. Holt has been Senior Vice President, Corporate Controller and Principal Accounting Officer since December 2002. She joined Cole National Corporation as the Vice President, Finance for Cole Licensed Brands in June 2000. Prior to joining the Company, she was with ICI Paints as Vice President, Finance in the U.S. stores division since September 1998, and with OfficeMax, Inc. as Vice President, Controller and other financial management positions between 1990 and May 1998. Information concerning Jeffrey A. Cole and Larry Pollock, the Company's executive officers who are also Directors, will be included in Cole National Corporation's Proxy Statement for the 2003 Annual Meeting of Stockholders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Cole National Corporation'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 2002 Fiscal 2001 ------------------------ ------------------------- Quarter High Low High Low - ------- ----- ------ ------ ------ First $19.65 $13.55 $10.40 $7.20 Second 19.03 12.45 15.22 9.65 Third 16.87 7.75 14.90 10.70 Fourth 13.99 9.54 16.55 12.78
The Company's dividend policy has been, and for the foreseeable future will continue to be, to retain earnings to support its growth strategy. No dividends were paid during the last two fiscal years. As of March 31, 2003, there were 628 shareholders of record of Cole National Corporation's common stock. 6 Securities authorized for issuance under equity compensation plans as of February 1, 2003 follows:
Equity Compensation Plan Information Number of securities remaining available Plan category Number of securities Weighted-average for future issuance to be issued upon exercise price of under equity exercise of outstanding options, compensations plans outstanding options warrants and rights (excluding securities warrants and rights reflected in column (a)) (a) (b) (c) -------------------- -------------------- ---------------------- Equity compensation plans approved by security holders 1,231,606 $ 15.51 809,394 Equity compensation plans not approved by security holders 1,520,928 12.09 62,191 --------- ------- Total 2,752,534 $ 13.61 871,585 ========= =======
7 ITEM 6. SELECTED FINANCIAL DATA 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 1, 2003 is referred to as "fiscal 2002". Fiscal 2002, 2001, 1999 and 1998 each consisted of a 52-week period, and fiscal 2000 consisted of a 53-week period. The selected financial data for the 2002, 2001 and 2000 fiscal years have been derived from the Company's audited financial statements appearing in this Form 10-K. The financial statements for the fiscal years 2001 and 2000 have been restated. See Note 17 of the Notes to Consolidated Financial Statements for further discussion of the restatement. The selected financial data for the 1999 and 1998 fiscal years have been derived from unaudited financial statements. The unaudited financial statements for these years have been restated to be consistent with the restatement adjustments made for the subsequent years. Certain prior year amounts have been reclassified to conform to the current year presentation. When you read this financial data, it is important that you also read the consolidated financial statements and related notes included in this Form 10-K, as well as the section of this report entitled Management's Discussion and Analysis of Financial Condition and Results of Operations. Historical results are not necessarily indicative of future results.
2002(1)(3) 2001(4) 2000(4) 1999(4) 1998(4) ----------- ----------- ----------- ----------- ----------- (Dollars in thousands, except per share amounts) Net revenue $ 1,148,119 $ 1,109,123 $ 1,078,634 $ 1,041,188 $ 1,043,125 Operating income $ 26,997 $ 28,243 $ 16,400 $ 23,800 $ 24,956 Income (loss) before extraordinary loss $ 2,093 $ (2,387) $ (7,810) $ (2,110) $ (4,042) Net income (loss) $ (5,149) $ (2,387) $ (7,810) $ (2,110) $ (4,042) Basic earnings (loss) per common share: Income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50) $ (0.14) $ (0.27) Extraordinary loss (0.45) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (0.32) $ (0.15) $ (0.50) $ (0.14) $ (0.27) =========== =========== =========== =========== =========== Diluted earnings (loss) per common share: Income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50) $ (0.14) $ (0.27) Extraordinary loss (0.44) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (0.31) $ (0.15) $ (0.50) $ (0.14) $ (0.27) =========== =========== =========== =========== =========== Weighted average number of shares outstanding (000's) Basic 16,223 16,019 15,564 14,879 14,802 Diluted 16,500 16,019 15,564 14,879 14,802 Total assets $ 643,607 $ 635,594 $ 633,756 $ 626,054 $ 649,447 Working capital $ 66,509 $ 74,563 $ 50,887 $ 56,436 $ 79,246 Stockholders' equity $ 93,253 $ 108,316 $ 108,542 $ 117,443 $ 119,226 Current ratio 1.32 1.36 1.24 1.29 1.38 Long-term debt, including capital leases $ 286,553 $ 284,574 $ 284,535 $ 284,754 $ 276,130 Number of stores at year end(2) 2,944 2,919 2,813 2,722 2,884
(1) Net income (loss) for fiscal 2002 includes an extraordinary loss of $7,242, net of tax for early extinguishment of debt. (2) Includes franchise locations. (3) The Company ceased amortization of goodwill and tradenames in fiscal 2002 upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets". (4) As restated. 8 The following selected financial data for the 1999 and 1998 fiscal years is derived from unaudited financial statements, and compares originally reported amounts with restated amounts for these two years.
1999 1998 ---------------------------- --------------------------- As reported Restated As reported Restated ----------- ----------- ----------- ----------- (Dollars in thousands, except per share) Net revenue $1,040,426 $ 1,041,188 $1,049,441 $ 1,043,125 Operating income $ 29,113 $ 23,800 $ 42,346 $ 24,956 Net income (loss) $ 2,008 $ (2,110) $ 14,276 $ (4,042) Basic earnings (loss) per common share: Income (loss) before extraordinary loss $ 0.13 $ (0.14) $ 0.96 $ (0.27) Extraordinary loss -- -- -- -- ---------- ----------- ---------- ----------- Net income (loss) $ 0.13 $ (0.14) $ 0.96 $ (0.27) ========== =========== ========== =========== Diluted earnings (loss) per common share: Income (loss) before extraordinary loss $ 0.13 $ (0.14) $ 0.94 $ (0.27) Extraordinary loss -- -- -- -- ---------- ----------- ---------- ----------- Net income (loss) $ 0.13 $ (0.14) $ 0.94 $ (0.27) ========== =========== ========== =========== Weighted average number of shares outstanding (000's) Basic 14,887 14,879 14,802 14,802 Diluted 14,941 14,879 15,176 14,802 Total assets $ 588,271 $ 626,054 $ 622,844 $ 649,447 Working capital $ 63,899 $ 56,436 $ 76,732 $ 79,246 Stockholders' equity $ 146,516 $ 117,443 $ 145,360 $ 119,226 Current ratio 1.45 1.29 1.44 1.38 Long-term debt, including capital leases $ 284,584 $ 284,754 $ 276,013 $ 276,130 Number of stores at year end(1) 2,722 2,722 2,884 2,884
(1) Includes franchise locations. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As discussed in Note 17 to the Notes to Consolidated Financial Statements, the Company's fiscal year 2001 and fiscal 2000 financial statements have been restated. See Note 17 for a summary of the significant effects of the restatement. The following discussion of the Company's financial condition and results of operations gives effect to the restatement and should be read in conjunction with the Consolidated Financial Statements and related notes. OVERVIEW Cole National, primarily through the subsidiaries owned by its direct subsidiary, Cole National Group, Inc., is a leading provider of optical products and services and personalized gifts. The Company sells its products and services through 2,480 company-owned retail locations and 464 franchised locations in 50 states, Canada and the Caribbean. 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 1, 2003 is referred to as "fiscal 2002". Fiscal 2002 and fiscal 2001 each consisted of a 52-week period, and fiscal 2000 consisted of a 53-week period. The Company has two reportable segments, Cole Vision and Things Remembered. Most of Cole Vision's revenue represents sales of prescription eyewear, accessories and services through its Cole Licensed Brands and Pearle Vision retail locations. Cole Vision revenue also includes sales of merchandise to franchisees, royalties based on franchise sales, initial franchise fees for Pearle Vision and capitation revenue, administrative service fee revenue and discount program service fees from its Cole Managed Vision business. Things Remembered's revenue represents sales of engraveable gift merchandise, personalization and other services primarily through retail in-line stores and kiosks. Things Remembered revenue also includes direct sales through its e-commerce site, http://www.ThingsRemembered.com, sales through Things Remembered catalogs and through affiliate programs direct to businesses. 10 RESULTS OF OPERATIONS The following schedule sets forth the results from continuing operations for the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001. This schedule and subsequent discussions should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K.
Change Fiscal Year ---------------------- ------------------------------------ 2002 vs. 2001 vs. 2002 2001 2000 2001 2000 -------- -------- -------- -------- -------- (Dollars in millions) Net revenue: Cole Vision $ 877.5 $ 836.8 $ 802.5 4.9% 4.3% Things Remembered 270.6 272.3 276.1 (0.6) (1.4) -------- -------- -------- Total net revenue $1,148.1 $1,109.1 $1,078.6 3.5% 2.8% Gross margin: Cole Vision $ 576.8 $ 550.9 $ 525.2 4.7% 4.9% Things Remembered 192.6 193.8 193.8 (0.6) -- -------- -------- -------- Total gross margin $ 769.4 $ 744.7 $ 719.0 3.3% 3.6% Operating expenses: Cole Vision $ 546.2 $ 531.7 $ 513.0 2.7% 3.6% Things Remembered 177.5 168.8 170.3 5.2 (0.9) Unallocated corporate expense 18.7 11.0 14.1 70.0 (22.0) -------- -------- -------- Total operating expenses $ 742.4 $ 711.5 $ 697.4 4.3% 2.0% Goodwill and tradename amortization: Cole Vision $ -- $ 4.1 $ 4.2 (100.0)% (2.4)% Things Remembered -- 0.9 1.0 (100.0) (10.0) -------- -------- -------- Total goodwill and tradename amortization $ -- $ 5.0 $ 5.2 (100.0)% (3.8)% Operating income: Cole Vision $ 30.6 $ 15.1 $ 8.0 102.6% 88.7% Things Remembered 15.1 24.1 22.5 (37.3) 7.1 Unallocated corporate expense (18.7) (11.0) (14.1) 70.0 (22.0) -------- -------- -------- Total operating income $ 27.0 $ 28.2 $ 16.4 (4.3)% 72.0% ======== ======== ======== Percentage of net revenue: Gross margin 67.0% 67.1% 66.7% (0.1) 0.5 Operating expenses 64.7 64.2 64.7 0.5 (0.5) Goodwill and tradename amortization -- 0.5 0.5 (0.5) -- Operating income 2.4% 2.5% 1.5% (0.2) 1.0 Number of retail locations at the end of the period: Cole Licensed Brands 1,310 1,282 1,164 Pearle company-owned 400 423 439 Pearle franchised 464 440 426 -------- -------- -------- Total Cole Vision 2,174 2,145 2,029 Things Remembered 770 774 784 -------- -------- -------- Total Cole National 2,944 2,919 2,813 ======== ======== ======== Same-Store Sales Growth: Cole Licensed Brands (U.S.) 3.7% 3.8% 3.7% Pearle company-owned (U.S.) 4.0 2.6 2.0 Total Cole Vision 3.3 2.6 3.1 Things Remembered (2.5) (1.8) 5.4 Total Cole National 1.8% 1.4% 3.7% Pearle US franchise stores 1.1% --% 3.3%
As used in Item 7 of this Form 10-K, same-store sales growth is a non-GAAP financial measure, which includes deferred warranty sales on a cash basis and does not reflect provisions for returns and remakes and certain other items. The Company's current systems do not gather data on these items on an individual store basis. Adjustments to the cash basis sales information accumulated at the store level are made for these items on an aggregate basis. As a retailer, the 11 Company believes that a measure of same-store sales performance is important for understanding its operations. The Company calculates same-store sales for stores opened for at least twelve months. A reconciliation of same-store sales to net revenue is presented below in the section "Reconciliation of Same-Store Sales Growth". Same-store sales for Pearle U.S. franchise stores is a non-GAAP financial measure that is provided for comparative purposes only. The Company believes that its franchisees' method of reporting sales is consistent on a year-to-year basis. FISCAL 2002 COMPARED TO FISCAL 2001 CONSOLIDATED OPERATIONS Total revenues were $1,148.1 million in fiscal 2002, compared with $1,109.1 million in fiscal 2001. Total revenues increased 3.5% in fiscal 2002, primarily attributable to a 1.8% increase in same-store sales, an increase in the number of stores open at year-end from 2,919 to 2,944 and an increase in revenues from managed vision care programs. Gross margin was $769.4 million in fiscal 2002, compared with $744.7 million in fiscal 2001, an increase of 3.3%. Gross margin dollars increased primarily due to higher revenues at Cole Vision. Gross margin percent declined to 67.0% in fiscal 2002, compared with 67.1% in fiscal 2001. The decline was attributable to lower gross margin percent at Cole Vision. A shift in sales mix to products with lower gross margin rates occurred at both Pearle Vision and Cole Licensed Brands (further discussion is included in the Cole Vision Segment). The gross margin rate at Things Remembered was the same as the prior year. Operating expenses were $742.4 million in fiscal 2002, compared with $711.5 million in fiscal 2001, an increase of 4.3%. Increased costs of store payroll, benefits, store occupancy and other store costs to support the increase in revenues at Cole Vision comprised most of the increase. Operating expenses at Cole Vision as a percent of sales declined from the prior year by 1.3%. At Things Remembered, operating expenses increased 5.2% on declining sales, primarily in occupancy, nonstore overhead and store wages. Store rent and occupancy expenses increased in fiscal 2002 primarily due to increases in insurance, taxes and other common area charges. These charges are generally variable and can increase as mall ownership or tenant occupancy rates change. Things Remembered nonstore expense increased in fiscal 2002 due primarily to costs associated with the anticipated settlement of a class action complaint in California involving overtime compensation (See Note 15 of the Notes to Consolidated Financial Statements). Legal and settlement costs for this matter totaled $1.1 million. Nonstore overhead also included costs of $0.5 million for a new store point of sales system, the implementation of which has subsequently been indefinitely delayed. Severance costs related to a senior Things Remembered executive totaled $0.3 million. Store wage costs at Things Remembered increased due to higher average hourly wage rates and increases in benefits and workers compensation. Also included in operating expenses, the Company incurred charges of approximately $3.4 million in fiscal 2002 for outside audit fees related to the reaudit of its restated financial statements for the previous two years. The Company and its optical subsidiaries have been sued by the State of California, which alleges claims for various statutory violations related to the operation of 24 Pearle Vision Centers in California (see Note 15 of the Notes to Consolidated Financial Statements). Legal costs associated with the defense of this matter totaled $3.5 million in fiscal 2002 and were charged to the Cole Vision segment. During the fourth quarter of fiscal 2002, the Company recorded a restructuring charge against operating expense of $1.1 million. Of this amount, $0.6 million was paid and $0.5 million was accrued to accrued liabilities for ongoing benefits, salary continuation and out placement costs. Charges to the liability are expected to total $0.4 million through the end of the first quarter of fiscal 2003, with the remaining costs continuing through the fourth quarter of fiscal 2003. The restructuring charge was related to a reduction in workforce of 60 individuals in the corporate office and field management. The Company expects the functions performed by these individuals to be absorbed by others. The Company recorded a charge of $0.3 million related to the closing of the corporate office and relocating it to the Company's facility in Twinsburg, Ohio. The Company recorded incremental costs of $1.2 million for continuing group medical and basic life insurance coverage for a group of employees covered under a postemployment benefits plan. Coverage of these benefits continue until death. In January 2002, the Company approved a plan freeze of its noncontributory defined benefit pension plan. As a result, the Company recorded no pension expense in fiscal 2002, compared to a $1.2 million charge in fiscal 2001, primarily in the Cole Vision segment. See Note 10 of Notes to the Consolidated Financial Statements for more information. In conjunction with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets, the Company evaluated the operating performance of each of its locations. The Company recorded impairment charges of $0.9 million in fiscal 2002, compared with impairment charges of $3.7 million in fiscal 2001. The reduction of the impairment charge was primarily attributable to improvements at Pearle Vision. In November 2002, the Company changed its paid-time-off (PTO) policy for its employees, and discontinued the practice of permitting most of its employees to carryover three leave days from one year 12 to the next. As a result of this change in policy, the Company reversed $0.5 million of accrued leave into income, as an offset to operating expense. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS142), in the first quarter of fiscal 2002. SFAS 142 requires that goodwill and certain intangible assets deemed to have indefinite useful lives no longer be amortized, but instead, be subject to at least an annual review for impairment. With the adoption of this statement, the Company ceased amortization of goodwill and tradenames as of February 3, 2002. The Company recorded a $5.0 million goodwill and tradename amortization charge in fiscal 2001. Operating income in fiscal 2002 was $27.0 million compared with $28.2 million in fiscal 2001, a decrease of 4.3%. A decline in operating income at Things Remembered and the costs associated with the reaudit, restructuring and legal costs associated with the California Attorney General's action, as well as the increased costs of post-employment benefits offset improvements at Cole Vision. Interest and other (income) expense, consists of interest expense on the Company's indebtedness, transaction gains and losses related to its holdings in notes and interest receivable from Pearle Europe, which are denominated in a foreign currency, interest income on franchise notes at Pearle Vision, interest income from temporary investments, and gains and losses from the sale of assets. Interest and other (income) expense, net, decreased to $20.0 million in fiscal 2002, compared to $25.5 million in fiscal 2001. The Company recorded a transaction gain of $3.8 million related to its investment in notes and interest receivable from Pearle Europe in fiscal 2002. This compared to a transaction loss of $1.2 million in fiscal 2001. In addition, the Company recorded lower interest expense in fiscal 2002 due to replacement of the $150.0 million 9-7/8% Senior Subordinated Notes with the issuance of 8-7/8% Senior Subordinated Notes in May 2002. See Note 5 of the Notes to Consolidated Financial Statements for further information regarding this transaction. The Company recognized a gain of $0.7 million from the sale of a Dallas, Texas facility in the first quarter of fiscal 2001. The effective income tax rate was 70.0% in fiscal 2002 compared with 187.8% in fiscal 2001. The lower effective tax rate in 2002 was primarily due to the elimination of goodwill amortization pursuant to the new accounting standard and a reduction in the provision for valuation allowances related to deferred tax assets for charitable contribution carryforwards. See Note 9 of Notes to Consolidated Financial Statements for further discussion. The results for fiscal 2002 include an extraordinary loss on early extinguishment of debt of $7.2 million, which is net of an income tax benefit of $3.9 million. The extraordinary charge represents payment of premiums and other costs of retiring Cole National Group's 9-7/8% Senior Subordinated Notes due 2006 and the write-offs of unamortized discount and deferred financing fees. See the section below entitled "Liquidity and Capital Resources" and Note 5 of the Notes to Consolidated Financial Statements for more information regarding this transaction. COLE VISION SEGMENT Cole Vision revenues were $877.5 million in fiscal 2002, compared with $836.8 million in fiscal 2001, an increase of 4.9%. Same store sales increased 4.0% at Pearle Vision company-owned stores, primarily reflecting an increase in average spectacle selling price. Improved merchandise assortment and selling skills at the store level have resulted in a higher rate of multi-pair purchases and increased sales of additional features. At Cole Licensed Brands, same-store sales increased 3.7%, driven by both average spectacle selling price and increased sales of accessories. New premium product introductions at both Sears Optical and Target Optical, offset slightly by increased sales of contact lenses, was a key factor in the average selling price increase. Cole Managed Vision sales also increased from the prior year, due to increases in claims revenue and administrative service only (ASO) fees and the addition of laser procedure revenue. Gross margin percent declined 0.1% at Cole Vision in fiscal 2002 compared to fiscal 2001. The decline in gross margin rate was attributable to a change in sales mix at both Pearle Vision and Cole Licensed Brands. At Pearle, the decline in margin rate was attributable to increased sales of product to franchisees, which are sold at lower gross margin rates than retail sales at company-owned locations. Sales to franchisees offer benefits for the Company, including producing a more uniform merchandise assortment and consistent brand look across all stores. Additionally, Pearle's mix of contact lens sales increased, which also contributed to a decline of the gross margin rate. At Cole Licensed Brands, the decline in gross margin rate was attributable to the increased sales of premium product and saleable accessories. Accessories, which include lens cleaner, lens cloth, clips and other products designed to care for optical purchases, and premium products, generally are sold at lower gross margin rates. In addition, Cole Licensed Brands made a strategic decision to lower retail prices of contact lenses in fiscal 2002 to become more competitive. The price decrease was a key factor in the gross margin rate decline. 13 Operating expenses as a percent of sales declined at Cole Vision by 1.3% in fiscal 2002, compared to fiscal 2001. In conjunction with SFAS 144, the Company evaluated the operating performance of each of its locations. Cole Vision recorded impairment charges of $0.4 million in fiscal 2002, compared with impairment charges of $2.8 million in fiscal 2001. The reduction of the impairment charge was primarily attributable to improvements at Pearle Vision. At Pearle Vision, store payroll declined as a percent of sales compared to the prior year due to higher same-store sales combined with reduced hours. The average hours worked per store per week was reduced 3.3 hours. In addition, overtime pay declined as a percent to sales compared to last year. Operating expenses at Cole Licensed Brands declined as a percent to sales compared to last year due primarily to improvements at Target Optical. Results at Target Optical improved as the focus changed from aggressive growth to measured growth and improved operations. Operating expenses at Cole Managed Vision declined as a percent to sales compared to last year primarily due to the reduction of processing fees paid to MetLife as claims processing was converted to the Company's internal systems at a lower cost per claim. Pension expense was $1.0 million lower than the prior year at Cole Vision due to the Company's decision to freeze the defined benefit pension plan. Operating expenses in fiscal 2002 included legal costs of $3.5 million associated with the California Attorney General's action mentioned previously. Operating income at Cole Vision improved to $30.6 million in fiscal 2002, compared to $15.1 million in fiscal 2001. The revenue increase of $40.7 million and improved expense leverage were the primary drivers of the increase in operating income. Results at Target Optical improved as the focus changed from aggressive growth to measured growth and improved operations. The cessation of goodwill and tradename amortization resulted in $4.1 million lower expense in fiscal 2002, compared to fiscal 2001. In addition, the growth in revenue and improved claims management efficiencies resulted in higher operating income at Cole Managed Vision. These improvements were offset by the $3.5 million in legal costs associated with the California Attorney General's action. THINGS REMEMBERED SEGMENT Things Remembered sales were $270.6 million in fiscal 2002, compared with $272.3 million in fiscal 2001, a decrease of 0.6%. The decrease in sales was primarily due to a same-store sales decrease of 2.5% and a lower number of stores operating than the prior year. Store count at fiscal year end dropped from 774 to 770. The same-store sales decline was primarily attributable to a slowdown in mall traffic during fiscal 2002. Demand for business award and recognition gifts also declined during the year due to changes in general economic conditions. Declines in customer count were partially offset by increases in average transaction value and a 40% growth in the still relatively small direct channel business. The gross margin rate at Things Remembered was the same as the prior year. At Things Remembered, operating expenses grew 5.2% on declining sales, primarily in occupancy, nonstore overhead and store wages. Store rent and occupancy charges increased in fiscal 2002 primarily due to increases in insurance, taxes and other common area charges. These charges are generally variable and can increase as mall ownership or tenant occupancy rates change. Things Remembered nonstore expense increased in fiscal 2002 due primarily to costs associated with the pending settlement of a class action complaint in California involving overtime compensation (See Note 15 of the Notes to Consolidated Financial Statements). Legal and settlement cost for this matter totaled $1.1 million. Nonstore overhead also included costs of $0.5 million for a new store point of sales system, the implementation of which has subsequently been indefinitely delayed. Severance costs related to a senior Things Remembered executive totaled $0.3 million. Store wage costs at Things Remembered increased due to higher average hourly wage rates and increases in benefits and workers compensation. Things Remembered recorded impairment charges of $0.5 million in fiscal 2002, compared with impairment charges of $0.9 million in fiscal 2001. Operating income decreased to $15.1 million in fiscal 2002 from $24.1 million in fiscal 2001. Reductions in revenue, higher mall occupancy costs, higher payroll and overhead costs were the primary causes of the reduction in operating income. FISCAL 2001 COMPARED TO FISCAL 2000 CONSOLIDATED OPERATIONS Total revenue was $1,109.1 million in fiscal 2001, compared with $1,078.6 million in fiscal 2000. Total revenue increased 2.8% in fiscal 2001, primarily attributable to a 1.4% increase in same-store sales, an increase in the number of stores opened at year-end from 2,813 to 2,919 and an increase in claims revenue from managed vision care programs. These increases were partially offset by one less week of revenue in fiscal 2001. Fiscal 2000 included 53 weeks of operations, compared to 52 weeks in fiscal 2001. The 53rd week in fiscal 2000 provided approximately $17.6 million in revenue. 14 Gross margin was $744.7 million in fiscal 2001, compared with $719.0 million in fiscal 2000, an increase of 3.6%. Gross margin dollars increased primarily due to higher revenues at Cole Vision and improvements in gross margin rate at Things Remembered. Gross margin percent increased to 67.1% in fiscal 2001, compared to 66.7% in fiscal 2000. The increase was attributable to gross margin rate improvements at both Cole Vision and Things Remembered. The gross margin rate at Cole Vision was higher than the prior year, although it declined in the second half of fiscal 2001, as more customers selected merchandise from Cole Licensed Brands' new, higher cost frame assortment at Sears. Higher revenue from managed vision care programs partially offset the impact of a decline in frame margins in fiscal 2001. At Things Remembered, the gross margin rate improved 1.0% compared to the prior year, reflecting the improvement in average selling price, lower merchandise acquisition costs, and less inventory shrinkage. Operating expenses were $711.5 million in fiscal 2001, compared with $697.4 million in fiscal 2000, an increase of 2.0%. Increased costs of store payroll, store occupancy and other store costs to support the increase in revenue at Cole Vision and the Target Optical expansion comprised most of the increase. Operating expenses at Cole Vision declined as a percent of sales compared to last year by 0.4%. Productivity gains at Pearle and reduced managed care claims processing costs contributed to the improvement. Further discussion is included in the Cole Vision segment. In conjunction with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets, the Company evaluated the operating performance of each of its locations. In fiscal 2000, Pearle Vision recorded $3.5 million of impairment charges related to the performance of 39 store locations. This compared to impairment charges of $2.6 million for 28 locations in fiscal 2001, a reduction of $0.9 million. At Things Remembered, operating expenses decreased by $1.5 million. Lower costs of store payroll together with reduced bonus expenses were partially offset by higher costs of store rent and occupancy. Things Remembered recorded impairment charges in accordance with SFAS 121 of $0.9 million in fiscal 2001 compared to $0.3 million the prior year. Goodwill and tradename amortization was $5.0 million in fiscal 2001 compared to $5.2 million in fiscal 2000. In fiscal 2001, the Company's operating income improved 72.0% from $16.4 million in fiscal 2000 to $28.2 million in fiscal 2001. Improvements were made at both segments. At Cole Vision, operating income improved 88.7% from the prior year due primarily to the reduced impairment charge and to productivity improvements. Things Remembered operating income improved 7.1% despite a decline in sales. Lower costs of store payroll and an increase in gross margin rate mitigated the reduction in revenues. During fiscal 2000, the Company recorded a restructuring charge against operating expense of $1.8 million. Of this amount, $1.6 million was paid and $0.2 million was recorded to accrued liabilities for salary continuation. Charges to the liability were $0.2 million in fiscal 2001. The restructuring charge was related to a reduction in workforce of 44 individuals in the corporate office. In addition, a reduction in corporate bonus expense of $0.8 million contributed to the improvement in operating income. The improvement in operating income occurred despite one less week of sales, and the absorption of increased losses from the continued expansion of Target Optical. Interest and other (income) expense, net, increased $0.2 million in fiscal 2001. The effective tax rate was 187.8% in fiscal 2001 compared to 10.6% in fiscal 2000. The higher effective tax rate in 2001 was primarily due to increased provision for state income taxes and an increase in the valuation allowances related to deferred tax assets for contribution carryforwards. See Note 9 of Notes to Consolidated Financial Statements for further discussion. COLE VISION SEGMENT Cole Vision revenues were $836.8 million in fiscal 2001, compared with $802.5 million in fiscal 2000, an increase of 4.3%. Same-store sales increased 2.6% at Pearle Vision company-owned stores, reflecting an increase in average selling price for the first nine months and an increase in the number of transactions for the fourth quarter. The increase in average selling price was due, in part, to not repeating a "50% off frames" promotion that ran during the entire first quarter of fiscal 2000. At Cole Licensed Brands, same-store sales increased 3.8%, primarily reflecting an increase in the average spectacle selling price. The 53rd week in fiscal 2000 provided approximately $14.4 million in revenue. The gross margin rate at Cole Vision was higher compared to the prior year, although it declined in the second half of 2001, as more customers selected merchandise from Cole Licensed Brands' new, higher cost frame assortment at Sears. Higher revenue from Cole Managed Vision partially offset the impact of decline in frame margins in fiscal 2001. Operating expenses increased 3.6%, but declined 0.4% as a percent of sales compared to last year at Cole Vision. Increased store payroll, occupancy and other store costs to support the increase in revenues at Cole Vision comprised most of the increase. Operating expenses at Pearle decreased from the prior year. Pearle Vision recorded $2.6 million of impairment 15 charges in accordance with SFAS 121 in fiscal 2001 compared to an impairment charge of $3.5 million in fiscal 2000. In addition, payroll costs were favorable due to productivity improvements. A reduction of the average weekly hours worked per store relative to fiscal 2000 was achieved. Other store costs at Pearle were lower than fiscal 2000, primarily due to write-offs of $0.8 million in third party receivables in fiscal 2000. Expenses declined as a percent of sales compared to last year at Cole Managed Vision due to a reduction in the processing cost per claim and increased volume and leverage gains in capitated business. Operating income at Cole Vision improved to $15.1 million in fiscal 2001, compared to $8.0 million in fiscal 2000. The reduction of the impairment charge at Pearle Vision and other operating improvements at both Pearle and Cole Managed Vision were the primary reasons for the increase. Gains in retail operations were tempered by the loss of revenues associated with the 53rd week in fiscal 2000 as well as the expansion of Target Optical. The Company opened 107 Target Optical stores during fiscal 2001. The losses associated with the Target Optical expansion are expected to decline as older stores ramp up to profitability, as a result of the new focus on opening only in Super Target stores and with a switch from fixed to percentage rent. The average time to store level profitability is also expected to become shorter. THINGS REMEMBERED SEGMENT Things Remembered revenues were $272.3 million in fiscal 2001, compared with $276.1 million in fiscal 2000, a decrease of 1.4%. The largest contributor to this year over year decrease was the 53rd week in fiscal 2000, which provided approximately $3.2 million in revenue. The decrease in revenues was due to a same-store sales decrease of 1.8%, attributable to the general slowdown in mall traffic which worsened following the events of September 11 and from not repeating a merchandise clearance promotion that was held in fiscal 2000. However, the average transaction selling price increased as a result of sales of new merchandise at higher average unit retails, more personalization and fewer promotions. At Things Remembered, the gross margin rate improved 1.0 percentage points compared to the prior year, reflecting the improvement in average selling price, lower merchandise acquisition costs and less inventory shrinkage. Operating expenses decreased $1.5 million in fiscal 2001 compared to the prior year due to lower costs of store payroll and bonus expense. These improvements were partially offset by higher costs of rent and occupancy. Things Remembered recorded impairment charges in accordance with SFAS 121 of $0.9 million in fiscal 2001 compared to $0.3 million in the prior year. Operating income increased to $24.1 million in fiscal 2001 from $22.5 million in fiscal 2000, primarily due to lower operating expenses and improvements in gross margin rate. RECONCILIATION OF SAME-STORE SALES GROWTH Same store sales growth is a non-GAAP financial measure, which includes deferred warranty sales on a cash basis and does not reflect provisions for returns and remakes and certain other items. The Company's current systems do not gather data on these items on an individual store basis. Adjustments to the cash basis sales information accumulated at the store level are made for these items on an aggregate basis. As a retailer, the Company believes that a measure of same store performance is important for understanding its operations. The Company calculates same-store sales for stores opened for at least twelve months. A reconciliation of same store sales to revenue reported on a GAAP basis follows: 16
2002 2001 2000 ----------- ----------- ----------- (Dollars in thousands) Current year same-store sales $ 993,776 $ 961,240 $ 949,023 Prior year same-store sales(1) 976,291 948,060 915,286 Percent change 1.8% 1.4% 3.7% Current year same-store sales $ 993,776 $ 961,240 $ 949,023 Adjustment for: Sales at new and closed stores 30,185 25,510 26,504 Extended warranties (2,701) (1,846) (102) Order vs. customer receipt (478) 4,341 (3,148) Returns, remakes and refunds (1,183) (751) (707) Other (37) 188 (968) ----------- ----------- ----------- Store sales 1,019,562 988,682 970,602 Nonstore revenues 157,042 146,631 129,072 Intercompany eliminations (28,485) (26,190) (21,040) ----------- ----------- ----------- GAAP Basis Net Revenue $ 1,148,119 $ 1,109,123 $ 1,078,634 =========== =========== ===========
(1) Prior year same-store sales differ from current year same-store sales in the prior year due to store openings and closings. LIQUIDITY AND CAPITAL RESOURCES Cole National Corporation'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 line of credit. As of fiscal year end 2002, the total commitment was $75.0 million and availability under the credit facility totaled $62.7 million after reduction for commitments under outstanding letters of credit. There are no working capital borrowings outstanding as of February 1, 2003. The maximum amount outstanding during fiscal 2002 was $2.3 million and the daily average borrowing during fiscal 2002 was approximately $31,000. The credit facility, which is guaranteed by Cole National Corporation and Cole National Group, requires Cole National Group and its principal operating subsidiaries to comply with various operating covenants that restrict corporate activities, including covenants restricting the ability of the subsidiaries to incur additional indebtedness, pay dividends, prepay subordinated indebtedness, dispose of certain investments or make acquisitions. The credit facility also requires Cole National Group to comply with certain financial covenants, including covenants regarding minimum interest coverage and maximum leverage. On November 25, 2002, the Company received a waiver from the lenders under the credit facility, which expired on December 31, 2002, of certain covenants to accommodate anticipated changes in the accounting treatment for the sale of certain optical warranties and the costs associated with auditing the Company's restated consolidated financial statements. On December 19, 2002, the credit agreement was amended to accommodate the anticipated changes due to the restatement. The Company received a waiver dated May 9, 2003 of the maximum leverage coverage test for the fiscal year end 2002 and the first quarter of fiscal 2003. During that waiver period the maximum leverage test was adjusted to accommodate the effect of the restatement on the Company's financial statements. This waiver will expire on the earlier of May 17, 2003 if the Lenders do not receive the Form 10-K and 10-Q's for the first through third fiscal quarters of 2002; on May 23, 2003 if certain additional financial information is not received by the Lenders; or June 30, 2003. The Company is currently in compliance with the covenants in the credit agreement and currently expects to meet the waiver conditions. The Company currently expects to complete a permanent amendment to the credit agreement on or before June 30, 2003. However, there is no assurance that the Company will be successful in its effort to complete such an amendment by that time if at all. The Company believes that, even if it is unsuccessful in its effort to complete such an amendment, it will have sufficient liquidity from internal and other external sources. On May 22, 2002, the Company issued $150.0 million of 8-7/8% senior subordinated notes due 2012. The notes are unsecured and mature on May 15, 2012. Net proceeds from the notes offering, together with cash on hand, were used to retire $150.0 million of 9-7/8% senior subordinated notes due 2006 and pay premium and other costs associated with retiring those notes. An extraordinary loss on early extinguishment of debt of $7.2 million, which is net of an income tax benefit of $3.9 million, representing the payment of premiums and other costs of retiring the notes and write-offs of unamortized discount and deferred financing fees, was recorded in the second quarter of fiscal 2002. 17 The indentures pursuant to which the 8-5/8% notes and the 8-7/8% notes were issued contain certain optional and mandatory redemption features and other financial covenants, including restrictions on the ability of Cole National Group to incur additional indebtedness, pay dividends or make other restricted payments to Cole National Corporation. The indentures also permit payments to Cole National Corporation for certain tax obligations and for administrative expenses not to exceed 0.25% of net sales. See Note 5 of the Notes to Consolidated Financial Statements. The Company may from time to time purchase its outstanding notes in the open market or refinance them depending on capital market conditions. No significant principal payment obligations are due under the Company's outstanding indebtedness until April 2004, when a $5.0 million principal payment is due under a 5.0% promissory note and until 2007, when the $125.0 million Senior Subordinated debt is due. The ability of Cole National Corporation and its subsidiaries to satisfy their obligations will be primarily dependent upon the future financial and operating performance of the subsidiaries and upon Cole National Corporation's ability to renew or refinance borrowings or raise additional capital through equity financing or sales of assets. The Company maintains a noncontributory defined benefit pension plan that covers employees who have met eligibility service requirements and are not members of certain collective bargaining units. The pension plan calls for benefits to be paid to eligible employees at retirement, based primarily upon years of service and their compensation levels near retirement. In January 2002, the Company approved a plan freeze for all participants except for participants who are at least age 50 or older with 10 years of benefit service as of March 31, 2002. These participants had their average pay frozen as of March 31, 2002, and covered compensation frozen as of December 31, 2001, but their benefit service will continue to grow. The Company's policy is to fund amounts necessary to keep the pension plan in full force and effect, in accordance with the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. During fiscal 2002, the Company changed the discount rate used to calculate its projected benefit obligation from 7.5% to 6.5%. The change in the discount rate reflects the overall decline in market interest rates and has led to an increase in the projected benefit obligation at February 1, 2003. In addition, the stock market declines have reduced the fair value of the pension plan's assets. As a result of these factors, the pension plan was underfunded by $16.0 million as of February 1, 2003. The Company has written off a prepaid pension asset of $4.6 million and recorded the minimum pension liability by charging $20.6 million to accumulated other comprehensive income (loss) in stockholders' equity. This charge will not impact the actual funding requirements of the plan or the Company's compliance with debt covenants. In November 1998, the Board of Directors authorized the repurchase from time to time of up to 1.0 million shares of common stock, through open market or block transactions. It is expected that any purchases will be made from internally generated funds and that the shares purchased will be used, in part, to offset dilution from stock options and in connection with other benefit plans. As of February 1, 2003, Cole National Corporation had purchased a total of 318,000 shares of common stock and has authority to purchase up to 682,000 additional shares of common stock in the open market or through block purchases. No shares were purchased during fiscal 2002, 2001 or 2000. Cash and cash equivalents at year end were $42.0 million at February 1, 2003 compared to $63.4 million at February 2, 2002. Operations generated net cash of $35.9 million in fiscal 2002, compared with $54.7 million in fiscal 2001 and $32.7 million in fiscal 2000. The primary reason for the $18.8 million decrease in cash provided from operations in fiscal 2002 compared to fiscal 2001 was changes in working capital. Changes in working capital resulted in a use of funds totaling $3.8 million in fiscal 2002 compared to a source of funds totaling $8.3 million in fiscal 2001. During fiscal 2001, the Company undertook an extensive re-merchandising program at Pearle Vision, which contributed to an inventory reduction of $9.8 million. Changes in receivables and other assets resulted in a use of $11.2 million in cash in fiscal 2002, compared to a source of $0.7 million in fiscal 2001. The increase in receivables was primarily due to increased sales and corresponding receivables at Cole Vision. Changes in accounts payable and other liabilities resulted in a source of cash of $8.8 million in fiscal 2002 compared to a use of cash of $4.2 million in fiscal 2001. The increase in other liabilities was due to accrued audit fees, deferred revenues, accrued retirement plans, benefit obligations and bonus accruals. Changes in accrued taxes resulted in a use of cash of $4.1 million in fiscal 2002, primarily due to a decrease in current year accruals for federal and state income taxes. Net cash from investing activities resulted in a use of funds of $51.0 million in fiscal 2002, compared to $36.9 million in fiscal 2001. Capital expenditures, which accounted for most of the cash used for investing, were $39.4 million, $33.8 million and $28.9 million in fiscal 2002, 2001 and 2000, respectively. The majority of capital expenditures were for store fixtures, equipment and leasehold improvements for new stores, including the Target Optical expansion, and remodeling of existing stores. A payment was made to Target Corporation in fiscal 2002 in consideration of prior years' capital expenditures, which had been accrued. The Company paid approximately $5.6 million, $6.9 million and $8.4 million for systems development costs in fiscal 2002, 2001 and 2000, respectively. Such costs have been capitalized and are being 18 amortized over the systems' estimated useful lives. In fiscal 2002, the Company provided a $4.0 million loan to U.S. Vision, Inc., as part of that company's management-led buyout. U.S. Vision is a large provider in Cole Managed Vision's Preferred Provider Network. Interest on the note accrues at 8.75% per annum (11.75% per annum in the event of default per the agreement) and is due quarterly starting on December 31, 2002 and on the last day of each March, June and September. The note matures December 1, 2003. The Company used $1.6 million and $0.8 million in fiscal 2002 and fiscal 2001, respectively, for contingent payments in connection with the prior acquisition of MetLife's managed vision business. In fiscal 2001, net proceeds of $12.5 million were received from the sale of two facilities no longer required for operations and from the sale and leaseback of Pearle Vision's former headquarters office building in Dallas, Texas and a portion of the land. In fiscal 2001, the Company used $6.4 million for additional net investment in Pearle Europe, primarily in connection with its acquisition of an optical retailer in Portugal. For fiscal 2003, the Company plans to expand the number of stores, including opening approximately 23 Target Optical stores, and to remodel and relocate other stores. The Company expects to open in new Super Target stores that will offer Target Optical excellent, highly visible and high traffic locations. As a result, the Company's emphasis on Target Optical has moved from opening stores to improving their operations. The Company currently estimates that capital expenditures in fiscal 2003 will be approximately $35.5 million, excluding acquisition and systems development costs. Approximately $3.9 million is estimated to be incurred for systems development costs in 2003, which will be capitalized and subsequently amortized. Net cash used for financing activities totaled $6.4 million in fiscal 2002. Net cash provided by financing totaled $8.4 million and $8.3 million in fiscal 2001 and fiscal 2000, respectively. In May 2002, Cole National Group, Inc., issued $150.0 million of 8-7/8% Senior Subordinated Notes due May 2012. The net proceeds of the issuance and cash on hand were used to retire all of Cole National Group's $150.0 million 9-7/8% Senior Subordinated Notes due 2006. Finance fees and early repayment of the 9-7/8% notes resulted in a net cash usage of $14.2 million. In fiscal 2000, the Company entered into a sale and leaseback transaction from the sale of its office facility in Twinsburg, Ohio. The transaction was accounted for under the finance method of accounting. At the time of the transaction, the Company had a continuing involvement. In July 2001, the continuing involvement ended and the transaction was reflected as a sale and leaseback. The Company received approximately $13.5 million in fiscal 2000, net of related costs. The Company believes that funds provided from operations, including cash on hand, along with funds available under the credit facility, will provide adequate sources of liquidity to allow its operating subsidiaries to continue to expand the number of stores and to fund capital expenditures and systems development costs. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS The Company leases a substantial portion of its equipment and facilities including laboratories, office and warehouse space, and retail locations. In addition, Cole Vision operates departments in various host stores and pays occupancy costs solely as a percentage of sales. A more complete discussion of the Company's lease and license commitments is included in Note 12 of the Notes to Consolidated Financial Statements. The Company guarantees future minimum lease payments for certain store locations leased directly by Pearle franchisees. The term of these guarantees range from one to ten years of which many are limited to periods that are less than the full term of the leases involved. A more complete discussion of the Company's guarantees is included in Note 12 of the Notes to Consolidated Financial Statements. The following table summarizes certain payments due by period for contractual obligations including operating leases:
Payments Due by Period (Dollars in thousands) ---------------------------------------------------------------------- Less Than After Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years - ----------------------- -------- -------- -------- -------- -------- Long-term debt $285,000 $ -- $ 6,000 $127,000 $152,000 Capital lease obligations, including interest 1,210 328 576 306 - Operating leases 419,079 82,904 133,282 88,217 114,676 Sublease agreements (43,223) (10,765) (15,825) (9,793) (6,840) -------- -------- -------- -------- -------- Total contractual obligations $662,066 $ 72,467 $124,033 $205,730 $259,836 ======== ======== ======== ======== ========
19 INVESTMENT IN PEARLE EUROPE Included in other assets is the Company's minority investment in Pearle Europe B.V. ("Pearle Europe"). HAL Holding N.V. ("HAL") owns a 68% interest, the Company owns a 21% interest, and Pearle Europe's management owns the remaining 11% interest in Pearle Europe. The Company believes that it no longer has the ability to exercise significant influence over the operating and financial policies of Pearle Europe as a result of a change in the shareholders agreement in June 2000. Accordingly, as discussed in Notes 2 and 17 of Notes to Consolidated Financial Statements, the Company's common equity investment in Pearle Europe of $9.1 million at February 1, 2003 is accounted for using the cost method. At February 1, 2003 the Company also holds $19.6 million of loans and interest receivable from Pearle Europe. Pearle Europe is one of Europe's largest optical retailers, and owns a number of optical retail chains with a total of more than 1,100 stores in eleven European countries. Pearle Europe's revenues for its fiscal year ended December 31, 2002 increased 22% to EUR 470 million or $490.0 million. In November 2002 Pearle Europe acquired the optical retail activities of Instrumentarium Oy ("Instrumentarium"), a Finnish company. These activities include optical retail chains in Finland, where it is the market leader with 132 stores; Sweden, where it has 31 stores, including 8 operated by franchisees; Estonia, where it has 15 stores; and Russia, where it has 1 store. Instrumentarium's revenue for 2002 was EUR 106 million or $111.0 million. The Company's equity interest in Pearle Europe includes 2 Class A Common Shares and 22,887 Class B Common Shares. Pearle Europe is closely held, and there is no market for these shares. The 2 Class A Common Shares have preferred share characteristics. On occasion, HAL, the Company or Pearle Europe sell shares to, or offer liquidity to and purchase shares from members of Pearle Europe management. Pearle Europe has developed a methodology to set a fair price for such purchase and sale transactions that is based upon the performance of its operating subsidiaries, the prices paid by Pearle Europe for recent acquisitions, and other factors. The most recent sale transaction of Class B Common Shares was completed by Pearle Europe at a price of EUR 4,190 per share. Applying this price to the Company's holdings of Pearle Europe Class B shares would indicate a value for the Company's holdings of EUR 96.0 million, which is equal to $103.0 million, using the exchange rate on February 1, 2003. A limited scope appraisal by Valuation Research, the Company's independent valuation advisors, indicates that this figure is within a range of reasonable values for the Company's equity interest in Pearle Europe, without taking into account discounts for minority interest or lack of marketability. Given the illiquid nature of this investment, there is no assurance that the Company would be able to sell its interest in Pearle Europe for that amount or at all. Moreover, the Company currently has no plans to sell its interest in Pearle Europe. Agreements between HAL, the Company and members of Pearle Europe management require HAL and the Company to periodically offer to purchase Pearle Europe shares held by the members of Pearle Europe Management. The offer price is to be set by HAL and the Company by agreement, and is required to be "fair in the opinion of" HAL and the Company. These offers are required to be made (1) not later than September 3, 2003, (2) in May 2005, and (3) biannually in May commencing in 2007. The obligations to fund the purchase of any shares as to which the offer to purchase is accepted are pro rata to HAL and to the Company based on their respective ownership interests on the date of the offer. HAL and the Company have not yet agreed on the price to offer this year or on the process to agree to the price or on the source of funding for any purchases. Funds could be derived from payments by Pearle Europe, from the separate resources of HAL and the Company, or from financings. In the event that all of Pearle Europe's managers who are entitled to receive an offer to purchase their shares were to accept that offer, the resulting obligation to the Company could be material. The Company believes that it will have sufficient liquidity to meet the obligation, if any, that may result from their commitment in fiscal 2003. RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" (SFAS 142) in the first quarter of fiscal 2002. This statement requires that goodwill and certain intangible assets deemed to have indefinite useful lives no longer be amortized, but instead be subject to at least an annual review for impairment. Other intangible assets with finite lives are amortized over their useful lives. With the adoption of this statement, the Company ceased amortization of goodwill and tradenames as of February 3, 2002. Amortization of goodwill and tradenames totaled $5.0 million and $5.2 million in fiscal 2001 and fiscal 2000, respectively. During the second quarter of fiscal 2002, the Company completed the transitional impairment testing of goodwill as required by SFAS 142. Based on the findings of its outside valuation advisor, the Company has concluded that there was no impairment of either its goodwill or tradenames at the adoption date of the new accounting standard, effective February 3, 2002. The Company has elected to perform its annual tests for potential impairment as of the first day of the Company's 20 fourth quarter. Based on its annual tests performed in the fourth quarter of fiscal 2002, the Company has concluded that there was no impairment of its goodwill or tradenames. As part of the restatement, the Company and its outside valuation advisor reviewed the previously completed impairment testing and confirmed that there was no impairment of either goodwill or tradenames. The Financial Accounting Standards Board (FASB) has issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical Corrections" (SFAS 145). SFAS 145 states that the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board (APB) Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for classification as an extraordinary item shall be reclassified as operating expenses. The Company will adopt SFAS 145 as of the beginning of fiscal 2003. As a result, the loss on early extinguishment of debt reported as an extraordinary item for the year ended February 1, 2003 will be reclassified at that time. The pretax loss from the early extinguishment of debt will be presented as a separate line within interest and other (income) expenses and the related income tax benefit will reduce the reported income tax provision. Other portions of the statement are not applicable to the Company. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003. The adoption had no effect on the Company's financial position or operations. The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosures" (SFAS 148) which amends SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 148 provides alternate methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in the financial statements about the effects of stock-based compensation. The Company has adopted the disclosure provisions of SFAS 148 as of fiscal 2002. The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143), and SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 143 provides guidance for legal obligations arising from the retirement of long-lived assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 was adopted during fiscal 2002 and had no effect on the Company's financial position or operations. SFAS 143 will be adopted during fiscal 2003 and is not expected to have a material effect on the Company's financial position or operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted the fair value recognition provision of this interpretation for guarantees issued or modified after December 31, 2002, which did not have a material effect on the Company's financial position or operations. The disclosure provisions of the interpretation have been adopted for the year ended February 1, 2003. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). The Interpretation requires certain variable interest entities, including certain special purpose entities, to be consolidated by the primary beneficiary if the equity investors in the entity do not have all the essential characteristics of a controlling financial interest or do not have sufficient equity at risk. The Interpretation immediately applies to entities created after January 31, 2003, and at the beginning of the Company's 2003 third quarter for existing variable interest entities. Management is still assessing the impacts of this Interpretation on its consolidated financial statements. However, it is reasonably possible that the synthetic operating lease for the Highland Heights, Ohio facility will require consolidation under this Interpretation. The consolidation will require an additional $2.4 million in assets and liabilities on the consolidated balance sheet. In November 2002, the Emerging Issues Task Force of the FASB ("EITF") reached a consensus on Issue 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor" (Issue 02-16). Certain aspects of the issue were effective immediately, which were adopted and did not have a significant impact on operations. The remaining portion of Issue 02-16 will be adopted during fiscal 2003 and is not expected to have a material effect on the Company's financial position or operations. 21 CONTINGENCIES The Company and its optical subsidiaries have been sued by the State of California, which alleges claims for various statutory violations related to the operation of 24 Pearle Vision Centers in California. The claims include untrue or misleading advertising, illegal dilation fees, unlawful advertising of eye exams, maintaining an optometrist on or near the premises of a registered dispensing optician, unlawful advertising of an optometrist, unlicensed practice of optometry, and illegal relationships between dispensing opticians, optical retailers and optometrists. The action seeks unspecified damages, restitution and injunctive relief. Although the State of California obtained a preliminary injunction to enjoin certain advertising practices and from charging dilation fees in July 2002, the terms of the injunction have not had and are not expected to have any material effect on the Company's operations. In addition, both the State and the Company have appealed the preliminary injunction. The injunction is not expected to have a material effect on the Company's operations. Although the Company believes it is in compliance with California law and intends to continue to defend the issues raised in the case vigorously, it may be required to further modify its activities or might be required to pay damages and or restitution in currently undeterminable amount if it is not successful, the cost of which, as well as continuing defense costs, might have a material adverse effect of the Company's operating results and cash flow in one or more periods. Things Remembered, Inc. is in the process of settling a class action complaint in California alleging that the putative class (alleged to include 200 members) were improperly denied overtime compensation in violation of a California law. The action sought unspecified damages, interest, restitution, as well as declaratory and injunctive relief and attorneys' fees. On February 3, 2003, Things Remembered and the plaintiffs reached an agreement to resolve the lawsuit for $562,500. The settlement is subject to court approval. A liability of $562,500 was recorded in the fourth quarter of 2002. Cole National Corporation is defending a purported class action lawsuit alleging claims for various violations of federal securities laws related to the Company's publicly reported revenues and earnings. The action, which proposes a class period of March 23, 1999 through November 26, 2002 and names the Company and certain present and former officers and directors as defendants, seeks unspecified compensatory damages, punitive damages "where appropriate", costs, expenses and attorneys fees. Following the Company's announcement in November 2002 of the restatement of the Company's financial statements, (see Note 17 of the Notes to Consolidated Financial Statements), the Securities and Exchange Commission began an inquiry into the Company's previous accounting. The course of this or further litigation or investigations arising out of the restatement of the Company's financial statements cannot be predicted. In addition, under certain circumstances the Company would be obliged to indemnify the individual current and former directors and officers of the Company who are named as defendants in litigation or who are or become involved in an investigation. The Company believes it has insurance that should be available with respect to litigation and any indemnification obligations. However, if the Company is unsuccessful in defending against any such litigation, and if its insurance coverage is not available or is insufficient to cover its expenses, indemnity obligations and liability, if any, the litigation and/or investigation may have a material adverse effect on the Company's financial condition, cash flow and results of operations. As described in Part I, Item 3, "Legal Proceedings", Cole National Group, Inc. has been named as a defendant along with numerous other retailers, in patent infringement litigation challenging the defendants' use of bar code technology. The Company believes it has available defenses and does not expect any liability. However, if Cole National Group, Inc. were to be found liable for an infringement, it might have a material adverse effect on our operating results and cash flow in the period incurred. In the ordinary course of business, the Company is involved in various other legal proceedings. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, liquidity or financial position of the Company. SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements requires the Company to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of judgment involved and its potential impact on the Company's reported financial results. Estimates are deemed significant when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period to period, and would materially impact the Company's financial condition, changes in financial condition or results of operations. The Company's significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements. Critical estimates inherent in these accounting policies are discussed in the following paragraphs. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS The Company records an allowance for uncollectible accounts to reflect management's best estimate of losses inherent in its portfolio of receivables from Cole Licensed Brands' host stores, Pearle Vision franchisees and managed vision care accounts. The allowance is established through a charge to the provision and represents amounts of current and past due receivable balances which management estimates will not be collectible. The Company calculates the allowance for uncollectible 22 accounts using historical experience, current trends, credit policy and aging reports. An analysis, including historical performance, break-even analysis and payment arrangements is performed on delinquent accounts. The Company's calculation is reviewed by management to assess whether additional consideration is required to appropriately estimate losses in the receivable portfolio. Management believes its receivables are adequately reserved under current conditions. Any significant deterioration in the economic environment could materially affect these expectations. VALUATION OF INVENTORIES Inventories are recorded at the lower of cost or market based on the first-in, first-out (FIFO) method for the optical inventories and based on the weighted average cost method for the gift inventories. The Company records a reserve for future inventory cost markdowns to be taken for inventory not expected to be part of its ongoing merchandise offering. The reserve is estimated based on historical information regarding sell through for similar products. The Company records a reserve for estimated shrinkage based on various factors including sales volume, historical shrink results and current trends. Management believes its inventories are appropriately valued. VALUATION OF LONG-LIVED ASSETS Property and equipment, systems development, and other finite intangibles are amortized over their estimated useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An initial screening is performed on all long-lived assets. Store locations less than three years old and stores relocated within three years of fiscal year-end are excluded from testing. If the undiscounted future cash flows from the long-lived asset are less than the carrying value, the Company recognizes a loss equal to the difference between the discounted future cash flow and the carrying value. Management's estimate of future cash flow is based on our experience, knowledge and market data. However, these estimates can be affected by factors such as future store profitability, real estate demand and economic conditions that can be difficult to predict. Goodwill, noncompete agreements and tradename assets were amortized over their estimated useful economic life using the straight-line method and are carried at cost less accumulated amortization. Beginning with fiscal year 2002, all goodwill and tradename amortization ceased in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142); and both goodwill and tradenames are tested at least annually for impairment. The Company adopted the first day of the fourth fiscal quarter for the annual impairment review. VALUATION OF DEFERRED INCOME TAXES Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Management regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance for tax assets based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. In determining the valuation allowance related to deferred tax assets, management estimates taxable income into the future. The assessment of whether or not a valuation allowance is required often requires significant judgment including the forecast of future taxable income and the evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowance are made to earnings in the period when such assessment is made. ALLOWANCE FOR REMAKES AND RETURNS Sales are recorded in accordance with the Company's policy for revenue recognition and deferred revenue discussed in the summary of Significant Accounting Policies. Revenues have been reduced by allowances for remakes of product and returns. The estimated allowances are calculated as a percentage of sales and based upon historical return percentages. MANAGED VISION UNDERWRITING RESULTS The Company sells capitated managed vision care plans which generally have a duration of one year. Based upon its experience, the Company believes that it can predict utilization and claims experience under these plans with a high level of confidence. Underwriting results are recognized using an estimated percentage of claims revenue. Each quarter, a portion of the resulting gain is reserved for potential variances between predicted and actual results. The reserves are reconciled following the end of each plan year. 23 SELF-INSURANCE RESERVES Due to the significant deductible under its insurance policies, the Company is primarily self-insured for property loss, workers' compensation, automobile and general liability costs. The liabilities are determined actuarially based on claims filed and estimates for claims incurred but not reported. These liabilities are not discounted. In estimating the obligation associated with incurred losses, the Company utilizes loss development factors prepared by independent third party actuaries. These development factors utilize historical data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported claims. DEFINED BENEFIT RETIREMENT PLANS The plan obligations and related assets of defined benefit retirement plans are presented in Note 10 of the Notes to Consolidated Financial Statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and annual pension expense are determined by independent actuaries and through the use of a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate and the estimated future return on plan assets. In determining the discount rate, the Company utilizes the yield on high-quality, fixed income investments currently available with maturities corresponding to the anticipated timing of the benefit payments. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans. At February 1, 2003, the weighted average actuarial assumptions of the Company's plans were: discount rate 6.5%, and long-term rate of return on plan assets 9.0%. FORWARD LOOKING STATEMENTS The Company's management expects its continued emphasis on becoming better retailers to have a positive impact on the Company's operations in fiscal 2003. However, the difficult economy and weak mall traffic negatively impacted store performance early in the 2003 fiscal year, and it is difficult to predict when the current conditions in the retail industry are likely to improve. For the first quarter of fiscal 2003, the Company expects low single digit negative same-store sales in the Cole Vision segment continuing similar trends seen in the fourth quarter of fiscal 2002. The Company expects positive same-store sales at Things Remembered for the first quarter of fiscal 2003, compared to a negative fourth quarter in fiscal 2002. Legal and accounting fees associated with the restatement, the resulting litigation and the SEC inquiry and the litigation in California are likely to have a negative impact on results in fiscal 2003. The Company's expectations and beliefs concerning the future contained in this document are 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 potential adverse consequences of the restatement of the Company's financial statements, including those resulting from litigation or government investigations, restrictions or curtailment of the Company's credit facility and other credit situations, costs and other effects associated with the California litigation, the timing and achievement of improvements in the operations of the optical business, the results of Things Remembered, which is highly dependent on the fourth quarter holiday season, the nature and extent of disruptions of the economy from terrorist activities or major health concerns and from governmental and consumer responses to such situations, the actual utilization of Cole Managed Vision funded eyewear programs, 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 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's major market risk exposure is to changes in foreign currency exchange rates in Canada and in Euros, which could impact its results of operations and financial condition. Foreign exchange risk arises from the Company's exposure to 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. A 10% adverse movement in quoted foreign currency exchange rates could result in a loss in fair value of investments and notes and interest receivables of $2.1 million. During the third quarter of 2002 the Company entered into interest swap agreements to take advantage of favorable market interest rates. These agreements require the Company to pay an average floating interest rate based on six month 24 LIBOR plus 4.5375% to a counter party while receiving a fixed rate on $50.0 million of the Company's $125.0 million 8-5/8% Senior Subordinated Notes due 2007. The agreements mature August 15, 2007 and qualify as fair value hedges. The LIBOR rate is reset in arrears. The reset effective on February 15, 2003 for six month LIBOR was 1.34% and resulted in a rate of 5.87750% applied from the inception date of the swaps through February 1, 2003. At February 1, 2003 the fair value of the swap agreement was an unrealized gain of approximately $0.8 million. A change in six month LIBOR would effect the interest cost associated with the $50.0 million notional value of the swap. A 50% change (approximately 67 basis points) in the market rates of interest for six month LIBOR as compared to the 5.8775% rate in effect for fiscal 2002 would increase the Company's annual interest cost by $0.3 million. In addition, the Company is exposed to changes in the fair value of our debt portfolio, primarily resulting from the effects of changes in interest rates. The Company utilizes interest rate swaps to manage its exposure. Management believes that its use of these financial instruments is in the Company's best interests. The Company does not enter into financial instruments for trading purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item appears on pages F-1 through F-41 of this Form 10-K and is incorporated herein by this reference. Other financial statements and schedules are filed herewith as "Financial Statement Schedules" pursuant to Item 15. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 13, 2002, upon the recommendation of the Company's Audit Committee, the Board of Directors determined to replace Arthur Andersen LLP ("Arthur Andersen") as the Company's independent public accountants and to appoint Deloitte & Touche LLP ("Deloitte & Touche") to serve as its independent public accountants for the fiscal year 2002. The change in auditors was effective June 13, 2002. Arthur Andersen's reports on the Company's consolidated financial statements for each of the fiscal years ended February 2, 2002 and February 3, 2001 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two fiscal years ended February 2, 2002 and February 3, 2001 and the subsequent interim period preceding the decision to change independent public accountants, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen's satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their audit reports on the Company's consolidated financial statements for such years, and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. In the years ended February 2, 2002 and February 3, 2001 and through the date of their appointment, the Company did not (i) receive a written report or oral advice from Deloitte & Touche with respect to either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or (ii) consult with Deloitte & Touche on any other matter that was either the subject of a disagreement, within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or any "reportable event," as that term is defined in Item 304(a)(1)(v) of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item as to Directors will be included in Cole National Corporation's Proxy Statement under the caption "Election of Directors" and is incorporated herein by this reference. The information required by this item as to executive officers who are not Directors is included in Item 4A of Part I of this report. 25 ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be included in Cole National Corporation's Proxy Statement under the caption "Compensation of Executive Officers" and is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be included in Cole National Corporation's Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners" and is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be included in Cole National Corporation's Proxy Statement under the caption "Compensation Committee Interlocks, Insider Participation and Certain Transactions" and is incorporated herein by this reference. ITEM 14. CONTROLS AND PROCEDURES (a) Immediately following the Signature section of this Annual Report are certifications of the Company's Chief Executive Officer and Chief Financial Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certification"). This portion of our Annual Report on Form 10-K is our disclosure of the results of our control evaluation referred to in paragraphs (4), (5) and (6) of the Section 302 Certification and should be read in conjunction with the Section 302 Certification for a more complete understanding of the topics presented. In November 2002 the Company determined it needed to restate its previously issued financial statements for the timing of the recognition of revenues earned on the sale of extended warranty contracts. The Company issued a press release on November 26, 2002 announcing the restatement of its historical consolidated financial statements beginning with its 1998 fiscal year. The Company subsequently determined that it needed to make other changes to previously issued financial statements in addition to the timing of the recognition of warranty revenues. The adjustments have a significant negative impact on the Company's previously reported revenue, net income, and earnings per share. See Note 17 of the Notes to Consolidated Financial Statements for further discussion of the restatement. In March 2003, the Audit Committee engaged outside counsel to conduct an inquiry into the issues surrounding the restatement. The results and conclusions of that inquiry have been considered in the preparation of the accompanying financial statements. Within 90 days prior to the filing date of this Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, of the effectiveness of the design and operation of its disclosure controls and procedures. In making this evaluation, the Company has considered matters relating to its restatement of previously issued financial statements, including the substantial process that was undertaken to ensure that all material adjustments necessary to restate the previously issued financial statements were recorded. The Company believes that certain of the restatement adjustments occurred because certain of the Company's control processes and procedures related to the matters underlying such adjustments were not effective. In connection with the audit of the Company's financial statements for the 2002 fiscal year and the restated financial statements for the 2001 and 2000 fiscal years, Deloitte & Touche reported to management and the Board of Directors on April 30, 2003 that certain deficiencies existed during the audit period in the design or operation of the Company's internal accounting controls which, constituted material weaknesses pursuant to standards established by the American Institute of Certified Public Accountants. Such deficiencies related to the application or selection of accounting principles, the use of management judgment and estimates, and the adequacy of account details and reconciliations. In order to improve the effectiveness of its control processes and procedures, the Company has taken a number of actions within the past year. The Company searched for and hired a new Chief Financial Officer from outside the Company, and filled the position of Corporate Controller. The Audit Committee approved a charter for the Internal Audit function; the Internal Audit staff was strengthened and Internal Audit's role was expanded. The Company established an internal representation requirement, whereby the operating executive and financial officer of each business unit and major staff area are required to certify on a quarterly basis the accuracy of the financial statements and the adequacy of the control processes and procedures within that business unit or staff area. With the approval of the Board of Directors, the Company amended its 26 Business Code of Conduct, and required that all management employees certify in writing that they comply with it. The Business Code of Conduct includes procedures for the receipt, retention and treatment of complaints received from employees regarding among, other things, accounting and internal accounting control matters. The Company is currently revising its Finance and Accounting Policies and Procedures Manual. Based in part upon these changes, the Company's Chief Executive Officer and Chief Financial Officer concluded that as of the evaluation date, the Company's disclosure controls and procedures were reasonably designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. (b) Other than as described above, since the evaluation date by the Company's management of its internal controls, there have not been any significant changes in the internal controls or in other factors that could significantly affect the internal controls. PART IV ITEM 15. 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 for Cole National Corporation and its consolidated subsidiaries 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-7. (b) Reports on Form 8-K The Company filed a Form 8-K (Item 5) on November 26, 2002, which attached a press release announcing that it would restate certain of its historical financial statements as a result of a change in the Company's accounting treatment for the timing of the recognition of revenues earned on the sale of optical warranties. The Company filed a Form 8-K (Item 5) on December 6, 2002 announcing that Ron Eilers, President and Chief Operating Officer of Deluxe Corporation (NYSE: DLX), had been appointed to its Board of Directors. The Company filed a Form 8-K (Item 5) on December 19, 2002, announcing that it had amended covenants in its agreement with the bank lenders for its $75 million credit facility to accommodate anticipated changes in the accounting treatment for the sale of certain optical warranties and the auditing costs associated with restating the Company's consolidated financial statements. 27 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 16, 2003 By: /s/ Ann M. Holt ---------------------------------------------- Ann M. Holt Senior Vice President and Corporate 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. /s/ Jeffrey A. Cole Chairman and Chief Executive Officer May 16, 2003 - ----------------------- and Director (Principal Executive Officer) Jeffrey A. Cole /s/ Larry Pollock President and Chief Operating Officer May 16, 2003 - ----------------------- and Director Larry Pollock /s/ Lawrence E. Hyatt Executive Vice President and May 16, 2003 - ----------------------- Chief Financial Officer Lawrence E. Hyatt (Principal Financial Officer) /s/ Ann M. Holt Senior Vice President and Corporate Controller May 16, 2003 - ----------------------- (Principal Accounting Officer) Ann M. Holt * Director May 16, 2003 - ----------------------- Ronald E. Eilers * Director May 16, 2003 - ----------------------- Timothy F. Finley * Director May 16, 2003 - ----------------------- Irwin N. Gold * Director May 16, 2003 - ----------------------- Melchert Frans Groot * Director May 16, 2003 - ----------------------- Peter V. Handal * Director May 16, 2003 - ----------------------- Charles A. Ratner * Director May 16, 2003 - ----------------------- Walter J. Salmon
* The undersigned, by signing her name hereto, does sign and execute this report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors of Cole National Corporation and which are being filed herewith with the Securities and Exchange Commission on behalf of such officers and directors. /s/ Ann M. Holt - ----------------------------- Ann M. Holt, Attorney-in-Fact 28 CERTIFICATION I, Jeffrey A. Cole, certify that: 1. I have reviewed this annual report on Form 10-K of Cole National Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 16, 2003 /s/ Jeffrey A. Cole ------------------------------------ Jeffrey A. Cole Chairman and Chief Executive Officer 29 CERTIFICATION I, Lawrence E. Hyatt, certify that: 1. I have reviewed this annual report on Form 10-K of Cole National Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 16, 2003 /s/ Lawrence E. Hyatt ---------------------------- Lawrence E. Hyatt Executive Vice President and Chief Financial Officer 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Independent Auditors' Report F - 2 Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002 (as restated) F - 3 Consolidated Statements of Operations for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 (as restated) and the 53 weeks ended February 3, 2001 (as restated) F - 4 Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 (as restated) and the 53 weeks ended February 3, 2001 (as restated) F - 5 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 (as restated), and the 53 weeks ended February 3, 2001 (as restated) F - 6 Notes to Consolidated Financial Statements F - 7 FINANCIAL STATEMENT SCHEDULES: Schedule I - Condensed Financial Information of Registrant F - 38 Schedule II - Valuation and Qualifying Accounts F - 41
All financial statement schedules not included have been omitted because they are not applicable or because the required information is otherwise furnished. F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Cole National Corporation: We have audited the accompanying consolidated balance sheets of Cole National Corporation and subsidiaries (the "Company") as of February 1, 2003 and February 2, 2002, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the three fiscal years in the period ended February 1, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Cole National Corporation and subsidiaries as of February 1, 2003 and February 2, 2002, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Notes 1 and 4 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets effective February 3, 2002. As discussed in Note 17, the accompanying fiscal 2001 and 2000 consolidated financial statements have been restated. /s/ Deloitte & Touche LLP Cleveland, Ohio May 15, 2003 F-2 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
February 1, February 2, 2003 2002 --------- --------- (As restated, Assets see Note 17) Current assets: Cash and cash equivalents $ 41,963 $ 63,418 Accounts receivable, less allowances of $3,063 in 2002 and $3,228 in 2001 50,544 41,365 Current portion of notes receivable 8,624 2,824 Inventories 118,119 119,203 Prepaid expenses and other 26,581 29,214 Deferred income taxes 31,333 27,252 --------- --------- Total current assets 277,164 283,276 Property and equipment, at cost 318,914 305,419 Less - accumulated depreciation and amortization (197,906) (184,985) --------- --------- Total property and equipment, net 121,008 120,434 Notes receivable, excluding current portion, less allowances of $3,010 in 2002 and $5,209 in 2001 22,928 20,193 Deferred income taxes 31,905 27,801 Other assets 54,142 52,201 Other intangibles, net 50,903 46,146 Goodwill, net 85,557 85,543 --------- --------- Total assets $ 643,607 $ 635,594 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Current portion long-term debt $ 232 $ 259 Accounts payable 67,579 65,124 Accrued interest 8,199 6,748 Accrued liabilities 92,096 92,577 Accrued income taxes 4,957 8,604 Deferred revenue 37,592 35,401 --------- --------- Total current liabilities 210,655 208,713 Long-term debt, net of discount and current portion 286,553 284,574 Other long-term liabilities 41,587 22,942 Deferred revenue, long-term 11,559 11,049 Stockholders' equity: Preferred stock -- -- Common stock 17 16 Paid-in capital 270,991 268,709 Accumulated other comprehensive loss (18,183) (4,895) Accumulated deficit (145,698) (140,549) Treasury stock at cost (9,900) (10,002) Unamortized restricted stock awards (1,685) (2,628) Notes receivable - stock option and awards (2,289) (2,335) --------- --------- Total stockholders' equity 93,253 108,316 --------- --------- Total liabilities and stockholders' equity $ 643,607 $ 635,594 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-3 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Fifty-Two Fifty-Two Fifty-Three Weeks Ended Weeks Ended Weeks Ended February 1, February 2, February 3, 2003 2002 2001 ----------- ----------- ----------- (As restated, see Note 17) Net revenue $ 1,148,119 $ 1,109,123 $ 1,078,634 Cost and expenses: Cost of goods sold 378,704 364,392 359,608 Operating expenses 742,418 711,478 697,458 Goodwill and tradename amortization -- 5,010 5,168 ----------- ----------- ----------- Total costs and expenses 1,121,122 1,080,880 1,062,234 ----------- ----------- ----------- Operating income 26,997 28,243 16,400 Interest and other (income) expense: Interest expense 26,772 29,417 29,121 Interest and other (income) (6,763) (3,892) (3,832) ----------- ----------- ----------- Total interest and other (income) expense, net 20,009 25,525 25,289 ----------- ----------- ----------- Income (loss) before income taxes 6,988 2,718 (8,889) Income tax provision (benefit) 4,895 5,105 (940) ----------- ----------- ----------- Income(loss) after taxes 2,093 (2,387) (7,949) Equity in net income of Pearle Europe -- -- 139 ----------- ----------- ----------- Income (loss) before extraordinary loss 2,093 (2,387) (7,810) Extraordinary loss on early extinguishment of debt, net of $3.9 million tax benefit (7,242) -- -- ----------- ----------- ----------- Net income (loss) $ (5,149) $ (2,387) $ (7,810) =========== =========== =========== Basic earnings (loss) per common share: Income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50) Extraordinary loss (0.45) -- -- ----------- ----------- ----------- Net income (loss) $ (0.32) $ (0.15) $ (0.50) =========== =========== =========== Diluted earnings (loss) per common share: Income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50) Extraordinary loss (0.44) -- -- ----------- ----------- ----------- Net income (loss) $ (0.31) $ (0.15) $ (0.50) =========== =========== =========== Weighted average shares: Basic 16,223 16,019 15,564 Diluted 16,500 16,019 15,564
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-4 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Fifty-Two Fifty-Two Fifty-Three Weeks Ended Weeks Ended Weeks Ended February 1, February 2, February 3, 2003 2002 2001 ----------- ----------- ----------- (As restated, see Note 17) Cash flows from operating activities: Net income (loss) $ (5,149) $ (2,387) $ (7,810) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 36,432 40,073 40,702 Gain on sale of building -- (683) -- Impairment losses 899 3,738 3,954 Deferred income tax provision (benefit) 3,202 2,725 (3,039) Extraordinary loss on early extinguishment of debt, net of tax 7,242 -- -- Noncash interest, foreign currency (gains) losses and other, net (4,270) 946 1,531 Noncash compensation 1,350 1,955 1,154 Increases (decreases) in cash resulting from changes in operating assets and liabilities: Accounts and notes receivable, prepaid expenses and other assets (11,180) 651 (5,389) Inventories 1,205 9,811 (6,258) Accounts payable, accrued liabilities and other liabilities 8,811 (4,164) 6,018 Accrued interest 1,451 (61) 292 Accrued and refundable income taxes (4,137) 2,103 1,553 ----------- ----------- ----------- Net cash provided by operating activities 35,856 54,707 32,708 ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (39,360) (33,791) (28,933) Net proceeds from sales and sale/leasebacks of fixed assets -- 12,481 -- Systems development costs (5,626) (6,918) (8,444) Investment and notes receivables in Pearle Europe, net -- (6,446) 2,875 Contingent payments for acquisition of business (1,645) (847) -- Cash paid for note receivable from third party network provider (4,000) -- -- Other, net (329) (1,361) (640) ----------- ----------- ----------- Net cash used for investing activities (50,960) (36,882) (35,142) ----------- ----------- ----------- Cash flows from financing activities: Repayment of long-term debt (158,318) (592) (1,557) Proceeds from issuance of long-term debt 150,000 -- 13,490 Payment of deferred financing fees (6,058) -- (422) Increase (decrease) overdraft balances 6,210 7,872 (2,704) Net proceeds from exercise of stock options and issuance of stock 1,745 1,564 895 Repayments (issuance) of notes receivable - stock options and awards, net 46 (340) (1,284) Other, net 24 (129) (108) ----------- ----------- ----------- Net cash (used for) provided by financing activities (6,351) 8,375 8,310 ----------- ----------- ----------- Cash and cash equivalents: Net (decrease) increase during the period (21,455) 26,200 5,876 Balance, beginning of period 63,418 37,218 31,342 ----------- ----------- ----------- Balance, end of period $ 41,963 $ 63,418 $ 37,218 =========== =========== =========== Supplemental disclosures: Interest paid $ 24,597 $ 28,193 $ 27,734 =========== =========== =========== Income taxes paid $ 5,350 $ 385 $ 538 =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-5 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (Dollars in thousands)
February 1, February 2, February 3, 2003 2002 2001 --------- --------- --------- (As restated, see Note 17) Common Stock: Balance at beginning of period $ 16 $ 16 $ 16 Issuance of stock 1 -- -- --------- --------- --------- Balance at end of period 17 16 16 --------- --------- --------- Paid-in Capital: Balance at beginning of period 268,709 263,312 262,158 Issuance of shares for employee stock purchase plan 442 881 887 Stock compensation 488 549 233 Exercise of stock options 1,303 4,080 8 Issuance of restricted stock from treasury shares, net 49 (113) 26 --------- --------- --------- Balance at end of period 270,991 268,709 263,312 --------- --------- --------- Accumulated Other Comprehensive Income (Loss), net of tax: Balance at beginning of period (4,895) (4,455) (2,344) Minimum pension liability, net of tax of $6,987 (13,665) -- -- Foreign currency translation adjustment 377 (440) (2,111) --------- --------- --------- Other comprehensive loss (13,288) (440) (2,111) --------- --------- --------- Balance at end of period (18,183) (4,895) (4,455) --------- --------- --------- Accumulated Deficit: Balance at beginning of period (140,549) (138,162) (130,352) Net income (loss) (5,149) (2,387) (7,810) --------- --------- --------- Balance at end of period (145,698) (140,549) (138,162) --------- --------- --------- Treasury Stock at cost: Balance at beginning of period (10,002) (6,483) (6,363) Issuance of restricted stock, net of forfeitures 383 357 (66) Shares received for exercise of stock options (223) (3,842) -- Shares held in deferred compensation plan (58) (34) (54) --------- --------- --------- Balance at end of period (9,900) (10,002) (6,483) --------- --------- --------- Unamortized Restricted Stock Awards: Balance at beginning of period (2,628) (3,691) (4,961) Issuance of restricted stock, net of forfeitures (438) (244) 40 Amortization of restricted stock awards 1,381 1,307 1,230 --------- --------- --------- Balance at end of period (1,685) (2,628) (3,691) --------- --------- --------- Notes Receivable - Stock Options and Awards: Balance at beginning of period (2,335) (1,995) (711) Issuance of notes receivable -- (384) (1,284) Repayments of notes receivable 46 44 -- --------- --------- --------- Balance at end of period (2,289) (2,335) (1,995) --------- --------- --------- Total Stockholders' Equity $ 93,253 $ 108,316 $ 108,542 ========= ========= ========= Total Comprehensive Income (Loss): Net income (loss) $ (5,149) $ (2,387) $ (7,810) Other comprehensive income (loss) per above (13,288) (440) (2,111) --------- --------- --------- Total comprehensive income (loss) $ (18,437) $ (2,827) $ (9,921) ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-6 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 ("the Parent"), its wholly owned subsidiary, Cole National Group, Inc. and its wholly owned subsidiaries (collectively referred to as "the Company"). The Company's 21% investment in Pearle Europe B.V. is accounted for using the cost method beginning with the third quarter of 2000 and accounted for using the equity method prior to the third quarter of 2000. All significant intercompany transactions have been eliminated in consolidation. Fiscal years end on the Saturday closest to January 31 and are identified according to the calendar year in which they begin. For example, the fiscal year ended February 1, 2003 is referred to as "fiscal 2002." Fiscal 2002 and fiscal 2001 each consisted of 52-week periods; fiscal 2000 consisted of a 53-week period. Nature of Operations The Company is a specialty service retailer operating in both host and nonhost environments, whose primary lines of business are optical products and services and personalized gifts. The Company sells its products through 2,480 company-owned retail locations and 464 franchised locations in 50 states, Canada, and the Caribbean. In connection with its optical business, the Company is a managed vision care benefits provider and claims payment administrator whose programs provide comprehensive eyecare benefits primarily marketed directly to large employers, health maintenance organizations (HMO) and other organizations. The Company has two reportable segments: Cole Vision and Things Remembered (see Note 11). Use of Estimates The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are required in determining the allowance for uncollectible accounts, inventory valuation, depreciation, amortization and recoverability of long-lived assets, deferred income taxes, remakes and returns allowances, managed vision underwriting results, self-insurance reserves, and retirement and post-employment benefits. Reclassifications Certain reclassifications have been made to prior year financial statements and the notes to conform to the current year presentation. Revenue Recognition and Deferred Revenue Revenues include sales of goods and services, including delivery fees to retail customers at company-operated stores, sales of merchandise inventory to franchisees and other outside customers, other revenues from franchisees such as royalties based on sales and initial franchise fees, and capitation and other fees associated with Cole Vision's managed vision care business. Revenues from merchandise sales and services, net of estimated returns and allowances, are recognized at the time of customer receipt or when the related goods are shipped direct to the customer and all significant obligations of the Company have been satisfied. The reserve for returns and allowances is calculated as a percentage of sales based on historical return percentages. Capitation revenues are accrued when due under related contracts at the agreed upon per member, per month rates. Administrative service revenue is recognized when services are provided over the contract period and the Company's customers are obligated to pay. Additionally, the Company sells F-7 discount programs which have twelve-month terms. Revenues from discount programs are deferred and amortized over the 12-month term. Additionally, the Company sells separately priced extended warranty contracts with terms of coverage of 12 and 24 months. Revenues from the sale of these contracts are deferred and amortized over the lives of the contracts, while the costs to service the warranty claims are expensed as incurred. Incremental costs directly related to the sale of such contracts, such as sales commissions and percentage rent, are deferred in prepaid expenses and charged to expense in proportion to the revenue recognized. A reconciliation of the changes in deferred revenue from the sale of warranty contracts follows (dollars in thousands):
2002 2001 -------- -------- Deferred revenues: Beginning balance $ 46,450 $ 44,604 Warranty contracts sold 53,023 50,074 Amortization of deferred revenue (50,322) (48,228) -------- -------- Ending balance $ 49,151 $ 46,450 ======== ========
Franchise revenues based on sales by franchisees are accrued as earned. Initial franchise fees are recorded as revenue when all material services or conditions relating to the sale of the franchises have been substantially performed or satisfied by the Company and when the related store begins operations. Things Remembered sells memberships in its Rewards ClubTM program, which allows members to earn rebates based on their accumulated purchases. The Company defers and amortizes the membership fee revenue over the life of the membership. The rebates, which can only be used to offset the price of future customer purchases, are recognized as a reduction of revenue based on the rebates earned and the estimated future redemptions. The cumulative liability for unredeemed rebates is adjusted over time based on actual experience and trends with respect to redemption. Consideration Received from Vendors The Company receives consideration from vendors as either rebates on the purchase of the inventory or as reimbursement of costs incurred to sell the vendors' products. Rebates received for purchases are deferred and recorded as a reduction of cost of sales when the product is sold or based upon estimated inventory turns. Reimbursement for specific, incremental and identifiable advertising costs incurred by the Company to sell the vendors' products are recorded as a reduction of those costs at the time the expense is recognized in the income statement. Co-op funds calculated as a percentage of inventory purchases are offset against the related expense at the time the inventory is sold. Managed Vision Underwriting Results The Company sells capitated managed vision care plans which generally have a duration of one year. Based upon its experience, the Company believes that it can predict utilization and claims experience under these plans with a high level of confidence. Underwriting results are recognized using an estimated percentage of claims revenue. Each quarter, a portion of the resulting gain is reserved for potential variances between predicted and actual results. The reserves are reconciled following the end of each plan year. Other Managed Vision Expenses Cost of printing member cards, program descriptions and related distribution costs for capitation and administrative service contracts are expensed when incurred. Expenses for discount programs are recognized over the 12-month contract period. F-8 Advertising and Direct Response Marketing Cost for newspaper, television, radio and other media advertising are expensed when incurred and production costs are expensed the first time the advertising occurs or when the service is performed, if later. Costs for certain direct response advertising are capitalized if such direct response advertising costs result in future economic benefit. Such costs related to direct response advertising are amortized in proportion to when the revenues are recognized, not to exceed 90 days. Generally, other direct response program costs that do not meet the capitalization criteria are expensed the first time advertising occurs. The total cost of advertising charged to operating expense is net of amounts reimbursed by franchisees based on a percentage of their sales. Advertising expense is summarized as follows (dollars in thousands):
2002 2001 2000 -------- -------- -------- Gross advertising expense $ 85,215 $ 84,191 $ 86,133 Less: Franchisee contribution (21,303) (20,486) (20,458) -------- -------- -------- Net advertising expense $ 63,912 $ 63,705 $ 65,675 ======== ======== ========
Gains (Losses) from the Sale and Franchising Company Operated Stores Gains (losses) from the sale and franchising company operated stores include the gains or losses from the sale of existing Pearle operated stores to new and existing franchisees, reduced by transaction costs and direct administrative costs of franchising. The Company recognizes these gains (losses) when the sale transaction closes, the franchisee has a minimum amount of the purchase at-risk and the Company is satisfied that the franchisee can meet its financial obligations. If the criteria for gain recognition are not met, the gain is deferred to the extent a remaining financial obligation in connection with the sales transaction exists. Deferred gains are recognized when these criteria are met or as the Company's financial obligation is reduced. Gains (losses) are recorded as decreases (increases) to operating expenses and were $711,000 and $44,000 in fiscal 2002 and 2001, respectively. No gains (losses) were recorded in fiscal 2000. Store Opening Expenses Store opening expenses are charged to operations in the period the expenses are incurred. Cash and Cash Equivalents Cash and cash equivalents consist of cash in banks, investments in money market accounts, treasury bills, commercial paper, and marketable securities with maturities of three months or less and credit card receivables recorded at the time of sale. Credit card receivables were $4.2 million and $3.8 million as of February 1, 2003 and February 2, 2002, respectively. In addition, overdrafts resulting from outstanding checks at the end of each reporting period are reclassified as current liabilities in either accounts payable or accrued expenses. This reclassification to accounts payable amounted to $28.4 million and $22.2 million at February 1, 2003 and February 2, 2002, respectively and to accrued expenses amounted to $3.2 million at February 1, 2003 and February 2, 2002. Valuation of Inventories Inventories are recorded at the lower of cost or market based on the first-in, first-out (FIFO) method for the optical inventories and based on the weighted average cost method for the gift inventories. The Company records a valuation reserve for future inventory cost markdowns to be taken for inventory not expected to be part of its ongoing merchandise offering. The reserve is estimated based on historical information regarding sell through for similar products. The Company records a reserve for estimated shrinkage based on various factors including sales volume, historical shrink results and current trends. Property and Equipment Property and equipment are stated at cost. Repairs and maintenance costs that extend the life of the asset are capitalized. Depreciation is provided principally by using the straight-line method over the estimated useful life of the F-9 related assets, generally 2 to 10 years for furniture, fixtures and equipment, 2 to 25 years for leasehold improvements and 5 to 40 years for buildings and improvements. Property and equipment at cost, consist of the following at February 1, 2003 and February 2, 2002 (dollars in thousands):
2002 2001 -------- -------- Land and building $ 3,812 $ 3,821 Furniture, fixtures and equipment 202,783 192,358 Leasehold improvements 112,319 109,240 -------- -------- Total property and equipment $318,914 $305,419 ======== ========
Capitalized Lease Property Capitalized lease assets are amortized using the straight-line method over the term of the lease, or in accordance with practices established for similar owned assets if ownership transfers to the Company at the end of the lease term. Capital lease assets are included in property and equipment and are $1.3 million and $1.5 million, net of accumulated amortization, in fiscal 2002 and 2001, respectively. Amortization is included with depreciation expense and was $960,000, $844,000 and $1,218,000 in fiscal 2002, 2001 and 2000. Software and Development Costs Software development and implementation costs are expensed until the Company has determined that the software will result in probable future economic benefits and management has committed to funding the project. Thereafter, all direct costs to develop or obtain internal use software, including internal costs, are capitalized in other assets and amortized over the estimated useful life of the software using the straight-line method. Amortization periods range from two to seven years and begin when the software is placed in service. At February 1, 2003 and February 2, 2002, these costs, net of accumulated amortization, were $31,665,000 and $34,314,000, respectively. Amortization of software development costs in fiscal 2002, 2001 and 2000 was $7,865,000, $7,659,000 and $7,695,000, respectively. Goodwill and Other Intangible Assets Goodwill, noncompete agreements and tradename assets were amortized over their estimated useful economic life using the straight-line method and are carried at cost less accumulated amortization. Beginning with fiscal year 2002, all goodwill and tradename amortization ceased in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), and both goodwill and tradenames are tested at least annually for impairment. The Company adopted the first day of the fourth fiscal quarter for the annual impairment review. Other intangible assets with finite lives are amortized over their estimated useful lives based on management's estimates of the period that the assets will generate revenue. Long-Lived Asset Recoverability Long-lived assets, including intangible assets, are reviewed for impairment when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. Impairment charges include the write-down of long-lived assets at stores that were assessed for impairment because changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment charges recorded to operating expenses by segment follows (dollars in thousands): F-10
2002 2001 2000 ---- ------ ------ Cole Vision $444 $2,848 $3,672 Things Remembered 455 890 282 ---- ------ ------ Total impairment charges $899 $3,738 $3,954 ==== ====== ======
Unamortized Debt Issuance Cost Financing costs incurred in connection with obtaining long-term debt are capitalized in other assets and amortized over the life of the related debt using the effective interest method. At February 1, 2003 and February 2, 2002, deferred financing costs net of accumulated amortization were $6,976,000 and $4,483,000, respectively. Amortization of financing costs included in interest expense in fiscal 2002, 2001 and 2000 was $1,128,000, $1,150,000 and $1,102,000, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. The Company includes interest on prior year taxes in income tax expense. Derivatives and Hedging Activity The interest rate swap agreements utilized by the Company are designated as fair value hedges of the underlying fixed rate debt obligations and are recorded at fair value as an increase in noncurrent assets or liabilities and an increase or decrease in long-term debt. These interest rate swaps qualify for the short-cut method for assessing hedge effectiveness under the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). Changes in fair value of the interest rate swaps are offset by the changes in fair value of the underlying debt. Self Insurance Due to the significant deductible under its insurance policies, the Company is primarily self-insured for property loss, workers' compensation, automobile and general liability costs. The liabilities are determined actuarially based on claims filed and estimates for claims incurred but not reported. These liabilities are not discounted. Accrued Liabilities Accrued liabilities consist of the following (dollars in thousands):
2002 2001 ------- ------- Accrued payroll and related liabilities $31,617 $27,859 Customer deposits 15,882 14,961 Other 44,597 49,757 ------- ------- $92,096 $92,577 ======= =======
Other Long-Term Liabilities Other long-term liabilities consist primarily of certain employee benefit obligations, deferred lease credits and other lease-related obligations, and other obligations not expected to be paid within 12 months. Deferred lease credits are amortized on a straight-line basis over the life of the applicable lease. F-11 Foreign Currency Translation The assets and liabilities of the Company's foreign subsidiary and the Company's notes receivable from Pearle Europe are translated to United States dollars at the rates of exchange on the balance sheet date. Income and expense items are translated at average rates of exchange for the foreign subsidiary and at average year-to-date rates of exchange for Pearle Europe. Translation adjustments for foreign subsidiary are presented as a component of accumulated other comprehensive income within stockholders' equity. Translation adjustments for the Company's notes receivable from in Pearle Europe are charged to interest and other income. Fair Value of Financial Instruments Due to their short-term nature, the carrying value of the Company's cash and cash equivalents, credit card and other receivables, and short-term borrowings approximate fair value. The fair value of the notes receivables has not been determined due to nonmarketability and related party nature of the notes. Fair value estimates for the Company's derivative and debt instruments are based on market prices when available or are derived from financial valuation methodologies such as discounted cash flow analyses. Earnings Per Common Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the periods presented. Diluted earnings per common share also includes the dilutive effect of potential common shares (primarily dilutive stock options) outstanding for the periods presented. The effects of stock options have not been included in fiscal 2001 and 2000 diluted loss per share as their effect would have been anti-dilutive. The anti-dilutive stock options were 979,331, 1,361,422 and 2,371,558 for fiscal 2002, 2001 and 2000, respectively. The following represents a reconciliation from basic average common shares outstanding to diluted average commons shares outstanding:
2002 2001 2000 --------- --------- --------- (In thousands, except per share amounts) Determination of shares: Average common shares outstanding 16,223 16,019 15,564 Assumed conversion of dilutive stock options and awards 277 -- -- --------- --------- --------- Diluted average common shares outstanding 16,500 16,019 15,564 ========= ========= ========= Basic earnings (loss) per common share before extraordinary loss $ 0.13 $ (0.15) $ (0.50) Diluted earnings (loss) per common share before extraordinary loss 0.13 (0.15) (0.50)
Stock-Based Compensation In accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees", the Company measures compensation expense for employee and director stock options as the aggregate difference between the market value of its common stock and the exercise price of the options on the date that both the number of shares the grantee is entitled to receive and the exercise price are known. Compensation expense associated with restricted stock grants is equal to the market value of the shares on the date of grant and is recorded pro rata over the required holding period. For Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation" (SFAS 123) purposes, the fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates of 4.6%, 4.8% and 6.2% for grants in fiscal 2002, 2001 and 2000, respectively, volatility of 49-50%, 47-49% and 45-47% in fiscal 2002, 2001 and 2000, respectively, and expected lives of six years for options granted in all fiscal years. The weighted average fair value of options granted during fiscal 2002, 2001 and 2000 at the date of grant was $9.50, $6.31 and $3.59, respectively. Pro forma information relating to the fair value of stock-based compensation is summarized as follows: F-12
2002 2001 2000 --------- --------- --------- (In thousands, except per share amounts) Net income (loss) Reported income (loss) $ (5,149) $ (2,387) $ (7,810) Compensation cost included in determination of net income as reported, net of tax -- -- -- Compensation cost as if fair value based method had been applied to all awards, net of tax (2,199) (1,208) (1,394) --------- --------- --------- Pro forma net income (loss) $ (7,348) $ (3,595) $ (9,204) ========= ========= ========= Basic earnings (loss) per share: Reported earnings (loss) per share $ (0.32) $ (0.15) $ (0.50) Compensation cost under fair value based method (0.14) (0.07) (0.09) --------- --------- --------- Pro forma basic per share income (loss) $ (0.46) $ (0.22) $ (0.59) ========= ========= ========= Diluted earnings (loss) per share: Reported earnings (loss) per share $ (0.31) $ (0.15) $ (0.50) Compensation cost under fair value based method (0.14) (0.07) (0.09) --------- --------- --------- Pro forma diluted earnings (loss) per share $ (0.45) $ (0.22) $ (0.59) ========= ========= =========
Retirement Plans The Company accounts for its defined benefit pension plans and its nonpension postretirement benefit plans using actuarial models required by SFAS No. 87, "Employers' Accounting for Pensions" (SFAS 87)and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), respectively. These models use an attribution approach that generally spreads individual events over the service lives of the employees in the plan. The Company accounts for other post-employment benefits under SFAS No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS 112), which requires the recognition of the obligation to provide benefits awarded to certain individuals. Recently Issued Accounting Standards The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" (SFAS 142) in the first quarter of fiscal 2002. This statement requires that goodwill and certain intangible assets deemed to have indefinite useful lives no longer be amortized, but instead be subject to at least an annual review for impairment. Other intangible assets with finite lives are amortized over their useful lives. With the adoption of this statement, the Company ceased amortization of goodwill and tradenames as of February 3, 2002. Amortization of goodwill and tradenames totaled $5.0 million in fiscal 2001 and $5.2 million in fiscal 2000. During the second quarter of fiscal 2002, the Company completed the transitional impairment testing of goodwill as required by SFAS 142. Based on the findings of its outside valuation advisor, the Company has concluded that there was no impairment of either its goodwill or tradenames at the adoption date of the new accounting standard, effective February 3, 2002. The Company has elected to perform its annual tests for potential impairment as of the first day of the Company's fourth quarter. Based on its annual tests performed in the fourth quarter of fiscal 2002, the Company has concluded that there was no impairment of its goodwill or tradenames. As part of the restatement, the Company and its outside valuation advisor reviewed the previously completed impairment testing and confirmed that there was no impairment of either goodwill or tradenames. The Financial Accounting Standards Board (FASB) has issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical Corrections" (SFAS 145). SFAS 145 states that the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB Opinion 30 for classification as an extraordinary item shall be reclassified as operating expenses. The Company will adopt SFAS 145 as of the beginning of fiscal 2003. As a result, the loss on early extinguishment of debt reported as an extraordinary item for the year ended February 1, 2003 will be reclassified at that time. The pretax loss from the early extinguishment of debt will be presented as a separate line F-13 within interest and other (income) expenses and the related income tax benefit will reduce the reported income tax provision. Other portions of the statement are not applicable to the Company. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement were effective for exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003. The adoption had no effect on the Company's financial position or operations. The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosures" (SFAS 148) which amends SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 148 provides alternate methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in the financial statements about the effects of stock-based compensation. The Company has adopted the disclosure provisions of SFAS 148 for fiscal 2002. The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143) and SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 143 provides guidance for legal obligations arising from the retirement of long-lived assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 was adopted during fiscal 2002 and had no effect on the Company's financial position or operations. SFAS 143 will be adopted during fiscal 2003 and is not expected to have a material effect on the Company's financial position or operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted the fair value recognition provision of this interpretation for guarantees issued or modified after December 31, 2002, which did not have a material effect on the Company's financial position or operations. The disclosure provisions of the interpretation have been adopted for the year ended February 1, 2003. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). The Interpretation requires certain variable interest entities, including certain special purpose entities, to be consolidated by the primary beneficiary if the equity investors in the entity do not have all the essential characteristics of a controlling financial interest or do not have sufficient equity at risk. The Interpretation immediately applies to entities created after January 31, 2003, and at the beginning of the Company's 2003 third quarter for existing variable interest entities. Management is still assessing the impacts of this Interpretation on its consolidated financial statements. However, it is reasonably possible that the synthetic operating lease for the Highland Heights, Ohio facility will require consolidation under this Interpretation. The consolidation will require an additional $2.4 million in assets and liabilities on the consolidated balance sheet. In November 2002, the Emerging Issues Task Force of the FASB ("EITF") reached a consensus on Issue 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor" (Issue 02-16), which addresses the accounting by a vendor for consideration given to a customer, including both a reseller of the vendor's products and an entity that purchases the vendor's products from a reseller. Certain aspects of the issue were effective immediately, which were adopted and did not have a significant impact on operations. The remaining portion of Issue 02-16 will be adopted during fiscal 2003 and is not expected to have a material effect on the Company's financial position or operations. (2) INVESTMENT IN AFFILIATES Included in other assets is Cole National Corporation's minority investment in Pearle Europe B.V. ("Pearle Europe"), which is in the retail optical business in Europe. HAL Holding N.V. ("HAL") (see Note 8) owns a 68% interest, Cole National Corporation owns a 21% interest, and Pearle Europe's management owns the remaining 11% interest in Pearle Europe. The Company's common equity investment in Pearle Europe of $9.1 million and $8.1 million at February 1, 2003 and February 2, 2002, respectively is accounted for using the cost method since the third quarter of 2000 and under the equity method prior to the third quarter of 2000. Included in notes receivable are $19.6 million and $15.1 million of loans and interest receivable from Pearle Europe and its subsidiaries at February 1, 2003 and February 2, 2002, respectively. The loans provide for interest at rates ranging from 5.0% to 12.7% with various maturities. The Company accrued interest income of $1.8 million on the notes in fiscal 2002 as compared to $1.6 million and $1.4 million in fiscal 2001 and 2000, respectively. During fiscal 2002 and 2001 the Company received no cash interest payments. In fiscal 2000 the Company received interest payments against the balances accrued totaling $1.3 million. The notes receivable are classified as long-term based on the Company's past practice of reinvesting amounts due. Currency gains (losses) recorded are $3.8 million, $(1.2) million and $(0.5) million in fiscal 2002, 2001 and 2000, respectively. F-14 In November 2000, Pearle Europe refinanced the loans made in connection with its acquisitions in Germany and Austria by issuing a new note to the Company and returning the remainder in cash. In May 2001, the Company advanced $6.4 million to provide additional equity and loans in connection with Pearle Europe's acquisition in Portugal. No cash payments or advances have been made in fiscal year 2002. During fiscal 2001, the Company converted $1.7 million in notes and interest receivables into common shares of Pearle Europe. During fiscal year 2002, the Company converted $1.0 million of notes receivable into common shares of Pearle Europe. Agreements between HAL, the Company and members of Pearle Europe management require HAL and the Company to periodically offer to purchase Pearle Europe shares held by the members of Pearle Europe Management. The offer price is to be set by HAL and the Company by agreement, and is required to be "fair in the opinion of" HAL and the Company. These offers are required to be made (1) not later than September 3, 2003, (2) in May 2005, and (3) biannually in May commencing in 2007. The obligations to fund the purchase of any shares as to which the offer to purchase is accepted are pro rata to HAL and to the Company based on their respective ownership interests on the date of the offer. HAL and the Company have not yet agreed on the price to offer this year or on the process to agree to the price or on the source of funding for any purchases. Funds could be derived from payments by Pearle Europe, from the separate resources of HAL and the Company, or from financings. In the event that all of Pearle Europe's managers who are entitled to receive an offer to purchase their shares were to accept that offer, the resulting obligation to the Company could be material. The Company believes that it will have sufficient liquidity to meet the obligation, if any, that may result from their commitment in fiscal 2003. (3) NOTES RECEIVABLE Notes from Pearle Europe, which are denominated in foreign currency and the notes receivable from Pearle's franchisees are included in notes receivable. The franchise notes are collateralized by inventory, equipment, and leasehold improvements at each location, generally bear interest at the prime rate plus 3.0%, and require monthly payments of principal and interest over periods of up to ten years. In October 2002, the Company received a subordinated promissory note from U.S. Vision, Inc. (USV) in exchange for a loan of $4.0 million. The note bears interest at 8.75% per annum and is payable quarterly. The terms also provide the Company with various collateral rights in the event of default on the note or on other agreements between the parties. The note matures December 1, 2003 and is included in the current portion of notes receivable in the accompanying consolidated balance sheet at February 1, 2003. Notes receivable at the end of fiscal years 2002 and 2001 are comprised of the following (dollars in thousands):
2002 2001 -------- -------- Franchisee notes receivable, current $ 4,517 $ 2,723 Other receivables, current 4,107 101 -------- -------- Net current notes receivable $ 8,624 $ 2,824 ======== ======== Long-term franchisee notes receivable $ 5,981 $ 9,918 Long-term Pearle Europe notes 19,648 15,067 Other receivables 309 417 Allowance for uncollectible accounts (3,010) (5,209) -------- -------- Net long-term notes receivable $ 22,928 $ 20,193 ======== ========
(4) GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted SFAS 142 in the first quarter of fiscal 2002. This statement requires that goodwill and certain intangible assets deemed to have indefinite lives will no longer be amortized, but instead, will be subject to review for impairment annually, or more frequently if certain indicators arise. With the adoption of this statement, the Company ceased amortization of goodwill and tradenames as of February 3, 2002. The Company completed the transitional impairment testing of goodwill and tradenames during the second quarter of fiscal 2002 as required by SFAS 142. Based on the findings of its outside valuation advisor, the Company has concluded that there was no impairment at the adoption date of the new accounting standard, effective February 3, 2002. The Company has elected to perform its annual tests for potential impairment as of the first day of the F-15 Company's fourth fiscal quarter. Based on its annual tests, performed at the end of fourth quarter of fiscal 2002, the Company has concluded that there was no impairment of its goodwill or tradenames. The following table provides the comparable effects of adopting SFAS 142 for the three years ended February 1, 2003, February 2, 2002 and February 3, 2001.
