-----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, TzHvAQZ2ZeqDlEnkZ+oAU3tcCTGTIEXGuswYGXjqioRVXpE1Dian3qCfSlsaz3un ybI2+wPg4yPxbGFfEW4AvA== 0000950152-97-003468.txt : 19970505 0000950152-97-003468.hdr.sgml : 19970505 ACCESSION NUMBER: 0000950152-97-003468 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970502 SROS: NYSE 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: 0203 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12814 FILM NUMBER: 97593946 BUSINESS ADDRESS: STREET 1: 5915 LANDERBROOK DR CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 BUSINESS PHONE: 2164494100 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 COLE NATIONAL CORPORATION /ANNUAL REPORT 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended February 1, 1997, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . ---------- ----------- Commission file number 1-12814 COLE NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 34-1453189 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 5915 Landerbrook Drive, Mayfield Heights, Ohio 44124 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (216) 449-4100 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Class A Common Stock, $.001 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 27, 1997 was approximately $362,903,000, based upon the last price reported for such date by the New York Stock Exchange. As of March 27, 1997, 12,031,060 shares of the registrant's Class A common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 12, 1997 are incorporated herein by reference into Part III. ================================================================================ 2 PART I Item 1. Business General Cole National Corporation ("CNC") was incorporated as a Delaware corporation in 1984. CNC, through the subsidiaries owned by its direct subsidiary, Cole National Group, Inc. ("CNG"), is a leading provider of eyewear products, optometric services and personalized gifts with over 3,100 retail locations in 50 states, Canada and the Caribbean. References herein to the "Company" include CNC and its direct and indirect subsidiaries and include its predecessor companies, which have operated for more than 50 years, where applicable. The Company's businesses are conducted through two principal operating units: (i) Cole Optical, consisting of Cole Vision Corporation ("Cole Vision") and Pearle, Inc. ("Pearle"), which was acquired on November 15, 1996; and (ii) Cole Gift, consisting of Things Remembered Inc. ("Things Remembered") and Cole Gift Centers, Inc. ("CGC"). Cole Optical is the largest optical retail company in the United States in terms of number of locations and is the second largest optical retailer in terms of sales volume. Cole Gift operates the only two nationwide chains of gift stores offering "while you shop" gift personalization, key duplicating, and related merchandise. The Company differentiates itself from other specialty retailers by providing value-added services at the point of sale at all of its retail locations. Cole Optical Pro forma for the Pearle acquisition, Cole Optical contributed 70% of the Company's net revenue in fiscal 1996 with over 2,100 company-owned and franchised locations throughout the United States, Canada and the Caribbean as of February 1, 1997. When the integration and consolidation of Pearle is complete, Cole Vision and Pearle will share management leadership, purchasing power and corporate support functions and Cole Vision's managed vision care programs will give participants access to a network of company-owned, franchised and third-party optical locations. Cole Vision Cole Vision operates principally under the "Sears Optical", "Montgomery Ward Vision Center" and "BJ's Optical Department" names. As of February 1, 1997, Cole Vision operated 1,063 departments in 46 states, including 675 departments on the premises of Sears department stores, 213 departments in Montgomery Ward stores, 75 departments in BJ's Wholesale Club stores, 19 departments located in three other retailers and 81 freestanding stores operated under the name "Sears Optical." In November 1996, Cole Vision acquired 73 Sears Optical departments and two freestanding Vision Club stores in Canada. Cole Vision departments are generally operated under a lease or license arrangement through which the host store collects the sales receipts, retains an agreed upon percentage of sales and remits the remainder to Cole Vision on a weekly basis. -1- 3 ' Cole Vision optical departments are, in most cases, full-service retail eyecare stores offering brand name and private label prescription eyeglasses, contact lenses and accessories with an on-premises doctor of optometry who performs complete eye examinations and prescribes eyeglasses and contact lenses. Most Cole Vision optical departments, which are typically 1,000 square feet in size, operate with a doctor of optometry, a department manager, and from one to seven opticians depending on store sales volume. A majority of the doctors of optometry are independent, as is often required by state law, with the remainder being employed by Cole Vision. The independent doctors sublease space and equipment from Cole Vision where permitted by law, or from the host, and retain their examination fees. Each of Cole Vision's optical departments is computer linked to Cole Vision's five centralized manufacturing laboratories, which grind, cut and fit lenses to order and ship them to the stores. Cole Vision provides next day delivery on most of the eyewear it offers when requested by its customers. Cole Vision purchases all of the frames and lenses used in its eyeglasses from outside suppliers, both in the United States and several foreign countries. Cole Vision conducts a variety of marketing and promotional efforts to build and maintain its customer base. Cole Vision primarily uses newspaper, direct mail, yellow pages and host advertising. Host advertising includes the placement of promotional material within sales circulars or credit card billings sent out by the host store to its customers. Cole Vision also promotes its next day service as "Eyewear Express." Managed Vision Care In the last several years, Cole Vision has expanded its managed vision care program that provides low cost, comprehensive eyecare benefits marketed directly to employers, other employee benefit plan sponsors and insurance companies, primarily under the name "Vision One." Vision One's basic program gives employers the opportunity to offer their employees a group discount at the managed vision care network with minimal direct cost to the employer. An enhanced Vision One program allows employers to provide their employees with prepaid eye examinations as well as pricing discounts or reimbursements. Cole Vision expects to add the Pearle company-owned and franchise locations to its managed vision care programs in fiscal 1997. Pearle At February 1, 1997, Pearle's operations consisted of 348 company-owned and 338 franchised stores located in 43 states, Canada, and the Caribbean. All Pearle stores operate in either an "Express" or "Mainline" store format. Express stores contain a full surfacing lab that can manufacture most glasses in approximately one hour. Mainline stores can manufacture over 50% of prescriptions on-site in approximately one hour. Other prescriptions are sent to a nearby Express location or to the main laboratory in Dallas. The main -2- 4 laboratory generally is able to complete orders for next day delivery if requested. At February 1, 1997, 268 of the company-owned stores and 121 of the franchised stores were Express, with the balance being Mainline. The Express stores typically are located in high traffic freestanding, strip center and mall locations with most stores averaging 3,000 square feet. The Express stores are usually staffed with two managers and a support staff of four to eight people. Mainline stores have an average size of 1,700 square feet and are also located in freestanding buildings, or in smaller strip or regional centers. Mainline stores generally carry a smaller assortment of inventory than Express stores and are usually staffed with one manager and two to three associates. Most Pearle stores have a doctor of optometry on site with approximately 80% leasing space from Pearle on an independent basis and the remaining being direct employees of Pearle. Pearle's marketing strategy employs a wide range of media at both the national and local levels. The franchised and company-owned stores each contribute a percentage of revenues to Pearle's marketing budget with approximately half of Pearle's marketing expenditures devoted to television. Pearle's brand positioning of high quality eyecare products and services has been reinforced by an advertising and promotions program, which includes Pearle's advertising slogan, Nobody Cares for Eyes More Than Pearle. Pearle operates a warehouse facility in Dallas which inventories and distributes a comprehensive product line including frames, eyeglass lenses, contact lenses, optical supplies and eyewear accessories to company-owned and franchised locations. The Company also has a 20% equity interest in Pearle Trust B.V. which operates 193 locations in the Netherlands and Belgium. Franchise Operations Pearle has maintained a franchise program since 1980. Most of the franchised stores are single franchise operations, with no franchisee operating more than five stores. With the proper financial approvals, a franchise purchase can be financed through Pearle. Currently, Pearle offers financing over seven to ten years at a rate of prime plus three points adjusted quarterly. Each franchisee is required to enter into a Franchise Agreement requiring payment of an initial franchise fee. The term of the typical franchise agreement is equal to the earlier of ten years or the expiration or termination of the underlying base lease. Royalty and advertising contributions typically are based on a percentage of the franchisee's gross revenues from the retail operation and/or non-surgical professional fee revenues. The total monthly advertising contribution is distributed between Pearle's system-wide advertising fund and the local co-op market advertising fund. -3- 5 Pearle has recently presented a new form of the Franchise Agreement to all franchisees which would reduce the royalty and advertising fees they pay and would, among other things, provide for the franchisee's participation in Cole Vision's managed vision care programs. Cole Gift Cole Gift, pro forma for the Pearle acquisition, contributed approximately 30% of the Company's net revenue in fiscal 1996. As of February 1, 1997, Cole Gift operated nearly 1,300 locations throughout the United States. Things Remembered and CGC share management expertise, purchasing power, warehousing, distribution systems and corporate support functions. Things Remembered As of February 1, 1997, Things Remembered operated 790 stores and kiosks generally located in large, enclosed shopping malls located in 45 states. Each location carries a wide assortment of engravable items and provides "while you shop" personalization and engraving services for any occasion including holiday, business and special occasion gift events. Things Remembered offers engraving for items purchased at the store as well as for items purchased elsewhere. Merchandise sold at Things Remembered stores consists of a broad assortment of gift categories and items at prices generally ranging from $10 to $75. Things Remembered's offering of gifts includes writing instruments, clocks, music boxes, picture frames and albums, executive desk sets and accessories, ID bracelets, glassware, lighters, keys and key rings, door knockers and Christmas ornaments. Things Remembered features brand name merchandise as well as higher margin private label merchandise. At February 1, 1997, Things Remembered locations consisted of 447 stores and 343 kiosks. The typical store consists of about 1,000 square feet, while kiosks, which are units located in the center of the common mall area, are typically 200 square feet in size. In fiscal 