2002 2001 2000 --------- --------- --------- (In thousands, except per share amount) Income(loss) before extraordinary loss: Reported income (loss) before extraordinary loss $ 2,093 $ (2,387) $ (7,810) Goodwill amortization - Cole Vision -- 2,825 2,956 Goodwill amortization - Things Remembered -- 948 952 Tradename amortization - Cole Vision -- 1,237 1,260 Related tax adjustment -- (680) (700) --------- --------- --------- Adjusted income (loss) before extraordinary loss $ 2,093 $ 1,943 $ (3,342) ========= ========= ========= Basic earnings (loss) per share: Reported income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50) Goodwill and tradename amortization, net of tax -- 0.27 0.29 --------- --------- --------- Adjusted income (loss) before extraordinary loss $ 0.13 $ 0.12 $ (0.21) ========= ========= ========= Diluted earnings (loss) per share: Reported income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50) Goodwill and tradename amortization, net of tax -- 0.27 0.29 --------- --------- --------- Adjusted income (loss) before extraordinary loss $ 0.13 $ 0.12 $ (0.21) ========= ========= =========
F-16
2002 2001 2000 --------- --------- --------- (In thousands, except per share amounts) Net income (loss) Reported net income (loss) $ (5,149) $ (2,387) $ (7,810) Goodwill amortization - Cole Vision -- 2,825 2,956 Goodwill amortization - Things Remembered -- 948 952 Tradename amortization - Cole Vision -- 1,237 1,260 Related tax adjustment -- (680) (700) --------- --------- --------- Adjusted net income (loss) $ (5,149) $ 1,943 $ (3,342) ========= ========= ========= Basic earnings (loss) per share: Reported net income (loss) $ (0.32) $ (0.15) $ (0.50) Goodwill and tradename amortization, net of tax -- 0.27 0.29 --------- --------- --------- Adjusted net income (loss) $ (0.32) $ 0.12 $ (0.21) ========= ========= ========= Diluted earnings (loss) per share: Reported net income (loss) $ (0.31) $ (0.15) $ (0.50) Goodwill and tradename amortization, net of tax -- 0.27 0.29 --------- --------- --------- Adjusted net income (loss) $ (0.31) $ 0.12 $ (0.21) ========= ========= =========
Other intangible assets consist of (dollars in thousands):
2002 2001 -------- -------- Tradename $ 49,460 $ 49,460 Noncompete agreements 840 840 Contracts 8,847 3,460 -------- -------- 59,147 53,760 Accumulated amortization (8,244) (7,614) -------- -------- $ 50,903 $ 46,146 ======== ========
The net carrying amount of goodwill at February 1, 2003, by business segment, was $64.2 million at Cole Vision and $21.4 million at Things Remembered. The increases in the net carrying amount of $14,000 for goodwill was due to foreign currency translation of goodwill at Cole Vision. Accumulated amortization of goodwill is $52.6 million for fiscal 2002 and 2001. The net carrying amount of $50.9 million for other intangibles at February 1, 2003 was attributable to the Cole Vision segment. Additional contingent payments related to the 1999 acquisition of MetLife's managed vision care benefits business increased the net carrying amount of contracts by $5.4 million, net of related amortization of $0.4 million. Amortization of other intangibles was $0.2 million in fiscal 2002. Amortization expense is expected to be $1.3 million for each of the next five fiscal years. F-17 (5) LONG-TERM DEBT Long-term debt at February 1, 2003 and February 2, 2002 is summarized as follows (dollars in thousands):
2002 2001 --------- --------- 8-7/8% Senior Subordinated Notes $ 150,000 $ -- 8-5/8% Senior Subordinated Notes, including fair market value adjustments related to interest rate swap 125,807 125,000 9-7/8% Senior Subordinated Notes, net of unamortized discount -- 149,318 5% Promissory Note 10,000 10,000 Capital lease obligations 978 515 --------- --------- 286,785 284,833 Less current portion (232) (259) --------- --------- Net long-term debt $ 286,553 $ 284,574 ========= =========
On May 22, 2002, Cole National Group issued $150.0 million of 8-7/8% Senior Subordinated Notes that mature on May 15, 2012. Interest on the notes is payable semi-annually on each May 15 and November 15, commencing November 15, 2002. Net proceeds from the 8-7/8% note offering, together with cash on hand, were used to retire $150.0 million of 9-7/8% senior subordinated notes due December 31, 2006 and pay premiums and other costs associated with retiring those notes. The Company's results for fiscal 2002 included an extraordinary loss on early extinguishment of debt of approximately $7.2 million, net of an income tax benefit of approximately $3.9 million, representing the payment of premiums and other costs of retiring the notes and the write-offs of unamortized discount and deferred financing fees. On August 22, 1997, Cole National Group issued $125.0 million of 8-5/8% Senior Subordinated Notes that mature on August 15, 2007 with no earlier scheduled redemption or sinking fund payments. Interest on the 8-5/8% notes is payable semi-annually on February 15 and August 15. F-18 The 8-5/8% notes and the 8-7/8% notes are general unsecured obligations of Cole National Group, subordinated in right of payment to senior indebtedness of Cole National Group and senior in right of payment to any current or future subordinated indebtedness of Cole National Group. The indentures pursuant to which the 8-5/8% notes and the 8-7/8% notes were issued restrict dividend payments to the Company. The indentures also contain certain optional and mandatory redemption features and other financial covenants. Cole National Group was in compliance with these covenants at February 1, 2003. On April 23, 1999, the Company issued a $10.0 million promissory note bearing interest at 5.0% per annum in recognition of a commitment to contribute $10.0 million to a leading medical institution, supporting the development of a premier eye care research and surgical facility. The note requires a $5.0 million principal payment to be made on April 23, 2004, and principal payments in the amount of $1.0 million to be made on the anniversary date of the note each successive year through 2009. Interest only is payable annually for the first 5 years, and thereafter with each payment of principal. At February 1, 2003, the fair value of long-term debt was approximately $270.0 million compared to a carrying value of $286.6 million. The fair value was estimated primarily by using quoted market prices. The Company has no significant principal payment obligations under its outstanding indebtedness until the $5.0 million principal payment due in 2004 under the 5.0% promissory note. During the third quarter of fiscal 2002, the Company entered into interest rate swap agreements to take advantage of favorable market interest rates. These agreements require the Company to pay an average floating interest rate based on six-month LIBOR plus 4.5375% to a counter party while receiving a fixed interest rate on a portion of the Company's $125.0 million 8-5/8% senior subordinated notes due 2007. The counter party is a major commercial bank. The agreements mature August 15, 2007 and qualify as fair value hedges. The aggregate notional amount of the interest rate swap agreements is $50.0 million. At February 1, 2003, the floating rate of swaps was approximately 5.9% and the fair value of the swap agreements was an unrealized gain of approximately $0.8 million. There was no impact to earnings for fiscal 2002 due to hedge ineffectiveness. (6) CREDIT FACILITY The operating subsidiaries of Cole National Group, Inc. have a working capital commitment of $75.0 million that extends until May 31, 2006. Borrowings under the credit facility presently bear interest based on leverage ratios of Cole National Group at a rate equal to either (a) the Eurodollar Rate plus 2.25% or (b) 1.25% plus the highest of (i) the CIBC prime rate, (ii) the three-week moving average of the secondary market rates for three-month certificates of deposit plus 1.0% or (iii) the federal funds rate plus 0.5%. Cole National Group pays a commitment fee of between 0.50% and 0.75% per annum on the total unused portion of the facility based on the percentage of revolving credit commitments used. The Company and Cole National Group guarantee this credit facility. The credit facility is secured by the assets of the operating subsidiaries of Cole National Group, Inc. The credit facility requires the principal operating subsidiaries of Cole National Group to comply with various operating covenants that restrict corporate activities, including covenants restricting the ability of the subsidiaries to incur additional indebtedness, pay dividends, prepay subordinated indebtedness, dispose of certain investments or make acquisitions. The credit facility also requires the subsidiaries of Cole National Group to comply with certain financial covenants, including covenants regarding interest coverage and maximum leverage. On November 25, 2002 the Company received a waiver, which expired on December 31, 2002 associated with the restatement of the financial statements. On December 19, 2002 the credit agreement was amended to accommodate the anticipated changes due to the restatement. The Company received a waiver dated May 9, 2003 of the maximum leverage coverage test for the fiscal year end 2002 and the first quarter of fiscal 2003. During the waiver period the maximum leverage test was adjusted to accommodate the effect of the restatement on the Company's financial statements. This waiver will expire on the earlier of May 17, 2003 if the Lenders do not receive the Form 10-K and 10-Q's for the first through third fiscal quarters of 2002; on May 23, 2003 if certain additional financial information is not received by the Lenders; or June 30, 2003. The Company is in compliance with the covenants in the credit agreement and expects to meet the waiver conditions. The Company expects to complete a permanent amendment to the credit agreement on or before June 30, 2003. However, there is no assurance that the Company will be successful in its effort to complete such an amendment. The Company believes that, even if it is unsuccessful in its effort to complete such an amendment, it will have sufficient liquidity from internal and other external sources. The credit facility restricts dividend payments to Cole National Group from its subsidiaries to amounts needed to pay interest on the 8-7/8% notes and the 8-5/8% notes, and certain amounts related to taxes, along with up to 0.25% of Cole National Group's consolidated net revenue annually for other direct expenses of the Company F-19 or Cole National Group. The credit facility restricts dividend payments to Cole National Group in an aggregate amount not to exceed $50.0 million to allow for the repurchase of Senior Subordinated Notes. As of fiscal year end 2002, the total commitment under the credit facility was $75.0 million and availability under the credit facility totaled $61.0 million after reduction for commitments under outstanding letters of credit. There were no working capital borrowings outstanding as of February 1, 2003 and February 2, 2002. The maximum amount of borrowings outstanding during fiscal 2002 was $2.3 million. There were no borrowings during fiscal 2001. (7) STOCK COMPENSATION At February 1, 2003, the Company had stock options outstanding under various stock option plans and agreements. The right to exercise these options generally commences between one and five years from the date of grant and expires ten years from the date of grant. Both the number of shares and the exercise price, which is based on the market price, are fixed at the date of grant. As of February 1, 2003, there were 351,949 shares available for future grants to officers, key employees and nonemployee directors under the Company's various stockholder approved stock option plans. In addition, the Company may make, from time to time, additional option awards outside such plans. A summary of the status of stock options and related weighted average exercise prices ("Price") as of the end of fiscal 2002, 2001 and 2000, and changes during each of the fiscal years is presented below:
2002 2001 2000 ----------------------- ----------------------- ----------------------- Shares Price Shares Price Shares Price --------- ------- --------- ------- --------- ------- Outstanding, beginning of year 2,370,066 $ 12.83 2,426,662 $ 12.58 2,035,587 $ 14.83 Granted 378,656 17.97 589,000 12.02 601,705 7.04 Exercised (173,859) 7.93 (388,452) 10.88 (2,000) 3.00 Canceled (84,829) 11.82 (257,144) 11.52 (208,630) 18.65 --------- --------- --------- Outstanding, end of year 2,490,034 13.99 2,370,066 12.83 2,426,662 12.58 ========= ========= ========= Exercisable at end of year 1,332,893 14.00 1,132,152 14.11 1,253,082 14.12
A summary of information for stock options outstanding at February 1, 2003 and related weighted average remaining contract life ("Life") and Price is presented below:
Options Outstanding Options Exercisable ----------------------------------- ----------------------- Shares Life Price Shares Price --------- --------- ------ --------- ------ $5.00 to $9.75 686,080 6.7 years $ 7.66 345,939 $ 7.31 $10.00 to $19.00 1,649,651 6.0 years 14.83 832,651 13.23 $26.13 to $44.94 154,303 3.9 years 33.16 154,303 33.16 --------- --------- 2,490,034 1,332,893 ========= =========
Payment for certain options exercised in 1993 was made by executing promissory notes of which $620,000 was outstanding at February 1, 2003 from the Company's Chairman. The promissory note is secured by shares of restricted common stock and is payable in January 2004 and bears interest at the rate of 6.01% per annum. The note is included in notes receivable-stock options and awards within stockholders' equity. On January 18, 2000, the Company granted two stock options not included in the tables above in connection with the commencement of employment of the Company's president. One option grant was awarded for 262,500 shares of common stock at an above-market exercise price of $10.00 per share. The options vested one-half each on the first and second anniversary of the grant date and expire after ten years. The other option for 100,000 shares was issued at the market price, vested immediately and expired at the end of its 90-day exercise period. Also awarded at the same time were 525,000 shares of restricted common stock. One-half of the restricted shares became nonforfeitable on January 18, 2002; one-quarter of the restricted shares became nonforfeitable on January 18, 2003 and the remainder vest on January F-20 18, 2004. The restricted shares may also become nonforfeitable prior to January 18, 2004 based upon the attainment of certain market prices for Cole National Corporation's common stock. In fiscal 2001 and 2000, the Company and its president entered into secured promissory notes for $1,669,000, an amount equal to a portion of the income tax imposed on his award of restricted stock. In fiscal 2001, the promissory notes were consolidated into one note that matures in January 2004, and bears interest at 3.0% per annum. The note is secured by a pledge of the restricted shares. The notes are included in notes receivable-options and awards within stockholders' equity. During fiscal 2002, the Company granted 25,000 restricted shares to its new Chief Financial Officer. These shares become nonforfeitable over four years with half of the restricted shares vesting July 15, 2005 and the remainder vesting on July 15, 2006. During fiscal 2002 and 2001, the Company granted 3,000 and 20,000 restricted shares, respectively to divisional executives. These shares become nonforfeitable over a three year period following the date of the award. During 1999, the Company granted 20,000 restricted shares to two divisional executives. In fiscal 2000, one of these grants for 10,000 shares was canceled. During fiscal 2002, 5,000 shares became nonforfeitable while the remaining 5,000 were canceled. At February 1, 2003, 123,750 restricted shares of common stock are outstanding under an award made to the Company's Chairman in December 1998 under the 1998 Equity and Incentive Performance Plan. Vesting may occur after the third anniversary of the grant date based upon the attainment of certain market prices for the Company's common stock or on March 1, 2004. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock-based compensation plans. In connection with the restricted stock awards described above, compensation cost of $1.4 million, $1.3 million and $1.2 million has been charged to expense in fiscal 2002, fiscal 2001 and fiscal 2000, respectively. Unamortized restricted stock awards of $1.7 million are expected to be amortized over future vesting periods. On March 8, 2001, the Company awarded restricted stock units representing shares of common stock to 568 employees and as of March 8, 2002, 76,627 shares of common stock were issued. At February 1, 2003, restricted stock unit awards representing 126,765 common shares were outstanding. The compensation cost related to the granting of the restricted stock units is being charged to the three-year period over which the common shares will vest assuming continuing employment. Compensation expense of $488,000 and $549,000 was charged to fiscal 2002 and fiscal 2001, respectively. In fiscal 1999, the Company established its Employee Stock Purchase Plan under which participants may contribute up to 15% of their annual compensation (subject to certain limits) to acquire shares of common stock at 85% of the lower market price on one of two specified dates in each plan period. The initial plan period included the five months ended December 31, 1999. Subsequent plan periods are semi-annual. However, there have been no plan periods since July 2002. Of the 700,000 shares of common stock authorized for purchase under the plan, 32,206, 96,013 and 180,378 shares were purchased in fiscal 2002, fiscal 2001 and fiscal 2000, respectively, by approximately 650 participating employees. The Company's Nonemployee Director Equity and Deferred Compensation Plan allows nonemployee directors to receive their annual retainer and other director fees in the form of shares of common stock. The plan also allows them to defer payment of all or part of that income. Certain nonemployee directors elected to defer payment and received credits payable in shares of common stock. Credits earned during fiscal 2002 and outstanding as of February 1, 2003 represented 6,204 shares and 36,456 shares, respectively. During fiscal 2002, 1,719 shares were issued to a director in connection with a prior period deferred election. (8) STOCKHOLDERS' EQUITY At February 1, 2003 and February 2, 2002, there were 16,154,916, and 15,905,147, respectively, shares of common stock, par value $.001 per share, outstanding and no preferred stock issued and outstanding. Common stock held in treasury at February 1, 2003 and February 2, 2002 totaled 577,867 and 578,546 shares, respectively. At February 1, 2003, there were 40,000,000 authorized shares of common stock and 5,000,000 authorized shares of preferred stock, 400,000 of which are designated as Series A Junior Participating Preferred stock and 4,600,000 of which are undesignated preferred stock. F-21 On November 18, 1999 the Board of Directors authorized the redemption of the Company's existing Stockholders' Rights Plan, adopted in 1995, and replaced it with a new plan. The new plan permits HAL to acquire up to 25% of the Company's then-outstanding common shares. As of March 31, 2003 HAL owned 20% of the Company's common stock. As a result of the redemption of the rights issued under the original plan, shareholders received payment of $0.01 per share of common stock in fiscal 1999. Under the new rights plan, one share purchase right was distributed in respect of each outstanding share of the Company's common stock held of record as of the close of business on December 6, 1999 and one right will be distributed in respect of each share of the Company's common stock that becomes 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 initially 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, subject to adjustment. The rights are only exercisable if a person or group other than HAL Holdings N.V. buys or announces a tender or exchange offer for 15% or more of the Company's common stock or if HAL buys or announces a tender or exchange offer for 25% 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 December 6, 2009, unless extended or unless the rights are redeemed earlier by the Company in whole, but not in part, at a price of $0.01 per right, or exchanged. The Board of Directors authorized the repurchase of up to 500,000 shares of common stock in November 1997 and an additional 500,000 shares in November 1998 from time to time through open market or block transactions. The Company has purchased a total of 318,000 shares for $6.6 million. No shares were purchased in fiscal 2002, 2001 and 2000. As of February 1, 2003, the Company has authority to purchase up to 682,000 additional shares. The share purchases are reflected in treasury stock within stockholders' equity. (9) INCOME TAXES The income tax provision reflected in the accompanying consolidated statements of operations for fiscal 2002, 2001 and 2000 are detailed below (dollars in thousands):
2002 2001 2000 ------- ------- ------- Current payable - Federal $ 522 $ 750 $ 1,336 State and local 538 1,335 449 Foreign 633 295 314 ------- ------- ------- 1,693 2,380 2,099 ------- ------- ------- Deferred - Federal 3,046 2,650 (2,792) State and local 183 32 (525) Foreign (27) 43 278 ------- ------- ------- 3,202 2,725 (3,039) ------- ------- ------- Income tax provision $ 4,895 $ 5,105 $ (940) ======= ======= =======
The exercise of nonqualified stock options during fiscal 2002 resulted in $498,000 of income tax benefits to the Company derived from the difference between the market price at the date of exercise and the option price. These tax benefits were recorded in additional paid-in capital. Tax benefits from option exercises in fiscal 2001 and 2000 were not significant. F-22 The income tax provision differs from the federal statutory rate as follows (dollars in thousands):
2002 2001 2000 ------- ------- ------- Income tax provision at statutory rate $ 2,446 $ 951 $(3,111) Tax effect of- Goodwill -- 1,451 1,972 State income taxes, net of federal tax benefit 533 900 (233) Foreign income 199 59 94 Valuation allowance 484 988 -- Stock Compensation 388 427 128 Nondeductible expenses 296 331 303 Equity earnings -- -- (49) Adjustment to prior year taxes 522 354 246 Research and development credit -- (265) -- Other, net 27 (91) (290) ------- ------- ------- Income tax provision $ 4,895 $ 5,105 $ (940) ======= ======= =======
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, 2003 and February 2, 2002 are as follows (dollars in thousands):
2002 2001 -------- -------- Deferred tax assets: Accrued compensation and benefits $ 12,017 $ 4,802 Deferred revenue 22,659 21,510 Other nondeductible accruals 12,095 12,699 Net operating loss carryforwards 8,961 6,801 Intangibles 4,373 6,008 Inventory basis differences 2,047 1,789 Leases 5,207 4,828 Contribution carryforward 1,223 1,820 Other 1,329 1,611 -------- -------- Total deferred tax assets 69,911 61,868 Valuation allowance (4,371) (4,809) -------- -------- Net deferred tax assets 65,540 57,059 Deferred tax liabilities: Depreciation (2,302) (2,006) -------- -------- Net deferred tax assets $ 63,238 $ 55,053 ======== ========
At February 1, 2003, the Company had approximately $17.8 million of federal tax net operating loss carryforwards in the United States that expire in years 2004 through 2022. Of that amount, $8.4 million resulted from the Company's acquisition of American Vision Centers ("AVC"). Due to the change in ownership requirements of the Internal Revenue Code, utilization of the AVC net operating loss is limited to approximately $0.3 million per year. Valuation allowances of $3.8 million and $0.6 million at February 1, 2003 have been established against net operating losses and charitable contribution carryforwards to reduce the corresponding deferred tax assets to the amount that will likely be realized. The decrease in the valuation allowance in 2002 is due to the expiration of certain tax carryforwards net of the current year provision of $484,000. No provision of United States federal and state income taxes has been provided for the undistributed earnings of the Company's foreign subsidiaries because those earnings are considered to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes (subject to an adjustment of foreign tax credits) and withholding taxes payable. Determination of the net amount of unrecognized U. S. income tax with respect to these earnings is not practicable. F-23 (10) RETIREMENT PLANS The Company maintains a noncontributory defined benefit pension plan that covers employees who have met eligibility service requirements and are not members of certain collective bargaining units. The pension plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service and their compensation levels near retirement. In January 2002, the Company approved a plan freeze for all participants except for participants who are age 50 with 10 years of benefit service as of March 31, 2002. These participants had their average pay frozen as of March 31, 2002, and covered compensation frozen as of December 31, 2001, but their benefit service will continue to grow. The Company's policy is to fund amounts necessary to keep the pension plan in full force and effect, in accordance with the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. The Company also maintains a postretirement benefit plan in connection with the acquisition of Pearle in 1996. This plan was closed to new participants at the time of acquisition. Under this plan, the eligible former employees are provided life insurance and certain health care benefits through insurance premiums based on expected benefits to be paid during the year. Substantial portions of the health care benefits are not insured and are paid by the Company. For measurement purposes, a 13% annual rate of increase for health care benefits was assumed for fiscal 2002. The rate was assumed to decrease gradually to 8% over ten years and level thereafter. A one percentage point change in the assumed health care cost trend rate would have the following effects:
1 Percentage 1 Percentage Point Increase Point Decrease -------------- --------------- Effect on total of service and interest cost $ 35,800 $ (29,600) Effect on the postretirement benefit obligation $ 551,400 $ (455,700)
F-24 The following provides a reconciliation of benefit obligations, plan assets and the funded status of the pension plan and postretirement benefits.
Pension Benefits Postretirement Benefits (SFAS 87) (SFAS 106) 2002 2001 2002 2001 -------- -------- ------- ------- (Dollars in thousands) Change in benefit obligation: Benefit obligation at beginning of period $ 28,825 $ 27,720 $ 2,879 $ 2,650 Service cost 238 1,868 -- -- Interest cost 2,423 2,156 203 174 Actuarial loss 10,203 2,260 1,149 195 Effect of curtailment -- (3,751) -- -- Benefits paid (1,147) (1,056) (159) (184) Participants contributions -- -- 37 44 Expenses paid (420) (372) -- -- -------- -------- ------- ------- Benefit obligation at end of period $ 40,122 $ 28,825 $ 4,109 $ 2,879 ======== ======== ======= ======= Change in plan assets: Fair value of plan assets at beginning of year $ 28,861 $ 26,076 $ -- $ -- Actual return of plan assets (3,709) (483) -- -- Employer contributions 522 4,696 122 140 Participants contributions -- -- 37 44 Benefits paid (1,147) (1,056) (159) (184) Expenses paid (420) (372) -- -- -------- -------- ------- ------- Fair value of plan assets at end of year $ 24,107 $ 28,861 $ -- $ -- ======== ======== ======= ======= Reconciliation of funded status: Benefit obligation at end of period $ 40,122 $ 28,825 $ 4,109 $ 2,879 Fair value of plan assets, primarily money market and equity mutual funds 24,107 28,861 -- -- -------- -------- ------- ------- (Unfunded) funded status (16,015) 36 (4,109) (2,879) Employer contributions after measurement date -- -- 10 11 Unrecognized prior service cost -- -- 103 112 Net unrecognized loss 20,992 4,554 2,614 1,548 Unamortized transition asset (340) (519) -- Charge to comprehensive loss (20,652) -- -- -- -------- -------- ------- ------- Plan (obligation) asset $(16,015) $ 4,071 $(1,382) $(1,208) ======== ======== ======= =======
F-25 Net pension expense and postretirement expense for fiscal 2002, 2001 and 2000 includes the following components (dollars in thousands):
Pension Benefits Postretirement Benefits ----------------------------------- ------------------------ 2002 2001 2000 2002 2001 2000 ------- ------- ------- ---- ---- ---- Service cost - benefits earned during the period $ 238 $ 1,868 $ 1,442 $ -- $ -- $ -- Interest cost on the projected benefit obligation 2,423 2,156 1,889 203 174 132 Less: Return on plan assets - Actual 3,709 483 (359) -- -- -- Deferred (6,234) (3,203) (2,086) -- -- -- ------- ------- ------- ---- ---- ---- (2,525) (2,720) (2,445) -- -- -- Amortization of actuarial loss -- -- -- 83 76 30 Amortization of transition asset (179) (179) (179) -- -- -- Prior service cost -- 25 28 9 9 9 ------- ------- ------- ---- ---- ---- Net expense (income) $ (43) $ 1,150 $ 735 $295 $259 $171 ======= ======= ======= ==== ==== ==== Acturial assumptions: Discount rate 6.5% 7.5% 7.8% 6.5% 7.5% 7.8% Expected return on plan assets 9.0% 9.5% 9.5% -- -- -- Rate of compensation increase N/A 3 to 7% 3 to 7% -- -- --
The change in the discount rate reflects the overall decline in market interest rates and has led to an increase in the projected benefit obligation from February 2, 2002. In addition, stock market declines have reduced the fair value of the pension plan's assets. As a result of these factors, the pension plan was underfunded by $16.0 million as of February 1, 2003. The Company has written off the prepaid pension expense of $4.6 million and recorded the minimum pension liability by charging $20.6 million to accumulated other comprehensive income (loss) in stockholders' equity. The amortization of this charge will result in higher pension costs in future periods. The Company has a defined contribution plan, including features under Section 401(k) of the Internal Revenue Code, which provides retirement benefits to its employees. Eligible employees may contribute up to 17% of their compensation to the plan. In the United States, the Company changed the plan beginning with the 2003 fiscal year to provide for a mandatory company match of 25% of the first 4% of employee contributions. During prior fiscal years, the plan provided a mandatory company match of 10% of employee contributions. The Company may also make a discretionary matching contribution for each plan year equal to such dollar amount or percentage of employee contributions as determined by the Company's Board of Directors. In Puerto Rico, the Company provides for a mandatory match of 50% of the first 6% of employee contributions. The plan provides for the investment of employer and employee contributions in the Company's common stock and other investment alternatives. The Company's matching contributions, net of forfeitures, of $1.0 million, $0.6 million and $0.6 million were recorded as expense for fiscal years 2002, 2001 and 2000, respectively. The Company has a Supplemental Executive Retirement Plan (SERP), which provides for the payment of retirement benefits for certain management and highly compensated employees supplementing amounts payable under the Company's non-contributory defined contribution plan. The benefits are unfunded and each participant's SERP account is credited with a percentage of their base salary for the year. Expenses for this plan for fiscal 2002, 2001 and 2000 were $0.4 million, $0.6 million and $0.6 million, respectively. The plan liability recorded in long-term liabilities was $2.3 million and $2.1 million at February 1, 2003 and February 2, 2002, respectively. The Company has a deferred compensation plan for executives and other senior management which allows deferral of income without regard to limitations imposed by the Company's 401(k) plan. The Company generally makes a contribution of its common stock equal to 10% of the participant's deferrals, however, in fiscal 2002 the Company made a cash contribution. The deferred compensation together with the Company's contributions is funded through various marketable securities based on the election of the participant. As of fiscal year end 2002 and 2001, the Company had accrued $2.1 million and $1.3 million, respectively for its obligations under these plans in other long-term liabilities. The Company's expense, which includes the participants' deferral and Company contributions was $0.8 million, $0.7 million and $0.5 million for fiscal 2002, 2001 and 2000, respectively. The investments made on behalf of the participants are included in other noncurrent assets and were $2.1 million, and $1.3 million for fiscal 2002 and 2001, respectively. F-26 The Company provides under certain conditions postemployment benefits for continuation of health care benefits and life insurance coverage to former employees after employment but before retirement. Pursuant to SFAS 112, the accrued cost for postemployment benefits was $2.6 million and $1.7 million at February 1, 2003 and February 2, 2002, respectively. The net postemployment benefits expense (income) was $0.9 million, $(0.2) million and $0.1 million in 2002, 2001 and 2000, respectively. The Company has certain individual deferred compensation agreements, which provide guaranteed retirement benefits per year for life. The benefits are accrued over the estimated period in which the employee is to render service and becomes eligible for the benefit. The benefits are unfunded. Expenses for these agreements for fiscal 2002, 2001 and 2000 were $0.5 million, $0.4 million and $0.3 million, respectively. At February 1, 2003 and February 2, 2002, the liability, which was recorded in other long-term liabilities, was $3.4 million and $2.8 million, respectively. (11) SEGMENT INFORMATION The Company has two reportable segments: Cole Vision and Things Remembered. Most of Cole Vision's revenue is provided primarily by sales of prescription eyewear, accessories and services through its Cole Licensed Brands and Pearle retail locations. Cole Vision's revenue is also provided by sales of merchandise to franchisees and other outside customers, by royalties based on sales and initial franchise fees from franchisees and by fees from managed vision care programs. Cole Vision is subject to various state regulations related to the dispensing of prescription eyewear, its relationship with the doctors of optometry and other matters. The Cole Licensed Brands and Pearle Vision business units have been aggregated in accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131), based on the similarity of their economic characteristics, nature of products, services and production processes, types of customers, distribution methods and regulatory environment. Things Remembered's revenue is provided by sales of engraveable gift merchandise, personalization and other services primarily through retail stores and kiosks. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). The reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires different technology and marketing strategies. Performance is evaluated based on operating income. Reported segment revenue, depreciation and amortization, and income or loss, with reconciliations to consolidated amounts are as follows (dollars in thousands):
2002 2001 2000 ----------- ----------- ----------- Net revenue: Cole Vision $ 877,550 $ 836,869 $ 802,518 Things Remembered 270,569 272,254 276,116 ----------- ----------- ----------- Consolidated net revenue $ 1,148,119 $ 1,109,123 $ 1,078,634 =========== =========== =========== Depreciation and amortization: Cole Vision $ 22,554 $ 25,508 $ 26,827 Things Remembered 10,297 10,520 9,857 ----------- ----------- ----------- Total segment depreciation and amortization 32,851 36,028 36,684 Corporate 3,581 4,045 4,018 ----------- ----------- ----------- Consolidated depreciation and amortization $ 36,432 $ 40,073 $ 40,702 =========== =========== =========== Income: Cole Vision $ 30,596 $ 15,111 $ 7,974 Things Remembered 15,060 24,149 22,507 ----------- ----------- ----------- Total segment operating income 45,656 39,260 30,481 Unallocated amounts, corporate expenses (18,659) (11,017) (14,081) ----------- ----------- ----------- Consolidated operating income 26,997 28,243 16,400 Interest and other (income) expense, net 20,009 25,525 25,289 ----------- ----------- ----------- Income (loss) before income taxes $ 6,988 $ 2,718 $ (8,889) =========== =========== ===========
F-27 Reported segment assets, expenditures for capital additions and systems development costs and acquisitions of businesses, with reconciliations to consolidated amounts, are as follows (dollars in thousands):
2002 2001 2000 ----------- ----------- ----------- Segment assets: Cole Vision $ 420,911 $ 408,909 $ 433,868 Things Remembered 119,105 118,069 119,101 ----------- ----------- ----------- Total segment assets 540,016 526,978 552,969 Corporate cash and temporary cash investments 28,435 50,333 26,306 Other corporate assets 75,156 58,283 54,481 ----------- ----------- ----------- Consolidated assets $ 643,607 $ 635,594 $ 633,756 =========== =========== =========== Expenditures for capital additions and systems development costs: Cole Vision $ 31,502 $ 26,445 $ 18,817 Things Remembered 10,342 12,582 11,192 ----------- ----------- ----------- Total segment expenditures 41,844 39,027 30,009 Corporate 3,142 1,682 7,368 ----------- ----------- ----------- Consolidated expenditures $ 44,986 $ 40,709 $ 37,377 =========== =========== =========== Contingent payments for acquisition of business Cole Vision $ 1,645 $ 847 $ -- =========== =========== ===========
Revenue from external customers of each group of similar products and services is as follows (dollars in thousands):
2002 2001 2000 ----------- ----------- ----------- Sales of optical products and services $ 783,765 $ 751,680 $ 729,870 Royalties and initial franchise fees 19,450 18,744 19,655 Fees from managed vision care programs 74,335 66,445 52,993 ----------- ----------- ----------- Total Cole Vision net revenue 877,550 836,869 802,518 Retail sales of gift merchandise and services 270,569 272,254 276,116 ----------- ----------- ----------- Consolidated net revenue $ 1,148,119 $ 1,109,123 $ 1,078,634 =========== =========== ===========
The Company operates primarily in the United States. Net revenue attributable to Cole Vision's Canadian operations was $28.6 million, $30.0 million and $31.1 million in fiscal 2002, 2001 and 2000, respectively. Long-lived assets located in Canada at February 1, 2003 and February 2, 2002 totaled $2.7 million and $3.0 million, respectively. The Company also has an investment in and notes receivable from Pearle Europe (see Note 2). (12) COMMITMENTS AND CONTINGENCIES The Company leases a substantial portion of its computers, equipment and facilities including laboratories, office and warehouse space, and retail store locations. These leases generally have initial terms of up to 10 years and often contain renewal or purchase options. Operating and capital lease obligations are based upon contractual minimum rates and, in most leases covering retail store locations, additional rents are payable based on store sales. In addition, Cole Vision operates departments in various host stores paying occupancy costs solely as a percentage of sales under agreements containing short-term cancellation clauses. Generally, the Company is required to pay taxes and normal expenses of operating the premises for laboratory, office, warehouse and retail store leases; the host stores pay these expenses for departments operated on a percentage-of-sales basis. The following amounts represent rental expense for fiscal 2002, 2001 and 2000 (dollars in thousands): F-28
2002 2001 2000 ----------- ----------- ----------- Occupancy costs based on sales $ 59,143 $ 57,379 $ 54,748 All other rental expense 91,446 89,616 86,532 Sublease rental income (18,422) (19,719) (21,354) ----------- ----------- ----------- Total rental expense, net $ 132,167 $ 127,276 $ 119,926 =========== =========== ===========
At February 1, 2003, future minimum lease payments and sublease income receipts under noncancelable leases and the present value of future minimum lease payments for capital leases are as follows (dollars in thousands):
Operating Leases Capital ------------------------ Leases Payments Receipts ------- -------- -------- 2003 $ 328 $ 82,904 $ (10,765) 2004 310 73,503 (8,759) 2005 266 59,779 (7,066) 2006 223 48,687 (5,625) 2007 83 39,530 (4,168) 2008 and thereafter - 114,676 (6,840) ----- --------- --------- Total future minimum lease payments 1,210 $ 419,079 $ (43,223) ========= ========= Amount representing interest (232) ----- Present value of future minimum lease payments $ 978 =====
In fiscal 2001, under a sale and leaseback agreement, the Company received approximately $5.7 million, net of related costs, from the sale of its Pearle Vision lab and distribution facility in Dallas, Texas and leased it back under a fifteen-year operating lease agreement with four five-year renewal options. The transaction produced a gain of approximately $0.6 million that was deferred and is being amortized over the fifteen year lease period. In fiscal 2000, the Company entered into a sale and leaseback agreement and received approximately $13.5 million, net of related costs, from the sale of its office facility in Twinsburg, Ohio and leased it back under an eighteen-year operating lease agreement with two ten year renewal options. The transaction was completed in June 2001 and produced a gain of approximately $4.8 million that was deferred and is being amortized over the eighteen year initial lease period. The transaction was accounted for under the finance method of accounting. At the time of the transaction, the Company had a continuing involvement. In July 2001, the continuing involvement ended and the transaction was reflected as a sale and leaseback. The Company received approximately $13.5 million in fiscal 2000, net of related costs. The Company also leases an office and general operating facility in Highland Heights, Ohio under a four-year operating lease with annual renewal options up to six years. The lease provides for regular payments based on LIBOR plus 1.50%. In accordance with this agreement, the Company must maintain compliance with a minimum net worth covenant. At the end of this lease in 2007, the Company has the option to purchase the property or arrange for the sale of the property. If the Company does not exercise its purchase option at the end of the lease, it is contingently liable for up to $1.7 million. The Company does not believe it will have any payment obligation at the end of the lease because either the Company will exercise the purchase option, or the net proceeds from the sale of the property will exceed the amount payable to the lessor. Management is still assessing the impact of FIN 46, however, it is reasonably possible this lease will require consolidation under this Interpretation. The consolidation will require an additional $2.4 million in assets and liabilities on the consolidated balance sheet. The Company guarantees future minimum lease payments for certain store locations leased directly by franchisees. These guarantees totaled approximately $13.8 and $13.7 million as of February 1, 2003 and February 2, 2002. Performance under a guarantee by the Company is triggered by default of a franchisee in their lease commitment. Generally, these guarantees also extend to payments of taxes and other normal expenses payable under these leases, the amounts of which are not readily quantifiable. The term of the guarantees range from one to ten years of which many are limited to periods that are less than the full term of the leases involved. Under the terms of the guarantees, the Company has the right to assume the primary obligation and begin operating as a company-owned store. In addition, as part of many franchise agreements, the Company may recover any amounts paid under a guarantee from the defaulting franchisee. The Company has recorded a liability of $5,700, which represents the fair value of the Company's obligations from guarantees entered into or modified after December 31, 2002 using an expected present value calculation. F-29 As discussed in Note 2, agreements between HAL, the Company and members of Pearle Europe management require HAL and the Company to periodically offer to purchase Pearle Europe shares held by the members of Pearle Europe Management. These offers are required to be made (1) not later than September 3, 2003, (2) in May 2005, and (3) biannually in May commencing in 2007. The obligations to fund the purchase of any shares as to which the offer to purchase is accepted are pro rata to HAL and to the Company based on their respective ownership interests on the date of the offer. HAL and the Company have not yet agreed on the price to offer this year or on the process to agree to the price or on the source of funding for any purchases. Funds could be derived from payments by Pearle Europe, from the separate resources of HAL and the Company, or from financings. In the event that all of Pearle Europe's managers who are entitled to receive an offer to purchase their shares were to accept that offer, the resulting obligation to the Company could be material. The Company believes that it will have sufficient liquidity to meet the obligation, if any, that may result from their commitment in fiscal 2003. (13) RESTRUCTURING CHARGES During fiscal 2002, the Company recorded a restructuring liability against operating expense of $1.1 million. Of this amount, $0.6 was paid in fiscal 2002 $0.5 million was accrued for ongoing benefits, salary continuation and placement costs. Charges to the liability are expected to total $0.4 million through the end of the first quarter of fiscal 2003, with the remaining costs continuing through the fourth quarter of fiscal 2003. The restructuring charge was related to a reduction in workforce of 60 individuals in the corporate office and field management. The Company expects the functions performed by these individuals to be absorbed by others. The Company also recorded a charge of $0.3 million in fiscal 2002 related to the closing of the corporate office and relocating it to the Company's facility in Twinsburg, Ohio, which is expected to be completed in fiscal 2003. During fiscal 2000, the Company recorded a restructuring charge against operating expense of $1.8 million. Of this amount, $1.6 million was paid and $0.2 million was accrued to accrued liabilities for salary continuation. Charges to the liability were $0.2 million in fiscal 2001. The restructuring charge was related to a reduction in workforce of 44 individuals in the corporate office and field management. The function performed by these individuals was absorbed by others. (14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) As discussed in Note 17, the 2001 Consolidated Financial Statements have been restated to appropriately account for certain transactions. Certain of these items also affect the Company's previously filed 2001 and 2002 interim financial information. The following is a summary of quarterly financial data for the 52 weeks ended February 1, 2003 and February 2, 2002. Quarterly financial data for the four quarters of 2001 and the first two quarters of 2002 have been derived from restated financial statements. Fiscal 2002 (In thousands, except per share amounts)
1st Quarter 2nd Quarter 3rd 4th As reported Restated As reported Restated Quarter Quarter ----------- -------- ----------- -------- ------- ------- Net revenue $290,109 $285,441 $288,857 $292,390 $275,501 $294,787 Gross margin 194,461 193,919 194,337 197,163 183,553 194,780 Income (loss) before income taxes 4,578 2,889 2,769 5,184 (6,421) 5,336 Income (loss) before extraordinary loss 3,543 866 2,691 1,556 (1,927) 1,598 Net income (loss) $ 3,543 $ 866 $ (4,943) $ (5,686) $ (1,927) $ 1,598 ======== ======== ======== ======== ======== ======== Basic earnings (loss) per common share: Income (loss) before extraordinary loss $ 0.22 $ 0.05 $ 0.16 $ 0.10 $ (0.12) $ 0.10 Extraordinary loss (0.47) (0.45) -------- -------- -------- -------- -------- -------- Net income (loss) $ 0.22 $ 0.05 $ (0.31) $ (0.35) $ (0.12) $ 0.10 ======== ======== ======== ======== ======== ======== Diluted earnings (loss) per common share: Income (loss) before extraordinary loss $ 0.22 $ 0.05 $ 0.16 $ 0.10 $ (0.12) $ 0.10 Extraordinary loss (0.46) (0.44) -------- -------- -------- -------- -------- -------- Net income (loss) $ 0.22 $ 0.05 $ (0.30) $ (0.34) $ (0.12) $ 0.10 ======== ======== ======== ======== ======== ========
In the fourth quarter of 2002 the Company incurred charges of $3.4 million for outside audit fees related to the reaudit of its restated financial statements from the previous two years. Also, during the fourth quarter of 2002 the Company recorded a restructuring charge of $1.1 million. F-30 Fiscal 2001 (In thousands, except per share amounts)
1st Quarter 2nd Quarter As reported Restated As reported Restated ----------- ----------- ----------- ----------- Net revenue $ 270,291 $ 271,774 $ 273,348 $ 275,334 Gross margin 182,569 186,597 182,041 185,305 Income (loss) before income taxes 1,485 1,109 3,008 3,437 Income (loss) before extraordinary loss 645 (970) 1,459 (3,014) Net income (loss) $ 645 $ (970) $ 1,459 $ (3,014) =========== =========== =========== =========== Basic earnings (loss) per common share: Income before extraordinary loss $ 0.04 $ (0.06) $ 0.09 $ (0.19) Extraordinary loss -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) $ 0.04 $ (0.06) $ 0.09 $ (0.19) =========== =========== =========== =========== Diluted earnings (loss) per common share: Income before extraordinary loss $ 0.04 $ (0.06) $ 0.09 $ (0.19) Extraordinary loss -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) $ 0.04 $ (0.06) $ 0.09 $ (0.19) =========== =========== =========== ===========
3rd Quarter 4th Quarter As reported Restated As reported Restated ----------- ----------- ----------- ----------- Net revenue $ 261,488 $ 263,349 $ 296,206 $ 298,666 Gross margin 173,976 175,955 197,995 196,874 Income (loss) before income taxes (5,017) (7,023) 11,540 5,195 Income (loss) before extraordinary loss (2,256) 6,155 5,347 (4,558) Net income (loss) $ (2,256) $ 6,155 $ 5,347 $ (4,558) =========== =========== =========== =========== Basic earnings (loss) per common share: Income (loss) before extraordinary loss $ (0.14) $ 0.38 $ 0.34 $ (0.28) Extraordinary loss -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) $ (0.14) $ 0.38 $ 0.34 $ (0.28) =========== =========== =========== =========== Diluted earnings (loss) per common share: Income (loss) before extraordinary loss $ (0.14) $ 0.38 $ 0.33 $ (0.28) Extraordinary loss -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) $ (0.14) $ 0.38 $ 0.33 $ (0.28) =========== =========== =========== ===========
In the fourth quarter of 2001 the Company recorded asset impairment charges of $3.5 million. F-31 (15) LEGAL PROCEEDINGS The Company and its optical subsidiaries have been sued by the State of California, which alleges claims for various statutory violations related to the operation of 24 Pearle Vision Centers in California. The claims include untrue or misleading advertising, illegal dilation fees, unlawful advertising of eye exams, maintaining an optometrist on or near the premises of a registered dispensing optician, unlawful advertising of an optometrist, unlicensed practice of optometry, and illegal relationships between dispensing opticians, optical retailers and optometrists. The action seeks unspecified damages, restitution and injunctive relief. Although the State of California obtained a preliminary injunction to enjoin certain advertising practices and from charging dilation fees in July 2002, the terms of the injunction have not had and are not expected to have any material effect on the Company's operations. In addition, both the State and the Company have appealed the preliminary injunction. The injunction is not expected to have a material effect on the Company's operations. Although the Company believes it is in compliance with California law and intends to continue to defend the issues raised in the case vigorously, it may be required to further modify its activities or might be required to pay damages and or restitution in currently undeterminable amount if it is not successful, the cost of which, as well as continuing defense costs, might have a material adverse effect on the Company's operating results and cash flow in one or more periods. Things Remembered, Inc. is in the process of settling a class action complaint in California alleging that the putative class (alleged to include 200 members) were improperly denied overtime compensation in violation of a California law. The action sought unspecified damages, interest, restitution, as well as declaratory and injunctive relief and attorneys' fees. On February 3, 2003, Things Remembered and the plaintiffs reached an agreement to resolve the lawsuit for $562,500. The settlement is subject to court approval. A liability of $562,500 was recorded in the fourth quarter of 2002. Cole National Corporation is defending a purported class action lawsuit alleging claims for various violations of federal securities laws related to the Company's publicly reported revenues and earnings. The action, which proposes a class period of March 23, 1999 through November 26, 2002 and names the Company and certain present and former officers and directors as defendants, seeks unspecified compensatory damages, punitive damages "where appropriate", costs, expenses and attorneys fee. Following the Company's announcement in November 2002 of the restatement of the Company's financial statements (see Note 17 of the Notes to Consolidated Financial Statements), the Securities and Exchange Commission began an inquiry into the Company's previous accounting. The course of this or further litigation or investigations arising out of the restatement of the Company's financial statements cannot be predicted. In addition, under certain circumstances the Company would be obliged to indemnify the individual current and former directors and officers who are named as defendants in litigation or who are or become involved in an investigation. The Company believes it has insurance that should be available with respect to litigation and any indemnification obligations. However, if the Company is unsuccessful in defending against any such litigation, and if its insurance coverage is not available or is insufficient to cover its expenses, indemnity obligations and liability, if any, the litigation and/or investigation may have a material adverse effect on the Company's financial condition, cash flow and results of operations. Cole National Group, Inc. has been named as a defendant along with numerous other retailers, in patent infringement litigation challenging the defendants' use of bar code technology. The Company believes it has available defenses and does not expect any liability. However, if Cole National Group, Inc. were to be found liable for an infringement, it might have a material adverse effect on our operating results and cash flow in the period incurred. In the ordinary course of business, the Company is involved in various other legal proceedings. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, liquidity or financial position of the Company. (16) SUBSEQUENT EVENTS As discussed in Note 6, the Company received a waiver dated May 9, 2003 of the maximum leverage coverage test for the fiscal year end 2002 and the first quarter of fiscal 2003. During the waiver period the maximum leverage test was adjusted to accommodate the effect of the restatement on the Company's financial statements. This waiver will expire on the earlier of May 17, 2003 if the Lenders do not receive the Form 10-K and 10-Q's for the first through third fiscal quarters of 2002; on May 23, 2003 if certain additional financial information is not received by the Lenders; or June 30, 2003. The Company is in compliance with the covenants in the credit agreement and F-32 expects to meet the waiver conditions. The Company expects to complete a permanent amendment to the credit agreement on or before June 30, 2003. However, there is no assurance that the Company will be successful in its effort to complete such an amendment. The Company believes that, even if it is unsuccessful in its effort to complete such an amendment, it will have sufficient liquidity from internal and other external sources. (17) RESTATEMENT Subsequent to the issuance of the Company's consolidated financial statements for the second quarter of fiscal 2002, the Company determined it needed to restate its previously issued financial statements for numerous items, each of which was an "error" within the meaning of Accounting Principles Board Opinion No. 20, "Accounting Changes". In addition to the restatement of its annual financial statements, the Company has also restated its previously issued quarterly financial statements for fiscal years 2002 and 2001. The principal reasons and significant effects of the restatement adjustments on the accompanying financials statements from amounts previously reported are summarized as follows:
As of and for As of and for As of the Fiscal Year Ended the Fiscal Year Ended January 29, February 2, 2002 February 3, 2001 2000 ---------------------------- ----------------------------- ----------- Increase Increase Accumulated (decease) Accumulated (decease) Accumulated Dollars in thousands Deficit in net income Deficit in net income Deficit ----------- ------------- ----------- ------------- ----------- As reported $ (92,560) $ 5,195 $ (97,755) $ 2,229 $ (99,984) Significant restatement items: Sale of extended warranty contracts (40,483) (1,580) (38,903) (104) (38,799) Other revenue recognition adjustments (12,416) 3,229 (15,645) (2,531) (13,114) Valuation of long-lived assets (5,601) (2,455) (3,146) (4,352) 1,206 Inventories and cost of goods sold (1,845) (451) (1,394) (154) (1,240) Accruals for operating expenses (9,087) (5,116) (3,971) (7,265) 3,294 1998 settlement from former owner of Pearle (5,806) 175 (5,981) (218) (5,763) Investment in Pearle Europe (2,807) (2,100) (707) (778) 71 Deferred income taxes and income tax liabilities 30,056 716 29,340 5,363 23,977 ---------- -------- ---------- -------- --------- Total restatement items (47,989) (7,582) (40,407) (10,039) (30,368) As restated $ (140,549) $ (2,387) $ (138,162) $ (7,810) $(130,352) ========== ======== ========== ======== =========
Recognition of Revenues Earned on the Sale of Extended Warranty Contracts. Customers purchasing eyeglasses from the Company's retail stores are offered the option of buying a warranty for up to two years, paying in full for the warranty at the time of sale. The Company historically recognized the revenue at the time of the sale. The Company has made restatement adjustments to record the warranty payment received at the time of the sale as deferred revenue and recognizes the revenue on a straight-line basis over the warranty period. Other Revenue Recognition Adjustments. Previously, the Company recognized certain sales transactions as revenue when the customer placed the order and a deposit was taken. Restatement adjustments were made to defer such revenue until (i) customer receipt or when the related goods were shipped direct to the customer and (ii) all significant obligations of the Company were satisfied. In addition, revenue adjustments have been made to establish adequate allowances for returns and remakes. Historically, the Company had recorded returns and remakes based on actual product returned during the period. Valuation of Long-lived Assets. Historically, the Company did not consider certain mature stores with negative cash flows in its asset impairment tests. In addition, in testing for SFAS 121 impairment, the Company did not allocate goodwill to the respective stores. As part of the restatement, the Company applied a methodology which includes all mature stores in its asset impairment tests and includes an allocation of goodwill for years prior to fiscal 2002. The restated financial statements also reflect the recognition of losses on the disposal of fixed assets in the appropriate periods. Additional adjustments were made to record depreciation expense for certain depreciable fixed assets which were not previously being depreciated. Also included is an adjustment to record capital lease assets and the corresponding lease obligation for leases that had previously been accounted for as operating leases. F-33 Inventories and Cost of Goods Sold. The Company's restated financial statements reflect adjustments relating to inventories and cost of goods sold primarily to i) recognize obsolescence reserves in appropriate periods and amounts, correct calculation errors and recognize certain inventory costs in appropriate periods and ii) reflect certain vendor allowances previously recorded in operations but not yet earned as a reduction in the inventory balances. Accruals for Operating Expenses. Historically, the Company did not always record changes in estimates in the period of change, and established accruals for certain expenses that had not yet been incurred. The restated financial statements reflect adjustments to recognize certain operating expenses in the period in which they were incurred and to record the corresponding liability for those items not paid at the end of the period. Such operating expenses primarily consist of advertising, self-insurance, IBNR claims, retirement and post employment benefits, vacation, allowance for uncollectible accounts and miscellaneous operating expenses. 1998 Settlement from Former Owner of Pearle. The Company's 1998 financial statements included the recognition of $6.0 million of income from a $13.0 million cash settlement with the former owner of Pearle. The terms of the related agreement included the settlement of certain claims and indemnifications associated with the purchase agreement. In addition, as part of the settlement, the Company agreed to assume certain contingent liabilities from the former owner. The restated financial statements reflect the treatment of this $6.0 million from the settlement as an adjustment to the purchase price of Pearle, thereby reducing the goodwill that was established in connection with the Pearle acquisition and associated amortization expense. Investment in Pearle Europe. The Company owns a 21% equity interest in Pearle Europe, B.V. ("Pearle Europe") which operates a retail optical business in Europe. HAL Holding N.V. ("HAL"), a Dutch investment Company, owns 68% of Pearle Europe and individual members of Pearle Europe's management own the remaining 11%. The Company has owned its interest in Pearle Europe and predecessor companies since 1996. The Company has historically accounted for its investment in Pearle Europe under the equity method, pursuant to which the Company's net income has included its equity share in Pearle Europe's earnings. The Company previously classified its equity in the net income of Pearle Europe within interest and other income, net in its consolidated statement of operations. Under APB Opinion 18 "The Equity Method of Accounting for Investments in Common Stock," use of the equity method is appropriate when an investor has the ability to exercise significant influence over the operating and financial policies of the investee. The Company has one of five seats on Pearle Europe's Supervisory Board, and the Pearle Europe management shareholders control one seat. HAL controls two seats, and appoints the President of the Supervisory Board, with the consent of the Company. Between 1996 and June 2000, the contractual arrangements between the parties gave the Company the ability to exercise significant influence over the operating and financial policies of Pearle Europe. In Pearle Europe's early years, the Company provided management advice and support. The contractual relationships between the parties changed significantly in June 2000, so that the Company no longer had the ability to exercise significant influence over the operating and financial policies of Pearle Europe. The restated financial statements reflect a change in the Company's method of accounting for its investment in Pearle Europe from the equity method of accounting to the cost method of accounting beginning with the third quarter of 2000. Under the cost method, the Company has recorded its investment in the Pearle Europe shares at the carrying value as of the end of second quarter fiscal 2000. Starting at the same time, the Company included foreign currency gains and losses related to the Pearle Europe notes in net income. The Company will recognize as income any dividends received from Pearle Europe that are distributed from Pearle Europe's net accumulated earnings. Deferred Income Taxes and Income Tax Liabilities. The Company reviewed all of its temporary differences and loss and tax credit carryforwards, and made adjustments to its deferred tax assets and liabilities. Adjustments were made to provide for state and local income tax deferred tax assets and liabilities, which were previously not recorded. The Company evaluated the adequacy of the tax liabilities established for the current and open tax years and adjusted the amounts maintained in the tax liability accounts. Also included is the tax effect of the restatement items. Summary. The consolidated financial statements for the years ended February 2, 2002 and February 3, 2001 contained herein have been restated to reflect all of the above discussed adjustments. In addition, the Company has restated accumulated deficit as of January 29, 2000 by $30.4 million to reflect the cumulative impact of the restatement adjustments on prior years. The following is a summary of the effects of the restatement. F-34 AS OF FEBRUARY 2, 2002
As Cumulative Previously Effect of Prior Fiscal 2001 Reported Years Changes(1) Adjustments As Restated -------- ---------------- ----------- ----------- Assets (Dollars in thousands) Current assets: Cash and cash equivalents $ 63,656 $ 493 $ (731) $ 63,418 Accounts receivable, less allowances of $3,228 in 2001 39,609 718 1,038 41,365 Current portion of notes receivable 2,926 (825) 723 2,824 Inventories 111,098 6,987 1,118 119,203 Refundable income taxes 502 (1,237) 735 -- Prepaid expenses and other 22,757 10,499 (4,042) 29,214 Deferred income taxes 477 24,949 1,826 27,252 --------- -------- -------- --------- Total current assets 241,025 41,584 667 283,276 Property and equipment, at cost 297,649 13,461 (5,691) 305,419 Less - accumulated depreciation and amortization (174,300) (7,481) (3,204) (184,985) --------- -------- -------- --------- Total property and equipment, net 123,349 5,980 (8,895) 120,434 Notes receivable, excluding current portion, less allowances of $5,209 in 2001 19,056 246 891 20,193 Deferred income taxes 23,119 5,006 (324) 27,801 Other assets 51,101 391 709 52,201 Other intangibles, net 42,992 2,943 211 46,146 Goodwill, net 103,552 (17,273) (736) 85,543 --------- -------- -------- --------- Total assets $ 604,194 $ 38,877 $ (7,477) $ 635,594 ========= ======== ======== ========= Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 85 $ 13,585 $(13,411) $ 259 Accounts payable 57,647 8,420 (943) 65,124 Accrued interest 6,539 73 136 6,748 Accrued liabilities(2) 78,254 15,065 (742) 92,577 Accrued income taxes 3,501 3,184 1,919 8,604 Deferred revenue(2) 1,468 29,740 4,193 35,401 --------- -------- -------- --------- Total current liabilities 147,494 70,067 (8,848) 208,713 Long-term debt, net of discount and current portion 284,318 249 7 284,574 Other long-term liabilities 16,775 (868) 7,035 22,942 Deferred revenue, long-term -- 10,437 612 11,049 Stockholders' equity: Preferred stock -- -- -- -- Common stock 16 -- -- 16 Paid-in capital 268,729 (164) 144 268,709 Accumulated other comprehensive loss (5,840) (485) 1,430 (4,895) Accumulated deficit (92,560) (40,407) (7,582) (140,549) Treasury stock at cost (9,769) -- (233) (10,002) Unamortized restricted stock awards (2,634) 48 (42) (2,628) Notes receivable - stock option and awards (2,335) -- -- (2,335) --------- -------- -------- --------- Total stockholders' equity 155,607 (41,008) (6,283) 108,316 --------- -------- -------- --------- Total liabilities and stockholders' equity $ 604,194 $ 38,877 $ (7,477) $ 635,594 ========= ======== ======== =========
(1) The cumulative amount reflects the effect of fiscal year 2000 and prior on the previously reported fiscal 2001 balance sheet. (2) Deferred revenues as of February 2, 2002 has been reclassified from accrued liabilities to deferred revenue. F-35 FOR THE YEAR ENDED FEBRUARY 2, 2002
As Previously Reported Adjustments As Restated -------- ----------- ----------- (In thousands, except per share amounts) Net revenue $ 1,101,333 $ 7,790 1,109,123 Cost and expenses: Cost of goods sold 364,752 (360) 364,392 Operating expenses 696,168 15,310 711,478 Goodwill and tradename amortization 5,769 (759) 5,010 ----------- -------- ----------- Total costs and expenses 1,066,689 14,191 1,080,880 ----------- -------- ----------- Operating income 34,644 (6,401) 28,243 Interest and other (income) expense: Interest expense 28,146 1,271 29,417 Interest and other (income) (4,518) 626 (3,892) ----------- -------- ----------- Total interest and other (income) expense, net 23,628 1,897 25,525 ----------- -------- ----------- Income (loss) before income taxes 11,016 (8,298) 2,718 Income tax provision (benefit) 5,821 (716) 5,105 ----------- -------- ----------- Net income (loss) $ 5,195 $ (7,582) $ (2,387) =========== ======== =========== Earnings (loss) per common share: Basic $ 0.33 $ (0.48) $ (0.15) Diluted $ 0.32 $ (0.47) $ (0.15) Weighted average shares: Basic 15,822 197 16,019 Diluted 16,073 (54) 16,019
F-36 FOR THE YEAR ENDED FEBRUARY 3, 2001
As Previously Reported Adjustments As Restated -------- ----------- ----------- (In thousands, except per share amounts) Net revenue $ 1,077,147 $ 1,487 $ 1,078,634 Cost and expenses: Cost of goods sold 358,030 1,578 359,608 Operating expenses 680,411 17,047 697,458 Goodwill and tradename amortization 5,840 (672) 5,168 ----------- -------- ----------- Total costs and expenses 1,044,281 17,953 1,062,234 ----------- -------- ----------- Operating income 32,866 (16,466) 16,400 Interest and other (income) expense: Interest expense 29,078 43 29,121 Interest and other (income) (2,864) (968) (3,832) ----------- -------- ----------- Total interest and other (income) expense, net 26,214 (925) 25,289 ----------- -------- ----------- Income (loss) before income taxes 6,652 (15,541) (8,889) Income tax provision (benefit) 4,423 (5,363) (940) ----------- -------- ----------- Income (loss) after taxes 2,229 (10,178) (7,949) Equity in net income of Pearle Europe -- 139 139 ----------- -------- ----------- Net income (loss) $ 2,229 $(10,039) $ (7,810) =========== ======== =========== Earnings (loss) per common share: Basic $ 0.14 $ (0.64) (0.50) Diluted $ 0.14 $ (0.64) (0.50) Weighted average shares: Basic 15,585 (21) 15,564 Diluted 15,620 (56) 15,564
F-37 SCHEDULE I COLE NATIONAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT COLE NATIONAL CORPORATION CONDENSED BALANCE SHEETS FEBRUARY 1, 2003 AND FEBRUARY 2, 2002 (Dollars in millions)
2002 2001 ------- ------- (As restated) Assets: Receivable from subsidiaries $ 78.5 $ 87.6 Investment in subsidiaries (5.3) 14.9 Notes and interest receivable 24.1 15.6 Property and equipment, net 1.4 2.1 Deferred income tax and other 14.6 14.6 --------- --------- Total assets $ 113.3 $ 134.8 ========= ========= Liabilities and stockholders' equity: Accounts payable and accrued expenses $ 5.0 $ 11.4 Long-term debt 10.0 10.0 Other long-term liabilities 5.0 5.1 Stockholders' equity 93.3 108.3 --------- --------- Total liabilities and stockholders' equity $ 113.3 $ 134.8 ========= =========
F-38 SCHEDULE I (CONTINUED) COLE NATIONAL CORPORATION CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS 52 WEEKS ENDED FEBRUARY 1, 2003, 52 WEEKS ENDED FEBRUARY 2, 2002 AND 53 WEEKS ENDED FEBRUARY 3, 2001 (Dollars in millions)
February 1, February 2, February 3, Condensed Statements of Operations 2003 2002 2001 - ---------------------------------- ------- ------- ------- (As Restated) Revenue - services to affiliates $ 3.2 $ 3.3 $ 4.2 Operating expenses 4.5 4.7 5.4 Interest and other (income) expenses, net (5.3) (4.3) (0.8) Income (loss) before taxes 4.0 2.9 (0.4) Income tax provision (benefit) 1.8 (0.2) (0.2) ------- ------- ------- Income (loss) before equity in undistributed earnings (loss) of subsidiaries 2.2 3.1 (0.2) Equity in undistributed earnings (loss) of subsidiaries (7.3) (5.5) (7.6) ------- ------- ------- Net income (loss) $ (5.1) $ (2.4) $ (7.8) ======= ======= ======= Condensed Statements of Cash Flows - ---------------------------------- Net cash (used for) provided by operating activities $ (7.5) $ 2.9 $ 16.1 ------- ------- ------- Investing activities: Advances from (to) affiliates 9.1 3.0 (14.0) Purchase of property and equipment, net -- -- (3.3) Investment in Pearle Europe, net -- (6.5) 2.9 Note from third party (4.0) -- -- Other, net 0.4 -- -- ------- ------- ------- Net cash provided by (used for) investing activities 5.5 (3.5) (14.4) ------- ------- ------- Financing activities: Repayment of long-term debt (0.1) -- (1.1) Repayment (issuance) of notes receivable-stock options and awards -- (0.3) (1.3) Net proceeds from exercise of stock options 1.1 0.4 -- Other, net 1.0 0.5 0.7 ------- ------- ------- Net cash provided by (used for) financing activities 2.0 0.6 (1.7) ------- ------- ------- Net change in cash -- -- -- Cash, beginning of period -- -- -- ------- ------- ------- Cash, end of period $ -- $ -- $ -- ======= ======= =======
F-39 SCHEDULE I (CONTINUED) NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT The accompanying financial information of Cole National Corporation is as of February 1, 2003 and February 2, 2002, and for the 52 weeks ended February 1, 2003 and February 2, 2002, and for the 53 weeks ended February 3, 2001. Cole National Corporation is a holding company for its wholly owned subsidiaries, including Cole National Group, Inc., 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 elsewhere in this Form 10-K. F-40 COLE NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS 52 WEEKS ENDED FEBRUARY 1, 2003, 52 WEEKS ENDED FEBRUARY 2, 2002 AND 53 WEEKS ENDED FEBRUARY 3, 2001 (Dollars in millions)
Charges Balance at (Reversals) Balance Beginning to Cost and End of Description of Period Expenses Transfers(C) Deductions(A) Period ----------- --------- -------- ------------ ------------- ------ FEBRUARY 1, 2003 Allowance for uncollectible accounts $3.2 $2.0 $ -- $(2.1) $3.1 Franchise note allowance for uncollectible accounts 5.2 (0.7) -- (1.5) 3.0 FEBRUARY 2, 2002 Allowance for uncollectible accounts (B) $6.3 $1.1 $(1.2) $(3.0) $3.2 Franchise note allowance for uncollectible accounts (B) 4.7 0.3 1.2 (1.0) 5.2 FEBRUARY 3, 2001 Allowance for uncollectible accounts (B) $7.7 $2.6 $ -- $(4.0) $6.3 Franchise note allowance for uncollectible accounts (B) 2.2 2.8 -- (0.3) 4.7
p (A) Receivable balances written off, net of recoveries (B) As restated, see Note 17 to the Notes to Consolidated Financial Statements. (C) Transfers resulted from conversion of accounts receivables to notes receivables. Allowance balances presented in the Notes to Consolidated Financial Statements are represented on this schedule. F-41 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1(i) Restated Certificate of Incorporation of Cole National Corporation, incorporated by reference to Exhibit 3.1 (i) of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 3.1(ii) Certificate of Amendment of the Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1(ii) to Cole National Corporation's Annual Report on Form 10-K for the period ended January 31, 1998 (File No. 1-12814). 3.2(ii) Amended and Restated By-Laws of Cole National Corporation, 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+ Amended Certificate of Designations of Series A Junior Participating Preferred Stock, dated November 22, 1999. 4.1 Indenture dated May 22, 2002, by and among Cole National Group, Inc. and Wells Fargo Bank Minnesota, National Association, as trustee, relating to the 8-7/8% Senior Subordinated Notes due 2012 (the form of which Senior Subordinated Note is included in such Indenture), incorporated by reference to Exhibit 10.2 of Cole National Corporation's Quarterly Report on Form 10-Q, filed on June 13, 2002 (File No. 1-12814). 4.2 Indenture dated August 22, 1997, between Cole National Group, Inc. and Norwest Bank Minnesota, National Association, as Trustee, relating to the 8-5/8% Senior Subordinated Notes Due 2007, incorporated by reference to Exhibit 4.4 of Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 333-34963). 4.3 Rights Agreement and Form of Right Certificate dated as of November 22, 1999 by and between Cole National Corporation and National City Bank, as Rights Agent, incorporated by reference to Exhibit 4.1 of Cole National Corporation's Registration Statement on Form 8-A dated November 24, 1999 (File No. 1-12814). 4.4 Cole National Corporation by this filing agrees, upon request, to file with the Commission the instruments defining the rights of holders of long-term debt of Cole National Corporation and its subsidiaries where the total amount of securities authorized thereunder does not exceed 10% of the total assets of Cole National Corporation and its subsidiaries on a consolidated basis. 10.1* Employment Agreement entered into as of December 17, 1998 by and among Cole National Corporation, Cole National Group, Inc., Cole Vision Corporation, Pearle, Inc., Things Remembered, Inc. and Jeffrey A. Cole, incorporated by reference to Exhibit 10.1 to Cole National Corporation's Annual Report on Form 10-K for the year ended January 30, 1999 (File No. 1-12814). 10.2* Agreement dated March 27, 1993 between Cole National Corporation 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* 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 Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.5* Form of Nonqualified Stock Option Agreement for Directors of the Company, dated March 1993 incorporated by reference to Exhibit 10.41 to Cole National Corporation 's Registration Statement on Form S-1 (Registration No. 33-74228).