1993, Things Remembered began a new retail concept by opening five "personalization superstores" that combine engraved gifts with personalized soft goods in a large store format. The Company utilizes computer-controlled embroidery equipment for the personalization of merchandise such as throws, sweaters, bathrobes, jackets, baseball caps, towels and baby blankets. At February 1, 1997, a total of 83 personalization superstores were open averaging approximately 2,200 square feet in size. In fiscal 1995, Cole Gift established a central fulfillment facility with computer-controlled embroidery equipment. In fiscal 1996, the Company added soft goods to most of Things Remembered's other locations providing these stores with personalization services from the central facility. -4- 6 CGC As of February 1, 1997, CGC operated 501 leased locations in 44 states including 455, 36 and nine locations in Sears, Venture and Montgomery Ward stores, respectively, and one location in the store of another national retailer. CGC stores are generally operated under a lease or license arrangement under which the host store collects the sales receipts, retains an agreed upon percentage of sales and remits the remainder to CGC on a weekly basis. CGC locations sell gifts and gift engraving and other services similar to those offered by Things Remembered, in addition to key duplicating and watch repair services. As of February 1, 1997, 96 of the CGC locations in operation were standard format shops occupying approximately 150 square feet. Since 1989, CGC has also operated greeting card locations in Sears stores and combined them with the CGC operations in such stores. Locations in this enhanced format, which numbered 67 as of February 1, 1997, average approximately 1,000 square feet in size. Over the last four years, 286 CGC locations have been converted to gift centers. Gift centers, which occupy approximately 1,200 square feet of space, typically carry a substantially expanded line of engravable and non-engravable gifts along with greeting cards. In the fourth quarter of fiscal 1995, gift centers began offering selected soft goods supported by the Cole Gift central fulfillment operation. CGC also operates 52 key kiosks, of approximately 80 square feet in size, that provide key duplicating and key related products only. In fiscal 1995, CGC opened the first "Personally Yours" department within Sears. Personally Yours is a concept designed to generate additional customer traffic and increase sales by offering personalization for hard and soft line products for both CGC and Sears merchandise. In the first half of fiscal 1996, CGC expanded this test by opening seven stores located in one metropolitan area. General Cole Gift locations are usually operated by one or two employees during non-peak periods and up to 15 employees during the peak Christmas season. Locations typically employ a store manager on a full-time basis and a full or part-time assistant manager, while the balance of the employees are part-time sales associates. Nearly all Cole Gift locations are equipped with gift engravers and key duplicating machines. Cole Gift has computerized engraving equipment in most Things Remembered stores and kiosks. Many Things Remembered stores also have equipment for etching glassware items. All Cole Gift locations are equipped with point of sale terminals. The Company ships most of Cole Gift's store merchandise, other than greeting cards, through its centralized distribution system at its warehouse in Highland Heights, Ohio. The warehouse, which services both Things Remembered and CGC, utilizes a computerized carousel system to automate the process of locating merchandise needed to fill a store order. -5- 7 Host Relationships The Company believes it has developed excellent relationships with the host stores in which CGC and Cole Vision operate. The Company has maintained its relationships with Sears and Montgomery Ward for over 40 years in the gift and key business and over 35 years in the optical business. Of the Sears and Montgomery Ward stores that offer optometric services, virtually all are operated by Cole Vision. Although CGC's and Cole Vision's leases with their major hosts are terminable by either party upon relatively short notice, neither has ever had a lease terminated other than in connection with a store closing, relocation or major remodeling. Seasonality The Company's business historically has been seasonal, with, on average, approximately 30% of its net revenue and approximately 50% of its income from operations generated in the fourth fiscal quarter because of the importance of gift sales during the important Christmas retailing season. Although the Pearle acquisition will moderate the seasonality of the Company due to relatively lower levels of optical product sales during the Christmas holiday season, the Company's business will remain seasonal. Purchasing The merchandise, supplies and component parts required for the various products sold by the Company are purchased from a large number of suppliers and manufacturers and are generally readily available. In most cases, such purchases are not made under long-term contracts. In fiscal 1996, no single supplier or manufacturer accounted for as much as 10% of total purchases. Competition The Company operates in highly competitive businesses. Cole Optical competes with other optical companies, private ophthalmologists, optometrists and opticians and a growing number of HMO's in a highly fragmented marketplace. Pearle competes on the basis of its highly recognized brand name, one-hour express service and by offering quality eyecare products. Cole Vision competes primarily on the basis of the service it provides as well as price and product quality, and the reputation of its host stores. The Company believes that Pearle and Cole Vision, based on sales, rank second and third, respectively in United States optical retailing sales. Although Cole Gift operates the only two nationwide chains of gift stores offering "while you shop" gift engraving, key duplicating, glass etching and monogramming, as well as related merchandise, it competes with many other retailers that sell gift items. Cole Gift competes with such other retailers primarily on the basis of the value-added point of sale services that it provides as well as price and product quality. Some of the Company's competitors have greater financial resources than the Company. -6- 8 Employees As of February 1, 1997, the Company and its subsidiaries had approximately 8,600 full-time and 5,100 part-time employees. During October, November and December, the Company employs additional full- and part-time employees. In fiscal 1996, approximately 5,000 additional employees were employed during such period. The hourly employees at Cole Gift's distribution center (approximately 80 employees in the aggregate) and approximately 140 employees at certain Pearle store locations are represented by labor unions. The Company considers its present labor relations to be satisfactory. Item 2. Properties The Company owns an office and warehouse in Highland Heights, Ohio that is subject to a mortgage and leases its executive offices and another office in Cleveland, Ohio. All of Cole Visions's and Cole Gift's retail locations are leased or operated under a license with the host store, and none of the individual retail locations is material to the Company's operations. Leases for stores operated in Sears stores and freestanding stores operated under the name "Sears Optical" are generally for terms of 90 days and five years, respectively. Leases for Things Remembered stores and kiosks are generally for terms of ten and five years, respectively. The Company believes that its relationships with its lessors are generally good. The Company leases its five Cole Vision optical laboratories, two of which are located in Knoxville, Tennessee; Memphis, Tennessee; Salt Lake City, Utah; and Richmond, Virginia, pursuant to leases expiring (including renewals at the option of the Company) in 1999, 2005, 2002, 2006 and 2002, respectively. Pearle has 635 stores based in forty-three states. Pearle also has eighteen stores in Canada and thirty-three stores in the Caribbean. Stores are located in malls, strip centers and freestanding locations. Pearle leases most of its retail stores under noncancellable operating leases with terms generally ranging from five to ten years and which generally contain renewal options for additional periods. Pearle also is the principal lessee on a majority of stores operated by franchisees, who sublease the facilities from Pearle. Pearle owns its Dallas Support Center, which comprises approximately 88,721 square feet of office space and 147,336 square feet of laboratory and distribution facilities. Pearle also owns a small headquarters and laboratory in Puerto Rico. The Company has acquired the land to construct a new warehouse and distribution facility for Cole Gift that is expected to improve distribution efficiencies. The facility, which the Company expects will be completed in fiscal 1997, will most likely be financed through a sale and lease-back transaction or through conventional secured real estate financing. The Company estimates the cost for this facility to be approximately $10 million. Item 3. Legal Proceedings The Company is subject to a variety of routine legal proceedings. -7- 9 Item 4. Submission of Matters to a Vote of Security-Holders There were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year ended February 1, 1997. Item 4A. Executive Officers of the Company (a) The following persons are the executive officers of the Company who are not members of the Company's Board of Directors, having been elected to their respective offices by the Board of Directors of the Company to serve until the election and qualification of their respective successors: Name Age Office ---- --- ------ Joseph Gaglioti 51 Vice President and Treasurer Wayne L. Mosley 43 Vice President and Controller (b) The following is a brief account of the positions held with the Company during the past five years by each of the above named executive officers of the Company: Mr. Gaglioti has been Vice President of the Company since 1992 and Treasurer of the Company since 1991. He was Assistant Treasurer of the Company and a subsidiary company that merged into the Company in September 1992 ("CNCD") from 1984 to 1991. Mr. Mosley has been Vice President and Controller, Assistant Secretary and Assistant Treasurer of the Company since 1992. Mr. Mosley served as Vice President, Controller - Finance of CNCD from 1991 to 1992 and was Chief Accounting Officer of CNCD from 1990 to 1991. Information concerning Jeffrey A. Cole and Brian B. Smith, the Company's executive officers who are also Directors, will be included in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders (the "Proxy Statement"). On May 6, 1992, Child World, Inc. (Child World), a former subsidiary of the Company, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Immediately prior to the sale of Child World on June 27, 1991, Mr. Gaglioti was Assistant Treasurer of Child World. -8- 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded on the New York Stock Exchange (NYSE) under the symbol "CNJ". The following table sets forth, for the fiscal periods indicated, the high and low sales prices per share. Fiscal 1996 Fiscal 1995 ----------------- ----------------- Quarter High Low High Low ------- ---- --- ---- --- First $17 5/8 $10 3/8 $ 9 7/8 $ 8 1/4 Second $21 5/8 $16 3/8 $11 7/8 $ 9 1/16 Third $25 1/4 $18 1/4 $13 $11 1/2 Fourth $28 5/8 $23 5/8 $14 1/8 $10 1/4 The Company's dividend policy for the foreseeable future is to retain earnings to support its growth strategy. The Company did not pay dividends on its Common Stock during the last two fiscal years. As of March 28, 1997, there were 178 shareholders of record. -9- 11 Item 6. Selected Financial Data The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and other information contained elsewhere in this report (dollars in thousands except per share amounts).