X-1 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.6* Amendment No. 1 to the Amended and Restated Nonqualified Stock Option Plan for Nonemployee Directors, incorporated by reference to Exhibit 10.1 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended November 5, 2001 (File No. 1-12814). 10.7* 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). 10.8* Management Incentive Bonus Program (Amended and Restated June 14, 2001), incorporated by reference to Exhibit B to Cole National Corporation's definitive Proxy Statement dated May 10, 2001 (File No. 1-12814). 10.9* Form of Nonqualified Stock Option Agreement (1997 Time Vesting), incorporated by reference to Exhibit 10.12 to Cole National Corporation's Annual Report on Form 10-K for the period ended January 31, 1998 (File No. 1-12814). 10.10* Executive Life Insurance Plan of Cole National Corporation, incorporated by reference to Exhibit 10.12 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.11* Medical Expense Reimbursement Plan of Cole National Corporation effective as of February 1, 1992, incorporated by reference to Exhibit 10.13 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.12 Agreement for the Allocation of Federal Income Tax Liability and Benefits among Members of the Parent Group dated August 23, 1985, as amended, incorporated by reference to Exhibit 10.26 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.13 Assignment and Assumption Agreement dated as of September 30, 1993 between the Company and Cole National Group, 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). 10.14 Form of Indemnification Agreement for Directors of Cole National Corporation, incorporated by reference to Exhibit 10.19 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.15 Form of Indemnification Agreement for Officers of Cole National Corporation, incorporated by reference to Exhibit 10.20 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.16* Supplemental Retirement Benefit Plan of Cole National Corporation, incorporated by reference to Exhibit 10.38 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.17* Supplemental Pension Plan of Cole National Corporation, incorporated by reference to Exhibit 10.48 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.18 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 on December 2, 1996 (File No. 1-12814). 10.19 First Amendment to the Credit Agreement, dated as of January 13, 1997, 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 10.33 of Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 333-34963).
X-2 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.20 Second Amendment to Credit Agreement, dated as of August 8, 1997, 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 10.34 of the Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 333-34963). 10.21 Cole National Group, Inc. Guarantee and Cash Collateral Agreement, dated as of November 15, 1996, by Cole National Group and Cole National Corporation, incorporated by reference to Exhibit 99.3 of Cole National Corporation's Report on Form 8-K, filed on December 2, 1996 (File No. 1-12814). 10.22 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 on December 2, 1996 (File No. 1-12814). 10.23* Agreement, dated August 4, 1997, between the Company and Leslie D. Dunn regarding termination of employment, incorporated by reference to Exhibit 10.37 of Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 333-34963). 10.24* Form of Cole National Corporation Nonqualified Stock Option Agreement (Nonemployee Directors), incorporated by reference to Exhibit 10.5 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended August 2, 1997 (File No. 1-12814). 10.25* Form of Cole National Corporation Nonemployee Director Equity and Deferred Compensation Plan, incorporated by reference to Exhibit B to Cole National Corporation's definitive Proxy Statement dated May 6, 1997 (File No. 1-12814). 10.26* Form of Cole National Corporation Nonemployee Director Equity and Deferred Compensation Plan Participation Agreement, incorporated by reference to Exhibit 10.7 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended August 2, 1997 (File No. 1-12814). 10.27* Form of Cole National Corporation's 1998 Equity and Performance Incentive Plan (Amended and Restated June 10, 1999), incorporated by reference to Annex B to Cole National Corporation's definitive Proxy Statement dated May 3, 1999 (File No. 1-12814). 10.28 Third Amendment to the Credit Agreement, dated as of May 15, 1998, among Cole Vision Corporation and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.1 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended May 2, 1998 (File No. 1-12814). 10.29 Fourth Amendment to the Credit Agreement, dated as of March 5, 1999, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc., and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.45 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 30, 1999 (File No. 1-12814). 10.30* Nonqualified Stock Option Agreement between Cole National Corporation and Jeffrey A. Cole dated as of December 17, 1998, incorporated by reference to Exhibit 10.46 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 30, 1999 (File No. 1-12814). 10.31* Form of Nonqualified Stock Option Agreement for Executive Officers under the Cole National Corporation 1998 Equity Performance and Incentive Plan, incorporated by reference to Exhibit 10.48 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 30, 1999 (File No. 1-12814).
X-3 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.32* Restricted Stock Agreement between Cole National Corporation and Jeffrey A. Cole dated as of December 17, 1998, incorporated by reference to Exhibit 10.49 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 30, 1999 (File No. 1-12814). 10.33* Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan dated as of December 17, 1998, incorporated by reference to Exhibit 10.51 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 30, 1999 (File No. 1-12814). 10.34* Cole National Group, Inc. Deferred Compensation Plan effective as of February 1, 1999, incorporated by reference to Exhibit 10.53 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 30, 1999 (File No. 1-12814). 10.35* Amendment No. 1, dated as of December 17, 1998, to the Cole National Group, Inc. Supplemental Pension Plan, incorporated by reference to Exhibit 10.54 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 30, 1999 (File No. 1-12814). 10.36 Fifth Amendment to the Credit Agreement, dated as of August 20, 1999, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc., and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.1 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended July 31, 1999 (File No. 1-12814). 10.37 Sixth Amendment and Waiver to the Credit Agreement, dated as of March 7, 2000, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc., and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.50 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 29, 2000 (File No. 1-12814). 10.38 Cole National Corporation Guarantee, in favor of Canadian Imperial Bank of Commerce, dated as of March 7, 2000, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc., incorporated by reference to Exhibit 10.51 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 29, 2000 (File No. 1-12814). 10.39* Employment Agreement entered into as of January 18, 2000 by and among Cole National Corporation and Larry Pollock, incorporated by reference to Exhibit 10.52 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 29, 2000 (File No. 1-12814). 10.40* Restricted Stock Agreement between Cole National Corporation and Larry Pollock dated as of January 18, 2000, incorporated by reference to Exhibit 10.53 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 29, 2000 (File No. 1-12814). 10.41* Nonqualified Stock Option Agreement #1 between Cole National Corporation and Larry Pollock dated as of January 18, 2000, incorporated by reference to Exhibit 10.54 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 29, 2000 (File No. 1-12814). 10.42 Standstill Agreement, dated as of November 22, 1999, by and between Cole National Corporation and HAL International N.V., incorporated by reference to Exhibit 10.56 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 29, 2000 (File No. 1-12814). 10.43* Form of Cole National Corporation's 1999 Employee Stock Purchase Plan (Amended and Restated June 14, 2001), incorporated by reference to Exhibit C of Cole National Corporation's definitive Proxy Statement dated May 10, 2001 (File No. 1-12814). 10.44* Addendum to Employment Agreement dated June 4, 1999 among Jeffrey A. Cole, Cole National Corporation and certain of its subsidiaries, incorporated by reference to Exhibit 10.67 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 29, 2000 (File No. 1-12814).
X-4 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.45* Amended and Restated Split-Dollar Agreement dated as of January 25, 2002 between Cole National Corporation and Jo Merrill, as Trustee of the Jeffrey A. Cole Insurance Trust, incorporated by referenced to Exhibit 10.57 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 2, 2002 (File No. 1-12814). 10.46 Seventh Amendment to the Credit Agreement, dated as of April 21, 2000, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc., and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.69 of Cole National Corporation's Annual Report on Form 10-K for the period ended January 29, 2000 (File No. 1-12814). 10.47 Eighth Amendment to the Credit Agreement, dated as of June 9, 2000 among Cole Vision Corporation, Things Remembered, Inc., and Pearle, Inc. and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.1 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended July 29, 2000 (File No. 1-12814). 10.48* Secured Promissory Note between Cole National Corporation and Jeffrey A. Cole as of November 17, 2000, incorporated by reference to Exhibit 10.1 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended October 28, 2000 (File No. 1-12814). 10.49* Stock Pledge and Security Agreement between Cole National Corporation and Jeffrey A. Cole dated as of November 17, 2000, incorporated by reference to Exhibit 10.2 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended October 28, 2000 (File No. 1-12814). 10.50* Amended and Restated 1999 Broad-Based Employee Stock Plan (Amended and Restated February 28, 2001), incorporated by reference to Exhibit 4.6 of Cole National Corporation's Registration Statement on Form S-8 filed on February 11, 2002 (Registration No. 333-822714). 10.51* Amendment No. 1 to the Cole National Group, Inc. Deferred Compensation Plan for Senior Executives and other Senior Management, dated January 25, 2002, incorporated by referenced to Exhibit 10.63 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 2, 2002 (File No. 1-12814). 10.52* Amendment No. 2 to the Cole National Group, Inc. Supplemental Pension Plan, dated January 25, 2002, incorporated by referenced to Exhibit 10.64 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 2, 2002 (File No. 1-12814). 10.53* Nonqualified Stock Option Agreement between Cole National Corporation and Jeffrey A. Cole dated January 25, 2002, incorporated by referenced to Exhibit 10.65 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 2, 2002 (File No. 1-12814). 10.54* Amendment No. 2 to the Cole National Group, Inc. Supplemental Retirement Benefit Plan, dated January 25, 2002, incorporated by referenced to Exhibit 10.66 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 2, 2002 (File No. 1-12814). 10.55* Amendment No. 1 to the Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan, dated January 25, 2002, incorporated by referenced to Exhibit 10.67 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 2, 2002 (File No. 1-12814). 10.56 Amended and Restated Credit Agreement, dated as of May 23, 2002, among Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc. and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.1 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended May 4, 2002 (File No. 1-12814).
X-5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.57* Letter dated April 14, 2002 from Cole National Corporation to Lawrence E. Hyatt incorporated by reference to Exhibit 10.1 of Cole National Corporation's Quarterly report on Form 10-Q for the period ended August 3, 2002 (File No. 1-12814). 10.58* Letter Agreement dated April 19, 2002 between Cole National Corporation and Lawrence E. Hyatt regarding termination of employment, incorporated by reference to Exhibit 10.2 of Cole National Corporation's Quarterly report on Form 10-Q for the period ended August 3, 2002 (File No. 1-12814). 10.59* Restricted Stock Agreement between Cole National Corporation and Lawrence E. Hyatt dated as of July 15, 2002, incorporated by reference to Exhibit 10.3 of Cole National Corporation's Quarterly report on Form 10-Q for the period ended August 3, 2002 (File No. 1-12814). 10.60* Nonqualified Stock Option Agreement, between Cole National Corporation and Lawrence E. Hyatt dated as of July 15, 2002, incorporated by reference to Exhibit 10.4 of Cole National Corporation's Quarterly report on Form 10-Q for the period ended August 3, 2002 (File No. 1-12814). 10.61 First Amendment to Credit Agreement, dated as of August 23, 2002, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc. and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.5 of Cole National Corporation's Quarterly report on Form 10-Q for the period ended August 3, 2002 (File No. 1-12814). 10.62 Second Amendment to Credit Agreement, dated as of September 13, 2002, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc. and Canadian Imperial Bank of Commerce incorporated by reference to Exhibit 10.6 of Cole National Corporation's Quarterly report on Form 10-Q for the period ended August 3, 2002 (File No. 1-12814). 10.63 Amendment No. 1 to the Cole National Group, Inc. Retirement Plan (Amended and Restated) as of January 1, 2001), effective March 31, 2002, incorporated by reference to Exhibit 10.7 of Cole National Corporation's Quarterly report on Form 10-Q for the period ended August 3, 2002 (File No. 1-12814). 10.64*+ Letter dated December 2, 2002 from Cole National Corporation to Ann M. Holt. 10.65*+ Letter Agreement dated May 31, 2000 between Cole National Corporation and Ann M. Holt regarding termination of employment. 10.66+ Third Amendment to Credit Agreement, dated December 16, 2002, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc. and Canadian Imperial Bank of Commerce. 10.67*+ Amended and Restated Instrument Designating Participants of the Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan dated January 25, 2002. 10.68+ Form of License/Lease Agreement for Sears Optical. 10.69+ Cole National Corporation 401(k) Plan dated March 27, 2003 effective March 1, 2002. 10.70+ Bank Waiver to the Credit Agreement, dated May 9, 2003, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc. and Canadian Imperial Bank of Commerce. 21+ Subsidiaries of Cole National Corporation. 23.1+ Independent Auditors' Consent. 24+ Power of Attorney.
X-6 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 99.1 Letter to Securities and Exchange Commission regarding Arthur Andersen LLP, incorporated by referenced to Exhibit 99 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 2, 2002 (File No. 1-12814). 99.2+ Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002.
* Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K. + Filed herewith. X-7 EX-3.3 3 l00460aexv3w3.txt EX-3.3 AMENDED CERT OF DESIGNATIONS OF SERIES A Exhibit 3.3 AMENDED CERTIFICATE OF DESIGNATIONS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF COLE NATIONAL CORPORATION Cole National Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law, effective as of November 22, 1999: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation and pursuant to the provisions of Section 151 of the Delaware General Corporation Law, the Board of Directors hereby amends and restates the terms of the Series A Junior Participating Preferred Stock, without par value, as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 400,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. (a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $.001 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $1.00 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time (A) declare or pay any dividend on the outstanding shares of Common Stock payable in shares of Common Stock or (B) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the amount to which holders of shares of Series A Preferred Stock would otherwise be entitled immediately prior to much event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (a) of this Section 2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless (i) the date of issue of such shares is prior to the record data for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of the first issuance of a share of Series A Preferred Stock, or (ii) the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 calendar days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes an all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time (i) declare or pay any dividend on the outstanding shares of Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the number of votes per share to which holders of shares of Series A Preferred 2 Stock would otherwise be entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and this denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred stock, or any shares of stock ranking an a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of 3 the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment; provided, however, that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (b) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time (i) declare or pay any dividend on the outstanding shares of Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of the shares of Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the aggregate amount to which each holder of shares of Series A Preferred Stock would otherwise be entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then, in each such case, each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or 4 any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time (a) declare or pay any dividend on the outstanding shares of Common Stock payable in shares of Common Stock or (b) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so an to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single series. IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation by its Chairman and attested to by its Secretary as of this 22nd day of November, 1999. COLE NATIONAL CORPORATION By: /s/ Jeffrey A. Cole ------------------------------------ Jeffrey A. Cole Chairman ATTEST: /s/ Leslie D. Dunn - ------------------------------------ Leslie D. Dunn Secretary 5 EX-10.64 4 l00460aexv10w64.txt EX-10.64 LETTER DATED DECEMBER 2,2002 Exhibit 10.64 December 2, 2002 Ann Holt 3055 Oaklawn Park Blvd Stow, OH 44224 Dear Ann: We are pleased to offer you the promotion to SENIOR VICE PRESIDENT, CORPORATE CONTROLLER, AND PRINCIPAL ACCOUNTING OFFICER for Cole National Corporation reporting to Larry Hyatt. The following highlights the terms and conditions of our offer. EFFECTIVE DATE: December 9, 2002 SALARY: Your initial bi-weekly salary will be $7,115.38, payable on a bi-weekly payroll schedule representing an annualized base salary of $185,000. OPERATING BONUS: You will continue to participate in the EBIT Management Incentive Plan. For Fiscal Year 2002 you will eligible for bonus under your current Plan. In FY 2003, you will be covered under the Corporate EBIT Plan. STOCK OPTIONS: We will request that the Board of Directors of Cole National Corporation grant you an option to purchase 5,000 shares of Cole National Corporation stock, at the time of the next grant. These options will have a four-year vesting period. MERIT INCREASE: Your salary will be reviewed annually, and adjustments, when they occur, will be effective in April, beginning with April 1, 2004. MEDICAL EXPENSE REIMBURSEMENT PLAN (MERP): Effective February 2, 2003 you will be eligible to participate in this plan. We will provide you information on this Plan under separate cover. SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERP): Effective February 2, 2003, you will be eligible to participate in the Company's non-qualified SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP). This Plan is a defined contribution plan that contributes 8% of your base salary annually with earnings on your account balance credited each year; vesting occurs over a 10-year period. TERMINATION/NON-COMPETE AGREEMENT: All terms and conditions of the Termination/Non-Compete Agreement dated May 15, 2000 between you and Cole Vision Corporation remain in full force and effect. EMPLOYMENT AT WILL: NOTHING contained in this offer letter is intended to create a fixed or contractual employment term between you and the Company and you understand and acknowledge that if you accept this offer, you are and will continue to be an employee at will, that your employment with the Company can be terminated with or without cause and with or without notice, at any time at the option of either you or the Company. Sincerely, /s/ Patricia M. Luzier Patricia M. Luzier Sr. Vice President & Chief Administrative Officer Enclosures Agreed to and acknowledged the 9th day of December, 2002. /s/ Ann Holt - --------------------------------------------------- Signature /jls EX-10.65 5 l00460aexv10w65.txt EX-10.65 LETTER AGREEMENT DATED MAY 31, 2000 Exhibit 10.65 May 15, 2000 Cole Vision Corporation Licensed Brands 1925 Enterprise Parkway Twinsburg, Ohio 44087 Gentlemen: In consideration of my employment as Vice President, Finance for the Licensed Brands division of Cole Vision Corporation and the benefits I derive from Paragraph L hereof (but without thereby creating any fixed or contractual employment term, understanding that my employment can be terminated, with or without cause and with or without notice, at any time at the option of either the Company or me), I hereby agree with the Company (for purposes of this letter agreement, the "Company" shall mean Cole Vision Corporation or any of its present or future parent, direct or indirect subsidiaries or affiliated entities by which I am employed or on behalf of which I provide services) as follows: A. During the term of my employment I will not compete, directly or indirectly, with the Company. In accordance with this restriction, but without limiting its terms, I will not: (a) enter into or engage in any business which competes with the business of the Company; or (b) solicit customers, business, patronage, or orders for, or sell, any product or products in competition with, or for any business that competes with, the business of the Company; or (c) divert, entice, or take away any customers, business, patronage or orders of the Company or attempt to do so; or (d) promote or assist, financially or otherwise, any person, firm, association or corporation or any other entity engaged in any business which competes with the business of the Company. B. For a period of twelve (12) months following termination of my employment with the Company, I will not enter into or engage in any business that competes with the Company's business. C. For a period of twelve (12) months following termination of my employment with the Company, I will not solicit customers, business, patronage, or orders for, or sell any product(s) in competition with the Company's business. D. For a period of twelve (12) months following termination of my employment with the Company, I will not divert, entice, or otherwise take away any customers, business, patronage, or orders of the Company, or attempt to do so. E. For a period of twelve (12) months following termination of my employment with the Company, I will not promote or assist financially or otherwise, any person, firm, association, partnership, corporation, or any other entity engaged in any business which competes with the Company's business. F. For the purposes of Paragraphs A through E, inclusive, I understand that I will be competing if I engage in any or all of the activities set forth therein directly as an individual on my own account, or indirectly as a partner, joint venturer, employee, agent, salesman, consultant, officer and/or director of any firm, association, corporation, or other entity, or as a stockholder of any corporation in which I own, directly or indirectly, individually or in the aggregate, more than one percent (1%) of the outstanding stock. G. For the purposes of Paragraphs B through E, inclusive, the Company's business is defined as the manufacture, production, sale, marketing and/or distribution of any product(s) and/or the rendering of any service(s) that are the same as or similar to those manufactured, produced, sold, marketed, distributed and/or rendered, as of the date of my termination, by the Company. H. I understand that the activities set forth in Paragraphs B through E, inclusive, shall be prohibited only within the United States, Canada and Puerto Rico or such lesser geographic area as to which or for which I was assigned or had responsibility at the time of my termination or at any time during the twelve (12) month period immediately preceding my termination. I. If it shall be judicially determined that I have violated any of my obligations under Paragraphs B through E, inclusive, then the period applicable to the obligation which I shall have been determined to have violated shall automatically be extended by a period of time equal in length to the period during which said violation(s) occurred. J. For a period of twelve (12) months following termination of my employment with the Company, I also agree that I will not directly or indirectly solicit or induce or attempt to solicit or induce any employee(s) or any sales representative(s), agent(s) or consultant(s) of the Company or any of its parent, subsidiary or affiliate entities to terminate their employment, representation or other association with the Company or such entity. K. During the period of my employment and at any time thereafter, I will not disclose, furnish, disseminate, make available or, except in the ordinary course of performing my duties on behalf of the Company, use any trade secrets or confidential business and technical information of the Company, or its parent, subsidiaries or affiliated entities or its customers, without limitation as to when it was acquired by me or whether it was compiled or obtained by, or furnished to me while I was employed by the Company. Such trade secrets and confidential business and technical information are considered to include, without limitation, the vision care plans, vendor lists, vendor terms and programs, merchandise costs, financial statistics, research data, or any other statistics and plans contained in monthly and annual review books, profit plans, capital plans, critical issues plans, strategic plans, or merchandising, marketing, real estate, or store operations plans. I specifically acknowledge that all such information, whether reduced to writing or maintained in my mind or memory and whether compiled by the Company and/or me derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from its disclosure or use, that reasonable efforts have been put forth by the Company to maintain the secrecy of such information, that such information is and will remain the sole property of the Company and that any retention and use of such information during or after the termination of my relationship with the Company (except in the course of performing my duties) shall constitute a misappropriation of the Company's trade secrets; provided, however, that this restriction shall not apply to information which is in the public domain or otherwise made public by others through no fault of mine. L. It is further understood and agreed that in the event my employment with the Company should be terminated by the Company without cause ("cause" for this purpose means gross neglect of duty, material breach of this Agreement, dishonesty, disloyalty, the inability to discharge my duties due to alcohol or drug addiction, or other misconduct inimicable to the best interests of the Company), I will receive, in full and complete settlement of any claims for compensation which I may have, a continuation of my annual base salary, in effect at the time of the termination of my employment, for a period of up to twelve (12) months immediately following such termination, payable in accordance with the Company's payroll schedule; provided, however, that in the event I obtain employment, any consulting assignments or any self-employment during said twelve (12) month period (and upon obtaining such employment or assignments I will promptly notify the Company of same), the payment of any unpaid balance hereunder, effective as of the date of such new employment or assignments, shall be: (i) canceled if the annual base salary of my new employment equals or exceeds my annual base salary at the Company at the time of my termination; or (ii) reduced to the amount by which my annual base salary at the Company at the time of my termination exceeds the annual base salary of my new employment prorated on the basis of the time remaining in said twelve (12) month period; or (iii) reduced by the amount of any consulting and self-employment income earned or paid to me during such period. As used herein, "annual base salary of my new employment" shall equal the greater of (x) the actual annual base salary of my new employment or (y) the average annual base salary payable to persons holding comparable positions as I then do with my new employer with businesses comparable to my then-new employer. It is the intent of this Paragraph L that I will be assured of the payment of an amount at least equal to my annual base salary at the time of my termination at the Company for a period of twelve (12) months following such termination, whether through payments from the Company, my new employer, or as consulting or self-employment income or a combination of payments from the Company, my new employer and consulting and self-employment income. I further agree to use my best efforts to obtain suitable employment following such termination. In no event, however, upon the termination of my employment by the Company, without cause, shall I receive less than the amount of money which is payable, if any, in accordance with the Company's severance pay policy in effect at the time of my termination. M. I expressly agree and understand that the remedy at law for any breach by me of this Agreement will be inadequate and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, it is acknowledged that upon my violation of any provision of this Agreement, the Company shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach without the necessity of proof of actual damage. Nothing in this Agreement shall be deemed to limit the Company's remedies at law or in equity for any breach by me of any of the provisions of this Agreement which may be pursued or availed of by the Company. N. This Agreement is not assignable by either party without the prior written consent of the other except that the Company may assign it without such consent to any parent, subsidiary or affiliated entity, and upon such entity's assumption of the Company's duties and obligations hereunder, such entity shall succeed to each of the Company's rights hereunder. Upon such assignment and assumption, I agree to and will become an employee of such entity, and all references to the Company in this Agreement shall, as the context requires, be deemed to be to the entity to which such assignment, assumption and employment relate. 0. No modification, waiver, amendment or addition to any of the terms of this Agreement shall be effective, except as set forth in a writing signed by me and the Company. The failure of the Company to enforce any provision of this Agreement shall not be construed to be a waiver of such provision or of the right of the Company thereafter to enforce each and every provision. P. This Agreement and any amendments thereto shall become effective on the date of acceptance by the Company and shall be governed by, and construed in accordance with, the internal, substantive laws of the State of Ohio. I agree that the state and federal courts located in the State of Ohio shall have jurisdiction in any action, suit or proceeding against me arising out of this Agreement and I hereby: (a) submit to the personal jurisdiction of such courts; (b) consent to service of process in connection with any action, suit or proceeding against me; and (c) waive any other requirement (whether imposed by statute, rule of court or otherwise) with respect to personal jurisdiction, venue or service of process. Q. This Agreement supersedes the provisions of each and every other agreement or understanding, whether oral or written, between the undersigned and the Company relating to the subject matter contained herein, and any such agreement or understanding shall be of no further force and effect. The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions and any partially unenforceable provision, the extent enforceable in any jurisdiction, shall, nevertheless, be binding and enforceable. The parties hereto agree that when fully executed, the foregoing shall constitute a legally enforceable Agreement between us, which also shall inure to the benefit of the Company's successors and assigns. Finally, I represent that prior to signing this Agreement, I have read, fully understand and voluntarily agree to the terms and conditions as stated above, that I was no coerced to sign this Agreement, that I was not under duress at the time I signed this Agreement and that, prior to signing this Agreement, I had adequate time to consider entering into this Agreement, including without limitation, the opportunity to discuss the terms and conditions of this Agreement, as well as its legal consequences, with an attorney of my choice. Very truly yours, By: /s/ Ann M. Holt ------------------------------------- Ann M. Holt Acknowledged and agreed to as of this 31st day of May, 2000. COLE VISIONS CORPORATION By: /s/ J. David Pierson -------------------------------- J. David Pierson President, Cole Licensed Brands EX-10.66 6 l00460aexv10w66.txt EX-10.66 THIRD AMENDMENT TO CREDIT AGREEMENT Exhibit 10.66 EXECUTION COPY THIRD AMENDMENT THIRD AMENDMENT, dated as of December 16, 2002 (this "Amendment"), to the Amended and Restated Credit Agreement, dated as of May 23, 2002 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among COLE VISION CORPORATION, a Delaware corporation ("Cole Vision"), THINGS REMEMBERED, INC., a Delaware corporation ("Things Remembered"), and PEARLE, INC., a Delaware corporation ("Pearle"; Cole Vision, Things Remembered, and Pearle each being referred to as a "Borrower" and collectively as the "Borrowers"), the several banks and other financial institutions from time to time parties thereto (collectively, the "Lenders"), LEHMAN COMMERCIAL PAPER INC., as syndication agent, WACHOVIA BANK, NATIONAL ASSOCIATION, as documentation agent, and CANADIAN IMPERIAL BANK OF COMMERCE, a Canadian-chartered bank acting through its New York Agency, as administrative agent for the Lenders thereunder (in such capacity, the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the Borrowers, the Lenders and the Administrative Agent are parties to the Credit Agreement; WHEREAS, the Borrowers and the other Loan Parties have requested that the Administrative Agent and the Lenders amend the Credit Agreement as set forth herein; and WHEREAS, the Administrative Agent and the Lenders are willing to effect such amendment, but only upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Borrowers, the other Loan Parties, the Lenders and the Administrative Agent hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement shall have such meanings when used herein. 2. Amendments to Subsection 1.1. (a) The definition of "EBITDA" is hereby amended by deleting the phrase "CNG and its Subsidiaries" and replacing it with the phrase "CNG, its Subsidiaries and Newco". (b) The definition of "EBITDA" is hereby further amended by inserting the following proviso at the end thereof: ", provided that, in computing EBITDA for any period of four consecutive fiscal quarters which includes the fourth quarter of 2002 but which does not in any event include any fiscal quarter after the third quarter of 2003, the Company shall be entitled to add back up to an amount not to exceed (x) $5,000,000 to reflect the effects of the change in accounting treatment that occurred in the fourth quarter of 2002 for sales of certain optical product warranties and to reflect any other one-time non-recurring effects of the changes in accounting methods that occurred in the fourth quarter of 2002 as a result of the re-audit of the financial statements of the Borrowers and the Subsidiaries for prior fiscal years by Deloitte & Touche, which have replaced Arthur Anderson as the Borrowers' auditors and (y) $2,000,000 to reflect the audit fees incurred in the fourth quarter of 2002 and the first quarter of 2003 associated with the re-audit of prior period results". (c) The following definition of "Newco" is hereby inserted in appropriate alphabetical order to read as follows: "Newco: Pearle Franchise Corporation, a Delaware corporation." (d) The definition of "Subsidiary" is hereby amended by inserting the following proviso at the end of the second sentence thereof: ", provided that, with respect to the Borrowers, Newco shall not be considered a Subsidiary". 3. Amendments to Subsection 8.5. (a) Subsection 8.5(b) is hereby amended by deleting the word "and" at the end thereof. (b) Subsection 8.5(c) is hereby amended by deleting the period at the end thereof and replacing it with a semicolon and the word "and". (c) A new Subsection 8.5(d) is hereby inserted to read as follows: "(d) Newco may be merged with or consolidated into Pearle Vision Inc. (provided that (i) Pearle Vision Inc. shall be the continuing or surviving corporation and (ii) after giving effect to such merger or consolidation, no Default or Event of Default shall be in existence)." 4. Amendments to Subsection 8.9. (a) Subsection 8.9(h) is hereby amended by deleting the word "and" at the end thereof. (b) Subsection 8.9(i) is hereby amended by relabelling it as Subsection 8.9(j). (c) A new Subsection 8.9(i) is hereby inserted to read as follows: "(i) a one-time cash capital contribution to Newco (and no other investments in or loans or advances to Newco) in an amount not to exceed $2,000,000, provided that prior to or contemporaneously with the making of such capital contribution all the requirements of subsection 7.10(a) with respect to Newco shall have been complied with and provided, further, that (i) the Borrowers shall not permit Newco to create, incur, assume or suffer to exist any Indebtedness, (ii) the Borrowers shall cause Newco to distribute to a Subsidiary by means of dividends any retained earnings in excess of $2,000,000 and (iii) the Borrowers shall not permit Newco to engage in any business other than the marketing and sale of franchises; and". 5. Amendment to Subsection 8.10(x). Subsection 8.10(x) is hereby amended by inserting the words "or Newco" after the words "or a Foreign Subsidiary". 6. Representations and Warranties. Each Borrower hereby confirms, reaffirms and restates the representations and warranties made by it in Section 5 of the Credit Agreement, provided that each reference to the Credit Agreement therein shall be deemed to be a reference to the Credit Agreement after giving effect to this Amendment. Each Borrower represents and warrants that, after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. 7. Effectiveness. This Amendment shall be effective on the date upon which (a) the Administrative Agent shall have received executed counterparts from each of the Borrowers, the other Loan Parties, itself and the Majority Lenders and (b) the Administrative Agent shall have received, on behalf of each Lender who has executed this Amendment on or before December 20, 2002, an amendment fee from the Parent Borrower in an amount equal to 0.10% of such Lender's Revolving Credit Commitment. 8. Continuing Effect of Credit Agreement. This Amendment shall not constitute a waiver, amendment or modification of any other provision of the Credit Agreement not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of the Borrowers that would require a waiver or consent of the Lenders or the Administrative Agent. Except as expressly amended or modified herein, the provisions of the Credit Agreement are and shall remain in full force and effect. 9. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Amendment signed by all the parties shall be lodged with the Borrowers and the Administrative Agent. 10. Payment of Expenses. The Borrowers agree, jointly and severally, to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of this Amendment and any other documents prepared in connection herewith, and the consummation and administration of the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 11. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COLE VISION CORPORATION By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Treasurer & Asst. Secretary THINGS REMEMBERED, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Treasurer & Asst. Secretary PEARL, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Vice President, Treasurer & Asst. Secretary CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as Administrative Agent By: ----------------------------------- Title IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COLE VISION CORPORATION By: ------------------------------ Title: THINGS REMEMBERED, INC. By: ------------------------------ Title: PEARLE, INC. By: ------------------------------ Title: CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as Administrative Agent By: /s/ GERALD GIRARDI ------------------------------ Title: GERALD GIRARDI EXECUTIVE DIRECTOR CIBC WORLD MARKETS CORP., AS AGENT CIBC INC. By: /s/ GERALD GIRARDI ------------------------------ Title: GERALD GIRARDI EXECUTIVE DIRECTOR CIBC WORLD MARKETS CORP., AS AGENT LEHMAN COMMERCIAL PAPER INC. By: /s/ Francis Charg ------------------------------ Title: Francis Charg Authorized Signatory WACHOVIA BANK, NATIONAL ASSOCIATION By: /s/ Thomas M. Harper ------------------------------ Name: Thomas M. Harper Title: Senior Vice President KEYBANK NATIONAL ASSOCIATION By: /s/ Lawrence A. Mack ------------------------------ Name: Lawrence A. Mack Title: Senior Vice President FIFTH THIRD BANK By: /s/ James P. Byrnes ------------------------------ Name: James P. Byrnes Title: V. P. The undersigned Guarantors do hereby consent and agree to the foregoing Amendment: COLE NATIONAL CORPORATION By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Vice President & Treasurer COLE NATIONAL GROUP, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Vice President & Treasurer BAY CITIES OPTICAL COMPANY By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Treasurer & Asst. Secretary WESTERN STATES OPTICAL, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Treasurer & Asst. Secretary COLE VISION SERVICES, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Treasurer COLE LENS SUPPLY, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Treasurer & Asst. Secretary THINGS REMEMBERED PERSONALIZED GIFTS, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Treasurer & Asst. Secretary PEARLE VISION, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Vice President, Treasurer & Asst. Secretary AMERICAN VISION CENTERS, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Vice President, Treasurer & Asst. Secretary NUVISION, INC. By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Vice President, Treasurer & Asst. Secretary COLE VISION LPA, LLC By: /s/ Joseph Gaglioti ----------------------------------- Title: Joseph Gaglioti Treasurer EX-10.67 7 l00460aexv10w67.txt EX-10.67 AMENDED AND RESTATED INSTRUMENT Exhibit 10.67 AMENDED AND RESTATED INSTRUMENT DESIGNATING PARTICIPANTS OF THE COLE NATIONAL GROUP, INC. 1999 SUPPLEMENTAL RETIREMENT BENEFIT PLAN 1. Participant. Cole National Group, Inc. (the "Company") hereby designates Jeffrey A. Cole as a Participant in the Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan, effective as of January 1, 1999 (as amended from time to time) (the "Plan"). 2. Special Provisions. (a) The Company, with the written consent of Jeffrey A. Cole, hereby amends, restates and supercedes his Instrument Designating Participants of the Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan dated December 17, 1998 (the "Original Instrument"). In addition, Jeffrey A. Cole by written consent hereby waives his rights to participate in and receive benefits, whether or not now accrued, under the Cole National Group, Inc. Supplemental Pension Plan (the "Supplemental Pension Plan") and the Cole National Group, Inc. Supplemental Retirement Benefit Plan (the "Supplemental Retirement Benefit Plan"). (b) For purposes of calculating the Supplemental Retirement Benefit payable to Jeffrey A. Cole in accordance with the Plan, the benefit formula used shall be the same as the formula used for purposes of calculating benefits under the Cole National Group, Inc. Retirement Plan (as amended and restated, January 1, 2002) (the "Pension Plan"), except that instead of using final five year average salary, the sum of base compensation and bonus for the calendar year during which the sum of base compensation and bonus earned was the highest shall be used, and except that such formula shall not be subject to any Code Limitation. (c) For purposes of calculating the Supplemental Retirement Benefit payable to Jeffrey A. Cole in accordance with the Plan, Jeffrey A. Cole shall be credited with years of service equal to (i) the number of years of service he is credited with under the Pension Plan, plus (ii) the number of years Jeffrey A. Cole served as a non-employee director and paid consultant of the Company. For purposes of (ii) in the previous sentence, the number of years Jeffrey A. Cole served as a non-employee director and paid consultant of the Company is eight. (d) For purposes of calculating the Supplemental Retirement Benefit payable to Jeffrey A. Cole in accordance with the Plan, the minimum annual Supplemental Retirement Benefit payable to Jeffrey A. Cole commencing on or after Jeffery A. Cole's attainment of age 65 (calculated as a single life annuity) shall be the amount determined by the formula "A-B," where: A= the greater of: (i) $474,000 or (ii) the amount determined based on the Company's regular Pension Plan formula but using Jeffrey A. Cole's salary and annual bonus using the highest year commencing in 1998 or thereafter, and reflecting service from 1969 on, and B= the sum of (i) the annualized amount, if any, payable to Jeffrey A. Cole in accordance with the Pension Plan (calculated as a single life annuity) and (ii) the annualized amount, if any, payable to Jeffrey A. Cole's former spouse pursuant to any qualified domestic relations order applicable to the Pension Plan and/or the Supplemental Pension Plan for the year for which the Supplemental Retirement Benefit payable to Jeffrey A. Cole is being calculated in accordance with the Plan. (e) For purposes of calculating the Supplemental Retirement Benefit payable to Jeffrey A. Cole in accordance with the Plan, the minimum annual Supplemental Retirement Benefit payable to Jeffrey A. Cole commencing prior to Jeffrey A. Cole's attainment of age 65 (calculated as a single life annuity) shall be the amount determined by the formula "(A-B) x C," where: A= the greater of (i) $474,000 or (ii) the amount determined based on the Company's regular Pension Plan formula but using Jeffrey A. Cole's salary and annual bonus using the highest year commencing in 1998 or thereafter, and reflecting service from 1969 on, B= the sum of (i) the annualized amount, if any, payable to Jeffrey A. Cole in accordance with the Pension Plan (calculated as a single life annuity) and (ii) the annualized amount, if any, payable to Jeffrey A. Cole's former spouse pursuant to any qualified domestic relations order applicable to the Pension Plan and/or the Supplemental Pension Plan for the year for which the Supplemental Retirement Benefit payable to Jeffrey A. Cole is being calculated in accordance with the Plan, C= the early retirement reduction factors set forth in Attachment A to this Instrument. (f) In computing the Supplemental Retirement Benefit under (d) and (e) above, if (i) Jeffrey A. Cole retires after he suffers a constructive termination, or (ii) there has been a change of control (as each such term is defined in his Employment Agreement with the Company and certain of its subsidiaries, dated the 17th day of December, 1998), then he will be credited with three (3) additional years of service in making the calculations above and his retirement will be deemed to have been made with the consent of the Special Compensation Committee of the Company's Board of Directors. (g) Notwithstanding Section 3.4 of the Plan, Jeffrey A. Cole's Supplemental Retirement Benefit shall be payable in (i) a one-time lump sum cash payment, (ii) 2 a series of up to 20 annual installments with interest credited and compounded quarterly on the unpaid balance at the interest rate specified from time-to-time under the Supplemental Retirement Benefit Plan, but not less than such rate specified at the date of his resignation or retirement from the position and title of Chief Executive Officer, or (iii) the same form and for the same duration as the benefits payable to the Participant (or Beneficiary) under the Pension Plan, as elected by Jeffrey A. Cole. Any form of payment of Jeffrey A. Cole's Supplemental Retirement Benefit shall be Actuarially Equivalent to the minimum annual Supplemental Retirement Benefit calculated under (d) or (e) above, as applicable. Jeffrey A. Cole's election of the form of payment of his Supplemental Retirement Benefit shall be made by written notice filed with the Company at least six (6) months prior to his voluntary termination of employment with, or retirement from, the Company. Any such election may be changed by Jeffrey A. Cole at any time and from time to time without the consent of any other person by filing a later signed written election with the Company; provided that any election made less than six (6) months prior to his voluntary termination of employment or retirement shall not be valid, and in such case payment shall be made in accordance with his prior election. In the absence of any effective election, Jeffrey A. Cole's Supplemental Retirement Benefit shall be payable in a one time lump sum cash payment. Jeffrey A. Cole shall be permitted to designate a beneficiary or beneficiaries for purposes of the Plan (on a form provided by the Company) to receive a benefit in the event that (i) he dies prior to his commencement of benefits under the Plan, or (ii) he dies after commencement of benefits under the Plan but before any lump sum elected is paid, or with any remaining elected installments unpaid. The Supplemental Retirement Benefit payable to Jeffrey A. Cole's beneficiary or beneficiaries in the event that he dies prior to his commencement of his Supplemental Retirement Benefit under the Plan shall be a one time lump sum cash payment in an amount equal to the then Actuarial Present Value of the accrued Supplemental Retirement Benefit that would have been payable to Jeffrey A. Cole as if he had commenced payment of his Supplemental Retirement Benefit under the Plan on the day before the day he died and as if he had attained not less than age 63, but counting service and compensation only through the date of his death, and as if he had elected a one time lump sum cash payment. (h) As used herein, the terms "Actuarially Equivalent" or "Actuarial Present Value" shall mean a benefit of actuarial equivalence determined using the 1994 Group Annuity Reserving Table (94 GAR) or such other mortality table that may be subsequently adopted by the Internal Revenue Service for purposes of Section 417 of the Code and an interest rate equal to the monthly average of the Moody's AA Corporate Bond rate for the period commencing with January 2002 and ending with the earlier of: (a) December 2004 or (b) the month prior to the month Jeffrey A. Cole's Supplemental Retirement Benefit is to commence. 3 3. Nothing committed to in this instrument may be changed, directly or indirectly, by an amendment of the Plan or otherwise, without the prior written consent of Jeffrey A. Cole. 4. This instrument shall satisfy the terms of Section 4(e) of the Employment Agreement dated December 17, 1998 among the Company, Cole National Corporation, Inc., four of its subsidiaries and Jeffrey A. Cole, as such agreement may be amended from time to time, for purposes of satisfying Jeffrey A. Cole's entitlement to participate in any of the retirement plans and supplemental arrangements in which senior management or executive employees of the subsidiaries participate from time to time. 5. Original Instrument. The provisions of this instrument designation amend, restate and supersede the provisions of the Original Instrument. Dated as of January 25, 2002 COLE NATIONAL GROUP, INC. By: /s/ Leslie D. Dunn ----------------------------- Title: Senior Vice President -------------------------- COLE NATIONAL CORPORATION By: /s/ Leslie D. Dunn ----------------------------- Title: Senior Vice President -------------------------- COLE VISION CORPORATION By: /s/ Leslie D. Dunn ----------------------------- Title: Senior Vice President -------------------------- PEARLE, INC. By: /s/ Leslie D. Dunn ----------------------------- Title: Senior Vice President -------------------------- 4 THINGS REMEMBERED, INC. By: /s/ Leslie D. Dunn ------------------------------- Its: Senior Vice President ------------------------------ Agreed and consented to this 25th day of January, 2002. /s/ Jeffrey A. Cole ---------------------------- Jeffrey A. Cole 5 ATTACHMENT A TO THE AMENDED AND RESTATED INSTRUMENT DESIGNATING PARTICIPANTS OF THE COLE NATIONAL GROUP, INC. 1999 SUPPLEMENTAL RETIREMENT BENEFIT PLAN FOR JEFFREY A. COLE If Jeffrey A. Cole retires before age 65, the following early retirement reduction factors apply:
If retirement is with the consent of Age at the Special Compensation Committee of If retirement is without the consent the Company's Board of of the Special Compensation Committee Retirement* Directors of the Company's Board of Directors ---------- ------------------------------------- ------------------------------------- 57 0.28 0.28 58 0.34 0.34 59 0.40 0.40 60 0.90 0.47 61 0.92 0.56 62 0.94 0.65 63 0.96 0.96 64 0.98 0.98 65 1.00 (no reduction) 1.00 (no reduction)
* Add three additional years (maximum age is 65) if there has been constructive termination, a termination without cause or a change of control. 6 EX-10.68 8 l00460aexv10w68.txt EX-10.68 FORM OF LICENSE/LEASE AGREEMENT Exhibit 10.68 FORM OF LICENSE/LEASE AGREEMENT OPTICAL THIS LICENSE/LEASE AGREEMENT (hereinafter referred to as "Agreement") is made and entered into as of, by and between SEARS, ROEBUCK AND CO., a New York corporation (hereinafter referred to as "Sears") and COLE VISION CORPORATION, a Delaware corporation, (hereinafter referred to as "Licensee/Tenant"). WHEREAS, Sears operates a retail store located at: REGION DIST. STORE LOCATION - ------ ----- ----- -------- (hereinafter referred to as the "Store"), and WHEREAS, Licensee/Tenant desires to operate an optical concession in the Store, NOW THEREFORE, Sears and Licensee/Tenant hereby mutually agree as follows: PURPOSE OF AGREEMENT 1. Licensee/Tenant is in the business described in this paragraph, and has expertise in that business and has a marketing plan for that business. Sears hereby leases to Licensee/Tenant the space described below, and grants Licensee/Tenant the privilege of conducting and operating within that space, and Licensee/Tenant shall conduct and operate, pursuant to the terms, provisions and conditions contained in this Agreement, a concession for the sale of optical merchandise, goods, and supplies; and for taking orders for repair, and repair of optical merchandise, goods and supplies and for visual eye exams and for the sale of repair and replacement certificates (hereinafter referred to as "Concession"), in the Store. TERM 2. The term of this Agreement (hereinafter referred to as "Term") shall be for a period beginning on and ending at the close of business on unless sooner terminated under any of the provisions of this Agreement. REPRESENTATION TO LICENSEE/TENANT 3. Sears makes no promises or representations whatsoever as to the potential amount of business Licensee/Tenant can expect at any time during the Term. Licensee/Tenant is solely responsible for any expenses incurred related to this Agreement. Sears shall not be obligated for any expense incurred by Licensee/Tenant in connection with any increase in the number of Licensee/Tenant's employes or expenditures made by Licensee/Tenant for additional facilities or equipment. UNAUTHORIZED SALES 4. Licensee/Tenant covenants that it will use the space occupied by the Concession only for the purpose expressly authorized in this Agreement, and will render only those services and sell only such merchandise in the Concession as expressly authorized by this Agreement. FEE 5. (a) Licensee/Tenant shall pay to Sears, as provided in Paragraph 26 of this Agreement, a fee. NET SALES (b) "Net Sales" means gross sales less returns, sales taxes, and allowances for sales of merchandise, goods and supplies made in, upon or from the Concession location, and includes: (1) Charges for repair work made pursuant to orders taken or received in, upon or from the Concession location and (2) Charges for services performed in connection with the sale in, upon or from the Concession location of merchandise, goods and supplies. GROSS SALES (c) "Gross Sales" means all of Licensee/Tenant's direct or indirect sales of services and merchandise from the Concession. Eye exam fees are excluded from Gross Sales. HOLDING OVER 6. Licensee/Tenant shall pay Sears double the monthly Fee, for each month or portion of a month for which Licensee/Tenant of the Concession area, retains possession of the Concession area or any part after the termination of the Term or Licensee/Tenant's right of possession, whether by lapse of time or otherwise. The provisions of this Paragraph shall not constitute a waiver of any other right or remedy of Sears under this Agreement or provided by law or equity. No such holding over shall renew or extend the Term even if Sears accepts Fee, and Licensee/Tenant shall have no right to continue possession of the premises, and shall be a Licensee/Tenant at sufferance only. CONSTRUCTION OF LEASEHOLD IMPROVEMENTS 7. (a) Licensee/Tenant shall determine (based on good engineering practices) the nature, scope, size of the Concession and Licensee/Tenant shall determine the nature, scope, size of the furniture, fixtures and equipment in the Concession. Licensee/Tenant shall submit plans to Sears, Sears must approve such plans, before commencement of construction. Sears will arrange for construction of all improvements. The expense of all such construction and equipment shall be divided between Sears and Licensee/Tenant as described in Exhibit A. TITLE TO LEASEHOLD IMPROVEMENTS (b) All Leasehold Improvements shall become the property of Sears at the termination of the Agreement. At the termination of the Agreement, or if Licensee/Tenant vacates or abandons the Concession, Licensee/Tenant shall convey to Sears, without charge, good title to the Leasehold Improvements free from any and all liens, charges, encumbrances and rights of third parties, by means of a Quit Claim Deed and any other documents required by Sears. CONCESSION FAILS TO BECOME FULLY OPERATIONAL (c) If the Concession is not fully operational within thirty (30) days after completion of construction of the concession area as a result of delay by Licensee/Tenant, Sears may, at Sears option, terminate this Agreement and have no further obligation to Licensee/Tenant, and Licensee/Tenant shall reimburse Sears within ten (10) days after receipt of an invoice, for Sears cost, of putting the space involved back to its condition immediately prior to the commencement of such construction. USE OF SEARS NAME 8. (a) Licensee/Tenant shall operate the Concession under the name "Sears Optical". Licensee/Tenant shall not commence any business activity under this Agreement without Sears prior written approval of any and all names that Licensee/Tenant intends to use in conjunction with the Concession. (b) Licensee/Tenant may use the name of Sears, and any Sears trademark, service mark or trade name only when communicating with customers or potential customers of the Concession. Licensee/Tenant shall not use the name Sears or any Sears trademark, service mark or trade name, either orally or in writing, including, but not limited to, use of any letterhead, when communicating with persons or entities other than such customers or potential customers. (c) Licensee/Tenant shall not question, contest or challenge, either during or after the Term of this Agreement, Sears ownership of the name "Sears" or of any other trademark, service mark or trade name Sears may license Licensee/Tenant to use in connection with the Concession. Licensee/Tenant will claim no right, title or interest in any such trademark, service mark or trade name, except the right to use the same pursuant to the terms and conditions of this Agreement, and will not seek to register the same. (d) Licensee/Tenant expressly recognizes and acknowledges that the use of any such trademark, service mark or trade name shall not confer upon Licensee/Tenant any proprietary rights to such trademark, service mark or trade name. Upon termination of this Agreement, Licensee/Tenant shall immediately stop using any such trademark, service mark or trade name and will execute all necessary or appropriate documents to confirm Sears ownership, or to transfer to Sears any rights it may have acquired from Sears in any such trademark, service mark or trade name. (e) Nothing in this Agreement shall be construed to bar Sears after expiration or termination of this Agreement from protecting its right to the exclusive use of its trademarks, service marks or trade names against infringement by any party or parties, including Licensee/Tenant. REMEDIES FOR UNAUTHORIZED USE (f) Licensee/Tenant recognizes that the trademark, service mark or trade name licensed under the Agreement possess a special, unique and extraordinary character which makes it difficult to assess the monetary damage Sears would sustain in the event of unauthorized use. Licensee/Tenant expressly recognizes that irreparable injury would be caused to Sears by such unauthorized use, and that preliminary or permanent injunctive relief would be appropriate in the event of breach of this Agreement by Licensee/Tenant. POLICING THE TRADEMARKS, SERVICE MARKS, TRADE NAMES (g) If Licensee/Tenant receives knowledge of any manufacture or sale by anyone else of products and/or services offered by the Licensee/Tenant that would be confusingly similar in the minds of the public and which bear or are promoted in association with the licensed trademarks, service marks or trade names or any names, symbols, emblems, or designs or colors which would be confusingly similar in the minds of the public to such licensed trademarks, service marks or trade names, Licensee/Tenant will promptly notify Sears. Sears shall have the sole right, at its sole expense, to take such action as it determines, in its sole discretion, is appropriate. Licensee/Tenant undertakes reasonably to cooperate and assist in such protest or legal action at Sears expense. If demanded by Sears, Licensee/Tenant shall join in such protest or legal action at Sears expense. Licensee/Tenant shall not undertake such protest or legal action on its own behalf without first securing Sears written permission to do so. If Sears permits Licensee/Tenant to undertake such protest or legal action, such protest or legal action shall be at Licensee/Tenant's sole expense. Sears shall cooperate and assist reasonably therein at Licensee/Tenant's expense. For the purposes of the foregoing, expenses shall include reasonable attorneys' fees. All recovery in the form of legal damages or settlement shall belong to the party bearing the expense of such protest or legal action. ADVERTISING 9. Licensee/Tenant shall advertise and actively promote the Concession authorized by this Agreement. Prior to Licensee/Tenant's use thereof in connection with the Concession, Licensee/Tenant shall submit all signs, advertising copy, including, but not limited to, sales brochures, newspaper advertisements, radio and television commercials; all sales promotional plans and devices; and all customer contract forms, guarantee certificates; and other forms and materials; to Sears Divisional Vice President, Licensed Businesses, in Hoffman Estates, or to his designee, for approval. Licensee/Tenant will not use any such advertising material or sales