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net revenue $ 683,990 $ 577,091 $ 528,049 $ 472,888 $ 428,066 Income (loss) from operations (1) $ (12,361) $ 45,956 $ 42,964 $ 37,232 $ 31,897 Income (loss) from continuing operations (1) $ (27,633) $ 13,758 $ 24,657 $ 13,072 $ 5,470 Income (loss) from continuing operations per common share (1) $ (2.44) $ 1.32 $ 2.62 $ 2.47 $ 1.09 Weighted average shares outstanding (000's) 11,333 10,415 9,395 5,283 5,004 Total assets $ 582,843 $ 300,781 $ 283,319 $ 257,944 $ 225,861 Working capital $ 51,845 $ 53,765 $ 49,612 $ 32,020 $ 1,897 Stockholders' equity (deficit) at year end $ 19,718 $ 17,133 $ 3,306 $ (75,070) $(123,957) Current ratio 1.24 1.57 1.54 1.34 1.02 Long-term obligations and redeemable preferred stock $ 317,547 $ 181,903 $ 184,388 $ 238,299 $ 255,610 Number of stores at year end (2) 3,115 2,378 2,287 2,097 2,080 Comparable store sales growth 6.3% 3.4% 5.5% 9.4% (0.7)%
(1) Includes a $64,400 pre-tax charge for business integration and other non-recurring items in 1996 primarily related to the acquisition of Pearle. (2) Includes Pearle franchise locations. -10- 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are identified according to the calendar year in which they begin. For example, the fiscal year ended February 1, 1997 is referred to as "fiscal 1996." Fiscal 1996 consisted of a 52-week period. Fiscal 1995 and fiscal 1994 consisted of 53- and 52-week periods, respectively. Results of Operations The following is a discussion of the results of the Company's operations for the three fiscal years ended February 1, 1997. Fiscal 1996 Compared to Fiscal 1995 On November 15, 1996, the Company acquired certain assets and all of the issued and outstanding common stock of Pearle, Inc. ("Pearle"). Immediately following the acquisition, the Company sold Pearle Holdings B.V., Pearle's European operations, to Pearle Trust B.V. The Company has a 20% common equity interest in Pearle Trust B.V. which operates 193 stores in the Netherlands and Belgium. A significant portion of the purchase price was financed by a subsidiary of the Company, Cole National Group, Inc. ("CNG"), by the issuance of $150.0 million of 9.875% Senior Subordinated Notes due 2006 (the "Notes"). The acquisition of Pearle has been accounted for under the purchase method of accounting. Accordingly, Pearle's results of operations have been included in the Company's consolidated statement of operations since the date of acquisition. For the eleven-week period, Pearle operated at approximately a break-even level with net revenue of $58.3 million reflecting the relatively lower level of optical retail sales during the holiday season. At February 1, 1997, the Pearle system included 348 company-operated optical stores and 338 franchised locations in the United States, Canada and the Caribbean. See Notes 2 and 3 of the Notes to Consolidated Financial Statements for further discussion of the Pearle acquisition. Except as otherwise indicated, the following discussion of net revenue, gross profit and operating expenses relates to the Company on an historical basis without giving effect to the Pearle acquisition. Net revenue increased 8.4% to $625.7 million in fiscal 1996 from $577.1 million in fiscal 1995. The increase in consolidated revenue was due to a comparable store sales increase of 6.3% and to the opening of additional Cole Gift and Cole Vision units including 75 optical locations in Canada as a result of the acquisition of AOCO Limited in November 1996. This was partially offset by one less week of sales in fiscal 1996 compared to fiscal 1995 and the closing of 95 low-volume Cole Gift departments. Comparable store sales increased 10.7% at Cole Vision primarily as a result of successful eyewear promotions and growth in the managed vision care program. Comparable store sales increased 1.4% at Cole Gift benefiting from the roll-out of monogrammed softgoods and the -11- 13 introduction of new merchandise. At February 1, 1997, the Company had 3,115 specialty service retail locations including the Pearle company-operated stores and 338 franchised locations, versus 2,378 at the end of the prior year. Gross profit increased to $429.4 million in fiscal 1996 from $394.2 million in fiscal 1995. Gross margins for fiscal 1996 and fiscal 1995 were 68.6% and 68.3%, respectively. The increase in gross margin percentage was the result of lower product costs, improved optical lab productivity and a higher level of personalization in the sales mix at Things Remembered. In fiscal 1997, the Company's consolidated gross margin is expected to decline from its historical levels as Pearle has a lower gross margin than the Company due to the higher costs of in-store laboratories and lower margin wholesale sales to franchised stores partially offset by franchise royalties, fees and interest income on franchise notes receivable which have no corresponding cost of goods sold. Operating expenses increased 8.2% to $359.8 million in fiscal 1996 from $332.5 million the prior year. As a percentage of revenue, operating expenses decreased to 57.5% in fiscal 1996 from 57.6% in fiscal 1995. Operating expenses increased primarily due to higher advertising expenditures, payroll costs and store occupancy expenses, partly offset by one less week in fiscal 1996. Advertising expenditures at Cole Vision were increased for optical promotions to encourage continued sales growth above last year's successful promotions. Payroll costs increased because of more higher-volume retail units open in 1996, including an increased number of Things Remembered personalization superstores, and additional payroll to support increased sales. Store occupancy expenses increased primarily as a result of the increased number of Things Remembered personalization superstores and higher percentage rents caused by increased comparable store sales. Fiscal 1996 depreciation and amortization expense of $17.6 million was $1.9 million more than fiscal 1995 reflecting an increase in capital expenditures. In the fourth quarter of fiscal 1996, the Company recorded a $64.4 million pre-tax charge for certain unusual and non-recurring items. Such charge was primarily related to the acquisition of Pearle and included costs incurred related to the integration and consolidation of Pearle into the Company's operations, as well as certain other non-recurring charges. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of the business integration and other non-recurring charges. Income from operations excluding the charge for non-recurring items increased 13.2% to $52.0 million in fiscal 1996 from $46.0 million the prior year. The increase was primarily attributable to increased revenue, higher gross margin and improved leveraging of operating expenses. -12- 14 Net interest expense for fiscal 1996 of $22.0 million was $0.6 million more than that of the prior year. This increase was primarily due to $3.4 million of additional interest expense related to the financing of the Pearle acquisition offset by decreases in interest expense due to the retirement of $5.0 million of 11.25% Senior Notes due 2001 (the "Senior Notes") in November 1995, the purchase and subsequent retirement of $15.1 million of Senior Notes in the second quarter of fiscal 1996, the elimination of working capital borrowings and increased interest income from an increase in temporary cash investments. The income tax benefit of $6.8 million for fiscal 1996 includes a $20.0 million income tax benefit related to the charge for business integration and other non-recurring items. The effective income tax rate on income excluding the charge for business integration and other non-recurring items was 44.0% in fiscal 1996 and 1995. This rate reflects the significant impact of non-deductible amortization of goodwill in both years. A more complete discussion of income taxes is included in Note 9 of the Notes to Consolidated Financial Statements. The net loss in fiscal 1996 of $28.3 million included a $0.7 million extraordinary loss, net of an income tax benefit of $0.5 million, recorded in the second quarter in connection with the early extinguishment of debt representing the payment of premiums, the write-off of unamortized discount and other costs associated with purchasing the debt. Fiscal 1995 Compared to Fiscal 1994 Net revenue increased 9.3% to $577.1 million in fiscal 1995 from $528.0 million in fiscal 1994. The increase in consolidated revenue was due to a comparable store sales increase of 3.4%, sales for the 53rd week of approximately $9.3 million and additional Things Remembered and Cole Vision units open in fiscal 1995. Comparable store sales increased primarily as a result of successful eyewear promotions and growth in the managed vision care program at Cole Vision and expanded gift and softgoods merchandise at Things Remembered locations. Fourth quarter comparable store sales were even with last year as the retail industry in general experienced a very difficult Christmas season and severe weather conditions in many major markets. At February 3, 1996, the Company operated 2,378 specialty service retail locations versus 2,287 at the end of the prior year. The net increase in retail units includes the acquisition by Cole Vision on May 21, 1995, of 59 optical departments located in BJ's Wholesale Club stores and the sale of the Company's 39 Sunspot fashion sunglass kiosks as of April 29, 1995. Gross profit increased to $394.2 million in fiscal 1995 from $363.3 million in fiscal 1994. Gross margins for fiscal 1995 and fiscal 1994 were 68.3% and 68.8%, respectively. The decrease in gross margin percentage was primarily due to an increase in the sales of lower margin optical products, including disposable contact lenses, and a lower mix of higher margin merchandise, -13- 15 primarily keys, at Cole Gift Centers. Gross margin in the fourth quarter of fiscal 1995, however, improved to 67.1% from 66.9% in fiscal 1994, benefiting from fiscal 1994 and 1995 investments aimed at increasing optical laboratory capacity and production efficiency and from reduced material costs for spectacles. Operating expenses increased 8.8% to $332.5 million in fiscal 1995 from $305.5 million the prior year. As a percentage of revenue, operating expenses decreased to 57.6% in fiscal 1995 from 57.8% in fiscal 1994. Operating expenses increased primarily because of higher payroll costs, store occupancy expenses and advertising expense due, in part, to the 53rd week. The higher payroll costs were also the result of more retail units in fiscal 1995 and additional payroll to support the higher level of sales. Partially offsetting the payroll increases were savings from outsourcing the Company's data processing operations in fiscal 1995. Store occupancy expense increased because of the increased number of retail units and higher percentage rents due to increased comparable store sales. Advertising costs increased primarily as a result of additional efforts to support eyewear promotions. Also included in operating expense in fiscal 1995 was a $0.2 million provision for the closing of approximately 90 low volume leased key and gift departments in the first quarter of fiscal 1996. Fiscal 1995 depreciation and amortization expense of $15.7 million was $0.8 million more than fiscal 1994 reflecting an increase in capital expenditures that began in the latter part of fiscal 1993. Income from operations increased 7.0% to $46.0 million in fiscal 1995 from $43.0 million the prior year. The increase was primarily attributable to the increased revenue. The lower gross margin percentage was partially offset by improved leveraging of operating expenses. Net interest expense for fiscal 1995 of $21.4 million was $1.8 million less than that of the prior year. This decrease was