promotional plan or device without such prior approval. Sears has the right to disapprove any or all the aforesaid advertising forms and other materials insofar as they, in Sears opinion, do not properly use Sears trademarks, service marks or trade names; may subject Sears to liability, loss of goodwill, damage to Sears reputation or Sears customer relations; or may fail to adhere to the requirements of any Federal, state or local governmental rules, regulations and laws. PUBLICITY 10. Licensee/Tenant will not issue any publicity or press release regarding its contractual relations with Sears hereunder or regarding the Concession, and will refrain from making any reference to this Agreement or to Sears in the solicitation of business without obtaining Sears prior written approval and consent to such action. RELATIONSHIP 11. Licensee/Tenant is an independent contractor. Nothing contained in or done pursuant to this Agreement shall be construed as creating a partnership, agency or joint venture. Except as otherwise expressly provided in this Agreement, neither party shall become bound by any representation, act or omission of the other party. PRICES 12. Sears has no right or power to establish or control the prices at which Licensee/Tenant offers service and/or merchandise in the Concession. Such right and power is retained by Licensee/Tenant. LICENSEE/TENANT'S OBLIGATIONS 13. (a) Licensee/Tenant will make no purchases or incur any obligation or expense of any kind in the name of Sears. Prior to any purchase(s) involving the Concession, Licensee/Tenant shall inform its vendor(s) that Sears is not responsible for any obligation(s) incurred as a result of Licensee/Tenant's purchase(s). (b) Licensee/Tenant shall promptly pay all its obligations, including those for labor and material, and will not allow any lien(s) to attach to any Sears or customer's property as a result of Licensee/Tenant's failure to pay such sums. LICENSEE/TENANT'S EMPLOYES 14. (a) Licensee/Tenant has no authority to employ persons on behalf of Sears and no employes of Licensee/Tenant shall be deemed to be employes or agents of Sears, such employes at all times remaining Licensee/Tenant's employes. Licensee/Tenant has sole and exclusive control over its labor and employe relations policies, and its policies relating to wages, hours, working conditions, or conditions of its employes. Licensee/Tenant has the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, adjust grievances and discharge its employes, provided, however, that at any time Sears so requests, Licensee/Tenant will give consideration to the transfer from the Concession of any employe who is objectionable to Sears for reasons of health, safety and/or security of Sears customers, employes or merchandise and/or whose manner impairs Sears customer relations. If Sears objects to any of Licensee/Tenant's employes, and Licensee/Tenant refuses to remove such employe and the conditions which caused Sears to object continue, Sears may terminate this Agreement by giving ninety (90) days notice to Licensee/Tenant. (b) Licensee/Tenant is solely responsible for all salaries and other compensation of all its employes and will make all necessary salary deductions and withholdings from its employes' salaries and other compensation, and is solely responsible for the payment of any and all contributions, taxes and assessments and all other requirements of the Federal Social Security, Federal and state unemployment compensation and Federal, state and local withholding of income tax laws on all salary and other compensation of its employes. (c) Licensee/Tenant will comply with any other contract, Federal, state or local law, ordinance, rule, or regulation regarding its employes, including Federal or state laws or regulations regarding minimum compensation, overtime and equal opportunities for employment, and, in particular, Licensee/Tenant will comply with the terms of the Federal Civil Rights Acts, Age Discrimination in Employment Act, Occupational Safety and Health Act, and the Federal Fair Labor Standards Act, whether or not Licensee/Tenant may otherwise be exempt from such acts by reason of Licensee/Tenant's size or the nature of Licensee/Tenant's business or for any other reason whatsoever. (d) Licensee/Tenant warrants that its employes, while working in connection with this Agreement, will comply with any and all applicable Federal, state or local laws, rules, regulations and ordinances. LICENSEE/TENANT'S EQUIPMENT 15. Entirely at its own expense, Licensee/Tenant shall install furniture, fixtures and equipment as may be necessary and proper for the operation of the Concession (such furniture, fixtures and equipment being herein for convenience referred to as "Licensee/Tenant's Equipment"). Licensee/Tenant's Equipment, and its size, design and location, shall at all times be subject to Sears approval. PROHIBITED LIENS 16. Except as otherwise provided in this Agreement, Licensee/Tenant shall not allow, suffer or permit any liens, claims or encumbrances to attach to or against by reason of the installation of any of Licensee/Tenant's Equipment or construction of Leasehold Improvements, Sears premises in which the Concession is located. In the event any lien, claim or encumbrance attaches to Sears premises, Licensee/Tenant shall immediately take all necessary action to cause such lien, claim or encumbrance to be released and discharged, or Sears, at its option, may take such action and charge Licensee/Tenant or withhold from sales receipts all expenses, including attorneys fees, incurred by Sears in removing such liens. CUSTOMER ADJUSTMENT 17. (a) All of the work and services performed by Licensee/Tenant in connection with the Concession shall be of a high standard of professionalism, and all of the merchandise sold in connection with such Concession shall be of high quality. Licensee/Tenant shall at all times maintain a general policy of satisfaction of customers and shall adjust all complaints of and controversies with customers arising out of the operation of the Concession. (b) In any case in which an adjustment is unsatisfactory to the customer, Sears shall have the right, at Licensee/Tenant's expense, to make such further adjustment as Sears may deem necessary under the circumstances, and any adjustment made by Sears shall be conclusive and binding upon Licensee/Tenant. Sears may deduct the amounts of any such adjustments from the sales receipts held by Sears as described in Paragraph 25. Licensee/Tenant shall maintain files pertaining to customer complaints and their adjustment and make such files available to Sears, at Sears request. CONDITION OF CONCESSION AREA 18. Licensee/Tenant shall, at its expense, keep the space occupied by the Concession in a thoroughly clean and neat condition and shall maintain Licensee/Tenant's Equipment in good order and repair. HOURS, RULES 19. (a) The Concession shall be kept open for business and operated during the business hours agreed to by Sears, Department 725 and Licensee/Tenant. (b) Licensee/Tenant shall conduct its operations in an honest, courteous and efficient manner and abide by safety and security rules and regulations of Sears in effect from time to time. ACCESS TO CONCESSION AREA 20. Licensee/Tenant shall have access to the area occupied by the Concession at all times that the Store is open to customers for business and at all such other times as the Store Manager of the Store authorizes and approves. Sears shall be furnished with keys to the Concession area and shall have access thereto at all times. RIGHTS RESERVED BY SEARS 21. Sears retains the following rights, each of which Sears may exercise without notice to Licensee/Tenant and without liability to Licensee/Tenant for damage or injury to property, person or business. The exercise of any such rights shall not be deemed to constitute an eviction, constructive or partial eviction or disturbance of Licensee/Tenant's use or possession of the Concession and shall not give rise to any claim for set-off or abatement of the Fee or any other claim: (a) To, solely at Sears' discretion, not open the Store at any time for purposes of taking a physical inventory. Licensee/Tenant waives any claim it may have against Sears for damages resulting from such closing. (b) Sears shall have the right to change the location, dimensions and amount of area of the Concession from time to time during the Term in accordance with Sears judgment as to what arrangements will be most satisfactory for the general good of the Store, and this Agreement shall apply to such new space. In the event Sears desires that the Concession's location be changed, Sears will, at its expense, move Licensee/Tenant's Equipment to the new location and prepare the space for occupation and use by the Concession. The new space shall be as nearly equal to the original space as practicable. If a change in location is requested or initiated by Licensee/Tenant, then Licensee/Tenant shall bear all expense involved in moving Licensee/Tenant's Equipment. (c) To change the Store's name or street address. (d) To install, affix and maintain any and all signs on the exterior and interior of the Store. Provided however, that when required by state law or ethical considerations, Licensee/Tenant shall have the right to post and maintain a sign on the Concession premises containing Licensee/Tenant's name and identifying the Concession as Licensee/Tenant's optometric office. All such signs shall comply with applicable rules and regulations, and shall be acceptable to Sears. (e) To decorate or to make repairs, alterations, additions, or improvements, whether structural or otherwise, in and about the Store, or any part thereof, and for such purposes enter the Concession and, during the continuance of any such work, to temporarily close doors, entryways, public space and corridors in the Store and to interrupt or temporarily suspend services and facilities, all without affecting any of Licensee/Tenant's obligations hereunder, so long as the Concession is reasonably accessible. (f) To furnish door keys of doors in the Concession at the commencement of the Agreement. To retain at all times, and to use in appropriate instances, keys to all doors within and into the Concession. Licensee/Tenant agrees to purchase only from Sears additional duplicate keys as required, not to change any locks, and not to affix additional locks on doors without the prior written consent of Sears. Notwithstanding the provision for Sears access to the Concession, Licensee/Tenant relieves Sears of all responsibility arising out of theft, robbery and pilferage. Provided however, that Licensee/Tenant does not relieve Sears of liability for Sears own negligence or willful misconduct. Upon the expiration of the Term or of Licensee/Tenant's right to possession, Licensee/Tenant shall return all keys to Sears and shall disclose to Sears the combination of any safes, cabinets or vaults left in the Concession. (g) To designate and approve, prior to installation, all types of window shades, blinds, draperies, window ventilators and any other similar equipment. (h) To approve the weight, size and location of safes, vaults and other heavy equipment and articles in and about the Concession, and to require all such items and furniture and similar items to be moved into or out of the Store and Concession only at such times and in such manner as Sears shall direct in writing. Licensee/Tenant shall not install or operate machinery or any mechanical devices of a nature not directly related to Licensee/Tenant's ordinary use of the Concession without the prior written consent of Sears. Movements of Licensee/Tenant's property into or out of the Store and within the Store are entirely at the risk and responsibility of Licensee/Tenant and Sears reserves the right to require permits before allowing any property to be moved into or out of the Store. (i) To establish controls for the purpose of regulating all property and packages (both personal and otherwise) to be moved into or out of the Store and Concession and for the purpose of regulating access to public common areas of the Store. (j) To regulate delivery and service of inventory, merchandise and other similar items in order to insure the cleanliness and security of the Concession, and to avoid congestion of the loading docks, receiving areas and freight elevators. (k) To show the Concession to prospective licensee/tenants at reasonable hours during the last three (3) months of the Term of the Agreement, and if vacated or abandoned, to show the Concession at any time and to prepare the Concession for reoccupancy. (l) To erect, use and maintain pipes, ducts, wiring, conduits and appurtenances in and through the Concession at reasonable locations and at all reasonable times. UTILITIES 22. (a) Sears shall furnish, at reasonable hours and, except as otherwise provided, without expense to Licensee/Tenant, a reasonable amount of heat, light and electric power for the operation of the Concession, except when prevented by strikes, accidents, breakdowns, improvements and repairs to the heating, lighting and electric power systems or other causes beyond the control of Sears. Sears shall not be liable for any injury or damage whatsoever which may arise by reason of Sears failure to furnish such heat, light and electric power, regardless of the cause of such failure, all claims for such injury or damage are expressly waived by Licensee/Tenant. TELEPHONE (b) If requested by Licensee/Tenant, Sears will arrange for telephone service for the Concession. Sears will pay for all local calls and Licensee/Tenant will pay for any long-distance calls, at the rate charged by the telephone company. All telephone numbers used in connection with the Concession shall be separate from phone numbers used by Licensee/Tenant in its other business operations and such numbers shall be deemed to be the property of Sears. Upon expiration or termination of this Agreement, Licensee/Tenant shall immediately, upon demand by Sears, cease to use such numbers and transfer such numbers to Sears or to any party Sears designates, and Licensee/Tenant shall immediately notify the telephone company of any such transfer. CREDIT SALES 23. (a) When permitted by state law, and with the approval of the Credit Central designated by Sears, Licensee/Tenant may offer to sell, assign and transfer its credit accounts to Sears, or Licensee/Tenant may make sales on such of Sears regularly established credit plans (including the Discover Card) as may be first approved by such Credit Central. The approval of such Credit Central is required for each individual credit sale, and approval shall be granted in the sole discretion of the Credit Central. No part of the finance charge which may be made by Sears in connection with any credit sale shall be payable to or credited in any way to Licensee/Tenant. All losses sustained by Sears as a result of non-payment of a Sears credit account shall be borne by Sears, provided that Licensee/Tenant has complied with Sears credit policies and procedures. CREDIT SALES (b) Licensee/Tenant will comply with all provisions of Federal and state laws governing credit sales, and their solicitation, including but not limited to provisions dealing with disclosures to customers and finance charges. NON-PAYMENT OF CHECKS (c) Any and all losses which may be sustained by reason of non-payment of any and all check(s) upon presentment shall be borne by and charged to Licensee/Tenant, and Sears shall have no liability for such checks. CASH REGISTER 24. At its expense, Sears shall furnish a cash register for use in connection with the Concession. Such cash register shall be of a size and design satisfactory to Sears, and shall at all times be and remain the property of Sears. Licensee/Tenant shall immediately return such cash register to Sears upon demand. Sears shall have the right to take possession of the cash register at any time without giving prior notice to Licensee/Tenant. SALES RECEIPTS 25. (a) At the close of each business day, Licensee/Tenant shall submit an accounting of the gross sales of Licensee/Tenant and where appropriate, the returns, allowances and customer adjustments made during such day by Licensee/Tenant to the head cashier of the Sears unit which Sears shall designate. When making such reports, Licensee/Tenant shall deliver, in cash, the gross amount of all cash sales, and all credit sales documents for transactions completed that day to such cashier. An account of Licensee/Tenant's receipts shall be kept by both Licensee/Tenant and Sears. Sears shall have the right to retain out of such receipts the proper amount of the Fee payable under this Agreement together with any other sums due Sears from Licensee/Tenant. The remaining balance shall be payable to Licensee/Tenant at the regular settlement. (b) Licensee/Tenant shall reimburse Sears at each settlement for all invoiced expenses, including any advertising expense, incurred by Sears on behalf of Licensee/Tenant and requested by Licensee/Tenant, outstanding at the time of such settlement. If Sears is not reimbursed at such settlement, then Sears shall have the right, but not the obligation, to retain out of Licensee/Tenant's sales receipts the amount of such expense(s) with interest, if any, due Sears. SETTLEMENT 26. A settlement between the parties shall be made promptly each month for all Commissions and any and all other sums due and owing between the parties for such month. Sears will advance to Licensee/Tenant at the end of each week a sum equal to: made by Licensee/Tenant in the Concession during such week. Such weekly advances shall be advances to the monthly settlement. AUDIT 27. Licensee/Tenant shall keep and maintain books and records which accurately reflect the sales made by Licensee/Tenant under this Agreement and the expenses which Licensee/Tenant incurs in performing under this Agreement. Sears shall have the right at any reasonable time to review and audit the books and records of Licensee/Tenant regarding this Agreement. Such books and records shall be kept and maintained according to generally accepted accounting principles. PERIODIC REPORTS 28. Licensee/Tenant shall provide to Sears a monthly report of sales and income in the manner and form prescribed by Sears, together with any other information Sears may require for its records or auditing purposes. WAIVER 29. Licensee/Tenant waives any and all claims it may have against Sears for damage to Licensee/Tenant, for the safekeeping or safe delivery or damage to any property whatsoever of Licensee/Tenant or of any customer of Licensee/Tenant at the location of the Concession, because of the alleged negligence, act or omission of Sears or of any tenant, licensee, or occupant of the premises at which the Concession may be located, or because of any damage caused by any casualty, including but not limited to, fire, water, snow, steam, gas or odors in or from the Store or Store premises, or because of the leaking of any plumbing, or because of any accident or event which may occur in the Store or upon Store premises, or because of the alleged acts or omissions of any janitors or other persons in or about the Store or Store premises or from any cause whatsoever. INDEMNITY BY LICENSEE/TENANT 30. Licensee/Tenant covenants that it will protect, defend, hold harmless and indemnify Sears, its directors, officers and employes, from and against any and all expenses, claims, actions, liabilities, penalties, attorneys' fees, damages and losses of any kind whatsoever (including, without limitation of the foregoing, death of or injury to persons and damage to property), actually or allegedly resulting from or connected with the operation of the Concession (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized therein, lack of repair in or about the area occupied by the Concession, operation of or defects in any machinery, motor vehicles, or equipment used in connection with Licensee/Tenant's business hereunder, or located within the area occupied by the Concession; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful by Licensee/Tenant or its agents or employes, whether or not such act is within the scope of the employment of such agents or employes. This indemnity shall not apply to any injury or damage which is caused solely by Sears' negligence. Licensee/Tenant's indemnity shall survive the termination of this Agreement. INSURANCE 31. (a) Licensee/Tenant hereby covenants that it shall, at its sole expense, obtain and maintain during the Term the following policies of insurance from companies satisfactory to Sears and containing provisions satisfactory to Sears and adequate to fully protect Sears as well as Licensee/Tenant from and against all expenses, claims, actions, liabilities and losses related to the subjects covered by the policies of insurance below: (1) Worker's Compensation Insurance containing a waiver of subrogation in favor of Sears executed by the insurance company (when permitted by state law) and covering all costs, benefits and liability under state worker's compensation and similar laws which may accrue in favor of any person employed by Licensee/Tenant; and Employer's Liability Insurance with limits of not less than $l00,000. (2) Comprehensive General Liability Insurance, including, but not limited to, coverage for product liability and completed operations insurance, and containing a Contractual Liability Endorsement specifically covering the indemnity provisions in this Agreement, with limits of not less than $500,000 for bodily injury per occurrence and $l00,000 for property damage per occurrence. (3) Motor Vehicle Liability insurance with an Employer's Non-Ownership Liability Endorsement in Licensee/Tenant's name covering all vehicles used by Licensee/Tenant in connection with Licensee/Tenant's business hereunder, with limits of not less than $500,000 combined single limit for bodily injury and property damage per occurrence. (4) Fire and Extended Coverage Insurance upon Licensee/Tenant's property, equipment and merchandise utilized in the Concession for the full insurable value thereof and containing a waiver of subrogation in favor of Sears executed by the insurance company. Licensee/Tenant shall pay only the first $250,000 for damages to Sears property caused by Licensee/Tenant, and Sears shall provide Licensee/Tenant with a waiver of subrogation for all losses covered by Sears fire and extended coverage insurance. (5) Bailee's Insurance with limits covering the value of any and all customers' goods in Licensee/Tenant's possession. (6) Malpractice or Professional Liability Insurance covering all professional activities conducted by Licensee/Tenant, or its agents, employees or sub-licensees, with limits of not less than $1,000,000 for bodily injury per occurrence. (b) Each policy shall name Sears as an additional insured and shall contain a severability of interest/cross liability endorsement and a waiver of subrogation in Sears favor executed by the insurance company. Licensee/Tenant may self-insure the coverage described in 31(a), (1), (4) and (5) above, with Sears consent. (c) Licensee/Tenant's policies of insurance shall expressly provide that they shall not be subject to material change or cancellation without at least thirty (30) days' prior notice to Sears. (d) Licensee/Tenant shall furnish Sears with certificates of insurance or, at Sears request, copies of policies, prior to execution of this Agreement. If, in Sears opinion, such policies do not afford adequate protection for Sears, Sears will so advise Licensee/Tenant, and if Licensee/Tenant does not furnish evidence of acceptable coverage within fifteen (l5) days, Sears shall have the right, at its option, to obtain additional insurance at the expense of Licensee/Tenant and deduct the cost of such insurance from the sales receipts held by Sears as described in Paragraph 25 of this Agreement. (e) Any approval by Sears of any of Licensee/Tenant's insurance policies or additional insurance obtained by Sears shall not relieve Licensee/Tenant of any responsibility under this Agreement, including liability for claims in excess of described limits. MUTUAL RIGHT OF TERMINATION 32. Either party may terminate this Agreement without cause, without penalty, and without liability for any damages as a result of such termination, at any time hereafter by giving the other party at least ninety (90) days' prior notice. The notice shall specify the termination date. ASSIGNMENT BY LICENSEE/TENANT 33. Licensee/Tenant may sublet all or a portion of the Concession area to a licensed optometrist or ophthalmologist for use as an examining room. Any such sub-lease shall be subject to all the terms and conditions of this Agreement, and Licensee/Tenant shall remain fully liable to Sears for the performance by such sub-leased tenant of all the obligations contained in this Agreement. Licensee/Tenant shall not otherwise sublet, assign or transfer all or any part of the Concession area without prior written consent of Sears. Any such transfer or attempt to transfer by Licensee/Tenant, whether expressly or by operation of law, and without Sears prior written consent, shall, at the option of Sears, without notice, immediately terminate this Agreement. The sale of Licensee/Tenant's business or any other transaction which shifts the rights or liabilities of Licensee/Tenant to another controlling interest, shall be such a transfer. RIGHT TO TERMINATE ON DEFAULT OR INSOLVENCY BY LICENSEE/TENANT 34. In the event any bankruptcy or insolvency proceedings are commenced by or against Licensee/Tenant, or if any property of Licensee/Tenant passes into the hands of any receiver, assignee, officer of the law or creditor, or if Licensee/Tenant vacates, abandons, or ceases to operate under this Agreement, or if Licensee/Tenant fails to comply with any material provision or condition of this Agreement, then, Sears may terminate this Agreement immediately unless prohibited by law. RIGHT TO TERMINATION ON CLOSING OF STORE 35. Sears may, solely at Sears discretion, terminate this Agreement without notice, due to the closing of the Store. Licensee/Tenant shall not be entitled to any notice of the Store closing prior to a public announcement of such closing. Licensee/Tenant waives any claim it may have against Sears for damages, if any, incurred as a result of such closing. RIGHT OF TERMINATION AFTER FIRE 36. In the event the Store is damaged by fire or any other casualty in such a manner that the space occupied by the Concession becomes untenantable, this Agreement may be terminated effective as of the date of such casualty, by either party giving the other party written notice of such termination within twenty (20) days after the occurrence of such casualty. If such notice is not given, then this Agreement shall not terminate, but shall remain in full force and effect and the parties shall cooperate with each other so that Licensee/Tenant may resume the conduct of business as soon as possible. SUBJECT TO STORE LEASES 37. If the Store is leased to Sears, this Agreement shall be subject to all of the terms, leases and conditions contained in such lease. In the event of the termination of any such lease by expiration of time or otherwise, this Agreement shall immediately terminate. FUTURE OBLIGATIONS 38. After the termination of this Agreement by expiration of time or otherwise, Licensee/Tenant shall have no right or interest in future contracts with Sears relating to any operation similar to that under this Agreement, and Sears may, without incurring any liability to Licensee/Tenant: (l) enter into an Agreement for the operation of a similar business with any person or organization Sears chooses, including, but not limited to, Licensee/Tenant or any of Licensee/Tenant's counterparts, (2) directly operate a similar business itself, or (3) terminate the operation of the business. REMOVAL OF LICENSEE/TENANT'S EQUIPMENT 39. Upon the termination of this Agreement by expiration of time or otherwise, Licensee/Tenant shall, at its expense, immediately remove all of Licensee/Tenant's Equipment from Sears' premises and shall, without delay and at Licensee/Tenant's expense, repair any damage to Sears' premises caused by such removal. QUIET ENJOYMENT 40. Sears covenants that, subject to the provisions of this Agreement and upon Licensee/Tenant (i) paying the Fee and other payments due to Sears under this Agreement, and (ii) observing and keeping all the covenants, terms and conditions of this Agreement, Licensee/Tenant will lawfully and quietly hold, occupy and enjoy the concession area during the Term without interference from Sears or any person claiming through Sears. SURVIVAL OF OBLIGATIONS 41. No termination of this Agreement, by expiration of time or otherwise, shall relieve the parties of liability for obligations arising out of the operation of the Concession before termination. LICENSES, LAWS, ORDINANCES 42. Licensee/Tenant shall, at its expense, obtain all permits and licenses which may be required under any applicable Federal, state, or local law, ordinance, rule or regulation by virtue of any act performed within the scope of this Agreement. Licensee/Tenant shall comply fully with all applicable Federal, state and local laws, ordinances, rules and regulations, including all rules and regulations of the Federal Trade Commission, all applicable rules and regulations governing the practice of optometry or opthalmology, and all ethical rules of Licensee/Tenant's profession. FEES, TAXES 43. Licensee/Tenant shall, at its expense, pay and discharge all license commissions, business, use, sales, gross receipts, income, property or other applicable taxes or assessments which may be charged or levied by reason of any act performed as a result of this Agreement, excluding, however, all taxes and assessments applicable to Sears income from the Fee or applicable to Sears property. REMEDIES CUMULATIVE 44. The remedies provided in this Agreement are cumulative, and shall not affect in any manner any other remedies that either party may have for any default or breach by the other party. The exercise of any right or remedy shall not constitute a waiver of any other right or remedy under this Agreement or provided by law or equity. No waiver of any such right or remedy shall be implied from failure to enforce any such right or remedy other than that to which the waiver is applicable, and only for that occurrence. ASSIGNS 45. The provisions of this Agreement shall be binding upon Licensee/Tenant and upon Licensee/Tenant's successors and assigns and shall be binding upon and inure to the benefit of Sears, its successors and assigns. NOTICES 46. All notices herein provided for or which may be given in connection with this Agreement shall be in writing and given by personal delivery or certified or registered mail with postage prepaid and return receipt requested or its equivalent such as private express courier. Notices given by Licensee/Tenant to Sears shall be addressed to: SEARS, ROEBUCK AND CO. Attention: Vice President & General Manager, Licensed Businesses, Department 725 E3-359B 3333 Beverly Road Hoffman Estates, Illinois 60179 Notices given by Sears to Licensee/Tenant shall be addressed to: COLE VISION CORPORATION Attention: President 1925 Enterprise Parkway Twinsburg, OH 44087-8059 Notices if so sent shall be deemed to have been given when sent. ILLEGAL PROVISION 47. If any provision in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been included. GOVERNING LAW 48. This Agreement shall be interpreted and governed by the laws of the State of Illinois. ENTIRE AGREEMENT 49. This Agreement sets forth the entire agreement and understanding between the parties with respect to the subject matter hereof. This Agreement shall not be supplemented, modified or amended except by a written instrument signed by a duly authorized officer or agent of both parties and no person has or shall have the authority to supplement, modify or amend this Agreement in any other manner. PARAGRAPH TITLES 50. The paragraph titles in this Agreement are for the mere convenience of the parties, and shall not be considered in any construction or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have this day set their hands by their proper officers or agents duly authorized thereunto. SEARS, ROEBUCK AND CO. By: ------------------------------------ Vice President & General Manager Licensed Businesses COLE VISION CORPORATION By: ------------------------------------ President EX-10.69 9 l00460aexv10w69.txt EX-10.69 COLE NATIONAL CORPORATION 401K PLAN Exhibit 10.69 ------------- COLE NATIONAL CORPORATION 401(K) PLAN MARCH 1, 2002 RESTATEMENT TABLE OF CONTENTS PREAMBLE
ARTICLE I DEFINITIONS 1.1 PLAN DEFINITIONS ......................................................................................2 1.2 INTERPRETATION ........................................................................................9 ARTICLE II SERVICE 2.1 SPECIAL DEFINITIONS ..................................................................................10 2.2 CREDITING OF HOURS OF SERVICE ........................................................................11 2.3 HOURS OF SERVICE EQUIVALENCIES .......................................................................12 2.4 LIMITATIONS ON CREDITING OF HOURS OF SERVICE .........................................................12 2.5 DEPARTMENT OF LABOR RULES ............................................................................13 2.6 CREDITING OF CONTINUOUS SERVICE ......................................................................13 2.7 ELIGIBILITY SERVICE ..................................................................................13 2.8 YEARS OF VESTING SERVICE .............................................................................13 2.9 CREDITING OF HOURS OF SERVICE WITH RESPECT TO SHORT COMPUTATION PERIODS ..............................14 2.10 CREDITING OF SERVICE ON TRANSFER OR AMENDMENT ........................................................14 ARTICLE III ELIGIBILITY 3.1 ELIGIBILITY ..........................................................................................16 3.2 TRANSFERS OF EMPLOYMENT ..............................................................................16 3.3 REEMPLOYMENT .........................................................................................16 3.4 NOTIFICATION CONCERNING NEW ELIGIBLE EMPLOYEES .......................................................16 3.5 EFFECT AND DURATION ..................................................................................17 ARTICLE IV TAX-DEFERRED CONTRIBUTIONS 4.1 TAX-DEFERRED CONTRIBUTIONS ...........................................................................18 4.2 AMOUNT OF TAX-DEFERRED CONTRIBUTIONS .................................................................18 4.3 AMENDMENTS TO REDUCTION AUTHORIZATION ................................................................18 4.4 SUSPENSION OF TAX-DEFERRED CONTRIBUTIONS .............................................................19 4.5 RESUMPTION OF TAX-DEFERRED CONTRIBUTIONS .............................................................19 4.6 DELIVERY OF TAX-DEFERRED CONTRIBUTIONS ...............................................................19 4.7 VESTING OF TAX-DEFERRED CONTRIBUTIONS ................................................................19
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ARTICLE V AFTER-TAX AND ROLLOVER CONTRIBUTIONS 5.1 NO AFTER-TAX CONTRIBUTIONS ...........................................................................20 5.2 ROLLOVER CONTRIBUTIONS ...............................................................................20 5.3 VESTING OF ROLLOVER CONTRIBUTIONS ....................................................................20 ARTICLE VI EMPLOYER CONTRIBUTIONS 6.1 CONTRIBUTION PERIOD ..................................................................................21 6.2 QUALIFIED NONELECTIVE CONTRIBUTIONS ..................................................................21 6.3 ALLOCATION OF QUALIFIED NONELECTIVE CONTRIBUTIONS ....................................................21 6.4 AMOUNT AND ALLOCATION OF REGULAR MATCHING CONTRIBUTIONS ..............................................21 6.5 ADDITIONAL DISCRETIONARY MATCHING CONTRIBUTIONS ......................................................22 6.6 LIMIT ON TAX-DEFERRED CONTRIBUTIONS MATCHED ..........................................................22 6.7 QUALIFIED MATCHING CONTRIBUTIONS .....................................................................22 6.8 VERIFICATION OF AMOUNT OF EMPLOYER CONTRIBUTIONS BY THE SPONSOR ......................................22 6.9 PAYMENT OF EMPLOYER CONTRIBUTIONS ....................................................................22 6.10 ALLOCATION REQUIREMENTS FOR EMPLOYER CONTRIBUTIONS ...................................................23 6.11 EXCEPTIONS TO ALLOCATION REQUIREMENTS FOR EMPLOYER CONTRIBUTIONS .....................................23 6.12 VESTING OF EMPLOYER CONTRIBUTIONS ....................................................................23 6.13 ELECTION OF FORMER VESTING SCHEDULE ..................................................................24 6.14 FORFEITURES TO REDUCE EMPLOYER CONTRIBUTIONS .........................................................24 ARTICLE VII LIMITATIONS ON CONTRIBUTIONS 7.1 DEFINITIONS ..........................................................................................25 7.2 CODE SECTION 402(g) LIMIT ............................................................................29 7.3 DISTRIBUTION OF EXCESS DEFERRALS .....................................................................30 7.4 LIMITATION ON TAX-DEFERRED CONTRIBUTIONS OF HIGHLY COMPENSATED EMPLOYEES .............................30 7.5 DETERMINATION AND ALLOCATION OF EXCESS TAX-DEFERRED CONTRIBUTIONS AMONG HIGHLY COMPENSATED EMPLOYEES .31 7.6 DISTRIBUTION OF EXCESS TAX-DEFERRED CONTRIBUTIONS ....................................................32 7.7 LIMITATION ON MATCHING CONTRIBUTIONS OF HIGHLY COMPENSATED EMPLOYEES .................................33 7.8 DETERMINATION AND ALLOCATION OF EXCESS MATCHING CONTRIBUTIONS AMONG HIGHLY COMPENSATED EMPLOYEES .....34 7.9 FORFEITURE OR DISTRIBUTION OF EXCESS CONTRIBUTIONS ...................................................35 7.10 MULTIPLE USE LIMITATION ..............................................................................35 7.11 TREATMENT OF FORFEITED MATCHING CONTRIBUTIONS ........................................................36 7.12 DETERMINATION OF INCOME OR LOSS ......................................................................36
ii 7.13 CODE SECTION 415 LIMITATIONS ON CREDITING OF CONTRIBUTIONS AND FORFEITURES ...........................36 7.14 APPLICATION OF CODE SECTION 415 LIMITATIONS WHERE PARTICIPANT IS COVERED UNDER OTHER QUALIFIED DEFINED CONTRIBUTION PLAN ....................................................................................37 7.15 SCOPE OF LIMITATIONS .................................................................................37 ARTICLE VIII TRUST FUNDS AND ACCOUNTS 8.1 GENERAL FUND .........................................................................................39 8.2 INVESTMENT FUNDS .....................................................................................39 8.3 LOAN INVESTMENT FUND .................................................................................39 8.4 INCOME ON TRUST ......................................................................................39 8.5 ACCOUNTS .............................................................................................40 8.6 SUB-ACCOUNTS .........................................................................................40 ARTICLE IX LIFE INSURANCE CONTRACTS 9.1 NO LIFE INSURANCE CONTRACTS ..........................................................................41 ARTICLE X DEPOSIT AND INVESTMENT OF CONTRIBUTIONS 10.1 FUTURE CONTRIBUTION INVESTMENT ELECTIONS .............................................................42 10.2 DEPOSIT OF CONTRIBUTIONS .............................................................................42 10.3 ELECTION TO TRANSFER BETWEEN FUNDS ...................................................................42 10.4 404(c) PROTECTION ....................................................................................42 10.5 SPECIAL RULES FOR INSIDER-PARTICIPANTS ...............................................................43 ARTICLE XI CREDITING AND VALUING ACCOUNTS 11.1 CREDITING ACCOUNTS ...................................................................................44 11.2 VALUING ACCOUNTS .....................................................................................44 11.3 PLAN VALUATION PROCEDURES ............................................................................44 11.4 FINALITY OF DETERMINATIONS ...........................................................................45 11.5 NOTIFICATION .........................................................................................45 ARTICLE XII LOANS 12.1 APPLICATION FOR LOAN .................................................................................46 12.2 REDUCTION OF ACCOUNT UPON DISTRIBUTION ...............................................................46
iii 12.3 REQUIREMENTS TO PREVENT A TAXABLE DISTRIBUTION .......................................................47 12.4 ADMINISTRATION OF LOAN INVESTMENT FUND ...............................................................48 12.5 DEFAULT ..............................................................................................49 12.6 DEEMED DISTRIBUTION UNDER CODE SECTION 72(P) .........................................................49 12.7 TREATMENT OF OUTSTANDING BALANCE OF LOAN DEEMED DISTRIBUTED UNDER CODE SECTION 72(P) .................49 12.8 SPECIAL RULES APPLICABLE TO LOANS ....................................................................50 12.9 LOANS GRANTED PRIOR TO AMENDMENT .....................................................................51 ARTICLE XIII WITHDRAWALS WHILE EMPLOYED 13.1 AGE 59 1/2 WITHDRAWALS ...............................................................................52 13.2 OVERALL LIMITATIONS ON NON-HARDSHIP WITHDRAWALS ......................................................52 13.3 HARDSHIP WITHDRAWALS .................................................................................53 13.4 HARDSHIP DETERMINATION ...............................................................................53 13.5 SATISFACTION OF NECESSITY REQUIREMENT FOR HARDSHIP WITHDRAWALS .......................................53 13.6 CONDITIONS AND LIMITATIONS ON HARDSHIP WITHDRAWALS ...................................................54 13.7 ORDER OF WITHDRAWAL FROM A PARTICIPANT'S SUB-ACCOUNTS ................................................54 ARTICLE XIV TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE 14.1 TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE ........................................................56 14.2 SEPARATE ACCOUNTING FOR NON-VESTED AMOUNTS ...........................................................56 14.3 DISPOSITION OF NON-VESTED AMOUNTS ....................................................................56 14.4 TREATMENT OF FORFEITED AMOUNTS .......................................................................57 14.5 RECREDITING OF FORFEITED AMOUNTS .....................................................................57 ARTICLE XV DISTRIBUTIONS 15.1 DISTRIBUTIONS TO PARTICIPANTS ........................................................................59 15.2 PARTIAL DISTRIBUTIONS TO RETIRED OR TERMINATED PARTICIPANTS ..........................................59 15.3 DISTRIBUTIONS TO BENEFICIARIES .......................................................................59 15.4 CASH OUTS AND PARTICIPANT CONSENT ....................................................................60 15.5 REQUIRED COMMENCEMENT OF DISTRIBUTION ................................................................60 15.6 TRANSITION RULES FOR REQUIRED COMMENCEMENT OF DISTRIBUTION ...........................................61 15.7 REEMPLOYMENT OF A PARTICIPANT ........................................................................61 15.8 RESTRICTIONS ON ALIENATION ...........................................................................61 15.9 FACILITY OF PAYMENT ..................................................................................62 15.10 INABILITY TO LOCATE PAYEE ............................................................................62 15.11 DISTRIBUTION PURSUANT TO QUALIFIED DOMESTIC RELATIONS ORDERS .........................................62
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ARTICLE XVI FORM OF PAYMENT 16.1 DEFINITIONS ..........................................................................................63 16.2 NORMAL FORM OF PAYMENT ...............................................................................64 16.3 OPTIONAL FORMS OF PAYMENT ............................................................................64 16.4 CHANGE OF ELECTION ...................................................................................64 16.5 AUTOMATIC ANNUITY REQUIREMENTS .......................................................................65 16.6 QUALIFIED PRERETIREMENT SURVIVOR ANNUITY REQUIREMENTS ................................................65 16.7 DIRECT ROLLOVER ......................................................................................65 16.8 NOTICE REGARDING FORMS OF PAYMENT ....................................................................66 16.9 REEMPLOYMENT .........................................................................................68 16.10 DISTRIBUTION IN THE FORM OF EMPLOYER STOCK ...........................................................68 ARTICLE XVII BENEFICIARIES 17.1 DESIGNATION OF BENEFICIARY ...........................................................................69 17.2 SPOUSAL CONSENT REQUIREMENTS .........................................................................69 ARTICLE XVIII ADMINISTRATION 18.1 AUTHORITY OF THE SPONSOR .............................................................................70 18.2 DISCRETIONARY AUTHORITY ..............................................................................70 18.3 ACTION OF THE SPONSOR ................................................................................70 18.4 CLAIMS REVIEW PROCEDURE ..............................................................................71 18.5 QUALIFIED DOMESTIC RELATIONS ORDERS ..................................................................72 18.6 INDEMNIFICATION ......................................................................................72 18.7 ACTIONS BINDING ......................................................................................72 ARTICLE XIX AMENDMENT AND TERMINATION 19.1 AMENDMENT ............................................................................................74 19.2 LIMITATION ON AMENDMENT ..............................................................................74 19.3 TERMINATION ..........................................................................................74 19.4 REORGANIZATION .......................................................................................75 19.5 WITHDRAWAL OF AN EMPLOYER ............................................................................76
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ARTICLE XX ADOPTION BY OTHER ENTITIES 20.1 ADOPTION BY RELATED COMPANIES ........................................................................77 20.2 EFFECTIVE PLAN PROVISIONS ............................................................................77 ARTICLE XXI MISCELLANEOUS PROVISIONS 21.1 NO COMMITMENT AS TO EMPLOYMENT .......................................................................78 21.2 BENEFITS .............................................................................................78 21.3 NO GUARANTEES ........................................................................................78 21.4 EXPENSES .............................................................................................78 21.5 PRECEDENT ............................................................................................78 21.6 DUTY TO FURNISH INFORMATION ..........................................................................78 21.7 MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS ....................................................79 21.8 BACK PAY AWARDS ......................................................................................79 21.9 CONDITION ON EMPLOYER CONTRIBUTIONS ..................................................................79 21.10 RETURN OF CONTRIBUTIONS TO AN EMPLOYER ...............................................................80 21.11 VALIDITY OF PLAN .....................................................................................80 21.12 TRUST AGREEMENT ......................................................................................80 21.13 PARTIES BOUND ........................................................................................80 21.14 APPLICATION OF CERTAIN PLAN PROVISIONS ...............................................................80 21.15 MERGED PLANS .........................................................................................81 21.16 TRANSFERRED FUNDS ....................................................................................81 21.17 VETERANS REEMPLOYMENT RIGHTS .........................................................................81 21.18 DELIVERY OF CASH AMOUNTS .............................................................................81 21.19 WRITTEN COMMUNICATIONS ...............................................................................81 ARTICLE XXII TOP-HEAVY PROVISIONS 22.1 DEFINITIONS ..........................................................................................83 22.2 APPLICABILITY ........................................................................................85 22.3 MINIMUM EMPLOYER CONTRIBUTION ........................................................................85 22.4 ACCELERATED VESTING ..................................................................................86 ARTICLE XXIII EFFECTIVE DATE 23.1 GUST EFFECTIVE DATES .................................................................................87
vi PREAMBLE The Cole National Corporation 401(k) Plan, originally effective as of October 1, 1993, is hereby amended and restated in its entirety. Except as otherwise specifically provided in Article XXIII, this amendment and restatement shall be effective as of March 1, 2002. The Plan, as amended and restated hereby, is intended to qualify as a profit-sharing plan under Code Section 401(a), and includes a cash or deferred arrangement that is intended to qualify under Code Section 401(k). The Plan is maintained for the exclusive benefit of eligible employees and their beneficiaries. Notwithstanding any other provision of the Plan to the contrary, a Participant's vested interest in his Account under the Plan on and after the effective date of this amendment and restatement shall be not less than his vested interest in his account on the day immediately preceding the effective date. Any provision of the Plan that restricted or limited withdrawals, loans, or other distributions, or otherwise required separate accounting with respect to any portion of a Participant's Account immediately prior to the later of the effective date of this amendment and restatement or the date this amendment and restatement is adopted and the elimination of which would adversely affect the qualification of the Plan under Code Section 401(a) shall continue in effect with respect to such portion of the Participant's Account as if fully set forth in this amendment and restatement. Any sample amendment adopted by the Sponsor prior to this amendment and restatement for purposes of complying with EGTRRA shall continue in effect after this amendment and restatement. 1 ARTICLE I DEFINITIONS 1.1 PLAN DEFINITIONS As used herein, the following words and phrases have the meanings hereinafter set forth, unless a different meaning is plainly required by the context: An "ACCOUNT" means the account maintained by the Trustee in the name of a Participant that reflects his interest in the Trust and any Sub-Accounts maintained thereunder, as provided in Article VIII. An "ADDITIONAL DISCRETIONARY MATCHING CONTRIBUTION" means any Matching Contribution made to the Plan at an Employer's discretion in addition to the Employer's Regular Matching Contribution as provided in Article VI, other than any such contribution characterized by the Employer as a Qualified Matching Contribution. The "ADMINISTRATOR" means the Sponsor unless the Sponsor designates another person or persons to act as such. An "AFTER-TAX CONTRIBUTION" means any after-tax employee contribution made by a Participant to the Plan as may be permitted under Article V or as may have been permitted under the terms of the Plan prior to this amendment and restatement or any after-tax employee contribution made by a Participant to another plan that is transferred directly to the Plan. The "BENEFICIARY" of a Participant means the person or persons entitled under the provisions of the Plan to receive distribution hereunder in the event the Participant dies before receiving distribution of his entire interest under the Plan. A Participant's "BENEFIT PAYMENT DATE" means (i) if payment is made through the purchase of an annuity, the first day of the first period for which the annuity is payable or (ii) if payment is made in any other form, the first day on which all events have occurred which entitle the Participant to receive payment of his benefit. A "BREAK IN SERVICE" means any "computation period" (as defined in Section 2.1 for purposes of determining years of Vesting Service) during which a person completes fewer than 501 Hours of Service except that no person shall incur a Break in Service solely by reason of temporary absence from work not exceeding 12 months resulting from illness, layoff, or other cause if authorized in advance by an Employer or a Related Company pursuant to its uniform leave policy, if his employment shall not otherwise be terminated during the period of such absence. 2 The "CODE" means the Internal Revenue Code of 1986, as amended from time to time. Reference to a Code section includes such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. The "COMPENSATION" of a Participant for any period means his wages, salaries, fees for professional service, and all other amounts received for personal services actually rendered in the course of employment with an Employer paid to him for such period for services as an Employee, but excluding (i) contributions made by the Participant's Employer to a plan of deferred compensation to the extent that, before application of the limitations of Code Section 415 to such plan, the contributions are not includible in the gross income of the Participant for the taxable year in which contributed, (ii) contributions made by the Employer to a simplified employee pension described in Code Section 408(k), (iii) any distributions from a plan of deferred compensation (except amounts received pursuant to an unfunded non-qualified plan in the year such amounts are includible in the gross income of the Participant), (iv) amounts received from the exercise of a non-qualified stock option or when restricted stock held by the Participant becomes freely transferable or is no longer subject to substantial risk of forfeiture, (v) amounts received from the sale, exchange or other disposition of stock acquired under a qualified or incentive stock option, (vi) any other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Participant), and (vii) contributions made by the Employer (whether or not pursuant to a salary reduction agreement) towards the purchase of an annuity described in Code Section 403(b) (whether or not the amounts are excludable from the gross income of the Participant). Notwithstanding the foregoing, Compensation shall not include imputed life insurance income, moving costs, company car, and educational assistance benefits. Notwithstanding the foregoing, Compensation includes any amount that would have been included in the foregoing description, but for the Participant's election to defer payment of such amount under Code Section 125, 402(e)(3), 402(h)(1)(B), 403(b), or 457(b) and certain contributions described in Code Section 414(h)(2) that are picked up by the employing unit and treated as employer contributions. Effective for Plan Years beginning on and after January 1, 2001, Compensation shall also include any amount that is not included in the Participant's taxable gross income pursuant to Code Section 132(f). In no event, however, shall the Compensation of a Participant taken into account under the Plan for any Plan Year exceed $150,000 (subject to adjustment annually as provided in Code Sections 401(a)(17)(B) and 415(d); provided, however, that the dollar increase in effect on January 1 of any calendar year, if any, is effective for Plan Years beginning in such calendar year). If the Compensation of a Participant is determined over a period of time that contains fewer than 12 calendar months, then the annual compensation limitation described above shall be adjusted with respect to that Participant by multiplying the annual compensation limitation in effect for the Plan Year by a fraction the numerator of which is the number of full months in the period and the 3 denominator of which is 12; provided, however, that no proration is required for a Participant who is covered under the Plan for less than one full Plan Year if the formula for allocations is based on Compensation for a period of at least 12 months. A "CONTRIBUTION PERIOD" means the period specified in Article VI for which Employer Contributions shall be made. "DISABLED" means a Participant can no longer continue in the service of his employer because of a mental or physical condition that is likely to result in death or is expected to continue for a period of at least six months. A Participant shall be considered Disabled only if the Administrator determines he is Disabled based on a written certificate of a physician acceptable to it. An "ELIGIBLE EMPLOYEE" means any Employee who has met the eligibility requirements of Article III to participate in the Plan. The "ELIGIBILITY SERVICE" of an employee means the period or periods of service credited to him under the provisions of Article II for purposes of determining his eligibility to participate in the Plan as may be required under Article III. An "EMPLOYEE" means a full or part-time regular associate who is scheduled to work 18 or more hours per week. "Leased employees" (other than "excludable leased employees") who meet the foregoing requirements but for the fact that they are not employed directly by an Employer shall be considered Employees under the Plan. The term "Employee" shall not include any such person who is either (i) covered by a collective bargaining agreement that does not specifically provide for coverage under the Plan or (ii) nonresident alien who does not receive United States source income. The term "Employee" also does not include the following: (i) resident aliens who received earned income from the Employer or a Related Company which constitutes income from within the U.S; (ii) persons who perform services for the Employer or a Related Company under a lease or sublease arrangement and are not compensated directly by the Employer or Related Company for their services, including, without limitation, professional optometrists performing services under a lease or sublease arrangement; and (iii) persons who are not classified as employees by the Employer or a Related Company. Any individual who is not treated by an Employer as a common law employee of the Employer shall be excluded from Plan participation even if a court or administrative agency determines that such individual is a common law employee and not an independent contractor. A "leased employee" means any person who performs services for an Employer or a Related Company (the "recipient") (other than an employee of the "recipient") pursuant to an agreement between the "recipient" and any other person (the "leasing organization") on a substantially full-time basis for a period of at least one year, provided that such services are performed under primary direction of or control by the "recipient". An "excludable leased employee" means any "leased employee" of the "recipient" who is covered by a money purchase pension plan 4 maintained by the "leasing organization" which provides for (i) a nonintegrated employer contribution on behalf of each participant in the plan equal to at least ten percent of compensation, (ii) full and immediate vesting, and (iii) immediate participation by employees of the "leasing organization" (other than employees who perform substantially all of their services for the "leasing organization" or whose compensation from the "leasing organization" in each plan year during the four-year period ending with the plan year is less than $1,000); provided, however, that "leased employees" do not constitute more than 20 percent of the "recipient's" nonhighly compensated work force. For purposes of this Section, contributions or benefits provided to a "leased employee" by the "leasing organization" that are attributable to services performed for the "recipient" shall be treated as provided by the "recipient". An "EMPLOYER" means the Sponsor and any entity which has adopted the Plan as may be provided under Article XX. An "EMPLOYER CONTRIBUTION" means the amount, if any, that an Employer contributes to the Plan as may be provided under Article VI or Article XXII. "EMPLOYER STOCK" means employer securities issued by Cole National Group, Inc. An "ENROLLMENT DATE" means each day of the Plan Year. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference to a section of ERISA includes such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. The "GENERAL FUND" means a Trust Fund maintained by the Trustee as required to hold and administer any assets of the Trust that are not allocated among any separate Investment Funds as may be provided in the Plan or the Trust Agreement. No General Fund shall be maintained if all assets of the Trust are allocated among separate Investment Funds. A "HIGHLY COMPENSATED EMPLOYEE" means any Employee or former Employee who is a "highly compensated active employee" or a "highly compensated former employee" as defined hereunder. A "highly compensated active employee" includes any Employee who performs services for an Employer or any Related Company during the Plan Year and who (i) was a five percent owner at any time during the Plan Year or the "look back year" or (ii) received "compensation" from the Employers and Related Companies during the "look back year" in excess of $80,000 (subject to adjustment annually at the same time and in the same manner as under Code Section 415(d)) and was in the top paid group of employees for the "look back year". An Employee is in the top paid group of employees if he is in the top 20 percent of the employees of his Employer and all Related Companies when ranked on the basis of "compensation" paid during the "look back year". 5 For Plan Years prior to the effective date of this amendment, an individual was considered a "highly compensated active employee" under clause (ii) without regard to whether he was in the top paid group of employees for the "look back year". "Highly compensated active employees" were determined without regard to the top paid group for the following Plan Year(s): 1997. A "highly compensated former employee" includes any Employee who (1) separated from service from an Employer and all Related Companies (or is deemed to have separated from service from an Employer and all Related Companies) prior to the Plan Year, (2) performed no services for an Employer or any Related Company during the Plan Year, and (3) was a "highly compensated active employee" for either the separation year or any Plan Year ending on or after the date the Employee attains age 55, as determined under the rules in effect under Code Section 414(q) for such year. The determination of who is a Highly Compensated Employee hereunder, including determinations as to the number and identity of employees in the top paid group, shall be made in accordance with the provisions of Code Section 414(q) and regulations issued thereunder. For purposes of this definition, the following terms have the following meanings: (a) An employee's "compensation" means compensation as defined in Code Section 415(c)(3) and regulations issued thereunder. (b) The "look back year" means the 12-month period immediately preceding the Plan Year. An "HOUR OF SERVICE" with respect to a person means each hour, if any, that may be credited to him in accordance with the provisions of Article II. An "INVESTMENT FUND" means any separate investment Trust Fund maintained by the Trustee as may be provided in the Plan or the Trust Agreement or any separate investment fund maintained by the Trustee, to the extent that there are Participant Sub-Accounts under such funds, to which assets of the Trust may be allocated and separately invested. A "MATCHING CONTRIBUTION" means any Employer Contribution made to the Plan on account of a Participant's Tax-Deferred Contributions as provided in Article VI, including Regular Matching Contributions and Additional Discretionary Matching Contributions and any such contribution that is designated by an Employer as a Qualified Matching Contribution. The "NORMAL RETIREMENT DATE" of an employee means the date he attains age 65. A "PARTICIPANT" means any person who has an Account in the Trust. The "PLAN" means the Cole National Corporation 401(k) Plan, as from time to time in effect. 