primarily due to retirement of debt in connection with the Company's initial public offering of its common stock (the "IPO") on April 18, 1994 and the retirement of $5.0 million of its Senior Notes in November 1995 along with higher interest income. The income tax provision of $10.8 million for fiscal 1995 represents an effective tax rate of 44.0%. This rate reflects the significant impact of non-deductible amortization of goodwill. The income tax benefit of $4.9 million in fiscal 1994 included the effects of utilizing all of the Company's net operating loss carryforwards and the reversal of a valuation allowance on net deferred tax assets in the fourth quarter of fiscal 1994. Net income in fiscal 1994 of $24.7 million included a loss on early extinguishment of debt of $0.9 million to reflect the payment of premiums, the write-off of unamortized debt discount and other costs associated with retiring the debt in connection with the IPO. -14- 16 Liquidity and Capital Resources The Company's primary source of liquidity is funds provided from operations of its wholly owned subsidiaries. In addition, CNG's operating subsidiaries have available to them working capital commitments of $75.0 million, reduced by commitments under letters of credit, under a credit facility put in place at the time of the Pearle acquisition (the "Credit Facility"). The Credit Facility replaced a $50.0 million revolving credit facility. There were no working capital borrowings outstanding during fiscal 1996 and the maximum amount outstanding during fiscal 1995 was $3.5 million. The Credit Facility contains covenants restricting the ability of the Company's operating subsidiaries to, among other things, pay dividends or make other restricted payments to the Company or CNG. The Credit Facility permits CNG's subsidiaries to pay dividends to CNG to the extent necessary to permit CNG to pay all interest and principal on the Senior Notes and the Notes when due. During the second quarter of fiscal 1996, the Company completed a public offering of 1,437,500 shares of its common stock at an offering price of $19.25 per share. The net proceeds from the offering were $26.2 million. A portion of the net proceeds was used to purchase in the open market $15.1 million of Senior Notes plus accrued interest thereon. Issuance of the Notes by CNG in connection with the Pearle acquisition and the retirement of $15.1 million of Senior Notes will result in a net increase in annual interest expense in fiscal 1997 compared to fiscal 1996 of approximately $11.0 million including amortization of the discount on the Notes and related deferred financing costs. At year end, the Company had outstanding $165.8 million of Senior Notes and $150.0 million of Notes. The Senior Notes and the Notes are unsecured and mature October 1, 2001 and December 31, 2006, respectively, with no earlier scheduled redemption or sinking fund payment. The Senior Notes bear interest at a rate of 11.25% per annum, payable semi-annually on each April 1 and October 1. The Notes bear interest at a rate of 9.875% per annum, payable semi-annually on each June 30 and December 31, commencing June 30, 1997. The indentures pursuant to which the Senior Notes and the Notes were issued contain certain optional and mandatory redemption features and other financial covenants, including restrictions on the ability of CNG to pay dividends or make other restricted payments to the Company. The indentures permit dividend payments to the Company of one-half of CNG's consolidated net income, provided that no default or event of default has occurred under the indentures and that CNG has met a specified fixed charge coverage ratio test. The indentures also permit payments to the Company for certain tax obligations and for administrative expenses of the Company not to exceed 0.25% of net revenue. See Note 5 of the Notes to Consolidated Financial Statements. -15- 17 The Company has no significant principal payment obligations under any of its outstanding indebtedness until the CNG Notes mature in 2001. The ability of the Company and its subsidiaries to satisfy that obligation will be primarily dependent upon future financial and operating performance of the subsidiaries and upon the Company's ability to renew or refinance borrowings or to raise additional equity capital. Cash balances at year end were $73.1 million compared to $29.3 million at February 3, 1996. Operations generated net cash of $84.7 million in fiscal 1996, $36.5 million in fiscal 1995 and $15.6 million in fiscal 1994. The $48.2 million increase in cash provided by operations in fiscal 1996 compared to fiscal 1995 was primarily attributable to an increase in accounts payable and accrued liabilities of $35.2 million excluding amounts related to the non-recurring charge, increased income from operations of $6.1 million excluding the non-recurring charge, increased depreciation and amortization expense of $4.4 million and increased accrued income taxes. Accrued income taxes at February 1, 1997 includes $15.0 million of taxes due on the sale of Pearle's European business that were reimbursed to the Company by the seller in connection with the Pearle acquisition. These cash flow increases were partly offset by an increase in inventories of $3.6 million versus a $2.5 million reduction in fiscal 1995. The $64.4 million charge for business integration and other non-recurring items recorded in fiscal 1996 had little effect on the change in cash flow for fiscal 1996 since most of the items were either non-cash or were accrued at year end. The total cash outlay related to this charge is expected to be approximately $41.1 million ($21.1 million after tax), of which $2.9 million has been paid as of February 1, 1997. The remaining amount is expected to be incurred within the next 12 to 18 months, except for certain lease costs which may be incurred over the remaining life of the leases. The $20.9 million increase in cash provided by operations in fiscal 1995 compared to fiscal 1994 was primarily due to a $2.5 million reduction in inventory, despite a 9.3% increase in revenue, compared to an $8.7 million increase in inventory the prior year. Also, income from operations in fiscal 1995 was higher by $3.0 million and interest expense was lower by $1.8 million than in fiscal 1994. Net capital additions were $23.5 million, $19.8 million and $18.5 million in fiscal 1996, 1995 and 1994, respectively. In addition, the Company used $157.4 million for the purchases of Pearle and AOCO Limited and $6.1 million for the investment in Pearle Trust B.V. in fiscal 1996, $0.8 million for the purchase of the BJ's Wholesale Club optical departments in fiscal 1995 and $4.7 million for the purchase of 107 Montgomery Ward optical departments in fiscal 1994. The majority of the capital additions were for store fixtures, equipment and leasehold improvements for new stores and the remodeling of existing stores. For fiscal 1997, the Company expects to continue to expand the number of stores as well as remodel and relocate stores. The Company currently estimates -16- 18 capital expenditures in fiscal 1997 will exceed $30.0 million including Pearle. The Company has acquired land and is constructing a new warehouse and distribution facility for Cole Gift that is expected to improve distribution efficiencies. The facility, which the Company expects will be completed in fiscal 1997, is expected to be financed through a sale and lease-back transaction or through conventional secured real estate financing. The Company estimates the cost of this facility to be approximately $10 million. The Company believes that funds provided from operations along with funds available under the Credit Facility will provide adequate sources of long-term liquidity to allow the Company's operating subsidiaries to continue to expand the number of stores. Forward-Looking Information Certain sections of this report contain forward-looking statements. Forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the Company. All forward-looking statements involve risk and uncertainty. The Company operates in a highly competitive environment, and its future liquidity, financial condition and operating results may be materially affected by a variety of factors, some of which may be beyond the control of the Company, including risks associated with the integration of Pearle, the Company's ability to select and stock merchandise attractive to customers, economic and weather factors affecting consumer spending, operating factors, including manufacturing quality of optical and engraved goods, affecting customer satisfaction, the Company's relationships with host stores and franchisees, the mix of goods sold, pricing and other competitive factors, and the seasonality of the Company's business. Item 8. Financial Statements and Supplementary Data Information required by this item appears on pages F-1 through F-22 of this Form 10-K and is incorporated herein by reference. Other financial statements and schedules are filed herewith as "Financial Statement Schedules" pursuant to Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item as to Directors will be included in the Company's Proxy Statement under the caption "Election -17- 19 of Directors" and is incorporated herein by reference. The information required by this item as to executive officers who are not Directors is included in Item 4A in Part I of this report. Item 11. Executive Compensation The information required by this item will be included in the Company's Proxy Statement under the caption "Compensation of Executive Officers" and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item will be included in the Company's Proxy Statement under the caption "Beneficial Ownership of Common Stock" and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item will be included in the Company's Proxy Statement under the caption "Compensation Committee Interlocks, Insider Participation and Certain Transactions" and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) and (2) Financial Statements and Financial Statement Schedules The consolidated financial statements and the related financial statement schedules filed as part of this Form 10-K are located as set forth in the index on page F-1 of this report. (a)(3) Exhibits See Exhibit Index on pages X-1 through X-8. (b) Reports on Form 8-K The following reports on Form 8-K were filed by the Company during the last quarter of the fiscal year ended February 1, 1997: On November 19, 1996, the Company filed a report on Form 8-K announcing completion of the acquisition of certain assets and all of the outstanding common stock of Pearle, Inc. (Pearle) from the Pillsbury Company on November 15, 1996. On December 2, 1996, the Company filed a report on Form 8-K reporting the Pearle transaction including the filing of Exhibits. -18- 20 On December 19, 1996, the Company filed a report on Form 8-K/A amending its report on Form 8-K filed on November 19, 1996 to include (i) audited financial statements for Pearle, Inc. for the years ended September 30, 1996, 1995 and 1994 and (ii) pro forma financial information for Cole National Corporation and Subsidiaries for the fiscal year ended February 3, 1996 and 39 weeks ended November 2, 1996. -19- 21 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Page ---- Report of Independent Public Accountants F - 2 Consolidated Balance Sheets at February 1, 1997 and February 3, 1996 F - 3 Consolidated Statements of Operations for the 52 weeks ended February 1, 1997, the 53 weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995 F - 4 Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 1997, the 53 weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995 F - 5 Consolidated Statements of Stockholders' Equity for the 52 weeks ended February 1, 1997, the 53 weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995 F - 6 Notes to Consolidated Financial Statements F - 7 Schedules included herein: Page ---- Report of Independent Public Accountants on Financial Statement Schedule F - 23 Schedule I - Condensed Financial Information of Registrant F - 24 All financial statement schedules not included have been omitted because they are not applicable or because the required information is otherwise furnished. F-1 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS OF COLE NATIONAL CORPORATION: We have audited the accompanying consolidated balance sheets of Cole National Corporation (a Delaware corporation) and Subsidiaries (the Company) as of February 1, 1997 and February 3, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended February 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cole National Corporation and Subsidiaries as of February 1, 1997 and February 3, 1996 and the results of their operations and their cash flows for each of the three years in the period ended February 1, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 19, 1997. F-2 23 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) February 1, February 3, 1997 1996 ---------- ---------- Assets Current assets: Cash and temporary cash investments $ 73,141 $ 29,260 Accounts receivable, less allowance for doubtful accounts of $3,068 in 1996 and $-0- in 1995 39,660 18,589 Current portion of notes receivable 6,060 -- Inventories 119,236 84,794 Prepaid expenses and other 7,378 5,892 Deferred income tax benefits 24,948 9,872 ---------- ---------- Total current assets 270,423 148,407 Property and equipment, at cost 216,575 157,050 Less - accumulated depreciation and amortization (100,918) (90,909) ---------- ---------- Total property and equipment, net 115,657 66,141 Other assets: Notes receivable, excluding current portion 27,951 -- Deferred income taxes and other 29,504 5,070 Intangible assets, net 139,308 81,163 ---------- ---------- Total assets $ 582,843 $ 300,781 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 1,336 $ 705 Accounts payable 62,379 29,273 Accrued interest 9,630 7,050 Accrued liabilities 123,263 51,638 Accrued income taxes 21,970 5,976 ---------- ---------- Total current liabilities 218,578 94,642 Long-term debt, net of discount and current portion 317,547 181,903 Other long-term liabilities 27,000 7,103 Stockholders' equity: Preferred stock -- -- Common stock 12 10 Paid-in capital 131,238 99,827 Foreign currency translation adjustment (606) -- Notes receivable-stock option exercise (1,024) (1,117) Accumulated deficit (109,902) (81,587) ---------- ---------- Total stockholders' equity 19,718 17,133 ---------- ---------- Total liabilities and stockholders' equity $ 582,843 $ 300,781 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 24 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) 52 Weeks 53 Weeks 52 Weeks Ended Ended Ended February 1, February 3, January 28, 1997 1996 1995 ---------- ---------- ---------- Net revenue $ 683,990 $ 577,091 $ 528,049 Costs and expenses: Cost of goods sold 221,304 182,934 164,723 Operating expenses 390,518 332,471 305,470 Depreciation and amortization 20,129 15,730 14,892 Business integration and other non-recurring charges 64,400 -- -- ---------- ---------- ---------- Total costs and expenses 696,351 531,135 485,085 ---------- ---------- ---------- Income (loss) from operations (12,361) 45,956 42,964 Interest expense (23,735) (22,149) (23,680) Interest income 1,704 761 464 ---------- ---------- ---------- Income (loss) before income taxes and extraordinary item (34,392) 24,568 19,748 Income tax provision (benefit) (6,759) 10,810 (4,909) ---------- ---------- ---------- Income (loss) before extraordinary item (27,633) 13,758 24,657 Extraordinary loss on early extinguishment of debt (682) -- (917) ---------- ---------- ---------- Net income (loss) $ (28,315) $ 13,758 $ 23,740 ========== ========== ========== Earnings (loss) per common share: Income (loss) before extraordinary item $ (2.44) $ 1.32 $ 2.62 Extraordinary loss (.06) -- (.10) ---------- ---------- ---------- Net income (loss) $ (2.50) $ 1.32 $ 2.52 ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 25 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
52 Weeks 53 Weeks 52 Weeks Ended Ended Ended February 1, February 3, January 28, 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss) $ (28,315) $ 13,758 $ 23,740 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt 682 -- 917 Non-recurring charges 23,292 -- -- Depreciation and amortization 20,129 15,730 14,892 Non-cash interest expense 440 454 469 Deferred income taxes (16,194) 4,495 (10,153) Change in assets and liabilities net of effects from acquisitions: Increase in accounts and notes receivable, prepaid expenses and other assets (3,967) (4,905) (4,610) Decrease (increase) in inventories (3,582) 2,452 (8,723) Increase (decrease) in accounts payable, accrued liabilities, and other liabilities 73,382 3,095 (1,252) Increase (decrease) in accrued interest 2,580 115 (2,451) Increase in accrued income taxes 16,256 1,332 2,807 ---------- ---------- ---------- Net cash provided by operating activities 84,703 36,526 15,636 ---------- ---------- ---------- Cash flows from financing activities: Repayment of long-term debt (17,105) (5,406) (56,859) Payment of deferred financing fees (6,066) -- (100) Net proceeds from sale of common stock 26,202 -- 54,540 Proceeds from long-term debt, net 148,875 -- -- Other 664 69 96 ---------- ---------- ---------- Net cash provided (used) by financing activities 152,570 (5,337) (2,323) ---------- ---------- ---------- Cash flows from investing activities: Purchases of property and equipment, net (23,469) (19,832) (18,527) Acquisitions of businesses, net of cash acquired (157,426) (800) (4,675) Investment in Pearle Trust B.V. (6,102) -- -- Systems development costs (3,820) (755) (1,295) Other, net (2,575) (272) 10 ---------- ---------- ---------- Net cash used by investing activities (193,392) (21,659) (24,487) ---------- ---------- ---------- Cash and temporary cash investments: Net increase (decrease) during the period 43,881 9,530 (11,174) Balance, beginning of the period 29,260 19,730 30,904 ---------- ---------- ---------- Balance, end of the period $ 73,141 $ 29,260 $ 19,730 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 26 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
Foreign Currency Notes Trans- Receivable Total lation Stock Accum- Stock- Common Paid-In Adjust- Option ulated holders' Stock Capital ment Exercise Deficit Equity --------- --------- --------- --------- --------- --------- Balance, January 29, 1994 $ 5 $ 45,140 $ -- $ (1,130) $(119,085) $ (75,070) --------- --------- --------- --------- --------- --------- Net income -- -- -- -- 23,740 23,740 Proceeds from initial public offering 5 54,535 -- -- -- 54,540 Exercise of stock options -- 74 -- -- -- 74 Repayment of notes receivable -- -- -- 22 -- 22 --------- --------- --------- --------- --------- --------- Balance, January 28, 1995 10 99,749 -- (1,108) (95,345) 3,306 --------- --------- --------- --------- --------- --------- Net income -- -- -- -- 13,758 13,758 Exercise of stock options -- 78 -- (9) -- 69 --------- --------- --------- --------- --------- --------- Balance, February 3, 1996 10 99,827 -- (1,117) (81,587) 17,133 --------- --------- --------- --------- --------- --------- Net loss -- -- -- -- (28,315) (28,315) Net proceeds from sale of common stock 1 26,201 -- -- -- 26,202 Stock options granted -- 4,153 -- -- -- 4,153 Exercise of stock options 1 1,057 -- (49) -- 1,009 Repayment of notes receivable -- -- -- 142 -- 142 Effect of foreign currency translation -- -- (606) -- -- (606) --------- --------- --------- --------- --------- --------- Balance, February 1, 1997 $ 12 $ 131,238 $ (606) $ (1,024) $(109,902) $ 19,718 ========= ========= ========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 27 COLE NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Basis of Presentation - The consolidated financial statements include the accounts of Cole National Corporation (CNC), its wholly owned Subsidiaries, including Cole National Group, Inc. (CNG), and CNG's wholly owned subsidiaries (collectively, the Company). CNG's subsidiaries include Pearle, Inc. (Pearle) which was acquired on November 15, 1996 (see Note 2). All significant intercompany transactions have been eliminated in consolidation. The Company is a specialty service retailer operating in both host and non-host environments. The Company's primary lines of business are eyewear products and services and personalized gifts. Eyewear products and services and personalized gifts represented approximately 60% and 40%, respectively, of sales in 1996 and 50% of sales each in 1995 and 1994. With the acquisition of Pearle, eyewear products and services are expected to comprise over 70% of the Company's net revenue in 1997. The Company sells its products through over 2,777 company-owned retail locations and 338 franchised locations in all 50 states, Canada, and the Caribbean, and differentiates itself from other specialty retailers by providing value-added services at the point of sale at all of its retail locations. The Company considers its operations to be in one business segment. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are identified according to the calendar year in which they begin. Fiscal years 1996 and 1994 consisted of 52 weeks while fiscal year 1995 consisted of 53 weeks. Inventories - The Company's inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Property and Depreciation - The Company's policy is to provide depreciation using the straight-line method over a period which is sufficient to amortize the cost of the asset during its useful life or lease term, whichever is shorter. F-7 28 The estimated useful lives for depreciation purposes are: Buildings and improvements 5 to 40 years Equipment 3 to 10 years Furniture and fixtures 2 to 10 years Leasehold improvements 2 to 20 years Property and equipment, at cost, consist of the following as of February 1, 1997 and February 3, 1996 (000's omitted): 1997 1996 -------- -------- Land and buildings $ 10,604 $ 3,615 Furniture, fixtures and equipment 148,116 116,968 Leasehold improvements 57,855 36,467 -------- -------- Total property and equipment $216,575 $157,050 ======== ======== Store Opening Expenses - Store opening expenses are charged to operations in the year the store is opened, which is generally the year the expense is incurred. Notes Receivable - The Company's notes receivable are primarily from Pearle's franchisees throughout the U.S. and are collateralized by inventory, equipment, and leasehold improvements at each location. The notes generally bear interest at the prime rate plus 3% and require monthly payments of principal and interest over periods of up to ten years. Intangible Assets - Intangible assets, net consist of the following at February 1, 1997 and February 3, 1996 (000's omitted): 1997 1996 -------- -------- Tradenames $ 49,198 $ -- Goodwill 90,110 81,163 -------- -------- $139,308 $ 81,163 ======== ======== Tradenames acquired in connection with the Pearle acquisition are being amortized on a straight-line basis over 40 years and are presented net of accumulated amortization of $262,000 at February 1, 1997. Goodwill is being amortized on a straight-line basis over 40 years and is presented net of accumulated amortization of $30,609,000 and $29,640,000 at February 1, 1997 and February 3, 1996, respectively. Management regularly evaluates its accounting for goodwill considering primarily such factors as historical profitability, current operating profits and cash flows. The Company believes that, at February 1, 1997, the