6 A "PLAN YEAR" means the 12-consecutive-month period ending each December 31. A "PREDECESSOR EMPLOYER" means any company that is a predecessor organization to an Employer under the Code, provided that the Employer maintains a plan of such predecessor organization. A "QUALIFIED JOINT AND SURVIVOR ANNUITY" means an immediate annuity payable at earliest retirement age under the Plan, as defined in regulations issued under Code Section 401(a)(11), that is payable (i) for the life of a Participant, if the Participant is not married, or (ii) for the life of a Participant with a survivor annuity payable for the life of the Participant's spouse that is equal to at least 50 percent, but not more than 100 percent, of the amount of the annuity payable during the joint lives of the Participant and his spouse, if the Participant is married. No survivor annuity shall be payable to the Participant's spouse under a Qualified Joint and Survivor Annuity if such spouse is not the same spouse to whom the Participant was married on his Benefit Payment Date. A "QUALIFIED MATCHING CONTRIBUTION" means any Matching Contribution made to the Plan as provided in Article VI that is 100 percent vested when made and may be taken into account to satisfy the limitations on Tax-Deferred Contributions made by Highly Compensated Employees under Article VII. A "QUALIFIED NONELECTIVE CONTRIBUTION" means any Employer Contribution made to the Plan as provided in Article VI that is 100 percent vested when made and may be taken into account to satisfy the limitations on Tax-Deferred Contributions and/or Matching Contributions made by or on behalf of Highly Compensated Employees under Article VII, other than Qualified Matching Contributions. A "QUALIFIED PRERETIREMENT SURVIVOR ANNUITY" means an annuity payable for the life of a Participant's surviving spouse if the Participant dies prior to his Benefit Payment Date. A "REGULAR MATCHING CONTRIBUTION" means any Matching Contribution made to the Plan at the rate specified in Article VI, other than the following: (a) an Additional Discretionary Matching Contribution. (b) any Matching Contribution characterized by the Employer as a Qualified Matching Contribution. A "RELATED COMPANY" means any corporation or business, other than an Employer, which would be aggregated with an Employer for a relevant purpose under Code Section 414. 7 A Participant's "REQUIRED BEGINNING DATE" means the following: (a) for a Participant who is not a "five percent owner", April 1 of the calendar year following the calendar year in which occurs the later of the Participant's (i) attainment of age 70 1/2 or (ii) Settlement Date. (b) for a Participant who is a "five percent owner", April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. A Participant is a "five percent owner" if he is a five percent owner, as defined in Code Section 416(i) and determined in accordance with Code Section 416, but without regard to whether the Plan is top-heavy, for the Plan Year ending with or within the calendar year in which the Participant attains age 70 1/2. The Required Beginning Date of a Participant who is a "five percent owner" hereunder shall not be redetermined if the Participant ceases to be a five percent owner as defined in Code Section 416(i) with respect to any subsequent Plan Year. A "ROLLOVER CONTRIBUTION" means any rollover contribution to the Plan made by a Participant as may be permitted under Article V. The "SETTLEMENT DATE" of a Participant means the date on which a Participant's interest under the Plan becomes distributable in accordance with Article XV. A "SINGLE LIFE ANNUITY" means an annuity payable for the life of a Participant. The "SPONSOR" means Cole National Group, Inc., and any successor thereto. A "SUB-ACCOUNT" means any of the individual sub-accounts of a Participant's Account that is maintained as provided in Article VIII. A "TAX-DEFERRED CONTRIBUTION" means the amount contributed to the Plan on a Participant's behalf by his Employer in accordance with Article IV. The "TRUST" means the trust, custodial accounts, annuity contracts, or insurance contracts maintained by the Trustee under the Trust Agreement. The "TRUST AGREEMENT" means any agreement or agreements entered into between the Sponsor and the Trustee relating to the holding, investment, and reinvestment of the assets of the Plan, together with all amendments thereto and shall include any agreement establishing a custodial account, an annuity contract, or an insurance contract (other than a life, health or accident, property, casualty, or liability insurance contract) for the investment of assets if the custodial account or contract would, except for the fact that it is not a trust, constitute a qualified trust under Code Section 401. 8 The "TRUSTEE" means the trustee or any successor trustee which at the time shall be designated, qualified, and acting under the Trust Agreement and shall include any insurance company that issues an annuity or insurance contract pursuant to the Trust Agreement or any person holding assets in a custodial account pursuant to the Trust Agreement. The Sponsor may designate a person or persons other than the Trustee to perform any responsibility of the Trustee under the Plan, other than trustee responsibilities as defined in ERISA Section 405(c)(3), and the Trustee shall not be liable for the performance of such person in carrying out such responsibility except as otherwise provided by ERISA. The term Trustee shall include any delegate of the Trustee as may be provided in the Trust Agreement. A "TRUST FUND" means any fund maintained under the Trust by the Trustee. A "VALUATION DATE" means the date or dates designated by the Sponsor and communicated in writing to the Trustee for the purpose of valuing the General Fund and each Investment Fund and adjusting Accounts and Sub-Accounts hereunder, which dates need not be uniform with respect to the General Fund, each Investment Fund, Account, or Sub-Account; provided, however, that the General Fund and each Investment Fund shall be valued and each Account and Sub-Account shall be adjusted no less often than once annually. The "VESTING SERVICE" of an employee means the period or periods of service credited to him under the provisions of Article II for purposes of determining his vested interest in his Employer Contributions Sub-Account, if Employer Contributions are provided for under either Article VI or Article XXII. 1.2 INTERPRETATION Where required by the context, the noun, verb, adjective, and adverb forms of each defined term shall include any of its other forms. Wherever used herein, the masculine pronoun shall include the feminine, the singular shall include the plural, and the plural shall include the singular. 9 ARTICLE II SERVICE 2.1 SPECIAL DEFINITIONS For purposes of this Article, the following terms have the following meanings. A "COMPUTATION PERIOD" for purposes of determining an employee's years of Vesting Service means each Plan Year. The "CONTINUOUS SERVICE" of an employee means the continuous service credited to him in accordance with the provisions of this Article. The "EMPLOYMENT COMMENCEMENT DATE" of an employee means the date he first completes an Hour of Service. A "MATERNITY/PATERNITY ABSENCE" means a person's absence from employment with an Employer or a Related Company because of the person's pregnancy, the birth of the person's child, the placement of a child with the person in connection with the person's adoption of the child, or the caring for the person's child immediately following the child's birth or adoption. A person's absence from employment will not be considered a maternity/paternity absence unless the person furnishes the Administrator such timely information as may reasonably be required to establish that the absence was for one of the purposes enumerated in this paragraph and to establish the number of days of absence attributable to such purpose. The "REEMPLOYMENT COMMENCEMENT DATE" of an employee means the first date following a "severance date" on which he again completes an Hour of Service. The "SEVERANCE DATE" of an employee means the earlier of (i) the date on which he retires, dies, or his employment with all Employers and Related Companies is otherwise terminated, or (ii) the first anniversary of the first date of a period during which he is absent from work with all Employers and Related Companies for any other reason; provided, however, that if he terminates employment with or is absent from work with all Employers and Related Companies on account of service with the armed forces of the United States, he shall not incur a "severance date" if he is eligible for reemployment rights under the Uniformed Services Employment and Reemployment Rights Act of 1994 and he returns to work with an Employer or a Related Company within the period during which he retains such reemployment rights, but, if he does not return to work within such period, his "severance date" shall be the earlier of the date which is one year after his absence commenced or the last day of the period during which he retains such reemployment rights; and provided, further, that if an employee is on a "maternity/paternity absence" beyond the first anniversary of the first day of such absence, he shall not incur a "severance date" if he returns to employment before the second anniversary of the first day of such absence but, if he 10 does not return within such period, his "severance date" shall be the second anniversary of the first date of such "maternity/paternity absence"; and provided, further, that if an employee is on a paid leave of absence beyond the first anniversary of the first day of such absence, he shall not incur a "severance date" if he returns to employment before the second anniversary of the first day of such absence but, if he does not return within such period, his "severance date" shall be the first anniversary of the first date of such paid leave of absence. 2.2 CREDITING OF HOURS OF SERVICE A person shall be credited with an Hour of Service for: (a) Each hour for which he is paid, or entitled to payment, for the performance of duties for an Employer, a Predecessor Employer, or a Related Company during the applicable period; provided, however, that hours compensated at a premium rate shall be treated as straight-time hours. (b) Subject to the provisions of Section 2.4, each hour for which he is paid, or entitled to payment, by an Employer, a Predecessor Employer, or a Related Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), lay-off, jury duty, military duty, or leave of absence. (c) Each hour for which he would have been scheduled to work for an Employer, a Predecessor Employer, or a Related Company during the period that he is absent from work because of service with the armed forces of the United States provided he is eligible for reemployment rights under the Uniformed Services Employment and Reemployment Rights Act of 1994 and returns to work with an Employer or a Related Company within the period during which he retains such reemployment rights; provided, however, that the same Hour of Service shall not be credited under paragraph (b) of this Section and under this paragraph (c). (d) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by an Employer, a Predecessor Employer, or a Related Company; provided, however, that the same Hour of Service shall not be credited both under paragraph (a) or (b) or (c) of this Section, as the case may be, and under this paragraph (d); and provided, further, that the crediting of Hours of Service for back pay awarded or agreed to with respect to periods described in such paragraph (b) shall be subject to the limitations set forth therein and in Section 2.4. (e) Solely for purposes of determining whether a person who is on a "maternity/paternity absence" has incurred a Break in Service for a "computation period", Hours of Service shall include those hours with which such person would otherwise have been credited but for such "maternity/paternity absence", or shall include eight Hours of Service for each 11 day of "maternity/paternity absence" if the actual hours to be credited cannot be determined; except that not more than the minimum number of hours required to prevent a Break in Service shall be credited by reason of any "maternity/paternity absence"; provided, however, that any hours included as Hours of Service pursuant to this paragraph shall be credited to the "computation period" in which the absence from employment begins, if such person otherwise would incur a Break in Service in such "computation period", or, in any other case, to the immediately following "computation period". (f) Solely for purposes of determining whether he has incurred a Break in Service, each hour for which he would have been scheduled to work for an Employer, a Predecessor Employer, or a Related Company during the period of time that he is absent from work on an approved leave of absence pursuant to the Family and Medical Leave Act of 1993; provided, however, that Hours of Service shall not be credited to an employee under this paragraph if the employee fails to return to employment with an Employer or a Related Company following such leave. Except as otherwise specifically provided with respect to Predecessor Employers, Hours of Service shall not be credited for employment with a corporation or business prior to the date such corporation or business becomes a Related Company. 2.3 HOURS OF SERVICE EQUIVALENCIES Notwithstanding any other provision of the Plan to the contrary, if an Employer does not maintain records that accurately reflect actual hours of service creditable to a person hereunder, such person shall be credited with 190 Hours of Service for each month in which he performs an Hour of Service. 2.4 LIMITATIONS ON CREDITING OF HOURS OF SERVICE In the application of the provisions of paragraph (b) of Section 2.2, the following shall apply: (a) An hour for which a person is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed shall not be credited to him if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers' compensation, unemployment compensation, or disability insurance laws. (b) Hours of Service shall not be credited with respect to a payment which solely reimburses a person for medical or medically-related expenses incurred by him. (c) A payment shall be deemed to be made by or due from an Employer, a Predecessor Employer, or a Related Company (i) regardless of whether such payment is made by or 12 due from such employer directly or indirectly, through (among others) a trust fund or insurer to which any such employer contributes or pays premiums, and (ii) regardless of whether contributions made or due to such trust fund, insurer, or other entity are for the benefit of particular persons or are on behalf of a group of persons in the aggregate. (d) No more than 501 Hours of Service shall be credited to a person on account of any single continuous period during which he performs no duties (whether or not such period occurs in a single "computation period"), unless no duties are performed due to service with the armed forces of the United States for which the person retains reemployment rights as provided in paragraph (c) of Section 2.2 or because of approved leaves of absence of up to two years. 2.5 DEPARTMENT OF LABOR RULES The rules set forth in paragraphs (b) and (c) of Department of Labor Regulations Section 2530.200b-2, which relate to determining Hours of Service attributable to reasons other than the performance of duties and crediting Hours of Service to particular periods, are hereby incorporated into the Plan by reference. 2.6 CREDITING OF CONTINUOUS SERVICE A person shall be credited with "continuous service" for the aggregate of the periods of time between his "employment commencement date" or any "reemployment commencement date" and the "severance date" that next follows such "employment commencement date" or "reemployment commencement date"; provided, however, that an employee who has a "reemployment commencement date" within the 12-consecutive-month period following the earlier of the first date of his absence or his "severance date" shall be credited with "continuous service" for the period between his "severance date" and "reemployment commencement date". 2.7 ELIGIBILITY SERVICE An employee shall be credited with Eligibility Service equal to his "continuous service". 2.8 YEARS OF VESTING SERVICE Years of Vesting Service shall be determined in accordance with the following provisions: (a) An employee shall be credited with a year of Vesting Service for each "computation period" during which he completes at least 1,000 Hours of Service. (b) Notwithstanding the provisions of paragraph (a), the following service shall not be included in determining an employee's years of Vesting Service: 13 (i) Service completed by the employee during periods in which the Employer does not maintain the Plan or predecessor plan. (ii) Service completed by an employee prior to a Break in Service, unless either (A) the employee had a nonforfeitable right to any portion of his Account, excluding that portion of his Account that is attributable to Rollover Contributions, before his Break in Service commenced, or (B) the number of his consecutive Breaks in Service is fewer than the greater of five or the aggregate number of his years of Vesting Service before his Break in Service commenced. 2.9 CREDITING OF HOURS OF SERVICE WITH RESPECT TO SHORT COMPUTATION PERIODS The following provisions shall apply with respect to crediting Hours of Service with respect to any short "computation period": (a) For purposes of this Article, the following terms have the following meanings: (i) An "old computation period" means any "computation period" that ends immediately prior to a change in the "computation period". (ii) A "short computation period" means any "computation period" of fewer than 12 consecutive months. (b) Notwithstanding any other provision of the Plan to the contrary, no person shall incur a Break in Service for a short "computation period" solely because of such short "computation period". (c) For purposes of determining the years of Vesting Service to be credited to an Employee, a "computation period" shall not include the "short computation period", but if an Employee completes at least 1,000 Hours of Service in the 12-consecutive-month period beginning on the first day of the "short computation period", such Employee shall be credited with a year of Vesting Service for such 12-consecutive-month period. 2.10 CREDITING OF SERVICE ON TRANSFER OR AMENDMENT Notwithstanding any other provision of the Plan to the contrary, if an Employee is transferred from employment covered under a qualified plan maintained by an Employer or a Related Company for which service for purposes of eligibility to participate is credited based on Hours of Service and computation periods in accordance with Department of Labor Regulations Section 2530.200 through 2530.203 to employment covered under the Plan or, prior to amendment, the 14 Plan provided for crediting of service for purposes of eligibility to participate on the basis of Hours of Service and computation periods in accordance with Department of Labor Regulations Section 2530.200 through 2530.203, an affected Employee shall be credited with Eligibility Service hereunder as provided in Treasury Regulations Section 1.410(a)-7(f)(1). In addition, notwithstanding any other provision of the Plan to the contrary, if an Employee is transferred from employment covered under a qualified plan maintained by an Employer or a Related Company for which service for purposes of vesting is credited based on elapsed time in accordance with Treasury Regulations Section 1.410(a)-7 to employment covered under the Plan or, prior to amendment, the Plan provided for crediting of service for purposes of vesting on the basis of elapsed time in accordance with Treasury Regulations Section 1.410(a)-7, an affected Employee shall be credited with Vesting Service hereunder as provided in Treasury Regulations Section 1.410(a)-7(f)(1). 15 ARTICLE III ELIGIBILITY 3.1 ELIGIBILITY Each Employee who was an Eligible Employee immediately prior to March 1, 2002 shall continue to be an Eligible Employee on March 1, 2002; provided, however, that if such Employee had not yet satisfied the eligibility requirements for receiving an allocation of Matching Contributions, he shall not be eligible to receive an allocation of such contributions until he satisfies such eligibility requirements as provided herein. Each other Employee shall become an Eligible Employee eligible to make Tax-Deferred Contributions and participate in all aspects of the Plan, except eligibility to receive an allocation of Matching Contributions, as of the Enrollment Date next following the date on which he has completed 90 days of Eligibility Service. An Employee shall become an Eligible Employee eligible to receive an allocation of Matching Contributions as of the Enrollment Date next following the date on which the Employee has completed one year of Eligibility Service. 3.2 TRANSFERS OF EMPLOYMENT If a person is transferred directly from employment with an Employer or with a Related Company in a capacity other than as an Employee to employment as an Employee, he shall become an Eligible Employee as of the date he is so transferred if prior to an Enrollment Date preceding such transfer date he has met the eligibility requirements of Section 3.1. Otherwise, the eligibility of a person who is so transferred to participate in the Plan shall be determined in accordance with Section 3.1. 3.3 REEMPLOYMENT If a person who terminated employment with an Employer and all Related Companies is reemployed as an Employee and if he had been an Eligible Employee prior to his termination of employment, he shall again become an Eligible Employee on the date he is reemployed. Otherwise, the eligibility of a person who terminated employment with an Employer and all Related Companies and who is reemployed by an Employer or a Related Company to participate in the Plan shall be determined in accordance with Section 3.1 or 3.2. 3.4 NOTIFICATION CONCERNING NEW ELIGIBLE EMPLOYEES Each Employer shall notify the Administrator as soon as practicable of Employees becoming Eligible Employees as of any date. 16 3.5 EFFECT AND DURATION Upon becoming an Eligible Employee, an Employee shall be entitled to participate in the Plan with respect to those aspects of the Plan for which he is an Eligible Employee and shall be bound by all the terms and conditions of the Plan and the Trust Agreement. A person shall continue as an Eligible Employee eligible to participate in the Plan only so long as he continues employment as an Employee. 17 ARTICLE IV TAX-DEFERRED CONTRIBUTIONS 4.1 TAX-DEFERRED CONTRIBUTIONS Effective as of the date he becomes an Eligible Employee, each Eligible Employee may elect, in accordance with rules prescribed by the Administrator, to have Tax-Deferred Contributions made to the Plan on his behalf by his Employer as hereinafter provided. An Eligible Employee's election shall include his authorization for his Employer to reduce his Compensation and to make Tax-Deferred Contributions on his behalf. An Eligible Employee who elects not to have Tax-Deferred Contributions made to the Plan as of the first Enrollment Date he becomes eligible to participate may change his election by amending his reduction authorization as prescribed in this Article. Tax-Deferred Contributions on behalf of an Eligible Employee shall commence with the first payment of Compensation made on or after the date on which his election is effective. 4.2 AMOUNT OF TAX-DEFERRED CONTRIBUTIONS The amount of Tax-Deferred Contributions to be made to the Plan on behalf of an Eligible Employee by his Employer shall be either (i) an integral percentage of his Compensation of not less than one percent nor more than 17 percent or (ii) a specified monetary amount, not in excess of 17 percent of the Eligible Employee's Compensation, with a minimum election of five dollars (if the Participant is paid on a weekly basis) or ten dollars (if the Participant is paid on a bi-weekly basis). In the event an Eligible Employee elects to have his Employer make Tax-Deferred Contributions on his behalf, his Compensation shall be reduced for each payroll period by the percentage or amount he elects to have contributed on his behalf to the Plan in accordance with the terms of his currently effective reduction authorization. 4.3 AMENDMENTS TO REDUCTION AUTHORIZATION An Eligible Employee may elect, in the manner prescribed by the Administrator, to change the amount of his future Compensation that his Employer contributes on his behalf as Tax-Deferred Contributions. An Eligible Employee may amend his reduction authorization at such time or times during the Plan Year as the Administrator may prescribe by giving such number of days advance notice of his election as the Administrator may prescribe. An Eligible Employee who amends his reduction authorization shall be limited to selecting an amount of his Compensation that is otherwise permitted under this Article IV. Tax-Deferred Contributions shall be made on behalf of such Eligible Employee by his Employer pursuant to his properly amended reduction authorization commencing with Compensation paid to the Eligible Employee on or after the date such amendment is effective, until otherwise altered or terminated in accordance with the Plan. 18 4.4 SUSPENSION OF TAX-DEFERRED CONTRIBUTIONS An Eligible Employee on whose behalf Tax-Deferred Contributions are being made may elect, in the manner prescribed by the Administrator, to have such contributions suspended at any time by giving such number of days advance notice of his election as the Administrator may prescribe. Any such voluntary suspension shall take effect commencing with Compensation paid to such Eligible Employee on or after the expiration of the required notice period and shall remain in effect until Tax-Deferred Contributions are resumed as hereinafter set forth. 4.5 RESUMPTION OF TAX-DEFERRED CONTRIBUTIONS An Eligible Employee who has voluntarily suspended his Tax-Deferred Contributions may elect, in the manner prescribed by the Administrator, to have such contributions resumed. An Eligible Employee may make such election at such time or times during the Plan Year as the Administrator may prescribe, by giving such number of days advance notice of his election as the Administrator may prescribe. 4.6 DELIVERY OF TAX-DEFERRED CONTRIBUTIONS As soon after the date an amount would otherwise be paid to an Employee as it can reasonably be separated from Employer assets, each Employer shall cause to be delivered to the Trustee in cash all Tax-Deferred Contributions attributable to such amounts. 4.7 VESTING OF TAX-DEFERRED CONTRIBUTIONS A Participant's vested interest in his Tax-Deferred Contributions Sub-Account shall be at all times 100 percent. 19 ARTICLE V AFTER-TAX AND ROLLOVER CONTRIBUTIONS 5.1 NO AFTER-TAX CONTRIBUTIONS There shall be no After-Tax Contributions made to the Plan. 5.2 ROLLOVER CONTRIBUTIONS An Employee who was a participant in a plan qualified under Code Section 401 who receives (or is eligible to receive) from such plan a cash distribution or distribution of a note reflecting a loan to the Employee from his account under such plan that he elects either (i) to roll over immediately to a qualified retirement plan or (ii) to roll over into a conduit IRA from which he receives a later cash distribution, may elect to make a Rollover Contribution to the Plan if he is entitled under Code Section 402(c) or 408(d)(3)(A) to roll over such distribution to another qualified retirement plan. The Administrator may require an Employee to provide it with such information as it deems necessary or desirable to show that he is entitled to roll over such distribution to another qualified retirement plan. An Employee shall make a Rollover Contribution to the Plan by delivering, or causing to be delivered, to the Trustee the cash and/or promissory note that constitutes the Rollover Contribution amount. If the Employee received a distribution that he is rolling over, such delivery must be made within 60 days of receipt of the distribution from the plan or from the conduit IRA in the manner prescribed by the Administrator. 5.3 VESTING OF ROLLOVER CONTRIBUTIONS A Participant's vested interest in his Rollover Contributions Sub-Account shall be at all times 100 percent. 20 ARTICLE VI EMPLOYER CONTRIBUTIONS 6.1 CONTRIBUTION PERIOD The Contribution Periods for Employer Contributions shall be as follows: (a) The Contribution Period for Regular Matching Contributions under the Plan is each Plan Year. (b) The Contribution Period for Additional Discretionary Matching Contributions is each Plan Year. (c) The Contribution Period for Qualified Nonelective Contributions under the Plan is each Plan Year. 6.2 QUALIFIED NONELECTIVE CONTRIBUTIONS Each Employer may, in its discretion, make a Qualified Nonelective Contribution to the Plan for the Contribution Period in an amount determined by the Sponsor. 6.3 ALLOCATION OF QUALIFIED NONELECTIVE CONTRIBUTIONS Any Qualified Nonelective Contribution made for a Contribution Period shall be allocated among the Eligible Employees during the Contribution Period who have met the allocation requirements for Qualified Nonelective Contributions described in this Article, other than any such Eligible Employee who is a Highly Compensated Employee. The allocable share of each such Eligible Employee in the Qualified Nonelective Contribution shall be in the ratio which his Compensation from the Employer for the Plan Year bears to the aggregate of such Compensation for all such Eligible Employees. 6.4 AMOUNT AND ALLOCATION OF REGULAR MATCHING CONTRIBUTIONS Each Employer shall make a Regular Matching Contribution to the Plan for each Contribution Period on behalf of each of its Eligible Employees during the Contribution Period who has met the allocation requirements for Regular Matching Contributions described in this Article. Prior to January 1, 2003, the amount of such Regular Matching Contribution shall be equal to ten percent of the Tax-Deferred Contributions made for the Contribution Period on behalf of such Eligible Employee. Effective on and after January 1, 2003, the amount of such Regular Matching Contribution shall be equal to 25 percent of the Tax-Deferred Contributions made for the Contribution Period on behalf of such Eligible Employee. 21 6.5 ADDITIONAL DISCRETIONARY MATCHING CONTRIBUTIONS In addition to its Regular Matching Contribution, each Employer may make an Additional Discretionary Matching Contribution to the Plan for each Contribution Period on behalf of each of its Eligible Employees who has met the allocation requirements for Additional Discretionary Matching Contributions described in this Article. The amount of any such Additional Discretionary Matching Contribution with respect to similarly situated Eligible Employees, as determined by the Employer in a non-discriminatory manner, shall be equal to a uniform percentage, determined by the Employer, in its discretion, of the Tax-Deferred Contributions made on behalf of each such similarly situated Eligible Employee for the Contribution Period. 6.6 LIMIT ON TAX-DEFERRED CONTRIBUTIONS MATCHED Notwithstanding any other provision of this Article to the contrary, effective on and after January 1, 2003, Tax-Deferred Contributions that exceed four percent of the Eligible Employee's Compensation for a Contribution Period shall be excluded in determining the amount and allocation of Regular Matching Contributions with respect to such Eligible Employee for the Contribution Period. The exclusions described above shall not apply in determining the amount and allocation of any Additional Discretionary Matching Contribution made by an Employer. 6.7 QUALIFIED MATCHING CONTRIBUTIONS An Employer may designate any portion or all of its Matching Contribution as a Qualified Matching Contribution. Amounts that are designated as Qualified Matching Contributions shall be accounted for separately and may be withdrawn only as permitted under the Plan. 6.8 VERIFICATION OF AMOUNT OF EMPLOYER CONTRIBUTIONS BY THE SPONSOR The Sponsor shall verify the amount of Employer Contributions to be made by each Employer in accordance with the provisions of the Plan. Notwithstanding any other provision of the Plan to the contrary, the Sponsor shall determine the portion of the Employer Contribution to be made by each Employer with respect to an Employee who transfers from employment with one Employer as an Employee to employment with another Employer as an Employee. 6.9 PAYMENT OF EMPLOYER CONTRIBUTIONS Employer Contributions made for a Contribution Period shall be paid in cash to the Trustee within the period of time required under the Code in order for the contribution to be deductible by the Employer in determining its Federal income taxes for the Plan Year. 22 6.10 ALLOCATION REQUIREMENTS FOR EMPLOYER CONTRIBUTIONS A person who was an Eligible Employee with respect to Matching Contributions during a Contribution Period shall be eligible to receive an allocation of Regular Matching Contributions for such Contribution Period only if (i) he is employed as an Employee on the last day of the Contribution Period and (ii) he has completed at least 1,000 Hours of Service during the Contribution Period. The number of Hours of Service required to receive an allocation of Regular Matching Contributions hereunder shall be pro-rated for any short Contribution Period. A person who was an Eligible Employee with respect to Matching Contributions during a Contribution Period shall be eligible to receive an allocation of Additional Discretionary Matching Contributions for such Contribution Period only if (i) he is employed on the last day of the Contribution Period and (ii) he has completed at least 1,000 Hours of Service during the Contribution Period. The number of Hours of Service required to receive an allocation of Additional Discretionary Matching Contributions hereunder shall be pro-rated for any short Contribution Period. A person who was an Eligible Employee at any time during a Contribution Period shall be eligible to receive an allocation of Qualified Nonelective Contributions for such Contribution Period. 6.11 EXCEPTIONS TO ALLOCATION REQUIREMENTS FOR EMPLOYER CONTRIBUTIONS Notwithstanding any other provision of the Plan to the contrary, the last day and annual service allocation requirements described above shall not apply to a person who terminates employment during the Contribution Period on or after his Normal Retirement Date or because of death or Disability. 6.12 VESTING OF EMPLOYER CONTRIBUTIONS A Participant's vested interest in his Qualified Nonelective and Qualified Matching Contributions Sub-Accounts shall be at all times 100 percent. A Participant's vested interest in his Regular and Additional Discretionary Matching Contributions Sub-Accounts shall be determined in accordance with the following schedule:
- ----------------------------------------------------------- -------------------------------------------------------- YEARS OF VESTING SERVICE VESTED INTEREST - ----------------------------------------------------------- -------------------------------------------------------- Less than 1 0% - ----------------------------------------------------------- -------------------------------------------------------- 1, but less than 2 25% - ----------------------------------------------------------- -------------------------------------------------------- 2, but less than 3 50% - ----------------------------------------------------------- -------------------------------------------------------- - ----------------------------------------------------------- --------------------------------------------------------
23
- ----------------------------------------------------------- -------------------------------------------------------- YEARS OF VESTING SERVICE VESTED INTEREST - ----------------------------------------------------------- -------------------------------------------------------- 3, but less than 4 75% - ----------------------------------------------------------- -------------------------------------------------------- 4 or more 100% - ----------------------------------------------------------- --------------------------------------------------------
Notwithstanding the foregoing, if a Participant is employed by an Employer or a Related Company on his Normal Retirement Date, the date he becomes Disabled, or the date he dies, his vested interest in his Regular and Additional Discretionary Matching Contributions Sub-Accounts shall be 100 percent. 6.13 ELECTION OF FORMER VESTING SCHEDULE If the Sponsor adopts an amendment to the Plan that directly or indirectly affects the computation of a Participant's vested interest in his Employer Contributions Sub-Account, any Participant with three or more years of Vesting Service shall have a right to have his vested interest in his Employer Contributions Sub-Account continue to be determined under the vesting provisions in effect prior to the amendment rather than under the new vesting provisions, unless the vested interest of the Participant in his Employer Contributions Sub-Account under the Plan as amended is not at any time less than such vested interest determined without regard to the amendment. A Participant shall exercise his right under this Section by giving written notice of his exercise thereof to the Administrator within 60 days after the latest of (i) the date he receives notice of the amendment from the Administrator, (ii) the effective date of the amendment, or (iii) the date the amendment is adopted. Notwithstanding the foregoing, a Participant's vested interest in his Employer Contributions Sub-Account on the effective date of such an amendment shall not be less than his vested interest in his Employer Contributions Sub-Account immediately prior to the effective date of the amendment. 6.14 FORFEITURES TO REDUCE EMPLOYER CONTRIBUTIONS Notwithstanding any other provision of the Plan to the contrary, the amount of the Employer Contribution required under this Article for a Plan Year shall be reduced by the amount of any forfeitures occurring during the Plan Year or any prior Plan Year that are not used to pay Plan expenses and that are applied against Employer Contributions as provided in Article XIV. 24 ARTICLE VII LIMITATIONS ON CONTRIBUTIONS 7.1 DEFINITIONS For purposes of this Article, the following terms have the following meanings: The "AGGREGATE LIMIT" means the sum of (i) 125 percent of the greater of the average "contribution percentage" for "eligible participants" other than Highly Compensated Employees or the average "deferral percentage" for Eligible Employees other than Highly Compensated Employees and (ii) the lesser of 200 percent or two plus the lesser of such average "contribution percentage" or average "deferral percentage", or, if it would result in a larger "aggregate limit", the sum of (iii) 125 percent of the lesser of the average "contribution percentage" for "eligible participants" other than Highly Compensated Employees or the average "deferral percentage" for Eligible Employees other than Highly Compensated Employees and (iv) the lesser of 200 percent or two plus the greater of such average "contribution percentage" or average "deferral percentage". For purposes of determining the "aggregate limit", the "contribution percentages" and "deferral percentages" used shall be for the applicable "testing year". The "ANNUAL ADDITION" with respect to a Participant for a "limitation year" means the sum of the Tax-Deferred Contributions and Employer Contributions allocated to his Account for the "limitation year" (including any "excess contributions" that are distributed pursuant to this Article), the employer contributions, "employee contributions", and forfeitures allocated to his accounts for the "limitation year" under any other qualified defined contribution plan (whether or not terminated) maintained by an Employer or a Related Company concurrently with the Plan, and amounts described in Code Sections 415(l)(2) and 419A(d)(2) allocated to his account for the "limitation year". The "CONTRIBUTION PERCENTAGE" with respect to an "eligible participant" for a particular Plan Year means the ratio of the Matching Contributions made to the Plan on his behalf for the Plan Year to his "test compensation" for such Plan Year. To the extent permitted by regulations issued under Code Section 401(m), the Sponsor may elect to include the Tax-Deferred Contributions and/or Qualified Nonelective Contributions made to the Plan on an "eligible participant's" behalf for the Plan Year in computing the numerator of such "eligible participant's" "contribution percentage". Notwithstanding the foregoing, any Tax-Deferred Contributions, Qualified Matching Contributions, and/or Qualified Nonelective Contributions that are included in determining the numerator of an "eligible participant's" "deferral percentage" may not be included in determining the numerator of his "contribution percentage". Contributions made on an "eligible participant's" behalf for a Plan Year shall be included in determining his "contribution percentage" for such Plan Year only if the contributions are allocated to the "eligible participant's" Account as of a date within such Plan Year and are made 25 to the Plan before the end of the 12-month period immediately following the Plan Year to which the contributions relate. For Plan Years in which the "testing year" means the Plan Year preceding the Plan Year for which the limitation on Matching Contributions described in Section 7.7 is being determined, contributions included for purposes of determining the "contribution percentage" for the "testing year" of an "eligible participant" who is not a Highly Compensated Employee must be made before the last day of the Plan Year for which the limitation is being determined. The determination of an "eligible participant's" "contribution percentage" shall be made after any reduction required to satisfy the Code Section 415 limitations is made as provided in this Article VII and shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. Effective for Plan Years beginning on or after January 1, 1999, if an Employer elects to change from the current year testing method to the prior year testing method, Tax-Deferred Contributions that were included in computing the numerator of an "eligible participant's" "contribution percentage" under the current year testing method for the Plan Year immediately preceding the Plan Year in which the prior year testing method is first effective, Qualified Matching Contributions that were included in computing the numerator of an "eligible participant's" "deferral percentage" under the current year testing method for such immediately preceding Plan Year, and Qualified Nonelective Contributions that were included in computing the numerator of an "eligible participant's" "contribution percentage" or "deferral percentage" under the current year testing method for such immediately preceding Plan Year shall not be included in computing the numerator of a non-Highly Compensated Employee's "contribution percentage" under the prior year testing method for such immediately preceding Plan Year. The "DEFERRAL PERCENTAGE" with respect to an Eligible Employee for a particular Plan Year means the ratio of the Tax-Deferred Contributions made on his behalf for the Plan Year to his "test compensation" for the Plan Year. To the extent permitted by regulations issued under Code Section 401(k), the Sponsor may elect to include Qualified Matching Contributions and/or Qualified Nonelective Contributions made to the Plan on the Eligible Employee's behalf for the Plan Year in computing the numerator of such Eligible Employee's "deferral percentage". Notwithstanding the foregoing, any Tax-Deferred Contributions, Qualified Matching Contributions, and/or Qualified Nonelective Contributions that are included in determining the numerator of an Eligible Employee's "contribution percentage" may not be included in determining the numerator of his "deferral percentage". Contributions made on an Eligible Employee's behalf for a Plan Year shall be included in determining his "deferral percentage" for such Plan Year only if they meet the following requirements: (a) Tax-Deferred Contributions must relate to Compensation that would, but for the Eligible Employee's deferral election, have been received by the Eligible Employee during such Plan Year. 26 (b) The contributions must be allocated to the Eligible Employee's Account as of a date within such Plan Year. (c) The contributions must be made to the Plan before the end of the 12-month period immediately following the Plan Year to which they relate. For Plan Years in which the "testing year" means the Plan Year preceding the Plan Year for which the limitation on Tax-Deferred Contributions described in Section 7.4 is being determined, Qualified Matching Contributions and Qualified Nonelective Contributions included for purposes of determining the "deferral percentage" of an Eligible Employee who is not a Highly Compensated Employee must be made before the last day of the Plan Year for which the limitation is being determined. The determination of an Eligible Employee's "deferral percentage" shall be made after any reduction required to satisfy the Code Section 415 limitations is made as provided in this Article VII and shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. An "ELECTIVE CONTRIBUTION" means any employer contribution made to a plan maintained by an Employer or a Related Company on behalf of a Participant in lieu of cash compensation pursuant to his written election to defer under any qualified CODA as described in Code Section 401(k), any simplified employee pension cash or deferred arrangement as described in Code Section 402(h)(1)(B), any eligible deferred compensation plan under Code Section 457, or any plan as described in Code Section 501(c)(18), and any contribution made on behalf of the Participant by an Employer or a Related Company for the purchase of an annuity contract under Code Section 403(b) pursuant to a salary reduction agreement. An "ELIGIBLE PARTICIPANT" means any Eligible Employee who is eligible to have Tax-Deferred Contributions made on his behalf (if Tax-Deferred Contributions are taken into account in determining "contribution percentages"), or to participate in the allocation of Matching Contributions. An "EMPLOYEE CONTRIBUTION" means any employee after-tax contribution allocated to an Eligible Employee's account under any qualified plan of an Employer or a Related Company. An "EXCESS CONTRIBUTION" means any contribution made to the Plan on behalf of a Participant that exceeds one of the limitations described in this Article. An "EXCESS DEFERRAL" with respect to a Participant means that portion of a Participant's Tax-Deferred Contributions for his taxable year that, when added to amounts deferred for such taxable year under other plans or arrangements described in Code Section 401(k), 408(k), or 403(b) (other than any such plan or arrangement that is maintained by an Employer or a Related Company), would exceed the dollar limit imposed under Code Section 402(g) as in effect on 27 January 1 of the calendar year in which such taxable year begins and is includible in the Participant's gross income under Code Section 402(g). A "LIMITATION YEAR" means the calendar year. A "MATCHING CONTRIBUTION" means any employer contribution allocated to an Eligible Employee's account under any plan of an Employer or a Related Company solely on account of "elective contributions" made on his behalf or "employee contributions" made by him. A "QUALIFIED MATCHING CONTRIBUTION" means any employer contribution allocated to an Eligible Employee's account under any plan of an Employer or a Related Company solely on account of "elective contributions" made on his behalf or "employee contributions" made by him that is a qualified matching contribution as defined in regulations issued under Code Section 401(k), is nonforfeitable when made, and is distributable only as permitted in regulations issued under Code Section 401(k). A "QUALIFIED NONELECTIVE CONTRIBUTION" means any employer contribution allocated to an Eligible Employee's account under any plan of an Employer or a Related Company that the Participant could not elect instead to receive in cash, that is a qualified nonelective contribution as defined in Code Sections 401(k) and 401(m) and regulations issued thereunder, is nonforfeitable when made, and is distributable only as permitted in regulations issued under Code Section 401(k). The "TEST COMPENSATION" of an Eligible Employee or "eligible participant" for a Plan Year means compensation as defined in Code Section 414(s) and regulations issued thereunder, limited, however, to $150,000 (subject to adjustment annually as provided in Code Sections 401(a)(17)(B) and 415(d); provided, however, that the dollar increase in effect on January 1 of any calendar year, if any, is effective for Plan Years beginning in such calendar year) and, if elected by the Sponsor, further limited solely to "test compensation" of an Employee attributable to periods of time when he is an Eligible Employee or "eligible participant". If the "test compensation" of an Eligible Employee or "eligible participant" is determined over a period of time that contains fewer than 12 calendar months, then the annual compensation limitation described above shall be adjusted with respect to that Eligible Employee or "eligible participant" by multiplying the annual compensation limitation in effect for the Plan Year by a fraction the numerator of which is the number of full months in the period and the denominator of which is 12; provided, however, that no proration is required for an Eligible Employee or "eligible participant" who is covered under the Plan for less than one full Plan Year if the formula for allocations is based on Compensation for a period of at least 12 months. The "TESTING YEAR" means the Plan Year immediately preceding the Plan Year for which the limitations on "deferral percentages" and "contribution percentages" of Highly Compensated Employees are being determined. 28 For Plan Years prior to the effective date of this amendment and restatement, the limitations on "deferral percentages" and "contribution percentages" of Highly Compensated Employees were determined using the Plan Year for which the limitations were being determined as the "testing year". The current Plan Year was the "testing year" for the following Plan Year(s): 1997 and 1998. 7.2 CODE SECTION 402(g) LIMIT In no event shall the amount of the Tax-Deferred Contributions made on behalf of an Eligible Employee for his taxable year, when aggregated with any "elective contributions" made on behalf of the Eligible Employee under any other plan of an Employer or a Related Company for his taxable year, exceed the dollar limit imposed under Code Section 402(g), as in effect on January 1 of the calendar year in which such taxable year begins. In the event that the Administrator determines that the reduction percentage elected by an Eligible Employee will result in his exceeding the Code Section 402(g) limit, the Administrator may adjust the reduction authorization of such Eligible Employee by reducing the percentage of his Tax-Deferred Contributions to such smaller percentage that will result in the Code Section 402(g) limit not being exceeded. If the Administrator determines that the Tax-Deferred Contributions made on behalf of an Eligible Employee would exceed the Code Section 402(g) limit for his taxable year, the Tax-Deferred Contributions for such Participant shall be automatically suspended for the remainder, if any, of such taxable year. If an Employer notifies the Administrator that the Code Section 402(g) limit has nevertheless been exceeded by an Eligible Employee for his taxable year, the Tax-Deferred Contributions that, when aggregated with "elective contributions" made on behalf of the Eligible Employee under any other plan of an Employer or a Related Company, would exceed the Code Section 402(g) limit, plus any income and minus any losses attributable thereto, shall be distributed to the Eligible Employee no later than the April 15 immediately following such taxable year. Any Tax-Deferred Contributions that are distributed to an Eligible Employee in accordance with this Section shall not be taken into account in determining the Eligible Employee's "deferral percentage" for the "testing year" in which the Tax-Deferred Contributions were made, unless the Eligible Employee is a Highly Compensated Employee. If an amount of Tax-Deferred Contributions is distributed to a Participant in accordance with this Section, Matching Contributions that are attributable solely to the distributed Tax-Deferred Contributions, plus any income and minus any losses attributable thereto, shall be forfeited by the Participant no earlier than the date on which distribution of Tax-Deferred Contributions pursuant to this Section occurs and no later than the last day of the Plan Year following the Plan Year for which the Matching Contributions were made. 29 7.3 DISTRIBUTION OF EXCESS DEFERRALS Notwithstanding any other provision of the Plan to the contrary, if a Participant notifies the Administrator in writing no later than the March 1 following the close of the Participant's taxable year that "excess deferrals" have been made on his behalf under the Plan for such taxable year, the "excess deferrals", plus any income and minus any losses attributable thereto, shall be distributed to the Participant no later than the April 15 immediately following such taxable year. Any Tax-Deferred Contributions that are distributed to a Participant in accordance with this Section shall nevertheless be taken into account in determining the Participant's "deferral percentage" for the "testing year" in which the Tax-Deferred Contributions were made. If an amount of Tax-Deferred Contributions is distributed to a Participant in accordance with this Section, Matching Contributions that are attributable solely to the distributed Tax-Deferred Contributions, plus any income and minus any losses attributable thereto, shall be forfeited by the Participant no earlier than the date on which distribution of Tax-Deferred Contributions pursuant to this Section occurs and no later than the last day of the Plan Year following the Plan Year for which the Matching Contributions were made. 7.4 LIMITATION ON TAX-DEFERRED CONTRIBUTIONS OF HIGHLY COMPENSATED EMPLOYEES Notwithstanding any other provision of the Plan to the contrary, the Tax-Deferred Contributions made with respect to a Plan Year on behalf of Eligible Employees who are Highly Compensated Employees may not result in an average "deferral percentage" for such Eligible Employees that exceeds the greater of: (a) a percentage that is equal to 125 percent of the average "deferral percentage" for all other Eligible Employees for the "testing year"; or (b) a percentage that is not more than 200 percent of the average "deferral percentage" for all other Eligible Employees for the "testing year" and that is not more than two percentage points higher than the average "deferral percentage" for all other Eligible Employees for the "testing year", unless the "excess contributions", determined as provided in Section 7.5, are distributed as provided in Section 7.6. In order to assure that the limitation contained herein is not exceeded with respect to a Plan Year, the Administrator is authorized to suspend completely further Tax-Deferred Contributions on behalf of Highly Compensated Employees for any remaining portion of a Plan Year or to adjust the projected "deferral percentages" of Highly Compensated Employees by reducing the percentage of their deferral elections for any remaining portion of a Plan Year to such smaller percentage that will result in the limitation set forth above not being exceeded. In the event of any such suspension or reduction, Highly Compensated Employees affected thereby shall be 30 notified of the reduction or suspension as soon as possible and shall be given an opportunity to make a new deferral election to be effective the first day of the next following Plan Year. In the absence of such an election, the election in effect immediately prior to the suspension or adjustment described above shall be reinstated as of the first day of the next following Plan Year. In determining the "deferral percentage" for any Eligible Employee who is a Highly Compensated Employee for the Plan Year, "elective contributions", "qualified nonelective contributions", and "qualified matching contributions" (to the extent that "qualified nonelective contributions" and "qualified matching contributions" are taken into account in determining "deferral percentages") made to his accounts under any plan of an Employer or a Related Company that is not mandatorily disaggregated pursuant to IRS regulations Section 1.410(b)-7(c), as modified by Section 1.401(k)-1(g)(11), shall be treated as if all such contributions were made to the Plan; provided, however, that if such a plan has a plan year different from the Plan Year, any such contributions made to the Highly Compensated Employee's accounts under the plan for the plan year ending with or within the same calendar year as the Plan Year shall be treated as if such contributions were made to the Plan. Notwithstanding the foregoing, such contributions shall not be treated as if they were made to the Plan if regulations issued under Code Section 401(k) do not permit such plan to be aggregated with the Plan. If one or more plans of an Employer or Related Company are aggregated with the Plan for purposes of satisfying the requirements of Code Section 401(a)(4) or 410(b), then "deferral percentages" under the Plan shall be calculated as if the Plan and such one or more other plans were a single plan. Plans may be aggregated to satisfy Code Section 401(k) only if they have the same plan year. The Administrator shall maintain records sufficient to show that the limitation contained in this Section was not exceeded with respect to any Plan Year and the amount of the "qualified nonelective contributions" and/or "qualified matching contributions" taken into account in determining "deferral percentages" for any Plan Year. 7.5 DETERMINATION AND ALLOCATION OF EXCESS TAX-DEFERRED CONTRIBUTIONS AMONG HIGHLY COMPENSATED EMPLOYEES Notwithstanding any other provision of the Plan to the contrary, in the event that the limitation on Tax-Deferred Contributions described in Section 7.4 is exceeded in any Plan Year, the Administrator shall determine the dollar amount of the excess by reducing the dollar amount of the contributions included in determining the "deferral percentage" of Highly Compensated Employees in order of their "deferral percentages" as follows: (a) The highest "deferral percentage(s)" shall be reduced to the greater of (1) the maximum "deferral percentage" that satisfies the limitation on Tax-Deferred Contributions described in Section 7.4 or (2) the next highest "deferral percentage". 31 (b) If the limitation on Tax-Deferred Contributions described in Section 7.4 would still be exceeded after application of the provisions of paragraph (a), the Administrator shall continue reducing "deferral percentages" of Highly Compensated Employees, continuing with the next highest "deferral percentage", in the manner provided in paragraph (a) until the limitation on Tax-Deferred Contributions described in Section 7.4 is satisfied. The determination of the amount of "excess contributions" hereunder shall be made after Tax-Deferred Contributions and "excess deferrals" have been distributed pursuant to Sections 7.2 and 7.3, if applicable. After determining the dollar amount of the "excess contributions" that have been made to the Plan, the Administrator shall allocate such excess among Highly Compensated Employees in order of the dollar amount of the Tax-Deferred and Qualified Matching Contributions (to the extent such contributions are included in determining "deferral percentages") allocated to their Accounts as follows: (c) The contributions made on behalf of the Highly Compensated Employee(s) with the largest dollar amount of Tax-Deferred and Qualified Matching Contributions allocated to his Account for the Plan Year shall be reduced by the dollar amount of the excess (with such dollar amount being allocated equally among all such Highly Compensated Employees), but not below the dollar amount of such contributions made on behalf of the Highly Compensated Employee(s) with the next highest dollar amount of such contributions allocated to his Account for the Plan Year. (d) If the excess has not been fully allocated after application of the provisions of paragraph (c), the Administrator shall continue reducing the contributions made on behalf of Highly Compensated Employees, continuing with the Highly Compensated Employees with the largest remaining dollar amount of such contributions allocated to their Accounts for the Plan Year, in the manner provided in paragraph (c) until the entire excess determined above has been allocated. 