asset is realizable and the amortization period is still appropriate. F-8 29 Other Assets - Financing costs incurred in connection with obtaining long-term debt are capitalized in other assets and amortized over the life of the related debt using the effective interest method. Other Long-Term Liabilities - Other long-term liabilities consist primarily of certain employee benefit obligations, deferred lease credits and other lease-related obligations not expected to be paid within 12 months and deferred income taxes. Deferred lease credits are amortized on a straight-line basis over the life of the applicable lease. Cash Flows - For purposes of reporting cash flows, the Company considers all temporary cash investments, which have original maturities of three months or less, to be cash equivalents. The carrying amounts of cash and cash equivalents approximate fair value due to the short maturity of those instruments. Net cash flows from operating activities reflect cash payments for income taxes and interest as follows (000's omitted): 1996 1995 1994 -------- -------- -------- Income taxes $ 5,300 $ 4,265 $ 2,249 Interest $ 20,834 $ 21,580 $ 24,662 During 1996 and 1995, non-cash financing activities included incurring $2,504,000 and $3,192,000, respectively, in capital lease obligations. Revenues - Revenues include sales of goods and services to retail customers at company-operated stores, sales of merchandise inventory to franchisees and other outside customers, and other revenues from franchisees such as royalties based on sales, interest income on notes receivable and initial franchise fees. Other revenues from franchisees totaled $4.0 million in fiscal 1996. Franchise revenues based on sales by franchisees are accrued as earned. Initial franchise fees are recorded as income when all material services or conditions relating to the sale of the franchises have been substantially performed or satisfied by the Company and when the related store begins operations. Advertising - The Company expenses advertising production costs and advertising costs as incurred. Advertising expense was approximately $33,630,000; $23,560,000 and $20,370,000 for 1996, 1995 and 1994, respectively. The Company has certain commitments to purchase advertising in fiscal 1997 approximating $8,000,000. F-9 30 Foreign Currency Translation - The assets and liabilities of the Company's foreign subsidiaries and its investment in Pearle Trust B.V. are translated to United States dollars at the rates of exchange on the balance sheet date. Income and expense items are translated at average monthly rates of exchange. Translation gains or losses are included in the foreign currency translation adjustment component of stockholders' equity. Capital Stock - At February 1, 1997 and February 3, 1996, there were 11,965,473 and 10,430,185, respectively, shares of common stock, par value $.001 per share (the Common Stock), outstanding. At February 1, 1997, there were 24,000,000 and 1,000,000 authorized shares of Common Stock and undesignated preferred stock, respectively. Earnings Per Share - Earnings per share for 1996, 1995 and 1994 have been calculated based on 11,333,453; 10,415,047 and 9,395,319, respectively, weighted average number of common shares outstanding. The impact of stock options and warrants has not been included in the calculation of earnings per share as the effect of their exercise is not material or is antidilutive. In fiscal 1997 the Company will adopt Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". This statement simplifies the standards for computing earnings per share and makes them comparable to international earnings per share. The adoption of this standard will not impact the Company's results of operations, financial position or cash flows. Asset Impairment - In the first quarter of 1996 the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of this standard did not have a material impact on the Company's results of operations, financial position or cash flows. During the fourth quarter of 1996, due to the Pearle acquisition and operating results, the Company recorded a provision for impairment (see Note 3). Reclassifications - Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentation. (2) Acquisitions of Businesses On November 15, 1996, the Company purchased, for an aggregate purchase price of $219.7 million, including the costs of acquisition, certain assets and all of the issued and outstanding common stock of Pearle. Pearle consisted of 346 company-operated optical stores and 340 franchised locations in the United States, Canada and the Caribbean and 193 locations in the Netherlands and Belgium. For its most recent fiscal year ended F-10 31 September 30, 1996, Pearle reported annual net revenue of $366.0 million including $63.8 million from its European operations. Immediately following the acquisition, the Company sold Pearle Holdings B.V., Pearle's European operations, to Pearle Trust B.V. (Pearle B.V.) for approximately $62 million. No gain or loss was recorded on this transaction. The Company has a 20% common equity interest in Pearle B.V., 12.5% redeemable preferred stock of $1.8 million and a 10% shareholder loan receivable of $3.9 million. The Company's investment in Pearle B.V. is being accounted for under the equity method of accounting. The Pearle acquisition was accounted for under the purchase method of accounting. The results of operations of Pearle have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the assets acquired and liabilities assumed based upon their relative fair values as of the closing date. This resulted in an excess of purchase price over net assets acquired of $20.2 million. The relative fair values of the assets acquired and liabilities assumed were based upon valuations and other studies and included tradenames of $49.5 million, unfavorable leasehold interests of $7.5 million, accruals for involuntary severance and termination benefits of $4.4 million and other purchase price adjustments. As of February 1, 1997, approximately $175,000 of severance and termination benefits were paid and charged against these liabilities. The purchase price allocation is substantially complete but is subject to adjustment, should actual costs differ from the recorded amounts. Such adjustments, if made within one year from the date of acquisition, will be recorded as adjustments to goodwill. Thereafter, any cost incurred in excess of the liability recorded will be included in the determination of net income. On a pro forma basis, if the Pearle acquisition had taken place at the beginning of the respective periods, the unaudited consolidated net revenues would have been $933.8 million for fiscal 1996 and $873.7 million for fiscal 1995. After giving effect to certain pro forma adjustments, including adjustments to reflect the amortization of tradenames and goodwill, the elimination of transactions between Pearle and its former parent, the elimination of Pearle's provision for impairment of intangible assets and related costs which resulted from the acquisition, increased interest expense and reduced interest income associated with acquisition funding and the estimated related income tax effects, pro forma net loss in fiscal 1996 would have improved by $1.8 million or $0.16 per share and pro forma net income in 1995 would have decreased by $11.6 million or $1.11 per share from the amounts reported. Anticipated efficiencies from the consolidation of the Company and Pearle have not been reflected in these amounts because their realization cannot be assured. The unaudited pro forma results have been prepared for informational purposes only and should not be considered indicative of the actual results of operations which would have occurred had the acquisition been in effect at the beginning of the periods indicated, and do not purport to be indicative of results of operations which may occur in the future. The Company also made the following acquisitions, each of which has been accounted for under the purchase method of accounting. In November F-11 32 1996, the Company acquired all of the issued and outstanding stock of AOCO Limited, which operates 73 Sears Optical Departments and two freestanding Vision Club stores in Canada, for a purchase price of $2.6 million. In May 1995, the Company acquired the assets of 59 optical departments located in BJ's Wholesale Clubs for a purchase price of $1.1 million. In January 1994, the Company acquired the assets of 107 leased optical departments within Montgomery Ward stores for a purchase price of $4.7 million. Pro forma financial results have not been presented for these acquisitions as they did not have a material effect on the Company's results of operations. (3) Business Integration and Other Non-recurring Charges In the fourth quarter of fiscal 1996, the Company recorded a $64.4 million pre-tax charge for certain unusual and non-recurring items. Such charge was primarily related to the acquisition of Pearle and included costs incurred related to the integration and consolidation of Pearle into the Company's operations, as well as certain other non-recurring charges. The charge included $17.6 million for store and other facility closings, $21.6 million related to computer systems, $9.4 million for asset impairment and $15.8 million of other charges. Total cash outlay related to these charges is approximately $41.1 million, of which $2.9 million has been paid as of February 1, 1997. The remaining amount is expected to be incurred within the next 12 to 18 months, except for certain lease costs which may be incurred over the remaining life of the leases. Although the Company currently does not anticipate that there will be additional non-recurring charges in the future, as the integration and consolidation of Pearle is completed, additional costs may be incurred that will be charged against operating income at that time. Subsequent to the effective date of the Pearle acquisition, the Company identified certain unprofitable Pearle stores which it intends to close in fiscal 1997. At certain other on-going retail locations, a decision was made to close the in-store labs and supply these locations from other facilities. In addition, the Company decided to retain Pearle's distribution and central lab facilities, but to close Pearle's home office facility in Dallas, Texas. The charge for store and other facilities closings consists primarily of the remaining noncancellable term of operating leases and other obligations remaining on these facilities subsequent to their estimated date of closing along with the loss on fixed assets. In fiscal 1995, the Company entered into a ten-year agreement to outsource its systems integration needs and data processing operations. Due to the Pearle acquisition, the Company has reassessed its system requirements and decided to terminate its outsourcing agreement and install new systems utilizing the resources of internal and external systems integrators. The Company and the outsourcing entity have agreed in principle to the terms of the termination arrangement. The settlement cost of terminating the outsourcing agreement, as well as other related costs, have been accrued as of February 1, 1997. Hardware and software costs directly related to the development and installation of new systems which will benefit future operations have been and will be capitalized as incurred. Following the Pearle acquisition and in light of current year operating results, the Company reviewed the strategic direction of certain F-12 33 other operations. In accordance with SFAS No. 121, the Company determined that the goodwill associated with portions of its gift and optical businesses would not be recoverable as the carrying values of these businesses exceeded fair