7.6 DISTRIBUTION OF EXCESS TAX-DEFERRED CONTRIBUTIONS "Excess contributions" allocated to a Highly Compensated Employee pursuant to the preceding Section, plus any income and minus any losses attributable thereto, shall be distributed to the Highly Compensated Employee prior to the end of the next succeeding Plan Year. If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year for which the excess occurred, an excise tax may be imposed under Code Section 4979 on the Employer maintaining the Plan with respect to such amounts. Excess amounts shall be distributed from the Highly Compensated Employee's Tax-Deferred Contributions and Qualified Matching Contributions Sub-Accounts in proportion to the Tax- 32 Deferred Contributions and Qualified Matching Contributions included in determining the Highly Compensated Employee's "deferral percentage" for the Plan Year. If an amount of Tax-Deferred Contributions is distributed to a Participant in accordance with this Section, Matching Contributions that are attributable solely to the distributed Tax-Deferred Contributions, plus any income and minus any losses attributable thereto, shall be forfeited by the Participant no earlier than the date on which distribution of Tax-Deferred Contributions pursuant to this Section occurs and no later than the last day of the Plan Year following the Plan Year for which the Matching Contributions were made. 7.7 LIMITATION ON MATCHING CONTRIBUTIONS OF HIGHLY COMPENSATED EMPLOYEES Notwithstanding any other provision of the Plan to the contrary, the Matching Contributions made with respect to a Plan Year on behalf of "eligible participants" who are Highly Compensated Employees may not result in an average "contribution percentage" for such "eligible participants" that exceeds the greater of: (a) a percentage that is equal to 125 percent of the average "contribution percentage" for all other "eligible participants" for the "testing year"; or (b) a percentage that is not more than 200 percent of the average "contribution percentage" for all other "eligible participants" for the "testing year" and that is not more than two percentage points higher than the average "contribution percentage" for all other "eligible participants" for the "testing year", unless the "excess contributions", determined as provided in Section 7.8, are forfeited or distributed as provided in Section 7.9. In determining the "contribution percentage" for any "eligible participant" who is a Highly Compensated Employee for the Plan Year, "matching contributions", "employee contributions", "qualified nonelective contributions", and "elective contributions" (to the extent that "qualified nonelective contributions" and "elective contributions" are taken into account in determining "contribution percentages") made to his accounts under any plan of an Employer or a Related Company that is not mandatorily disaggregated pursuant to IRS regulations Section 1.410(b)-7(c), as modified by IRS regulations Section 1.401(k)-1(g)(11), shall be treated as if all such contributions were made to the Plan; provided, however, that if such a plan has a plan year different from the Plan Year, any such contributions made to the Highly Compensated Employee's accounts under the plan for the plan year ending with or within the same calendar year as the Plan Year shall be treated as if such contributions were made to the Plan. Notwithstanding the foregoing, such contributions shall not be treated as if they were made to the Plan if regulations issued under Code Section 401(m) do not permit such plan to be aggregated with the Plan. 33 If one or more plans of an Employer or a Related Company are aggregated with the Plan for purposes of satisfying the requirements of Code Section 401(a)(4) or 410(b), the "contribution percentages" under the Plan shall be calculated as if the Plan and such one or more other plans were a single plan. Plans may be aggregated to satisfy Code Section 401(m) only if they have the same plan year. The Administrator shall maintain records sufficient to show that the limitation contained in this Section was not exceeded with respect to any Plan Year and the amount of the "elective contributions", "qualified nonelective contributions", and/or "qualified matching contributions" taken into account in determining "contribution percentages" for any Plan Year. 7.8 DETERMINATION AND ALLOCATION OF EXCESS MATCHING CONTRIBUTIONS AMONG HIGHLY COMPENSATED EMPLOYEES Notwithstanding any other provision of the Plan to the contrary, in the event that the limitation on Matching Contributions described in Section 7.7 is exceeded in any Plan Year, the Administrator shall determine the dollar amount of the excess by reducing the dollar amount of the contributions included in determining the "contribution percentage" of Highly Compensated Employees in order of their "contribution percentages" as follows: (a) The highest "contribution percentage(s)" shall be reduced to the greater of (1) the maximum "contribution percentage" that satisfies the limitation on Matching Contributions described in Section 7.7 or (2) the next highest "contribution percentage". (b) If the limitation on Matching Contributions described in Section 7.7 would still be exceeded after application of the provisions of paragraph (a), the Administrator shall continue reducing "contribution percentages" of Highly Compensated Employees, continuing with the next highest "contribution percentage", in the manner provided in paragraph (a) until the limitation on Matching Contributions described in Section 7.7 is satisfied. The determination of the amount of excess Matching Contributions shall be made after application of Sections 7.2, 7.3, and 7.6, if applicable. After determining the dollar amount of the "excess contributions" that have been made to the Plan, the Administrator shall allocate such excess among Highly Compensated Employees in order of the dollar amount of the Matching and Tax-Deferred Contributions (to the extent such contributions are included in determining "contribution percentages") allocated to their Accounts as follows: (c) The contributions made on behalf of the Highly Compensated Employee(s) with the largest dollar amount of Matching and Tax-Deferred Contributions allocated to his Account for the Plan Year shall be reduced by the dollar amount of the excess (with such 34 dollar amount being allocated equally among all such Highly Compensated Employees), but not below the dollar amount of such contributions made on behalf of the Highly Compensated Employee(s) with the next highest dollar amount of such contributions allocated to his Account for the Plan Year. (d) If the excess has not been fully allocated after application of the provisions of paragraph (c), the Administrator shall continue reducing the contributions made on behalf of Highly Compensated Employees, continuing with the Highly Compensated Employees with the largest remaining dollar amount of such contributions allocated to their Accounts for the Plan Year, in the manner provided in paragraph (c) until the entire excess determined above has been allocated. 7.9 FORFEITURE OR DISTRIBUTION OF EXCESS CONTRIBUTIONS "Excess contributions" allocated to a Highly Compensated Employee pursuant to the preceding Section, plus any income and minus any losses attributable thereto, shall be forfeited, to the extent forfeitable, or distributed to the Participant prior to the end of the next succeeding Plan Year as hereinafter provided. If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year for which the excess occurred, an excise tax may be imposed under Code Section 4979 on the Employer maintaining the Plan with respect to such amounts. The distribution or forfeiture requirement of this Section shall be satisfied by reducing contributions made by or on behalf of the Highly Compensated Employee to the extent necessary in the following order: (a) Matching Contributions included in determining the Highly Compensated Employee's "contribution percentage" shall be distributed or forfeited, as appropriate. (b) Tax-Deferred Contributions included in determining the Highly Compensated Employee's "contribution percentage" shall be distributed. Excess Matching Contributions shall be distributed only to the extent a Participant has a vested interest in his Matching Contributions Sub-Account and shall otherwise be forfeited. Any amounts forfeited with respect to a Participant pursuant to this Section shall be treated as a forfeiture under the Plan no later than the last day of the Plan Year following the Plan Year for which the Matching Contributions were made. 7.10 MULTIPLE USE LIMITATION Notwithstanding any other provision of the Plan to the contrary, the following multiple use limitation as required under Code Section 401(m) shall apply: the sum of the average "deferral percentage" for Eligible Employees who are Highly Compensated Employees and the average "contribution percentage" for "eligible participants" who are Highly Compensated Employees 35 may not exceed the "aggregate limit". In the event that, after satisfaction of the limitations provided under this Article, it is determined that contributions under the Plan fail to satisfy the multiple use limitation contained herein, the multiple use limitation shall be satisfied by further reducing the "contribution percentages" of "eligible participants" who are Highly Compensated Employees to the extent necessary to eliminate the excess, as provided in the preceding Sections. Instead of reducing "contribution percentages", the Administrator may determine to satisfy the multiple use limitation in an alternative manner, consistently applied, that may be permitted by regulations issued under Code Section 401(m). 7.11 TREATMENT OF FORFEITED MATCHING CONTRIBUTIONS Any Matching Contributions that are forfeited pursuant to the provisions of the preceding Sections of this Article shall be treated as a forfeiture under the Plan and applied in accordance with the provisions of Article XIV. 7.12 DETERMINATION OF INCOME OR LOSS The income or loss attributable to "excess contributions" that are distributed pursuant to this Article shall be determined for the preceding Plan Year under the method otherwise used for allocating income or loss to Participants' Accounts. 7.13 CODE SECTION 415 LIMITATIONS ON CREDITING OF CONTRIBUTIONS AND FORFEITURES Notwithstanding any other provision of the Plan to the contrary, the "annual addition" with respect to a Participant for a "limitation year" shall in no event exceed the lesser of (i) $30,000 (adjusted as provided in Code Section 415(d)) or (ii) 25 percent of the Participant's compensation, as defined in Code Section 415(c)(3) and regulations issued thereunder, for the "limitation year"; provided, however, that the limit in clause (i) shall be pro-rated for any short "limitation year". If the "annual addition" to the Account of a Participant in any "limitation year" would otherwise exceed the amount that may be applied for his benefit under the limitation contained in this Section, the limitation shall be satisfied by reducing contributions made to the Participant's Account to the extent necessary in the following order: Tax-Deferred Contributions made on behalf of the Participant for the "limitation year" that have not been matched, if any, shall be reduced. Tax-Deferred Contributions made on behalf of the Participant for the "limitation year" that have been matched, if any, and the Matching Contributions attributable thereto shall be reduced pro rata. Qualified Nonelective Contributions otherwise allocable to the Participant's Account for the "limitation year", if any, shall be reduced. 36 The amount of any reduction of Tax-Deferred Contributions (plus any income attributable thereto) shall be returned to the Participant. The amount of any reduction of Employer Contributions shall be deemed a forfeiture for the "limitation year". Amounts deemed to be forfeitures under this Section shall be held unallocated in a suspense account established for the "limitation year" and shall be applied against the Employer's contribution obligation for the next following "limitation year" (and succeeding "limitation years", as necessary). If a suspense account is in existence at any time during a "limitation year", all amounts in the suspense account must be applied against the Employer's contribution obligation before any further contributions that would constitute "annual additions" may be made to the Plan. No suspense account established hereunder shall share in any increase or decrease in the net worth of the Trust. For purposes of this Article, excesses shall result only from the allocation of forfeitures, a reasonable error in estimating a Participant's annual compensation (as defined in Code Section 415(c)(3) and regulations issued thereunder), a reasonable error in determining the amount of "elective contributions" that may be made with respect to any Participant under the limits of Code Section 415, or other limited facts and circumstances that justify the availability of the provisions set forth above. 7.14 APPLICATION OF CODE SECTION 415 LIMITATIONS WHERE PARTICIPANT IS COVERED UNDER OTHER QUALIFIED DEFINED CONTRIBUTION PLAN If a Participant is covered by any other qualified defined contribution plan (whether or not terminated) maintained by an Employer or a Related Company concurrently with the Plan, and if the "annual addition" for the "limitation year" would otherwise exceed the amount that may be applied for the Participant's benefit under the limitation contained in the preceding Section, such excess shall be reduced first by returning or forfeiting, as provided under the applicable defined contribution plan, the contributions last allocated to the Participant's accounts for the "limitation year" under all such defined contribution plans, and, to the extent such contributions are returned to the Participant, the income attributable thereto. If contributions are allocated to the defined contribution plans as of the same date, any excess shall be allocated pro rata among the defined contribution plans. For purposes of determining the order of reduction hereunder, contributions to a simplified employee pension plan described in Code Section 408(k) shall be deemed to have been allocated first and contributions to a welfare benefit fund or individual medical account shall be deemed to have been allocated next, regardless of the date such contributions were actually allocated. 7.15 SCOPE OF LIMITATIONS The Code Section 415 limitations contained in the preceding Sections shall be applicable only with respect to benefits provided pursuant to defined contribution plans and defined benefit plans described in Code Section 415(k). For purposes of applying the Code Section 415 limitations 37 contained in the preceding Sections, the term "Related Company" shall be adjusted as provided in Code Section 415(h). 38 ARTICLE VIII TRUST FUNDS AND ACCOUNTS 8.1 GENERAL FUND The Trustee shall maintain a General Fund as required to hold and administer any assets of the Trust that are not allocated among the Investment Funds as provided in the Plan or the Trust Agreement. The General Fund shall be held and administered as a separate common trust fund. The interest of each Participant or Beneficiary under the Plan in the General Fund shall be an undivided interest. 8.2 INVESTMENT FUNDS The Sponsor shall determine the number and type of Investment Funds and shall communicate the same and any changes therein in writing to the Administrator and the Trustee. Each Investment Fund shall be held and administered as a separate common trust fund. The interest of each Participant or Beneficiary under the Plan in any Investment Fund shall be an undivided interest. The Sponsor may determine to offer one or more Investment Funds that are invested primarily in Employer Stock issued by an Employer or a Related Company that are publicly traded and are "qualifying employer securities" as defined in ERISA Section 407(d)(5). In no event may a Participant's Tax-Deferred Contributions made for any Plan Year beginning on or after January 1, 1999 in excess of one percent of the Participant's Compensation for such Plan Year be required to be invested in such equity securities. Notwithstanding any other provision of the Plan to the contrary, effective November 25, 2002, investments to such Employer Stock Investment Fund shall cease to be made under the Plan. The Employer Stock Investment Fund shall be subject to such other limitations and restrictions as the Administrator determines are necessary and advisable to conform to federal rules and regulations and to protect the assets held in Participants' Accounts. 8.3 LOAN INVESTMENT FUND If a loan from the Plan to a Participant is approved in accordance with the provisions of Article XII, the Sponsor shall direct the establishment and maintenance of a loan Investment Fund in the Participant's name. The assets of the loan Investment Fund shall be held as a separate trust fund. A Participant's loan Investment Fund shall be invested in the note(s) reflecting the loan(s) made to the Participant in accordance with the provisions of Article XII. Notwithstanding any other provision of the Plan to the contrary, income received with respect to a Participant's loan Investment Fund shall be allocated and the loan Investment Fund shall be administered as provided in Article XII. 39 8.4 INCOME ON TRUST Any dividends, interest, distributions, or other income received by the Trustee with respect to any Trust Fund maintained hereunder shall be allocated by the Trustee to the Trust Fund for which the income was received. 8.5 ACCOUNTS As of the first date a contribution is made by or on behalf of an Employee there shall be established an Account in his name reflecting his interest in the Trust. Each Account shall be maintained and administered for each Participant and Beneficiary in accordance with the provisions of the Plan. The balance of each Account shall be the balance of the account after all credits and charges thereto, for and as of such date, have been made as provided herein. 8.6 SUB-ACCOUNTS A Participant's Account shall be divided into such separate, individual Sub-Accounts as are necessary or appropriate to reflect the Participant's interest in the Trust. 40 ARTICLE IX LIFE INSURANCE CONTRACTS 9.1 NO LIFE INSURANCE CONTRACTS A Participant's Account may not be invested in life insurance contracts on the life of the Participant. 41 ARTICLE X DEPOSIT AND INVESTMENT OF CONTRIBUTIONS 10.1 FUTURE CONTRIBUTION INVESTMENT ELECTIONS Each Eligible Employee shall make an investment election in the manner and form prescribed by the Administrator directing the manner in which the contributions made on his behalf shall be invested. An Eligible Employee's investment election shall specify the percentage, in the percentage increments prescribed by the Administrator, of such contributions that shall be allocated to one or more of the Investment Funds with the sum of such percentages equaling 100 percent. The investment election by a Participant shall remain in effect until his entire interest under the Plan is distributed or forfeited in accordance with the provisions of the Plan or until he records a change of investment election with the Administrator, in such form as the Administrator shall prescribe. If recorded in accordance with any rules prescribed by the Administrator, a Participant's change of investment election may be implemented effective as of the business day on which the Administrator receives the Participant's instructions. 10.2 DEPOSIT OF CONTRIBUTIONS All contributions made on a Participant's behalf shall be deposited in the Trust and allocated among the Investment Funds in accordance with the Participant's currently effective investment election; provided, however, effective November 25, 2002, any contributions made to the Plan shall no longer be allocated to the Employer stock Investment Fund, until the Administrator directs otherwise. If no investment election is recorded with the Administrator at the time contributions are to be deposited to a Participant's Account, his contributions shall be allocated among the Investment Funds as directed by the Administrator. 10.3 ELECTION TO TRANSFER BETWEEN FUNDS A Participant may elect to transfer investments from any Investment Fund to any other Investment Fund. The Participant's transfer election shall specify a percentage, in the percentage increments prescribed by the Administrator, of the amount eligible for transfer that is to be transferred, which percentage may not exceed 100 percent; provided, however, effective November 25, 2002, the Plan shall not permit transfers of existing account balances into the Employer Stock Investment Fund. The Plan shall permit transfers of existing account balances out of the Employer Stock Investment Fund. Any transfer election must be recorded with the Administrator, in such form as the Administrator shall prescribe. Subject to any restrictions pertaining to a particular Investment Fund, if recorded in accordance with any rules prescribed by the Administrator, a Participant's transfer election may be implemented effective as of the business day on which the Administrator receives the Participant's instructions. 42 10.4 404(c) PROTECTION The Plan is intended to constitute a plan described in ERISA Section 404(c) and regulations issued thereunder. The fiduciaries of the Plan may be relieved of liability for any losses that are the direct and necessary result of investment instructions given by a Participant, his Beneficiary, or an alternate payee under a qualified domestic relations order. 10.5 SPECIAL RULES FOR INSIDER-PARTICIPANTS This Section applies only to an Insider-Participant's direction to invest (directly or indirectly) all or any portion of such Insider-Participant's Account in the Employer Stock Investment Fund and receipt of distributions from such Insider-Participant's Account invested in the Employer Stock Investment Fund. An Insider-Participant's right to direct the investment (directly or indirectly) of such Insider-Participant's Account in the Employer Stock Investment Fund or to receive distributions from such Insider-Participant's Account invested in the Employer Stock Investment Fund shall be governed by this Article, except to the extent that such rules conflict with the rules set forth in this Section, in which event the rules set forth in this Section shall control in order to qualify for the exemptions from Section 16 of the Securities Exchange Act of 1934, as amended (the "Act"), pursuant to Rule 16b-3 promulgated by the Securities and Exchange Commission. Any direction or distribution which is subject to the rules set forth in this Section must satisfy each of the provisions set forth below to the extent applicable. An Insider-Participant is a Participant who: (A) either (i) is or was in the prior six months an officer or director of an Employer or (ii) owns, directly or indirectly, more than ten percent of any class of Employer equity securities registered pursuant to Section 12 of the Act and (B) is subject to Section 16 of the Act and the rules promulgated thereunder by the Securities and Exchange Commission. An Insider-Participant's direction to transfer the investment of such Insider-Participant's Account either to or from the Employer Stock Investment Fund from any other funds under the Plan is subject to the provisions of Section 16 of the Act or the regulations promulgated thereunder. In the event the provisions of Section 16 of the Act or the regulations promulgated thereunder are amended, changing the parameters effecting the restrictions applicable to Insider-Participants, the above restrictions shall be deemed to be automatically amended to permit Insider-Participants to make transfers, distributions and elections in accordance with and to the extent provided by such amended provisions of the Act or regulations promulgated thereunder. Notwithstanding any other provision of the Plan to the contrary, effective November 25, 2002, an Insider-Participant's direction to invest (directly or indirectly) all or any portion of such Insider-Participant's Account to the Employer Stock Investment Fund shall cease to be made under the Plan. The Employer Stock Investment Fund and any other funds under the Plan are subject to the provisions of Section 16 of the Act or the regulations promulgated thereunder. 43 ARTICLE XI CREDITING AND VALUING ACCOUNTS 11.1 CREDITING ACCOUNTS All contributions made under the provisions of the Plan shall be credited to Accounts in the Trust Funds by the Trustee, in accordance with procedures established in writing by the Administrator, either when received or on the succeeding Valuation Date after valuation of the Trust Fund has been completed for such Valuation Date as provided in Section 11.2, as shall be determined by the Administrator. 11.2 VALUING ACCOUNTS Accounts in the Trust Funds shall be valued by the Trustee on the Valuation Date, in accordance with procedures established in writing by the Administrator, either in the manner adopted by the Trustee and approved by the Administrator or in the manner set forth in Section 11.3 as Plan valuation procedures, as determined by the Administrator. 11.3 PLAN VALUATION PROCEDURES With respect to the Trust Funds, the Administrator may determine that the following valuation procedures shall be applied. As of each Valuation Date hereunder, the portion of any Accounts in a Trust Fund shall be adjusted to reflect any increase or decrease in the value of the Trust Fund for the period of time occurring since the immediately preceding Valuation Date for the Trust Fund (the "valuation period") in the following manner: (a) First, the value of the Trust Fund shall be determined by valuing all of the assets of the Trust Fund at fair market value. (b) Next, the net increase or decrease in the value of the Trust Fund attributable to net income and all profits and losses, realized and unrealized, during the valuation period shall be determined on the basis of the valuation under paragraph (a) taking into account appropriate adjustments for contributions, loan payments, and transfers to and distributions, withdrawals, loans, and transfers from such Trust Fund during the valuation period. (c) Finally, the net increase or decrease in the value of the Trust Fund shall be allocated among Accounts in the Trust Fund in the ratio of the balance of the portion of such Account in the Trust Fund as of the preceding Valuation Date less any distributions, withdrawals, loans, and transfers from such Account balance in the Trust Fund since the Valuation Date to the aggregate balances of the portions of all Accounts in the Trust Fund similarly adjusted, and each Account in the Trust Fund shall be credited or charged with 44 the amount of its allocated share. Notwithstanding the foregoing, the Administrator may adopt such accounting procedures as it considers appropriate and equitable to establish a proportionate crediting of net increase or decrease in the value of the Trust Fund for contributions, loan payments, and transfers to and distributions, withdrawals, loans, and transfers from such Trust Fund made by or on behalf of a Participant during the valuation period. 11.4 FINALITY OF DETERMINATIONS The Trustee shall have exclusive responsibility for determining the value of each Account maintained hereunder. The Trustee's determinations thereof shall be conclusive upon all interested parties. 11.5 NOTIFICATION Within a reasonable period of time after the end of each Plan Year, the Administrator shall notify each Participant and Beneficiary of the value of his Account and Sub-Accounts as of a Valuation Date during the Plan Year. 45 ARTICLE XII LOANS 12.1 APPLICATION FOR LOAN A Participant who is a party in interest as defined in ERISA Section 3(14) may make application to the Administrator for a loan from his Account. Loans shall be made to Participants in accordance with written guidelines which are hereby incorporated into and made a part of the Plan. To the extent that such written guidelines comply with the requirements of Code Section 72(p), but are inconsistent with the provisions of this Article, such written guidelines shall be given effect. As collateral for any loan granted hereunder, the Participant shall grant to the Plan a security interest in his vested interest under the Plan equal to the amount of the loan; provided, however, that in no event may the security interest exceed 50 percent of the Participant's vested interest under the Plan determined as of the date as of which the loan is originated in accordance with Plan provisions. In the case of a Participant who is an active employee, the Participant also shall enter into an agreement to repay the loan by payroll withholding. No loan in excess of 50 percent of the Participant's vested interest under the Plan shall be made from the Plan. Loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other employees. A loan shall not be granted unless the Participant consents to the charging of his Account for unpaid principal and interest amounts in the event the loan is declared to be in default. If a Participant's Account is subject to the "automatic annuity" provisions under Article XVI, the Participant's spouse must consent in writing to any loan hereunder. Any spousal consent given pursuant to this Section must be made within the 90-day period ending on the date the Plan acquires a security interest in the Participant's Account, must acknowledge the effect of the loan, and must be witnessed by a Plan representative or a notary public. Such spousal consent shall be binding with respect to the consenting spouse and any subsequent spouse with respect to the loan. A new spousal consent shall be required if the Participant's Account is used for security in any renegotiation, extension, renewal, or other revision of the loan. 12.2 REDUCTION OF ACCOUNT UPON DISTRIBUTION Notwithstanding any other provision of the Plan, the amount of a Participant's Account that is distributable to the Participant or his Beneficiary under Article XIII or XV shall be reduced by the portion of his vested interest that is held by the Plan as security for any loan outstanding to the Participant, provided that the reduction is used to repay the loan. If distribution is made because of the Participant's death prior to the commencement of distribution of his Account and the Participant's vested interest in his Account is payable to more than one individual as Beneficiary, then the balance of the Participant's vested interest in his Account shall be adjusted 46 by reducing the vested account balance by the amount of the security used to repay the loan, as provided in the preceding sentence, prior to determining the amount of the benefit payable to each such individual. 12.3 REQUIREMENTS TO PREVENT A TAXABLE DISTRIBUTION Notwithstanding any other provision of the Plan to the contrary, the following terms and conditions shall apply to any loan made to a Participant under this Article: (a) The interest rate on any loan to a Participant shall be a reasonable interest rate commensurate with current interest rates charged for loans made under similar circumstances by persons in the business of lending money. (b) The amount of any loan to a Participant (when added to the outstanding balance of all other loans to the Participant from the Plan or any other plan maintained by an Employer or a Related Company) shall not exceed the lesser of: (i) $50,000, reduced by the excess, if any, of the highest outstanding balance of any other loan to the Participant from the Plan or any other plan maintained by an Employer or a Related Company during the preceding 12-month period over the outstanding balance of such loans on the date a loan is made hereunder; or (ii) 50 percent of the vested portions of the Participant's Account and his vested interest under all other plans maintained by an Employer or a Related Company. (c) The term of any loan to a Participant shall be no greater than five years, except in the case of a loan used to acquire any dwelling unit which within a reasonable period of time is to be used (determined at the time the loan is made) as a principal residence (as defined in Code Section 121) of the Participant. (d) Substantially level amortization shall be required over the term of the loan with payments made not less frequently than quarterly, except that if so provided in the written guidelines applicable to Plan loans, the amortization schedule may be waived and payments suspended while a Participant is on a leave of absence from employment with an Employer or any Related Company (for periods in which the Participant does not perform military service as described in paragraph (e)), provided that all of the following requirements are met: (i) Such leave is either without pay or at a reduced rate of pay that, after withholding for employment and income taxes, is less than the amount required to be paid under the amortization schedule; 47 (ii) Payments resume after the earlier of (a) the date such leave of absence ends or (b) the one-year anniversary of the date such leave began; (iii) The period during which payments are suspended does not exceed one year; (iv) Payments resume in an amount not less than the amount required under the original amortization schedule; and (v) The waiver of the amortization schedule does not extend the period of the loan beyond the maximum period permitted under this Article. (e) If a Participant is absent from employment with any Employer or any Related Company for a period during which he performs services in the uniformed services (as defined in chapter 45 of title 38 of the United States Code), whether or not such services constitute qualified military service, the suspension of payments shall not be taken into account for purposes of applying either paragraph (c) or paragraph (d) of this Section provided that all of the following requirements are met: (i) Payments resume upon completion of such military service; (ii) Payments resume in an amount not less than the amount required under the original amortization schedule and continue in such amount until the loan is repaid in full; (iii) Upon resumption, payments are made no less frequently than required under the original amortization schedule and continue under such schedule until the loan is repaid in full; and (iv) The loan is repaid in full, including interest accrued during the period of such military service, no later than the last scheduled repayment date under the original amortization schedule extended by the period of such military service. (f) The loan shall be evidenced by a legally enforceable agreement that demonstrates compliance with the provisions of this section. 12.4 ADMINISTRATION OF LOAN INVESTMENT FUND Upon approval of a loan to a Participant, the Administrator shall direct the Trustee to transfer an amount equal to the loan amount from the Investment Funds in which it is invested, as directed by the Administrator, to the loan Investment Fund established in the Participant's name. Any loan approved by the Administrator shall be made to the Participant out of the Participant's loan Investment Fund. All principal and interest paid by the Participant on a loan made under this Article shall be deposited to his Account and shall be allocated upon receipt among the 48 Investment Funds in accordance with the Participant's currently effective investment election. The balance of the Participant's loan Investment Fund shall be decreased by the amount of principal payments and the loan Investment Fund shall be terminated when the loan has been repaid in full. 12.5 DEFAULT If either (1) a Participant fails to make or cause to be made, any payment required under the terms of the loan within 90 days following the date on which such payment shall become due, unless payment is not made because the Participant is on a leave of absence and the amortization schedule is waived as provided in Section 12.3(d) or (e), or (2) there is an outstanding principal balance existing on a loan after the last scheduled repayment date (extended as provided in Section 12.3(e), if applicable), the Administrator shall direct the Trustee to declare the loan to be in default, and the entire unpaid balance of such loan, together with accrued interest, shall be immediately due and payable. In any such event, if such balance and interest thereon is not then paid, the Trustee shall charge the Account of the borrower with the amount of such balance and interest as of the earliest date a distribution may be made from the Plan to the borrower without adversely affecting the tax qualification of the Plan or of the cash or deferred arrangement. 12.6 DEEMED DISTRIBUTION UNDER CODE SECTION 72(p) If a Participant's loan is in default as provided in Section 12.5, the Participant shall be deemed to have received a taxable distribution in the amount of the outstanding loan balance as required under Code Section 72(p), whether or not distribution may actually be made from the Plan without adversely affecting the tax qualification of the Plan. If a Participant is deemed to have received distribution of an outstanding loan balance hereunder, no further loans may be made to such Participant from his Account unless either (a) there is a legally enforceable arrangement among the Participant, the Plan, and the Participant's employer that repayment of such loan shall be made by payroll withholding or (b) the loan is secured by such additional collateral consisting of real, personal, or other property satisfactory to the Administrator to provide adequate security for the loan. 12.7 TREATMENT OF OUTSTANDING BALANCE OF LOAN DEEMED DISTRIBUTED UNDER CODE SECTION 72(p) With respect to any loan made on or after January 1, 2002, the balance of such loan that is deemed to have been distributed to a Participant hereunder shall cease to be an outstanding loan for purposes of Code Section 72(p) and a Participant shall not be treated as having received a taxable distribution when his Account is offset by such outstanding loan balance as provided in Section 12.5. Any interest that accrues on a loan after it is deemed to have been distributed shall not be treated as an additional loan to the Participant and shall not be included in the Participant's taxable income as a deemed distribution. Notwithstanding the foregoing, however, unless a 49 Participant repays such loan, with interest, the amount of such loan, with interest thereon calculated as provided in the original loan note, shall continue to be considered an outstanding loan for purposes of determining the maximum permissible amount of any subsequent loan under Section 12.3(b). If a Participant elects to make payments on a loan after it is deemed to have been distributed hereunder, such payments shall be treated as After-Tax Contributions to the Plan solely for purposes of determining the taxable portion of the Participant's Account and shall not be treated as After-Tax Contributions for any other Plan purpose, including application of the limitations on contributions applicable under Code Sections 401(m) and 415. 12.8 SPECIAL RULES APPLICABLE TO LOANS Any loan made hereunder shall be subject to the following rules: (a) Minimum Loan Amount: A Participant may not request a loan for less than $1,000. (b) Maximum Number of Outstanding Loans: A Participant may not have more than two outstanding loans at any time. A Participant with two outstanding loans may not apply for another loan until all but one of the existing loans is repaid in full and may not refinance an existing loan or obtain a third loan for the purpose of paying off an existing loan. The provisions of this paragraph shall not apply to any loans made prior to the effective date of this amendment and restatement; provided, however, that any such loan shall be taken into account in determining whether a Participant may apply for a new loan hereunder. (c) Maximum Period for Principal Residence Loan: The term of any loan to a Participant that is used to acquire any dwelling unit which within a reasonable period of time is to be used (determined at the time the loan is made) as a principal residence (as defined in Code Section 121) of the Participant shall be no greater than ten years. (d) Pre-Payment Without Penalty: A Participant may pre-pay the balance of any loan hereunder prior to the date it is due without penalty. (e) Effect of Termination of Employment: Upon a Participant's termination of employment, the balance of any outstanding loan hereunder shall become due and owing within 90 days of termination of employment. (f) No Roll Over of Loans: A Participant may not elect to roll over any loan note held pursuant to the provisions of this Article. 50 12.9 LOANS GRANTED PRIOR TO AMENDMENT Notwithstanding any other provision of this Article to the contrary, any loan made under the provisions of the Plan as in effect prior to this amendment and restatement shall remain outstanding until repaid in accordance with its terms or the otherwise applicable Plan provisions. 51 ARTICLE XIII WITHDRAWALS WHILE EMPLOYED 13.1 AGE 59 1/2 WITHDRAWALS A Participant who is employed by an Employer or a Related Company and who has attained age 59 1/2 may elect, subject to the limitations and conditions prescribed in this Article, to make a cash withdrawal or, if the Participant's Account is subject to the "automatic annuity" provisions of Article XVI, a withdrawal through the purchase of a Qualified Joint and Survivor Annuity or a Single Life Annuity as provided in Article XVI from his vested interest in any of the following Sub-Accounts: (a) his Tax-Deferred Contributions Sub-Account. (b) his Rollover Contributions Sub-Account. (c) his Qualified Nonelective Contributions Sub-Account. (d) his Qualified Matching Contributions Sub-Account. (e) his Regular Matching Contributions Sub-Account. (f) his Additional Discretionary Matching Contributions Sub-Account. 13.2 OVERALL LIMITATIONS ON NON-HARDSHIP WITHDRAWALS Non-hardship withdrawals made pursuant to this Article shall be subject to the following conditions and limitations: (a) A Participant must apply for a non-hardship withdrawal such number of days prior to the date as of which it is to be effective as the Administrator may prescribe. (b) Withdrawals may be made effective as soon as administratively practicable after the Administrator's approval of the Participant's withdrawal application. (c) If a Participant's Account is subject to the "automatic annuity" provisions of Article XVI, the Participant's spouse must consent to any withdrawal hereunder, unless the withdrawal is made in the form of a Qualified Joint and Survivor Annuity. 52 13.3 HARDSHIP WITHDRAWALS A Participant who is employed by an Employer or a Related Company and who is determined by the Administrator to have incurred a hardship in accordance with the provisions of this Article may elect, subject to the limitations and conditions prescribed in this Article, to make a cash withdrawal or, if the Participant's Account is subject to the "automatic annuity" provisions of Article XVI, a withdrawal through the purchase of a Qualified Joint and Survivor Annuity or a Single Life Annuity as provided in Article XVI from his vested interest in any of the following Sub-Accounts: (a) his Tax-Deferred Contributions Sub-Account, excluding any income credited to such Sub-Account. (b) his Rollover Contributions Sub-Account. 13.4 HARDSHIP DETERMINATION The Administrator shall grant a hardship withdrawal only if it determines that the withdrawal is necessary to meet an immediate and heavy financial need of the Participant. An immediate and heavy financial need of the Participant means a financial need on account of: (a) expenses previously incurred by or necessary to obtain for the Participant, the Participant's spouse, or any dependent of the Participant (as defined in Section 152 of the Code) medical care described in Section 213(d) of the Code; (b) costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant; (c) payment of tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the Participant, the Participant's spouse, or any dependent of the Participant; or (d) the need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. 13.5 SATISFACTION OF NECESSITY REQUIREMENT FOR HARDSHIP WITHDRAWALS A withdrawal shall be deemed to be necessary to satisfy an immediate and heavy financial need of a Participant only if the Participant satisfies all of the following requirements: (a) The withdrawal is not in excess of the amount of the immediate and heavy financial need of the Participant. 53 (b) The Participant has obtained all distributions, other than hardship distributions, and all non-taxable loans currently available under all plans maintained by an Employer or any Related Company. (c) The Participant's Tax-Deferred Contributions and the Participant's "elective contributions" and "employee contributions", as defined in Article VII, under all other qualified and non-qualified deferred compensation plans maintained by an Employer or any Related Company shall be suspended for at least 12 months after his receipt of the withdrawal. (d) The Participant's Tax-Deferred Contributions and "elective contributions", as defined in Article VII, for his taxable year immediately following the taxable year of the withdrawal shall not exceed the applicable limit under Code Section 402(g) for such next taxable year less the amount of the Participant's Tax-Deferred Contributions and "elective contributions" for the taxable year of the withdrawal. A Participant shall not fail to be treated as an Eligible Employee for purposes of applying the limitations contained in Article VII of the Plan merely because his Tax-Deferred Contributions are suspended in accordance with this Section. 13.6 CONDITIONS AND LIMITATIONS ON HARDSHIP WITHDRAWALS Hardship withdrawals made pursuant to this Article shall be subject to the following conditions and limitations: (a) A Participant must apply for a hardship withdrawal such number of days prior to the date as of which it is to be effective as the Administrator may prescribe. (b) Hardship withdrawals may be made effective as soon as administratively practicable after the Administrator's approval of the Participant's withdrawal application. (c) The amount of a hardship withdrawal may include any amounts necessary to pay any Federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. (d) If a Participant's Account is subject to the "automatic annuity" provisions of Article XVI, the Participant's spouse must consent to any withdrawal hereunder, unless the withdrawal is made in the form of a Qualified Joint and Survivor Annuity. 13.7 ORDER OF WITHDRAWAL FROM A PARTICIPANT'S SUB-ACCOUNTS Distribution of a withdrawal amount shall be made from a Participant's Sub-Accounts, to the extent necessary, in the order prescribed by the Administrator, which order shall be uniform with 54 respect to all Participants and non-discriminatory. If the Sub-Account from which a Participant is receiving a withdrawal is invested in more than one Investment Fund, the withdrawal shall be charged against the Investment Funds as directed by the Administrator. 55 ARTICLE XIV TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE 14.1 TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE A Participant's Settlement Date shall occur on the date he terminates employment with the Employers and all Related Companies because of death, disability, retirement, or other termination of employment. Written notice of a Participant's Settlement Date shall be given by the Administrator to the Trustee. 14.2 SEPARATE ACCOUNTING FOR NON-VESTED AMOUNTS If as of a Participant's Settlement Date the Participant's vested interest in his Employer Contributions Sub-Account is less than 100 percent, that portion of his Employer Contributions Sub-Account that is not vested shall be accounted for separately from the vested portion and shall be disposed of as provided in the following Section. If prior to such Settlement Date the Participant received a distribution under the Plan, his vested interest in his Employer Contributions Sub-Account shall be an amount ("X") determined by the following formula: X = P(AB + D) - D For purposes of the formula: P = The Participant's vested interest in his Employer Contributions Sub-Account on the date distribution is to be made. AB = The balance of the Participant's Employer Contributions Sub-Account as of the Valuation Date immediately preceding the date distribution is to be made. D = The amount of all prior distributions from the Participant's Employer Contributions Sub-Account. Amounts deemed to have been distributed to a Participant pursuant to Code Section 72(p), but which have not actually been offset against the Participant's Account balance shall not be considered distributions hereunder. 14.3 DISPOSITION OF NON-VESTED AMOUNTS That portion of a Participant's Employer Contributions Sub-Account that is not vested upon the occurrence of his Settlement Date shall be disposed of as follows: (a) If the Participant has no vested interest in his Account upon the occurrence of his Settlement Date or his vested interest in his Account as of the date of distribution does 56 not exceed $5,000, resulting in the distribution or deemed distribution to the Participant of his entire vested interest in his Account, the non-vested balance remaining in the Participant's Employer Contributions Sub-Account shall be forfeited and his Account closed as of (i) the Participant's Settlement Date, if the Participant has no vested interest in his Account and is therefore deemed to have received distribution on that date, or (ii) the date actual distribution is made to the Participant. (b) If the Participant's vested interest in his Account exceeds $5,000 and the Participant is eligible for and consents in writing to a single sum payment of his vested interest in his Account, the non-vested balance remaining in the Participant's Employer Contributions Sub-Account shall be forfeited and his Account closed as of the date the single sum payment occurs, provided that such distribution is made because of the Participant's Settlement Date. A distribution is deemed to be made because of a Participant's Settlement Date if it occurs prior to the end of the second Plan Year beginning on or after the Participant's Settlement Date. (c) If neither paragraph (a) nor paragraph (b) is applicable, the non-vested balance remaining in the Participant's Employer Contributions Sub-Account shall continue to be held in such Sub-Account and shall not be forfeited until the date the Participant incurs five consecutive Breaks in Service. 14.4 TREATMENT OF FORFEITED AMOUNTS Whenever the non-vested balance of a Participant's Employer Contributions Sub-Account is forfeited during a Plan Year in accordance with the provisions of the preceding Section, the amount of such forfeiture shall be applied against the Employer Contribution obligations for any subsequent Contribution Period of the Employer for which the Participant last performed services as an Employee or against Plan expenses, as directed by the Administrator. Notwithstanding the foregoing, however, should the amount of all such forfeitures for any Contribution Period with respect to any Employer exceed the amount of such Employer's Employer Contribution obligation for the Contribution Period, the excess amount of such forfeitures shall be held unallocated in a suspense account established with respect to the Employer and shall be applied against Plan expenses and the Employer's Employer Contribution obligations for the following Contribution Period. 14.5 RECREDITING OF FORFEITED AMOUNTS A former Participant who forfeited the non-vested portion of his Employer Contributions Sub-Account in accordance with the provisions of paragraph (a) or (b) of Section 14.3 and who is reemployed by an Employer or a Related Company shall have such forfeited amounts recredited to a new Account in his name, without adjustment for interim gains or losses experienced by the Trust, if: 57 (a) he returns to employment with an Employer or a Related Company before he incurs five consecutive Breaks in Service commencing after the date he received, or is deemed to have received, distribution of his vested interest in his Account; (b) he resumes employment covered under the Plan before the earlier of (i) the end of the five-year period beginning on the date he is reemployed or (ii) the date he incurs five consecutive Breaks in Service commencing after the date he received, or is deemed to have received, distribution of his vested interest in his Account; and (c) if he received actual distribution of his vested interest in his Account, he repays to the Plan the full amount of such distribution that is attributable to Employer Contributions before the earlier of (i) the end of the five year period beginning on the date he is reemployed or (ii) the date he incurs five consecutive Breaks in Service commencing after the date he received distribution of his vested interest in his Account. Funds needed in any Plan Year to recredit the Account of a Participant with the amounts of prior forfeitures in accordance with the preceding sentence shall come first from forfeitures that arise during such Plan Year, and then from Trust income earned in such Plan Year, to the extent that it has not yet been allocated among Participants' Accounts as provided in Article XI, with each Trust Fund being charged with the amount of such income proportionately, unless his Employer chooses to make an additional Employer Contribution, and shall finally be provided by his Employer by way of a separate Employer Contribution. 58 ARTICLE XV DISTRIBUTIONS 15.1 DISTRIBUTIONS TO PARTICIPANTS A Participant whose Settlement Date occurs shall receive distribution of his vested interest in his Account in the form provided under Article XVI beginning as soon as reasonably practicable following his Settlement Date or the date his application for distribution is filed with the Administrator, if later. 15.2 PARTIAL DISTRIBUTIONS TO RETIRED OR TERMINATED PARTICIPANTS A Participant whose Settlement Date has occurred, but who has not reached his Required Beginning Date may elect to receive partial distribution of any portion of his Account at any time prior to his Required Beginning Date in the form provided in Article XVI. 15.3 DISTRIBUTIONS TO BENEFICIARIES If a Participant dies prior to his Benefit Payment Date, his Beneficiary shall receive distribution of the Participant's vested interest in his Account in the form provided under Article XVI beginning as soon as reasonably practicable following the date the Beneficiary's application for distribution is filed with the Administrator. Unless distribution is to be made over the life or over a period certain not greater than the life expectancy of the Beneficiary, distribution of the Participant's entire vested interest shall be made to the Beneficiary no later than the end of the fifth calendar year beginning after the Participant's death. If distribution is to be made over the life or over a period certain no greater than the life expectancy of the Beneficiary, distribution shall commence no later than: (a) If the Beneficiary is not the Participant's spouse, the end of the first calendar year beginning after the Participant's death; or (b) If the Beneficiary is the Participant's spouse, the later of (i) the end of the first calendar year beginning after the Participant's death or (ii) the end of the calendar year in which the Participant would have attained age 70 1/2. If distribution is to be made to a Participant's spouse, it shall be made available within a reasonable period of time after the Participant's death that is no less favorable than the period of time applicable to other distributions. If a Participant dies after the date distribution of his vested interest in his Account begins under this Article, but before his entire vested interest in his Account is distributed, his Beneficiary shall receive distribution of the remainder of the Participant's vested interest in his Account beginning as soon as reasonably practicable following 59 the Participant's date of death in a form that provides for distribution at least as rapidly as under the form in which the Participant was receiving distribution. 15.4 CASH OUTS AND PARTICIPANT CONSENT Notwithstanding any other provision of the Plan to the contrary, if a Participant's vested interest in his Account does not exceed $5,000, distribution of such vested interest shall be made to the Participant in a single sum payment or through a direct rollover, as described in Article XVI, as soon as reasonably practicable following his Settlement Date. If a Participant has no vested interest in his Account on his Settlement Date, he shall be deemed to have received distribution of such vested interest on his Settlement Date. If a Participant's vested interest in his Account exceeds $5,000, distribution shall not commence to such Participant prior to his Normal Retirement Date without the Participant's written consent and, if the Participant is married and his Account is subject to the "automatic annuity" provisions of Article XVI, the written consent of his spouse. Notwithstanding the foregoing, spousal consent shall not be required if distribution is made through the purchase of a Qualified Joint and Survivor Annuity or the spouse cannot be located or spousal consent cannot be obtained for other reasons set forth in Code Section 401(a)(11) and regulations issued thereunder. If a Participant's Account is subject to the "automatic annuity" provisions of Article XVI, the Participant's vested interest in his Account shall be deemed to exceed $5,000 if the Participant's Benefit Payment Date has occurred with respect to amounts currently held in his Account and as of such Benefit Payment Date his vested interest in his Account exceeded $5,000. 15.5 REQUIRED COMMENCEMENT OF DISTRIBUTION Notwithstanding any other provision of the Plan to the contrary, distribution of a Participant's vested interest in his Account shall commence to the Participant no later than the earlier of: (a) unless the Participant elects a later date, 60 days after the close of the Plan Year in which (i) the Participant's Normal Retirement Date occurs, (ii) the tenth anniversary of the year in which he commenced participation in the Plan occurs, or (iii) his Settlement Date occurs, whichever is latest; or (b) his Required Beginning Date. Distributions required to commence under this Section shall be made in the form provided under Article XVI and in accordance with Code Section 401(a)(9) and regulations issued thereunder, including the minimum distribution incidental benefit requirements. 60 15.6 TRANSITION RULES FOR REQUIRED COMMENCEMENT OF DISTRIBUTION A Participant who attains age 70 1/2 prior to January 1, 2002 and who is not a five-percent owner may make an election prior to April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2 to postpone his Required Beginning Date as defined in Article I. A Participant, other than a "five percent owner", as defined in Code Section 416(i) and determined in accordance with Code Section 416, who is receiving required distributions under the Plan pursuant to the provisions of Code Section 401(a)(9) as in effect prior to January 1, 1997, and whose Settlement Date has not occurred may elect to discontinue further distribution hereunder. Consent of a Participant's spouse shall not be required for a Participant to elect to discontinue further distribution hereunder. The following provisions shall apply to a Participant who discontinues further distribution as provided in this Section: (a) Such Participant may not recommence distribution until otherwise permitted under the terms of the Plan other than this Section. (b) The recommencement of distributions to such Participant shall not constitute a new Benefit Payment Date with respect to such Participant. (c) Distribution shall recommence to the Participant in the form elected by the Participant on his Benefit Payment Date; provided, however, that if the Participant elected a form of payment that is not available to retirees, distribution shall recommence to the Participant in the form that would have been applicable to him if he had continued receiving distribution until retirement rather than electing to discontinue distribution. Notwithstanding any other provision of this Section, a Participant to whom distribution has been made from the Plan through the purchase of an annuity contract may not elect to discontinue further payments to be made under the terms of such annuity contract. 15.7 REEMPLOYMENT OF A PARTICIPANT If a Participant whose Settlement Date has occurred is reemployed by an Employer or a Related Company, he shall lose his right to any distribution or further distributions from the Trust arising from his prior Settlement Date and his interest in the Trust shall thereafter be treated in the same manner as that of any other Participant whose Settlement Date has not occurred. 15.8 RESTRICTIONS ON ALIENATION Except as provided in Code Section 401(a)(13) (relating to qualified domestic relations orders), Code Section 401(a)(13)(C) and (D) (relating to offsets ordered or required under a criminal 61 conviction involving the Plan, a civil judgment in connection with a violation or alleged violation of fiduciary responsibilities under ERISA, or a settlement agreement between the Participant and the Department of Labor in connection with a violation or alleged violation of fiduciary responsibilities under ERISA), Section 1.401(a)-13(b)(2) of Treasury regulations (relating to Federal tax levies and judgments), or as otherwise required by law, no benefit under the Plan at any time shall be subject in any manner to anticipation, alienation, assignment (either at law or in equity), encumbrance, garnishment, levy, execution, or other legal or equitable process; and no person shall have power in any manner to anticipate, transfer, assign (either at law or in equity), alienate or subject to attachment, garnishment, levy, execution, or other legal or equitable process, or in any way encumber his benefits under the Plan, or any part thereof, and any attempt to do so shall be void. 15.9 FACILITY OF PAYMENT If the Administrator finds that any individual to whom an amount is payable hereunder is incapable of attending to his financial affairs because of any mental or physical condition, including the infirmities of advanced age, such amount (unless prior claim therefore shall have been made by a duly qualified guardian or other legal representative) may, in the discretion of the Administrator, be paid to another person for the use or benefit of the individual found incapable of attending to his financial affairs or in satisfaction of legal obligations incurred by or on behalf of such individual. The Trustee shall make such payment only upon receipt of written instructions to such effect from the Administrator. Any such payment shall be charged to the Account from which any such payment would otherwise have been paid to the individual found incapable of attending to his financial affairs and shall be a complete discharge of any liability therefore under the Plan. 15.10 INABILITY TO LOCATE PAYEE If any benefit becomes payable to any person, or to the executor or administrator of any deceased person, and if that person or his executor or administrator does not present himself to the Administrator within a reasonable period after the Administrator mails written notice of his eligibility to receive a distribution hereunder to his last known address and makes such other diligent effort to locate the person as the Administrator determines, that benefit will be forfeited. However, if the payee later files a claim for that benefit, the benefit will be restored. 15.11 DISTRIBUTION PURSUANT TO QUALIFIED DOMESTIC RELATIONS ORDERS Notwithstanding any other provision of the Plan to the contrary, if a qualified domestic relations order so provides, distribution may be made to an alternate payee pursuant to a qualified domestic relations order, as defined in Code Section 414(p), regardless of whether the Participant's Settlement Date has occurred or whether the Participant is otherwise entitled to receive a distribution under the Plan. 62 ARTICLE XVI FORM OF PAYMENT 16.1 DEFINITIONS For purposes of this Article, the following terms have the following meanings: The "AUTOMATIC ANNUITY FORM" means the form of annuity that will be purchased on behalf of a Participant who has elected to receive distribution through the purchase of an annuity contract that provides for payment over his life (or whose Account includes assets transferred directly from a plan subject to Code Section 417) unless the Participant elects another form of annuity. A "QUALIFIED ELECTION" means an election that is made during the qualified election period. A "qualified election" of a form of payment other than a Qualified Joint and Survivor Annuity or designating a Beneficiary other than the Participant's spouse to receive amounts otherwise payable as a Qualified Preretirement Survivor Annuity must include the written consent of the Participant's spouse, if any. A Participant's spouse will be deemed to have given written consent to the Participant's election if the Participant establishes to the satisfaction of a Plan representative that spousal consent cannot be obtained because the spouse cannot be located or because of other circumstances set forth in Code Section 401(a)(11) and regulations issued thereunder. The spouse's written consent must acknowledge the effect of the Participant's election and must be witnessed by a Plan representative or a notary public. In addition, the spouse's written consent must either (i) specify the form of payment selected instead of a Qualified Joint and Survivor Annuity, if applicable, and that such form may not be changed (except to a Qualified Joint and Survivor Annuity) without written spousal consent and specify any non-spouse Beneficiary designated by the Participant, if applicable, and that such Beneficiary may not be changed without written spousal consent or (ii) acknowledge that the spouse has the right to limit consent as provided in clause (i), but permit the Participant to change the form of payment selected or the designated Beneficiary without the spouse's further consent. Any written consent given or deemed to have been given by a Participant's spouse hereunder shall be irrevocable and shall be effective only with respect to such spouse and not with respect to any subsequent spouse. The "QUALIFIED ELECTION PERIOD" with respect to the "automatic annuity form" means the 90 day period ending on a Participant's Benefit Payment Date. The "qualified election period" with respect to a Qualified Preretirement Survivor Annuity means the period beginning on the later of (i) the date his Account becomes subject to the automatic annuity provisions of this Article or (ii) the first day of the Plan Year in which the Participant attains age 35 or, if he terminates employment prior to such date, the day he terminates employment with his Employer and all Related Companies. A Participant whose employment has not terminated may make a "qualified election" designating a Beneficiary other than his spouse prior to the Plan Year in which he 63 attains age 35; provided, however, that such election shall cease to be effective as of the first day of the Plan Year in which the Participant attains age 35. 16.2 NORMAL FORM OF PAYMENT Subject to the Qualified Preretirement Survivor Annuity requirements described in this Article, unless a Participant, or his Beneficiary, if the Participant has died, elects an optional form of payment, distribution shall be made to the Participant, or his Beneficiary, as the case may be, in a single sum payment. 16.3 OPTIONAL FORMS OF PAYMENT A Participant, or his Beneficiary, as the case may be, may elect to receive distribution of all or a portion of his Account in one of the following optional forms of payment: (a) Installment Payments - Distribution shall be made in a series of cash installments over a period not exceeding the life expectancy of the Participant, or the Participant's Beneficiary, if the Participant has died, or a period not exceeding the joint life and last survivor expectancy of the Participant and his Beneficiary. Each installment shall be equal in amount except as necessary to adjust for any changes in the value of the Participant's Account. The determination of life expectancies shall be made on the basis of the expected return multiples in Tables V or VI of Section 1.72-9 of the Treasury regulations and shall be calculated once at the time installment payments begin. (b) Annuity Contract - Distribution shall be made through the purchase of a single premium, nontransferable annuity contract for such term and in such form as the Participant, or his Beneficiary, if the Participant has died, shall select, subject to the automatic annuity requirements described in this Article; provided, however, that a Participant's Beneficiary may not elect to receive distribution of an annuity payable over the joint lives of the Beneficiary and any other individual. The terms of any annuity contract purchased hereunder and distributed to a Participant or his Beneficiary shall comply with the requirements of the Plan. 16.4 CHANGE OF ELECTION Subject to the automatic annuity requirements of this Article, a Participant or Beneficiary who has elected an optional form of payment may revoke or change his election at any time prior to his Benefit Payment Date by filing his election with the Administrator in the form prescribed by the Administrator. 64 16.5 AUTOMATIC ANNUITY REQUIREMENTS If a Participant elects to receive distribution through the purchase of an annuity contract that provides for payment over his life (or his Account includes assets transferred directly from a plan subject to Code Section 417), distribution shall be made to such Participant through the purchase of an annuity contract that provides for payment in one of the following "automatic annuity forms", unless the Participant elects a different type of annuity. (a) The "automatic annuity form" for a Participant who is married on his Benefit Payment Date is the 50 percent Qualified Joint and Survivor Annuity. (b) The "automatic annuity form" for a Participant who is not married on his Benefit Payment Date is the Single Life Annuity. A Participant's election of an annuity other than the "automatic annuity form" shall not be effective unless it is a "qualified election"; provided, however, that spousal consent shall not be required if the form of payment elected by the Participant is a Qualified Joint and Survivor Annuity. A Participant who has elected to receive distribution through the purchase of an annuity contract that provides for payment over his life (or whose Account includes assets transferred directly from a plan subject to Code Section 417) may only change his election of a form of payment pursuant to a "qualified election"; provided, however, that spousal consent shall not be required if the form of payment elected by the Participant is a Qualified Joint and Survivor Annuity. 16.6 QUALIFIED PRERETIREMENT SURVIVOR ANNUITY REQUIREMENTS If a married Participant who elects to receive distribution through the purchase of an annuity contract that provides for payment over his life (or whose Account includes assets transferred directly from a plan subject to Code Section 417) dies before his Benefit Payment Date, his spouse shall receive distribution of the value of the Participant's vested interest in his Account through the purchase of an annuity contract that provides for payment over the life of the Participant's spouse. A Participant's spouse may elect to receive distribution under any one of the other forms of payment available under this Article instead of in the Qualified Preretirement Survivor Annuity form. A married Participant who has elected to receive distribution through the purchase of an annuity contract that provides for payment over his life (or whose Account includes assets transferred directly from a plan subject to Code Section 417) may only designate a non-spouse Beneficiary to receive distribution of his Account pursuant to a "qualified election". 16.7 DIRECT ROLLOVER Notwithstanding any other provision of the Plan to the contrary, in lieu of receiving distribution in a form of payment provided under this Article, a "qualified distributee" may elect in writing, in accordance with rules prescribed by the Administrator, to have a portion or all of any "eligible 65 rollover distribution" paid directly by the Plan to the "eligible retirement plan" designated by the "qualified distributee". Any such payment by the Plan to another "eligible retirement plan" shall be a direct rollover. Notwithstanding the foregoing, a "qualified distributee" may not elect a direct rollover with respect to an "eligible rollover distribution" if the total value of such distribution is less than $200 or with respect to a portion of an "eligible rollover distribution" if the value of such portion is less than $500. For purposes of this Section, the following terms have the following meanings: (a) An "eligible retirement plan" means an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a) that accepts rollovers; provided, however, that, in the case of a direct rollover by a surviving spouse, an eligible retirement plan does not include a qualified trust described in Code Section 401(a). (b) An "eligible rollover distribution" means any distribution of all or any portion of the balance of a Participant's Account; provided, however, that an eligible rollover distribution does not include the following: (i) any distribution to the extent such distribution is required under Code Section 401(a)(9). (ii) any distribution that is one of a series of substantially equal periodic payment made not less frequently than annually for the life or life expectancy of the "qualified distributee" or the joint lives or life expectancies of the "qualified distributee" and the "qualified distributee's" designated beneficiary, or for a specified period of ten years or more. (iii) any hardship withdrawal of Tax-Deferred Contributions made in accordance with the provisions of Article XIII. (c) A "qualified distributee" means a Participant, his surviving spouse, or his spouse or former spouse who is an alternate payee under a qualified domestic relations order, as defined in Code Section 414(p). 16.8 NOTICE REGARDING FORMS OF PAYMENT The Administrator shall provide each Participant with a written explanation of his right to defer distribution until his Normal Retirement Date, or such later date as may be provided in the Plan, his right to make a direct rollover, and the forms of payment available under the Plan, including a written explanation of (i) the terms and conditions of the "automatic annuity form" applicable if the Participant elects to receive distribution through the purchase of an annuity that provides for 66 payment over his life (or if his Account includes assets transferred directly from a plan subject to Code Section 417), (ii) the Participant's right to choose a form of payment other than the "automatic annuity form" or to revoke such choice, and (iii) the rights of the Participant's spouse. The Administrator shall provide such explanation within the 60 day period ending 30 days before the Participant's Benefit Payment Date. Notwithstanding the foregoing, distribution of the Participant's Account may commence fewer than 30 days after such explanation is provided to the Participant if (i) the Administrator clearly informs the Participant of his right to consider his election of whether or not to make a direct rollover or to receive a distribution prior to his Normal Retirement Date and his election of a form of payment for a period of at least 30 days following his receipt of the explanation, (ii) the Participant, after receiving the explanation, affirmatively elects an early distribution with his spouse's written consent, if necessary, and, if the Participant has elected distribution through the purchase of an annuity contract that provides for payment over his life (or his Account includes assets transferred directly from a plan subject to Code Section 417), (iii) the Participant may revoke his election at any time prior to the later of his Benefit Payment Date or the expiration of the seven-day period beginning the day after the date the explanation is provided to him, and (iv) distribution does not commence to the Participant before such revocation period ends. In addition, the Administrator shall provide a Participant who has elected distribution through the purchase of an annuity that provides for payment over his life (or whose Account includes assets transferred directly from a plan subject to Code Section 417) with a written explanation of (i) the terms and conditions of the Qualified Preretirement Survivor Annuity, (ii) the Participant's right to designate a non-spouse Beneficiary to receive distribution of his Account otherwise payable as a Qualified Preretirement Survivor Annuity or to revoke such designation, and (iii) the rights of the Participant's spouse. The Administrator shall provide such explanation within one of the following periods, whichever ends last: (a) the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending on the last day of the Plan Year preceding the Plan Year in which the Participant attains age 35; (b) the period beginning 12 calendar months before the date an individual becomes a Participant and ending 12 calendar months after such date; or (c) provided the Participant's Account does not include assets transferred directly from a plan subject to Code Section 417, the period beginning 12 calendar months before the date the Participant elects to receive distribution through the purchase of an annuity contract that provides for payment over his life and ending 12 calendar months after such date; provided, however, that in the case of a Participant who separates from service prior to attaining age 35, the explanation shall be provided to such Participant within the period beginning 12 calendar months before the Participant's separation from service and ending 12 calendar months after his separation from service. 67 16.9 REEMPLOYMENT If a Participant is reemployed by an Employer or a Related Company prior to receiving distribution of the entire balance of his vested interest in his Account, his prior election of a form of payment hereunder shall become ineffective. Notwithstanding the foregoing, if a Participant had elected to receive distribution through the purchase of an annuity contract that provides for payment over his life, the automatic annuity and Qualified Preretirement Survivor Annuity requirements described in this Article shall continue to apply to his entire Account. 16.10 DISTRIBUTION IN THE FORM OF EMPLOYER STOCK Notwithstanding any other provision of the Plan to the contrary, to the extent that his Account is invested in Employer Stock on the date distribution is to be made to a Participant, the Participant may elect to receive distribution of the fair market value of such Account in the form of Employer Stock. 68 ARTICLE XVII BENEFICIARIES 17.1 DESIGNATION OF BENEFICIARY An unmarried Participant's Beneficiary shall be the person or persons designated by such Participant in accordance with rules prescribed by the Administrator. A married Participant's Beneficiary shall be his spouse, unless the Participant designates a person or persons other than his spouse as Beneficiary with his spouse's written consent. For purposes of this Section, a Participant shall be treated as unmarried and spousal consent shall not be required if the Participant is not married on his Benefit Payment Date. A Participant's designation of a Beneficiary shall be subject to the Qualified Preretirement Survivor Annuity provisions of Article XVI. If no Beneficiary has been designated pursuant to the provisions of this Section, or if no Beneficiary survives the Participant and he has no surviving spouse, then the Beneficiary under the Plan shall be the deceased Participant's surviving children in equal shares or, if there are no surviving children, the Participant's estate. If a Beneficiary dies after becoming entitled to receive a distribution under the Plan but before distribution is made to him in full, and if the Participant has not designated another Beneficiary to receive the balance of the distribution in that event, the estate of the deceased Beneficiary shall be the Beneficiary as to the balance of the distribution. 17.2 SPOUSAL CONSENT REQUIREMENTS Any written spousal consent given pursuant to this Article must acknowledge the effect of the action taken and must be witnessed by a Plan representative or a notary public. In addition, the spouse's written consent must either (i) specify any non-spouse Beneficiary designated by the Participant and that such Beneficiary may not be changed without written spousal consent or (ii) acknowledge that the spouse has the right to limit consent to a specific Beneficiary, but permit the Participant to change the designated Beneficiary without the spouse's further consent. A Participant's spouse will be deemed to have given written consent to the Participant's designation of Beneficiary if the Participant establishes to the satisfaction of a Plan representative that such consent cannot be obtained because the spouse cannot be located or because of other circumstances set forth in Section 401(a)(11) of the Code and regulations issued thereunder. Any written consent given or deemed to have been given by a Participant's spouse hereunder shall be valid only with respect to the spouse who signs the consent. 69 ARTICLE XVIII ADMINISTRATION 18.1 AUTHORITY OF THE SPONSOR The Sponsor, which shall be the administrator for purposes of ERISA and the plan administrator for purposes of the Code, shall be responsible for the administration of the Plan and, in addition to the powers and authorities expressly conferred upon it in the Plan, shall have all such powers and authorities as may be necessary to carry out the provisions of the Plan, including the power and authority to interpret and construe the provisions of the Plan, to make benefit determinations, and to resolve any disputes which arise under the Plan. The Sponsor may employ such attorneys, agents, and accountants as it may deem necessary or advisable to assist in carrying out its duties hereunder. The Sponsor shall be a "named fiduciary" as that term is defined in ERISA Section 402(a)(2). The Sponsor, by action of its board of directors, may: (a) allocate any of the powers, authority, or responsibilities for the operation and administration of the Plan (other than trustee responsibilities as defined in ERISA Section 405(c)(3)) among named fiduciaries; and (b) designate a person or persons other than a named fiduciary to carry out any of such powers, authority, or responsibilities; except that no allocation by the Sponsor of, or designation by the Sponsor with respect to, any of such powers, authority, or responsibilities to another named fiduciary or a person other than a named fiduciary shall become effective unless such allocation or designation shall first be accepted by such named fiduciary or other person in a writing signed by it and delivered to the Sponsor. 18.2 DISCRETIONARY AUTHORITY In carrying out its duties under the Plan, including making benefit determinations, interpreting or construing the provisions of the Plan, and resolving disputes, the Sponsor (or any individual to whom authority has been delegated in accordance with Section 18.1) shall have absolute discretionary authority. 18.3 ACTION OF THE SPONSOR Any act authorized, permitted, or required to be taken under the Plan by the Sponsor and which has not been delegated in accordance with Section 18.1, may be taken by a majority of the members of the board of directors of the Sponsor, either by vote at a meeting, or in writing without a meeting, or by the employee or employees of the Sponsor designated by the board of directors to carry out such acts on behalf of the Sponsor. All notices, advice, directions, 70 certifications, approvals, and instructions required or authorized to be given by the Sponsor as under the Plan shall be in writing and signed by either (i) a majority of the members of the Sponsor's board of directors or by such member or members as may be designated by an instrument in writing, signed by all the members thereof, as having authority to execute such documents on its behalf, or (ii) the employee or employees authorized to act for the Sponsor in accordance with the provisions of this Section. 18.4 CLAIMS REVIEW PROCEDURE Whenever a claim for benefits under the Plan filed by any person (herein referred to as the "Claimant") is denied, whether in whole or in part, the Sponsor shall transmit a written notice of such decision to the Claimant within 90 days of the date the claim was filed or, if special circumstances require an extension, within 180 days of such date, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of (i) the specific reasons for the denial of the claim, (ii) specific reference to pertinent Plan provisions on which the denial is based, (iii) a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such information is necessary, (iv) that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, (v) records and other information relevant to the Claimant's claim, a description of the review procedures and in the event of an adverse review decision, a statement describing any voluntary review procedures and the Claimant's right to obtain copies of such procedures, and (vi) a statement that there is no further administrative review following the initial review, and that the Claimant has a right to bring a civil action under ERISA Section 502(a) if the Sponsor's decision on review is adverse to the Claimant. The notice shall also include a statement advising the Claimant that, within 60 days of the date on which he receives such notice, he may obtain review of such decision in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his authorized representative may request that the claim denial be reviewed by filing with the Sponsor a written request therefore, which request shall contain the following information: (a) the date on which the Claimant's request was filed with the Sponsor; provided, however, that the date on which the Claimant's request for review was in fact filed with the Sponsor shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph; (b) the specific portions of the denial of his claim which the Claimant requests the Sponsor to review; (c) a statement by the Claimant setting forth the basis upon which he believes the Sponsor should reverse the previous denial of his claim for benefits and accept his claim as made; and 71 (d) any written material (offered as exhibits) which the Claimant desires the Sponsor to examine in its consideration of his position as stated pursuant to paragraph (c) of this Section. Within 60 days of the date determined pursuant to paragraph (a) of this Section or, if special circumstances require an extension, within 120 days of such date, the Sponsor shall conduct a full and fair review of the decision denying the Claimant's claim for benefits and shall render its written decision on review to the Claimant. The Sponsor's decision on review shall be written in a manner calculated to be understood by the Claimant and shall specify the reasons and Plan provisions upon which the Sponsor's decision was based. Notwithstanding the foregoing, special procedures apply for processing claims and reviewing prior claim determinations if a Claimant's claim for benefits is contingent upon a determination as to whether a Participant is Disabled under the Plan. 18.5 QUALIFIED DOMESTIC RELATIONS ORDERS The Sponsor shall establish reasonable procedures to determine the status of domestic relations orders and to administer distributions under domestic relations orders which are deemed to be qualified orders. Such procedures shall be in writing and shall comply with the provisions of Code Section 414(p) and regulations issued thereunder. 18.6 INDEMNIFICATION In addition to whatever rights of indemnification the Trustee or the members of the Sponsor's board of directors or any employee or employees of the Sponsor to whom any power, authority, or responsibility is delegated pursuant to Section 18.3, may be entitled under the articles of incorporation or regulations of the Sponsor, under any provision of law, or under any other agreement, the Sponsor shall satisfy any liability actually and reasonably incurred by any such person or persons, including expenses, attorneys' fees, judgments, fines, and amounts paid in settlement (other than amounts paid in settlement not approved by the Sponsor), in connection with any threatened, pending or completed action, suit, or proceeding which is related to the exercising or failure to exercise by such person or persons of any of the powers, authority, responsibilities, or discretion as provided under the Plan, or reasonably believed by such person or persons to be provided hereunder, and any action taken by such person or persons in connection therewith, unless the same is judicially determined to be the result of such person or persons' gross negligence or willful misconduct. 18.7 ACTIONS BINDING Subject to the provisions of Section 18.4, any action taken by the Sponsor which is authorized, permitted, or required under the Plan shall be final and binding upon the Employers, the Trustee, 72 all persons who have or who claim an interest under the Plan, and all third parties dealing with the Employers or the Trustee. 73 ARTICLE XIX AMENDMENT AND TERMINATION 19.1 AMENDMENT Subject to the provisions of Section 19.2, the Sponsor may at any time and from time to time, by action of its board of directors, or such officers of the Sponsor as are authorized by its board of directors, amend the Plan, either prospectively or retroactively. Any such amendment shall be by written instrument executed by the Sponsor. 19.2 LIMITATION ON AMENDMENT The Sponsor shall make no amendment to the Plan which shall decrease the accrued benefit of any Participant or Beneficiary, except that nothing contained herein shall restrict the right to amend the provisions of the Plan relating to the administration of the Plan and Trust. Moreover, no such amendment shall be made hereunder which shall permit any part of the Trust to revert to an Employer or any Related Company or be used or be diverted to purposes other than the exclusive benefit of Participants and Beneficiaries. The Sponsor shall make no retroactive amendment to the Plan unless such amendment satisfies the requirements of Code Section 401(b) and/or Section 1.401(a)(4)-11(g) of the Treasury regulations, as applicable. 19.3 TERMINATION The Sponsor reserves the right, by action of its board of directors, to terminate the Plan as to all Employers at any time (the effective date of such termination being hereinafter referred to as the "termination date"). Upon any such termination of the Plan, the following actions shall be taken for the benefit of Participants and Beneficiaries: (a) As of the termination date, each Investment Fund shall be valued and all Accounts and Sub-Accounts shall be adjusted in the manner provided in Article XI, with any unallocated contributions or forfeitures being allocated as of the termination date in the manner otherwise provided in the Plan. The termination date shall become a Valuation Date for purposes of Article XI. In determining the net worth of the Trust, there shall be included as a liability such amounts as shall be necessary to pay all expenses in connection with the termination of the Trust and the liquidation and distribution of the property of the Trust, as well as other expenses, whether or not accrued, and shall include as an asset all accrued income. (b) All Accounts shall then be disposed of to or for the benefit of each Participant or Beneficiary in accordance with the provisions of Article XV as if the termination date were his Settlement Date; provided, however, that notwithstanding the provisions of Article XV, if the Plan does not offer an annuity option and if neither his Employer nor a 74 Related Company establishes or maintains another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)), the Participant's written consent to the commencement of distribution shall not be required regardless of the value of the vested portions of his Account. (c) Notwithstanding the provisions of paragraph (b) of this Section, no distribution shall be made to a Participant of any portion of the balance of his Tax-Deferred Contributions Sub-Account prior to his separation from service (other than a distribution made in accordance with Article XIII or required in accordance with Code Section 401(a)(9)) unless (i) neither his Employer nor a Related Company establishes or maintains another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7), a tax credit employee stock ownership plan as defined in Code Section 409, or a simplified employee pension as defined in Code Section 408(k)) either at the time the Plan is terminated or at any time during the period ending 12 months after distribution of all assets from the Plan; provided, however, that this provision shall not apply if fewer than two percent of the Eligible Employees under the Plan were eligible to participate at any time in such other defined contribution plan during the 24-month period beginning 12 months before the Plan termination, and (ii) the distribution the Participant receives is a "lump sum distribution" as defined in Code Section 402(e)(4), without regard to clauses (I), (II), (III), and (IV) of sub-paragraph (D)(i) thereof. Notwithstanding anything to the contrary contained in the Plan, upon any such Plan termination, the vested interest of each Participant and Beneficiary in his Employer Contributions Sub-Account shall be 100 percent; and, if there is a partial termination of the Plan, the vested interest of each Participant and Beneficiary who is affected by the partial termination in his Employer Contributions Sub-Account shall be 100 percent. For purposes of the preceding sentence only, the Plan shall be deemed to terminate automatically if there shall be a complete discontinuance of contributions hereunder by all Employers. 19.4 REORGANIZATION The merger, consolidation, or liquidation of any Employer with or into any other Employer or a Related Company shall not constitute a termination of the Plan as to such Employer. If an Employer disposes of substantially all of the assets used by the Employer in a trade or business or disposes of a subsidiary and in connection therewith one or more Participants terminates employment but continues in employment with the purchaser of the assets or with such subsidiary, no distribution from the Plan shall be made to any such Participant from his Tax-Deferred Contributions Sub-Account prior to his separation from service (other than a distribution made in accordance with Article XIII or required in accordance with Code Section 401(a)(9)), except that a distribution shall be permitted to be made in such a case, subject to the Participant's consent (to the extent required by law), if (i) the distribution would constitute a "lump sum distribution" as defined in Code Section 402(e)(4), without regard to clauses (I), (II), (III), or (IV) of sub-paragraph (D)(i) thereof, (ii) the Employer continues to maintain the Plan after the disposition, (iii) the purchaser does not maintain the Plan 75 after the disposition, and (iv) the distribution is made by the end of the second calendar year after the calendar year in which the disposition occurred. 19.5 WITHDRAWAL OF AN EMPLOYER An Employer other than the Sponsor may withdraw from the Plan at any time upon notice in writing to the Administrator (the effective date of such withdrawal being hereinafter referred to as the "withdrawal date"), and shall thereupon cease to be an Employer for all purposes of the Plan. An Employer shall be deemed automatically to withdraw from the Plan in the event of its complete discontinuance of contributions, or, subject to Section 19.4 and unless the Sponsor otherwise directs, it ceases to be a Related Company of the Sponsor or any other Employer. Upon the withdrawal of an Employer, the withdrawing Employer shall determine whether a partial termination has occurred with respect to its Employees. In the event that the withdrawing Employer determines a partial termination has occurred, the action specified in Section 19.3 shall be taken as of the withdrawal date, as on a termination of the Plan, but with respect only to Participants who are employed solely by the withdrawing Employer, and who, upon such withdrawal, are neither transferred to nor continued in employment with any other Employer or a Related Company. The interest of any Participant employed by the withdrawing Employer who is transferred to or continues in employment with any other Employer or a Related Company, and the interest of any Participant employed solely by an Employer or a Related Company other than the withdrawing Employer, shall remain unaffected by such withdrawal; no adjustment to his Accounts shall be made by reason of the withdrawal; and he shall continue as a Participant hereunder subject to the remaining provisions of the Plan. 76 ARTICLE XX ADOPTION BY OTHER ENTITIES 20.1 ADOPTION BY RELATED COMPANIES A Related Company that is not an Employer may, with the consent of the Sponsor, adopt the Plan and become an Employer hereunder by causing an appropriate written instrument evidencing such adoption to be executed in accordance with the requirements of its organizational authority. Any such instrument shall specify the effective date of the adoption. 20.2 EFFECTIVE PLAN PROVISIONS An Employer who adopts the Plan shall be bound by the provisions of the Plan in effect at the time of the adoption and as subsequently in effect because of any amendment to the Plan. 77 ARTICLE XXI MISCELLANEOUS PROVISIONS 21.1 NO COMMITMENT AS TO EMPLOYMENT Nothing contained herein shall be construed as a commitment or agreement upon the part of any person to continue his employment with an Employer or Related Company, or as a commitment on the part of any Employer or Related Company to continue the employment, compensation, or benefits of any person for any period. 21.2 BENEFITS Nothing in the Plan nor the Trust Agreement shall be construed to confer any right or claim upon any person, firm, or corporation other than the Employers, the Trustee, Participants, and Beneficiaries. 21.3 NO GUARANTEES The Employers, the Administrator, and the Trustee do not guarantee the Trust from loss or depreciation, nor do they guarantee the payment of any amount which may become due to any person hereunder. 21.4 EXPENSES The expenses of administration of the Plan, including the expenses of the Administrator and fees of the Trustee, shall be paid from the Trust as a general charge thereon, unless the Sponsor elects to make payment. Notwithstanding the foregoing, the Sponsor may direct that administrative expenses that are allocable to the Account of a specific Participant shall be paid from that Account and that the costs incident to the management of the assets of an Investment Fund or to the purchase or sale of securities held in an Investment Fund shall be paid by the Trustee from such Investment Fund. 21.5 PRECEDENT Except as otherwise specifically provided, no action taken in accordance with the Plan shall be construed or relied upon as a precedent for similar action under similar circumstances. 21.6 DUTY TO FURNISH INFORMATION The Employers, the Administrator, and the Trustee shall furnish to any of the others any documents, reports, returns, statements, or other information that the other reasonably deems necessary to perform its duties hereunder or otherwise imposed by law. 78 21.7 MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS The Plan shall not be merged or consolidated with any other plan, nor shall any of its assets or liabilities be transferred to another plan, unless, immediately after such merger, consolidation, or transfer of assets or liabilities, each Participant in the Plan would receive a benefit under the Plan which is at least equal to the benefit he would have received immediately prior to such merger, consolidation, or transfer of assets or liabilities (assuming in each instance that the Plan had then terminated). 21.8 BACK PAY AWARDS The provisions of this Section shall apply only to an Employee or former Employee who becomes entitled to back pay by an award or agreement of an Employer without regard to mitigation of damages. If a person to whom this Section applies was or would have become an Eligible Employee after such back pay award or agreement has been effected, and if any such person who had not previously elected to make Tax-Deferred Contributions pursuant to Section 4.1 shall within 30 days of the date he receives notice of the provisions of this Section make an election to make Tax-Deferred Contributions in accordance with such Section 4.1 (retroactive to any Enrollment Date as of which he was or has become eligible to do so), then such Participant may elect that any Tax-Deferred Contributions not previously made on his behalf but which, after application of the foregoing provisions of this Section, would have been made under the provisions of Article IV shall be made out of the proceeds of such back pay award or agreement. In addition, if any such Employee or former Employee would have been eligible to participate in the allocation of Employer Contributions under the provisions of Article VI or XXII for any prior Plan Year after such back pay award or agreement has been effected, his Employer shall make an Employer Contribution equal to the amount of the Employer Contribution which would have been allocated to such Participant under the provisions of Article VI or XXII as in effect during each such Plan Year. The amounts of such additional contributions shall be credited to the Account of such Participant. Any additional contributions made pursuant to this Section shall be made in accordance with, and subject to the limitations of the applicable provisions of the Plan. 21.9 CONDITION ON EMPLOYER CONTRIBUTIONS Notwithstanding anything to the contrary contained in the Plan or the Trust Agreement, any contribution of an Employer hereunder is conditioned upon the continued qualification of the Plan under Code Section 401(a), the exempt status of the Trust under Code Section 501(a), and the deductibility of the contribution under Code Section 404. Except as otherwise provided in this Section and Section 21.10, however, in no event shall any portion of the property of the Trust ever revert to or otherwise inure to the benefit of an Employer or any Related Company. 79 21.10 RETURN OF CONTRIBUTIONS TO AN EMPLOYER Notwithstanding any other provision of the Plan or the Trust Agreement to the contrary, in the event any contribution of an Employer made hereunder: (a) is made under a mistake of fact, or (b) is disallowed as a deduction under Code Section 404, such contribution may be returned to the Employer within one year after the payment of the contribution or the disallowance of the deduction to the extent disallowed, whichever is applicable. In the event the Plan does not initially qualify under Code Section 401(a), any contribution of an Employer made hereunder may be returned to the Employer within one year of the date of denial of the initial qualification of the Plan, but only if an application for determination was made within the period of time prescribed under ERISA Section 403(c)(2)(B). 21.11 VALIDITY OF PLAN The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the laws of the state or commonwealth in which the Trustee has its principal place of business or, if the Trustee is an individual or group of individuals, the state or commonwealth in which the Sponsor has its principal place of business, except as preempted by applicable Federal law. The invalidity or illegality of any provision of the Plan shall not affect the legality or validity of any other part thereof. 21.12 TRUST AGREEMENT The Trust Agreement and the Trust maintained thereunder shall be deemed to be a part of the Plan as if fully set forth herein and the provisions of the Trust Agreement are hereby incorporated by reference into the Plan. 21.13 PARTIES BOUND The Plan shall be binding upon the Employers, all Participants and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them. 21.14 APPLICATION OF CERTAIN PLAN PROVISIONS For purposes of the general administrative provisions and limitations of the Plan, a Participant's Beneficiary or alternate payee under a qualified domestic relations order shall be treated as any other person entitled to receive benefits under the Plan. Upon any termination of the Plan, any such Beneficiary or alternate payee under a qualified domestic relations order who has an interest under the Plan at the time of such termination, which does not cease by reason thereof, shall be 80 deemed to be a Participant for all purposes of the Plan. A Participant's Beneficiary, if the Participant has died, or alternate payee under a qualified domestic relations order shall be treated as a Participant for purposes of directing investments as provided in Article X. 21.15 MERGED PLANS In the event another defined contribution plan (the "merged plan") is merged into and made a part of the Plan, each Employee who was eligible to participate in the "merged plan" immediately prior to the merger shall become an Eligible Employee on the date of the merger. In no event shall a Participant's vested interest in his Sub-Account attributable to amounts transferred to the Plan from the "merged plan" (his "transferee Sub-Account") on and after the merger be less than his vested interest in his account under the "merged plan" immediately prior to the merger. Notwithstanding any other provision of the Plan to the contrary, a Participant's service credited for eligibility and vesting purposes under the "merged plan" as of the merger, if any, shall be included as Eligibility and Vesting Service under the Plan to the extent Eligibility and Vesting Service are credited under the Plan. Special provisions applicable to a Participant's "transferee Sub-Account", if any, shall be specifically reflected in the Plan or in an Addendum to the Plan. 21.16 TRANSFERRED FUNDS If funds from another qualified plan are transferred or merged into the Plan, such funds shall be held and administered in accordance with any restrictions applicable to them under such other plan to the extent required by law and shall be accounted for separately to the extent necessary to accomplish the foregoing. 21.17 VETERANS REEMPLOYMENT RIGHTS Notwithstanding any other provision of the Plan to the contrary, contributions, benefits, and service credit with respect to qualified military service shall be provided in accordance with Code Section 414(u). The Administrator shall notify the Trustee of any Participant with respect to whom additional contributions are made because of qualified military service. 21.18 DELIVERY OF CASH AMOUNTS To the extent that the Plan requires the Employers to deliver cash amounts to the Trustee, such delivery may be made through any means acceptable to the Trustee, including wire transfer. 21.19 WRITTEN COMMUNICATIONS Any communication among the Employers, the Administrator, and the Trustee that is stipulated under the Plan to be made in writing may be made in any medium that is acceptable to the receiving party and permitted under applicable law. In addition, any communication or disclosure to or from Participants and/or Beneficiaries that is required under the terms of the Plan 81 to be made in writing may be provided in any other medium (electronic, telephonic, or otherwise) that is acceptable to the Administrator and permitted under applicable law. 82 ARTICLE XXII TOP-HEAVY PROVISIONS 22.1 DEFINITIONS For purposes of this Article, the following terms shall have the following meanings: The "COMPENSATION" of an employee means compensation as defined in Code Section 415 and regulations issued thereunder. In no event, however, shall the "compensation" of a Participant taken into account under the Plan for any Plan Year exceed $150,000 (subject to adjustment annually as provided in Code Sections 401(a)(17)(B) and 415(d); provided, however, that the dollar increase in effect on January 1 of any calendar year, if any, is effective for Plan Years beginning in such calendar year). If the "compensation" of a Participant is determined over a period of time that contains fewer than 12 calendar months, then the annual "compensation" limitation described above shall be adjusted with respect to that Participant by multiplying the annual "compensation" limitation in effect for the Plan Year by a fraction the numerator of which is the number of full months in the period and the denominator of which is 12; provided, however, that no proration is "required" for a Participant who is covered under the Plan for less than one full Plan Year if the formula for allocations is based on "compensation" for a period of at least 12 months. The "DETERMINATION DATE" with respect to any Plan Year means the last day of the preceding Plan Year, except that the "determination date" with respect to the first Plan Year of the Plan, shall mean the last day of such Plan Year. A "KEY EMPLOYEE" means any Employee or former Employee who is a "key employee" pursuant to the provisions of Code Section 416(i)(1) and any Beneficiary of such Employee or former Employee. A "NON-KEY EMPLOYEE" means any Employee who is not a "key employee". A "PERMISSIVE AGGREGATION GROUP" means those plans included in each Employer's "required aggregation group" together with any other plan or plans of the Employer, so long as the entire group of plans would continue to meet the requirements of Code Sections 401(a)(4) and 410. A "REQUIRED AGGREGATION GROUP" means the group of tax-qualified plans maintained by an Employer or a Related Company consisting of each plan in which a "key employee" participates and each other plan that enables a plan in which a "key employee" participates to meet the requirements of Code Section 401(a)(4) or Code Section 410, including any plan that terminated within the five-year period ending on the relevant "determination date". 83 A "SUPER TOP-HEAVY GROUP" with respect to a particular Plan Year means a "required" or "permissive aggregation group" that, as of the "determination date", would qualify as a "top-heavy group" under the definition in this Section with "90 percent" substituted for "60 percent" each place where "60 percent" appears in the definition. A "SUPER TOP-HEAVY PLAN" with respect to a particular Plan Year means a plan that, as of the "determination date", would qualify as a "top-heavy plan" under the definition in this Section with "90 percent" substituted for "60 percent" each place where "60 percent" appears in the definition. A plan is also a "super top-heavy plan" if it is part of a "super top-heavy group". A "TOP-HEAVY GROUP" with respect to a particular Plan Year means a "required" or "permissive aggregation group" if the sum, as of the "determination date", of the present value of the cumulative accrued benefits for "key employees" under all defined benefit plans included in such group and the aggregate of the account balances of "key employees" under all defined contribution plans included in such group exceeds 60 percent of a similar sum determined for all employees covered by the plans included in such group. A "TOP-HEAVY PLAN" with respect to a particular Plan Year means (i), in the case of a defined contribution plan (including any simplified employee pension plan), a plan for which, as of the "determination date", the aggregate of the accounts (within the meaning of Code Section 416(g) and the regulations and rulings thereunder) of "key employees" exceeds 60 percent of the aggregate of the accounts of all participants under the plan, with the accounts valued as of the relevant valuation date and increased for any distribution of an account balance made in the five-year period ending on the "determination date", (ii), in the case of a defined benefit plan, a plan for which, as of the "determination date", the present value of the cumulative accrued benefits payable under the plan (within the meaning of Code Section 416(g) and the regulations and rulings thereunder) to "key employees" exceeds 60 percent of the present value of the cumulative accrued benefits under the plan for all employees, with the present value of accrued benefits for employees (other than "key employees") to be determined under the accrual method uniformly used under all plans maintained by an Employer or, if no such method exists, under the slowest accrual method permitted under the fractional accrual rate of Code Section 411(b)(1)(C) and including the present value of any part of any accrued benefits distributed in the five-year period ending on the "determination date", and (iii) any plan (including any simplified employee pension plan) included in a "required aggregation group" that is a "top-heavy group". For purposes of this paragraph, the accounts and accrued benefits of any employee who has not performed services for an Employer or a Related Company during the five-year period ending on the "determination date" shall be disregarded. For purposes of this paragraph, the present value of cumulative accrued benefits under a defined benefit plan for purposes of top-heavy determinations shall be calculated using the actuarial assumptions otherwise employed under such plan, except that the same actuarial assumptions shall be used for all plans within a "required" or "permissive aggregation group". A Participant's interest in the Plan attributable to any Rollover Contributions, except Rollover Contributions made from a plan maintained by an Employer or a Related Company, shall not be considered in determining whether the Plan is top- 84 heavy. Notwithstanding the foregoing, if a plan is included in a "required" or "permissive aggregation group" that is not a "top-heavy group", such plan shall not be a "top-heavy plan". The "VALUATION DATE" with respect to any "determination date" means the most recent Valuation Date occurring within the 12-month period ending on the "determination date". 22.2 APPLICABILITY Notwithstanding any other provision of the Plan to the contrary, the provisions of this Article shall be applicable during any Plan Year in which the Plan is determined to be a "top-heavy plan" as hereinafter defined. If the Plan is determined to be a "top-heavy plan" and upon a subsequent "determination date" is determined no longer to be a "top-heavy plan", the vesting provisions of this Article shall continue to apply. 22.3 MINIMUM EMPLOYER CONTRIBUTION If the Plan is determined to be a "top-heavy plan" for a Plan Year, the Employer Contributions, other than Matching Contributions, allocated to the Account of each "non-key employee" who is an Eligible Employee and who is employed by an Employer or a Related Company on the last day of such top-heavy Plan Year shall be no less than the lesser of (i) three percent of his "compensation" or (ii) the largest percentage of "compensation" that is allocated as an Employer Contribution and/or Tax-Deferred Contribution for such Plan Year to the Account of any "key employee"; except that, in the event the Plan is part of a "required aggregation group", and the Plan enables a defined benefit plan included in such group to meet the requirements of Code Section 401(a)(4) or 410, the minimum allocation of Employer Contributions to each such "non-key employee" shall be three percent of the "compensation" of such "non-key employee". In lieu of the minimum allocation described in the preceding sentence, the Employer Contributions allocated to the Account of each "non-key employee" who is employed by an Employer or a Related Company on the last day of a top-heavy Plan Year and who is also covered under a top-heavy defined benefit plan maintained by an Employer or a Related Company will be no less than five percent of his "compensation". Any minimum allocation to a "non-key employee" required by this Section shall be made without regard to any social security contribution made on behalf of the non-key employee, his number of hours of service, his level of "compensation", or whether he declined to make elective or mandatory contributions. Employer Contributions allocated to a Participant's Account in accordance with this Section shall be considered "annual additions" under Article VII for the "limitation year" for which they are made and shall be separately accounted for. Employer Contributions allocated to a Participant's Account shall be allocated upon receipt among the Investment Funds in accordance with the Participant's currently effective investment election. 85 22.4 ACCELERATED VESTING If the Plan is determined to be a "top-heavy plan", a Participant's vested interest in his Employer Contributions Sub-Account shall be determined no less rapidly than in accordance with the following vesting schedule:
- ----------------------------------------------------------- -------------------------------------------------------- YEARS OF VESTING SERVICE VESTED INTEREST - ----------------------------------------------------------- -------------------------------------------------------- Less than 1 0% - ----------------------------------------------------------- -------------------------------------------------------- 1, but less than 2 25% - ----------------------------------------------------------- -------------------------------------------------------- 2, but less than 3 50% - ----------------------------------------------------------- -------------------------------------------------------- 3, but less than 4 75% - ----------------------------------------------------------- -------------------------------------------------------- 4 or more 100% - ----------------------------------------------------------- --------------------------------------------------------
86 ARTICLE XXIII EFFECTIVE DATE 23.1 GUST EFFECTIVE DATES Unless otherwise specifically provided by the terms of the Plan, this amendment and restatement is effective with respect to each change made to satisfy the provisions of (i) the Uniformed Services Employment and Reemployment Rights Act of 1994 ("USERRA"), (ii) Small Business Job Protection Act of 1996 ("SBJPA"), (iii) the Taxpayer Relief Act of 1997 ("TRA '97"), (iv) any other change in the Code or ERISA, or (v) regulations, rulings, or other published guidance issued under the Code, ERISA, USERRA, SBJPA, or TRA '97 (collectively the "GUST required changes"), the first day of the first period (which may or may not be the first day of a Plan Year) with respect to which such change became required because of such provision (including any day that became such as a result of an election or waiver by an Employee or a waiver or exemption issued under the Code, ERISA, USERRA, SBJPA, or TRA '97), including, but not limited to, the following: (a) The addition of a new Section to Article XXI entitled "Veterans Reemployment Rights" is effective December 12, 1994. (b) The following changes are effective for Plan Years beginning after December 31, 1996: (i) elimination of the family aggregation requirements; (ii) changes to the definition of "Highly Compensated Employee" in Article I of the Plan; (iii) changes to the definition of "leased employee" in Article I or II, as applicable; (iv) changes to the 401(k) discrimination test in Article VII of the Plan and changes to the method of correction where the Plan fails to satisfy the test; and (v) changes to the 401(m) discrimination test in Article VII of the Plan and changes to the method of correction where the Plan fails to satisfy the test. (c) Changes in the definition of "Required Beginning Date" in Article I of the Plan and the addition of special provisions in Article XV permitting Participants to whom distribution has commenced under the old rules, but who would not be required to commence under the new rules, to suspend distributions, are effective January 1, 2002. 87 (d) Changes to the anti-alienation provisions of Article XV to include the exceptions in Code Section 401(a)(13)(C) and (D) are effective for judgments, orders, and decrees issued and settlement agreements entered into on or after August 5, 1997. (e) The increase in the cashout limit from $3,500 to the limit specified in the Plan is effective January 1, 1998. (f) Elimination of the look back rule for determining whether the value of a Participant's Account exceeds the cashout limit is effective March 22, 1999. (g) Exclusion of hardship withdrawals of Tax-Deferred Contributions from the definition of "eligible rollover distribution" is effective January 1, 1999. (h) Elimination of the combined limit on defined benefit and defined contribution plans under Code Section 415(e) is effective the first day of the first "limitation year" beginning on or after January 1, 2000. * * * EXECUTED _______________________________________________, ____________________________, this ___24th____ day of _____January______, __2003______. COLE NATIONAL GROUP, INC. By: Leslie D. Dunn --------------------------------- Title: Senior Vice President 88 EX-10.70 10 l00460aexv10w70.txt EX-10.70 BANK WAIVER TO THE CREDIT AGREEMENT EXHIBIT 10.70 EXECUTION COPY WAIVER WAIVER (this "Waiver") dated as of May 9, 2003 to the Amended and Restated Credit Agreement, dated as of May 23, 2002 (as amended, supplemented or otherwise modified from time to time the "Credit Agreement among COLE VISION CORPORATION, a Delaware corporation ("Cole Vision"), THINGS REMEMBERED, INC., a Delaware corporation ("Things Remembered"), and PEARLE, INC., a Delaware corporation ("Pearle"; Cole Vision. Things Remembered, and Pearle each being referred to as a "Borrower" and collectively as the "Borrowers"), the several banks and other financial institutions from time to time parties thereto (collectively, the "Lenders"), LEHMAN COMMERCIAL PAPER INC., as syndication agent, WACHOVIA BANK, NATIONAL ASSOCIATION, as documentation agent and CANADIAN IMPERIAL BANK OF COMMERCE, a Canadian-chartered bank acting through its New York Agency, as administrative agent for the Lenders thereunder (in such capacity, the "Administrative Agent"). WITNESSETH: WHEREAS, the Borrowers, the Lenders and the Administrative Agent are parties to the Credit Agreement; and WHEREAS, the Borrowers have requested that violations of a certain covenant in the Credit Agreement be waived in the manner provided for in this Waiver and the Lenders are willing to waive such violations, but only upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Defined Terms. Terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. SECTION 2. Waiver. The Lenders hereby waive any violation of Section 8.1(a) of the Credit Agreement that has resulted as of the end of the fiscal quarters ended May 4, 2002, August 3, 2002, November 2, 2002 and February 1, 2003 or that may result as of the end of the fiscal quarter ending May 3, 2003, provided that such waiver shall automatically terminate and have no further force or effect if (a) it shall be determined that the Leverage Ratio exceeded 4.45 to 1.00 as of February 1, 2003 or (b) on any date during the period from February 2, 2003 through the date upon which such waiver shall expire pursuant to the immediately succeeding sentence, the ratio of (i) Total Indebtedness on such date to (ii) EBITDA for the twelve-month period most recently ended prior to such date for which financial statements shall have been delivered to each Lender pursuant to Section 7.1(c) of the Credit Agreement shall be determined to have exceeded, or shall exceed, as the case may be, 4.45 to 1.00. The waivers set forth in this Section shall expire and have no further force or effect on (x) May 17, 2003, if the Borrowers have not then furnished to each Lender CNG's Form 10-K for the fiscal year ended February 1, 2003 and CNG's restated Form lO-Q's for the fiscal quarters ended May 4,2002, August 3, 2002 and November 2, 2002, (y) May 23, 2003, if the Borrowers have not then furnished to each Lender the revised financial projections of the balance sheet, statement of income and statement of cash flows on a Consolidated basis of CNG and its Subsidiaries for fiscal years 2003 through 2006 (which shall be in reasonable detail and on a quarter-by-quarter basis for fiscal years 2003 and 2004 and on a year-by-year basis for fiscal years 2005 and 2006 and shall be accompanied by a certificate of a Responsible Officer with respect thereto of a type described in Section 7.2(c) of the Credit Agreement) or (z) June 30, 2003, otherwise. The Lenders acknowledge and agree that the changes in the reported financial condition of the Borrowers and their Subsidiaries as a result of the change in accounting treatment that occurred in the fiscal fourth quarter of 2002 for, among other things, sales of certain optical product warranties as a result of the re-audit of the financial statements of the Borrowers and the Subsidiaries for prior fiscal years by Deloitte & Touche, which have replaced Arthur Anderson as the Borrowers' auditors, do not result in a Material Adverse Effect. SECTION 3. Representations and Warranties. After giving effect to this Waiver, the Borrowers hereby confirm that the representations and warranties set forth in Section 5 of the Credit Agreement are true and correct in all material respects on and as of the date hereof as if made on and as of such date. Each Borrower represents and warrants that, after giving effect to this Waiver, no Default or Event of Default (other than any which has been hereby waived) has occurred and is continuing. SECTION 4. Effectiveness. This Waiver shall become effective upon execution and delivery by each of the Borrowers, the other Loan Parties, the Administrative Agent and the Majority Lenders. SECTION 5. Continuing Effect of Credit Agreement. This Waiver shall not constitute a waiver, amendment or modification of any other provision of the Credit Agreement not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of the Borrowers that would require a waiver or consent of the Lenders or the Administrative Agent. The provisions of the Credit Agreement are and shall remain in full force and effect. SECTION 6. Counterparts. This Waiver may be executed by one or more of the parties hereto on any number of separate counterparts, and all such counterparts shall be deemed to be one and the same instrument. Each party hereto confirms that any facsimile copy of such party's executed counterpart of this Waiver (or its signature page thereof) shall be deemed to be an executed original thereof. SECTION 7. Expenses. The Borrowers agree to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Waiver, including without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. SECTION 8. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COLE VISION CORPORATION By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Treasurer and Assistant Secretary THINGS REMEMBERED, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Treasurer and Assistant Secretary PEARLE, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Vice President, Treasurer and Asst. Sec. CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as Administrative Agent By: /s/ GERALD GIRARDI --------------------------------- Title: GERALD GIRARDI EXECUTIVE DIRECTOR CIBC WORLD MARKETS CORP., AS AGENT CIBC INC. By: /s/ GERALD GIRARDI --------------------------------- Name: GERALD GIRARDI Title: EXECUTIVE DIRECTOR CIBC WORLD MARKETS CORP., AS AGENT LEHMEN COMMERCIAL PAPER INC. By: /s/ FRANCIS CHANG --------------------------------- Name: FRANCIS CHANG Title: AUTHORIZED SIGNATORY WACHOVIA BANK, NATIONAL ASSOCIATION By: /s/ WILLIAM F.FOX --------------------------------- Name: William F. Fox Title: Vice President KEYBANK NATIONAL ASSOCIATION By: /s/ DAVID J. WECHTER, VP --------------------------------- Name: David J. Wechter Title: Vice President FIFTH THIRD BANK By: /s/ JAMES P. BYRNES --------------------------------- Name: James P. Byrnes Title: Vice President THINGS REMEMBERED PERSONALIZED GIFTS, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Treasurer and Asst. Secretary PEARLE VISION, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Vice President, Treasurer, Asst. Secretary AMERICAN VISION CENTERS, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Jossph Gaglioti Vice President, Treasurer, Asst. Secretary NUVISION, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Vice President, Treasurer, Asst. Secretary The undersigned Guarantors do hereby consent and agree to the foregoing Waiver: COLE NATIONAL CORPORATION By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Vice President and Treasurer COLE NATIONAL GROUP, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Vice President and Treasurer BAY CITIES OPTICAL COMPANY By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Treasurer and Asst. Secretary WESTERN STATES OPTICAL, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Treasurer and Asst. Secretary COLE VISION SERVICES, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Treasurer COLE LENS SUPPLY, INC. By: /s/ JOSEPH GAGLIOTI --------------------------------- Title: Joseph Gaglioti Treasurer and Asst. Secretary EX-21 11 l00460aexv21.txt EX-21 SUBSIDIARIES OF COLE NATIONAL CORPORATION . . . EXHIBIT 21 LIST OF SUBSIDIARIES OF COLE NATIONAL CORPORATION
Names Subsidiaries Corporation Name State of Incorporation Do Business Under - ---------------- ---------------------- ----------------- Cole National Group, Inc. Delaware Cole Vision Corporation Delaware Sears Optical BJ's Optical Target Optical Bay Cities Optical Company California Target Optical Western States Optical, Inc. Washington Sears Optical Shop Cole Vision Services, Inc. Delaware Cole Lenses Supply, Inc. Delaware Cole Vision Canada, Inc. New Brunswick Sears Optical Pearle Vision Center Pearle Vision Management Care - Texas HMO of Texas, Inc. Cole Vision IPA, LLC New York Cole Vision Corporation DS Management Corporation Delaware Cole National Group, Inc. Pearle, Inc. Delaware Pearle Vision, Inc. Delaware Pearle Vision Center Pearle Vision Express Pearle Eyelab Express Pearle Vision Pearle Vision Center of Puerto Rico Commonwealth of Puerto Rico Same as Pearle Vision, Inc. Pearle Vision Care, Inc. California Pearle Vision (HMO) American Vision Centers, Inc. Delaware NuVison, Inc. Michigan Pearle Vision Center Pearle Vision Nuvision Things Remembered, Inc. Delaware Things Remembered Personalized Gifts, Inc. Ohio Cole Managed Vision, Inc. Delaware Cole National Group
EX-23.1 12 l00460aexv23w1.txt EX-23.1 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-18765, 333-19419, 333-40605, 333-40607, 333-40609, 333-53900, 333-82263, 333-82265, 333-82271, 333-82480, and 333-83630 of Cole National Corporation (the "Company") on Forms S-8 of our report dated May 15, 2003 (which report expresses an unqualified opinion and includes explanatory paragraphs relating to the change in method of accounting for goodwill and other intangible assets as discussed in Notes 1 and 4, and the restatement of the Company's fiscal 2001 and 2000 consolidated financial statements as discussed in Note 17), appearing in this Annual Report on Form 10-K of Cole National Corporation for the year ended February 1, 2003. Cleveland, Ohio May 15, 2003 EX-24 13 l00460aexv24.txt EX-24 POWER OF ATTORNEY EXHIBIT 24 COLE NATIONAL CORPORATION POWER OF ATTORNEY Each of the undersigned officers and/or directors of Cole National Corporation, a Delaware corporation (the "Corporation"), hereby constitutes and appoints Jeffrey A. Cole, Lawrence Hyatt, Joseph Gaglioti, Ann Holt and Leslie D. Dunn, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned an Annual Report on Form 10-K for the fiscal year ended February 1, 2003, pursuant to Section 13 of the Securities Exchange Act of 1934 and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the 27th day of March, 2003. /s/ Jeffrey A. Cole /s/ Larry Pollock - --------------------------------------- --------------------------- Jeffrey A. Cole, Director and Principal Larry Pollock, Director Executive Officer /s/ Timothy F. Finley /s/ Irwin N. Gold - --------------------------------------- --------------------------- Timothy F. Finley, Director Irwin N. Gold, Director /s/ Melchert Frans Groot /s/ Peter V. Handal - --------------------------------------- --------------------------- Melchert Frans Groot, Director Peter V. Handal, Director /s/ Charles A. Ratner /s/ Walter J. Salmon - --------------------------------------- --------------------------- Charles A. Ratner, Director Walter J. Salmon, Director /s/ Ronald E. Eilers /s/ Ann Holt - --------------------------------------- --------------------------- Ronald E. Eilers, Director Ann Holt, Principal Accounting Officer /s/ Lawrence E. Hyatt - --------------------------------------- Lawrence E. Hyatt, Principal Financial Officer EX-99.2 14 l00460aexv99w2.txt EX-99.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Cole National Corporation (the "Company") on Form 10-K for the period ended February 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Date: May 16, 2003 /s/ Jeffrey A. Cole ------------------------------ Name: Jeffrey A. Cole Title: Chief Executive Officer /s/ Lawrence E. Hyatt ------------------------------ Name: Lawrence E. Hyatt Title: Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----