value, as measured by projected future discounted cash flows. The other charges include costs related to employee matters, including duplicate costs incurred through fiscal year end and costs related to hiring employees in connection with the consolidation of the Pearle home office functions, and other costs of management realignment. In addition, the other charges include incremental travel and professional fees incurred in connection with the integration of Pearle, along with costs of developing and implementing a new franchise agreement. Also, in February 1996, the Board of Directors granted stock options to executive officers at a share price equal to the market price of the common stock on the date of grant, which were subject to stockholder approval. The increase in the price of the common stock between the grant date and the date of stockholder approval resulted in $4.2 million of compensation expense. The options as approved contained accelerated vesting provisions if the common stock price rose to certain levels, which were reached in the fourth quarter of fiscal 1996. Because future periods will not benefit by this plan, the Company recognized the full costs of the plan as expense. (4) Public Offerings On April 18, 1994, the Company completed an initial public offering (IPO) of five million shares of Common Stock at a price to the public of $12.00 per share. Net proceeds from the IPO were $54.5 million and were used to retire outstanding debt (see Note 5). In 1996, the Company completed a public offering of 1,437,500 shares of Common Stock at a price to the public of $19.25 per share. The net proceeds from the offering were $26.2 million. A portion of the proceeds were used to purchase $15.1 million of 11.25% Senior Notes (the Senior Notes), plus accrued interest thereon (see Note 5). F-13 34 (5) Long-Term Debt Long-term debt at February 1, 1997 and February 3, 1996 is summarized as follows (000's omitted): 1997 1996 ---------- ---------- 7.5% Obligation in connection with Industrial Revenue Bonds $ 338 $ 506 11.25% Senior Notes: Face value 165,838 181,000 Unamortized discount (1,455) (1,834) ---------- ---------- Total 11.25% Senior Notes 164,383 179,166 9.875% Senior Subordinated Notes: Face value 150,000 -- Unamortized discount (1,111) -- ---------- ---------- Total 9.875% Senior Subordinated Notes 148,889 -- Capital lease obligations (see Note 11) 5,273 2,936 ---------- ---------- 318,883 182,608 Less current portion (1,336) (705) ---------- ---------- Net long-term debt $ 317,547 $ 181,903 ========== ========== The Senior Notes mature October 1, 2001 with no earlier scheduled redemption or sinking fund payments. Interest on the Senior Notes is payable semi-annually on each April 1 and October 1. On November 15, 1996, CNG issued $150 million of 9.875% Senior Subordinated Notes (the Notes) due in 2006. The Notes were used by the Company to finance a portion of the Pearle acquisition (see Note 2). Interest on the Notes is payable semi-annually in arrears on December 31 and June 30 commencing June 30, 1997. The Senior Notes and the Notes are general unsecured obligations of CNG, subordinated in right of payment to senior indebtedness of CNG and senior in right of payment to any current or future subordinated indebtedness of CNG. The indentures pursuant to which the Senior Notes and the Notes were issued restrict dividend payments to the Company to 50% of CNG's net income after October 31, 1993, plus amounts due to the Company under a tax sharing agreement and for administrative expenses of the Company not to exceed 0.25% of CNG's net revenue. The indentures also contain certain optional and mandatory redemption features and other financial covenants. The Company was in compliance with these covenants at February 1, 1997. Proceeds from the IPO were used to retire $4.0 million of the Senior Notes and $50.0 million of other notes during the first quarter of fiscal 1994. The Company recorded an extraordinary loss of $0.9 million, net of an income tax benefit of $0.5 million, representing the payment of premiums, the write-off of unamortized discount and other costs associated with retiring this debt. F-14 35 A portion of the proceeds from the Company's 1996 stock offering was used to purchase $15.1 million of the Senior Notes. The Company recorded an extraordinary loss of $0.7 million, net of an income tax benefit of $0.5 million, representing the payment of premiums, the write-off of unamortized discount and other costs associated with retiring this debt. The agreement in connection with the Industrial Revenue Bonds provides for repayment of the obligation in annual installments of $168,750 through 1998. The Industrial Revenue Bonds are secured by office and distribution facilities with a net book value of $1,646,000 at February 1, 1997. At February 1, 1997, the fair value of the Company's long-term debt was approximately $346.7 million compared to a carrying value of $318.9 million. The fair value was estimated primarily by using quoted market prices. (6) Credit Facility Concurrent with the Pearle acquisition, the principal operating subsidiaries of CNG (the Borrowers) entered into a Credit Facility. The Credit Facility replaced, concurrent with the issuance of the Notes, the existing revolving credit facility. The Credit Facility provides the Borrowers with a four-year revolving line of credit of up to the lesser of a "borrowing base" or $75 million. Up to $30 million of the Credit Facility is available for the issuance of letters of credit. Borrowings under the Credit Facility initially bear interest at a rate equal to, at the option of the Borrowers, either (a) the Eurodollar Rate plus 1.25% or (b) 0.25% plus the highest of (i) the prime rate, (ii) the three-week moving average of the secondary market rates for three-month certificates of deposit plus 1% and (iii) the federal funds rate plus 0.5%. The Company pays a commitment fee of 0.375% per annum on the total unused portion of the facility. Additionally, the Credit Facility requires the Borrowers to comply with various operating covenants that restrict corporate activities, including covenants restricting the Borrowers' ability to incur additional indebtedness, pay dividends, prepay subordinated indebtedness, dispose of certain investments or make acquisitions. The Credit Facility also requires the Borrowers to comply with certain financial covenants, including covenants regarding minimum interest coverage, maximum leverage and consolidated net worth. The Borrowers were in compliance with these covenants at February 1, 1997. The Credit Facility restricts dividend payments to CNG to amounts needed to pay interest on the Senior Notes and the Notes, and certain amounts related to taxes, along with up to $8.0 million plus 0.25% of the Company's net revenue annually for other direct expenses of CNC or CNG. In addition, dividends of up to $20.0 million are permitted to repurchase the Senior Notes and/or the Notes. The maximum amount of short-term borrowings outstanding during 1995 was $3.5 million. No amounts were outstanding as of February 1, 1997 or February 3, 1996, or at any time during fiscal 1996. F-15 36 (7) Stock Options and Warrants The Company had stock options outstanding at February 1, 1997 under the 1992, the 1993 and the 1996 Management Stock Option Plans (the 1992, 1993 and 1996 Plans), the 1993 Option Agreements granting options to non-employee Directors (the 1993 Option Agreements) and the 1994 non-qualified Stock Option Plan for non-employee Directors (the 1994 Plan). The Company is authorized to issue to key employees up to 555,556; 600,000 and 884,000 shares of Common Stock under the 1992, 1993 and 1996 Plans, respectively. The Company is also authorized to issue to non-employee Directors of the Company up to 22,500 and 100,000 shares of Common Stock under the 1993 Option Agreements and the 1994 Plan, respectively. Options generally become exercisable over a three-, four- or five-year period from the date of grant and expire ten years from the date of grant. A summary of the status of the Company's stock option plans as of January 28, 1995, February 3, 1996 and February 1, 1997, and changes during each of the fiscal years is presented below:
1994 1995 1996 --------------------------- --------------------------- --------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 813,922 $ 13.88 668,554 $ 9.14 749,297 $ 9.76 Granted 5,000 12.63 123,100 11.34 804,000 13.87 Exercised (24,775) 3.00 (25,066) 3.11 (97,787) 6.08 Canceled (125,593) 18.31 (17,291) 6.93 (11,722) 10.19 ---------- ---------- ---------- Outstanding at end of year 668,554 9.14 749,297 9.77 1,443,788 12.29 ========== ========== ========== Exercisable at end of year 273,772 6.73 385,646 8.37 508,530 9.86 Weighted-average fair value of options granted during the year $ 5.11 $ 10.87
F-16 37 A summary of information about stock options outstanding at February 1, 1997, is presented below:
Options Outstanding Options Exercisable ------------------------------------------------------------- ------------------------ Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of of Contractual Exercise of Exercise Exercise Prices Shares Life Price Shares Price --------------- --------- --------- --------- --------- --------- $3.00 93,848 5.6 years $ 3.00 93,848 $ 3.00 $ 9.75 to $13.69 1,208,940 8.1 11.15 414,682 11.41 $24.88 to $28.63 141,000 10.0 28.25 -- -- --------- --------- $ 3.00 to $28.63 1,443,788 8.1 12.29 508,530 9.86 ========= =========
At February 1, 1997, there were 115,006 shares available for future grant under the 1992, 1993 and 1996 Plans and 92,500 shares available for future grant under the 1994 Plan. During 1994, the Company offered holders of options under the 1993 Plan the opportunity to exchange a portion of their existing vested and unvested stock options for a reduced number of new options under the 1993 Plan with adjusted exercise prices and vesting schedules. The result was to reduce the aggregate number of options outstanding under the 1993 Plan, to extend the vesting schedule for the repriced options from four to five years and to reduce the maximum exercise price from $27.00 per share to $12.25 per share. Payment for certain options exercised between 1993 and 1996 has been made by executing promissory notes, of which $1,024,000 were outstanding at February 1, 1997. The promissory notes are secured by the shares of common stock acquired and payable five years from the date of exercise at interest rates ranging from 5.33% to 6.37%. At February 1, 1997, there were warrants outstanding to purchase 173,678 shares of common stock. Of these, warrants to purchase 2,625 shares are exercisable at $1.00 per share and expire in 2000. Warrants to purchase 92,104 shares are exercisable at $24.70 per share and expire on May 7, 1997. Warrants to purchase 78,949 shares are exercisable at $49.40 per share and expire on March 6, 1999. The Company applies APB Opinion 25 and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its stock option plans in fiscal 1994 and fiscal 1995. Compensation cost that has been charged against income for its stock-based plans in fiscal 1996 was $4.2 million as discussed in Note 3. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the dates of awards under those plans consistent with the method of SFAS No. 123, the Company's net loss and loss per share in fiscal 1996 would have been increased to $30,234,000 and $2.67, respectively, and its net income and earnings per share in fiscal 1995 would have been reduced to $13,617,000 and $1.31, respectively. F-17 38 The fair value of each option grant in fiscal 1995 and 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rates of 6.4% and 6.2% for grants in fiscal 1995 and 1996, respectively, and expected lives of six years and volatility of 33% for options granted in both fiscal years. Because the SFAS No. 123 method of accounting has not been applied to options prior to January 29, 1995, the resulting pro forma expense may not be representative of that to be expected in the future. (8) Stockholders' Equity In August 1995, the Company's Board of Directors approved a Stockholders' Rights Plan. The Rights Plan provides for the distribution of one Right for each outstanding share of the Company's Common Stock held of record as of the close of business on September 1, 1995 or that thereafter become outstanding prior to the earlier of the Final Expiration Date of the Rights or the first date upon which the Rights become exercisable. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, without par value, at a price of $40.00, subject to adjustment. The Rights are only exercisable if a person or group buys or announces a tender offer for 15% or more of the Company's Common Stock. In the event such a transaction occurs, Rights that are beneficially owned by all other persons would be adjusted and such holders would thereafter have the right to receive, upon exercise thereof at the then current exercise price of the Right, that number of shares of Common Stock (or, under certain circumstances, an economically equivalent security of the Company) having a market value of two times the exercise price of the Right. The Rights will expire on August 31, 2005, unless extended or unless the Rights are earlier redeemed by the Company in whole, but not in part, at a price of $0.01 per Right, or exchanged. (9) Income Taxes Income tax provision (benefit) for fiscal 1996, 1995 and 1994 is detailed below (000's omitted): 1996 1995 1994 -------- -------- -------- Currently payable - Federal $ 7,408 $ 4,518 $ 3,228 State and local 2,027 1,797 2,016 -------- -------- -------- 9,435 6,315 5,244 -------- -------- -------- Deferred - Federal (16,194) 3,361 (766) Utilization of net operating loss carryforwards -- 1,134 4,859 Change in valuation allowance -- -- (14,246) -------- -------- -------- (16,194) 4,495 (10,153) -------- -------- -------- Income tax provision (benefit) $ (6,759) $ 10,810 $ (4,909) ======== ======== ======== F-18 39 The income tax provision (benefit) reflected in the accompanying consolidated statements of operations differs from the federal statutory rate as follows (000's omitted): 1996 1995 1994 -------- -------- -------- Tax provision (benefit) at statutory rate $(12,038) $ 8,599 $ 6,912 Tax effect of - State income taxes, net of federal tax benefit 1,318 1,168 1,310 Amortization of goodwill 936 900 901 Non-recurring charges 2,666 -- -- Change in valuation allowance -- -- (14,246) Other, net 359 143 214 -------- -------- -------- Tax provision (benefit) $ (6,759) $ 10,810 $ (4,909) ======== ======== ======== The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and deferred tax liabilities at February 1, 1997 and February 3, 1996 are as follows (000's omitted): 1997 1996 -------- -------- Deferred tax assets: Employee benefit accruals $ 6,137 $ 3,375 Business integration accruals 13,373 -- Other non-deductible accruals 15,066 3,959 State and local taxes 1,277 1,108 Tax credit and net operating loss carryforwards -- 1,990 Intangibles 6,148 -- Other 8,569 1,252 -------- -------- Total deferred tax assets 50,570 11,684 -------- -------- Deferred tax liabilities: Depreciation and amortization (5,543) (5,225) Other (5,535) (836) -------- -------- Total deferred tax liabilities (11,078) (6,061) -------- -------- Net deferred taxes $ 39,492 $ 5,623 ======== ======== Accrued income taxes at February 1, 1997 includes $15.0 million of taxes due on the sale of Pearle Holdings B.V. that were reimbursed to the Company by the seller in connection with the Pearle acquisition. (10) Retirement Plans The Company maintains a noncontributory defined benefit pension plan (the Retirement Plan) that covers employees who have met eligibility service requirements and are not members of certain collective bargaining units. The Retirement Plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and their compensation levels near retirement. The Company's policy is to fund amounts necessary to keep the Retirement Plan in full force and effect, in accordance with the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. F-19 40 Actuarial present values of benefit obligations are determined using the projected unit credit method. Pension expense for fiscal 1996, 1995 and 1994 includes the following components (000's omitted): 1996 1995 1994 -------- -------- -------- Service cost - benefits earned during the period $ 646 $ 528 $ 581 Interest cost on the projected benefit obligation 1,467 1,369 1,292 Less: Return on plan assets - Actual (1,669) (1,138) 178 Deferred 477 11 (1,294) -------- -------- -------- (1,192) (1,127) (1,116) Amortization of transition asset over 17.9 years (179) (179) (179) -------- -------- -------- Net pension expense $ 742 $ 591 $ 578 ======== ======== ======== The following sets forth the funded status of the Retirement Plan at December 31, 1996 and 1995 based upon the actuarial present values of benefit obligations (000's omitted): 1996 1995 -------- -------- Accumulated benefit obligations: Vested $ 17,605 $ 17,147 Nonvested 238 291 -------- -------- Total $ 17,843 $ 17,438 ======== ======== Projected benefit obligation for service rendered to date $ 19,046 $ 19,030 Fair value of plan assets, primarily money market and equity mutual funds 16,774 13,849 -------- -------- Plan assets less than projected benefit obligation (2,272) (5,181) Unrecognized prior service cost 140 168 Net unrecognized loss 1,252 2,983 Unamortized transition asset (1,416) (1,595) -------- -------- Pension liability included in accrued liabilities $ (2,296) $ (3,625) ======== ======== The weighted average discount rate used to measure the projected benefit obligation was 8.0% in 1996 and 7.75% in 1995. For both years, the rate of increase in future compensation levels was 5.0% and the expected long-term rate of return on plan assets was 9.5%. The Company has a defined contribution plan, including features under Section 401(k) of the Internal Revenue Code, which provides retirement benefits to its employees. Eligible employees may contribute up to 15% of their compensation to the plan. There is no mandatory matching of employee F-20 41 contributions by the Company, but discretionary matches of $327,000, $164,000 and $164,000 were recorded for 1996, 1995 and 1994, respectively. The Company also has a contributory profit-sharing plan for Pearle employees meeting certain service requirements as defined in the plan. The Company's contribution to the plan consists of a minimum matching contribution plus an additional performance contribution. Profit sharing expense amounted to $229,000 in 1996. During fiscal 1994, the Company established two Supplemental Executive Retirement Plans which will provide for the payment of retirement benefits to participating executives supplementing amounts payable under the Company's Retirement Plan. The first plan is an excess benefit plan designed to replace benefits that would otherwise have been payable under the Retirement Plan but that were limited as a result of certain tax law changes. The second plan is a defined contribution plan under which participants will receive an annual credit based on a percentage of base salary, subject to vesting requirements. Expense for these plans for fiscal 1996, 1995 and 1994 was $468,000, $447,000 and $413,000, respectively. (11) Commitments The Company leases a substantial portion of its facilities including laboratories, office and warehouse space, and retail store locations. These leases generally have initial terms of up to 10 years and often contain renewal options. Certain of the store locations have been sublet to franchisees. In most leases covering retail store locations, additional rents are payable based on store sales. In addition, the Company operates departments in various host stores paying occupancy costs solely as a percentage of sales under agreements containing short-term cancellation clauses. Generally, the Company is required to pay taxes and normal expenses of operating the premises for laboratory, office, warehouse and retail store leases; the host stores pay these expenses for departments operated on a percentage-of-sales basis. The following amounts represent rental expense for fiscal 1996, 1995 and 1994 (000's omitted): 1996 1995 1994 -------- -------- -------- Occupancy costs based on sales $ 53,152 $ 50,218 $ 47,198 All other rental expense 45,365 32,697 30,003 Sublease rental income (5,935) (1,510) (1,455) -------- -------- -------- $ 92,582 $ 81,405 $ 75,746 ======== ======== ======== During 1996 and 1995, the Company entered into leases for equipment which have been accounted for as capital leases. At February 1, 1997 and February 3, 1996, property under capital leases consisted of $5,696,000 and $3,192,000 in equipment with accumulated amortization of $397,000 and $37,000, respectively. F-21 42 At February 1, 1997, future minimum lease payments and sublease income receipts under noncancellable leases, and the present value of future minimum lease payments for capital leases are as follows (000's omitted): Operating Leases Capital ---------------------- Leases Payments Receipts -------- -------- -------- 1997 $ 1,497 $ 66,887 $ 13,528 1998 1,494 58,641 11,503 1999 1,499 50,277 9,202 2000 1,295 37,386 6,655 2001 353 26,797 4,112 2002 and thereafter -- 65,157 6,152 -------- -------- -------- Total future minimum lease payments 6,138 $305,145 $ 51,152 ======== ======== Amount representing interest (865) -------- Present value of future minimum lease payments $ 5,273 ======== (12) Quarterly Results of Operations (Unaudited) The Company's business is seasonal, with approximately 30% of its revenue and approximately 50% of its income from operations generated in the fourth fiscal quarter which contains the important Christmas selling season. The following is a summary of quarterly financial data for the 52 weeks ended February 1, 1997 and the 53 weeks ended February 3, 1996. The fourth quarter of fiscal 1996 includes a $64.4 million pre-tax charge for business integration and other non-recurring charges (see Note 3). The fourth quarter of fiscal 1995 consisted of 14 weeks; all other quarters consisted of 13 weeks (000's omitted, except per share amounts): Quarter Ended --------------------------------------------- May 4, Aug. 3, Nov. 2, Feb. 1, 1996 1996 1996 1997 --------- --------- --------- --------- Net revenue $ 142,890 $ 153,465 $ 146,702 $ 240,933 Gross margin 98,390 106,065 101,929 156,302 Income (loss) before extraordinary loss 980 5,177 1,173 (34,963) Net income (loss) 980 4,495 1,173 (34,963) Earnings (loss) per share: Income (loss) before extraordinary loss .09 .47 .10 (2.93) Net income (loss) .09 .41 .10 (2.93) Quarter Ended --------------------------------------------- Apr. 29, July 29, Oct. 28, Feb. 3, 1995 1995 1995 1996 --------- --------- --------- -------- Net revenue $ 125,254 $ 138,099 $ 138,646 $ 175,092 Gross margin 86,530 94,758 95,465 117,404 Net income (loss) (27) 3,766 229 9,790 Earnings per share .00 .36 .02 .94 F-22 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To Cole National Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in this Form 10-K and have issued our report thereon dated March 19, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 19, 1997. F-23 44 Schedule I COLE NATIONAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT ================================================================================ Cole National Corporation Condensed Balance Sheets February 1, 1997 and February 3, 1996 (Dollars in millions) 1997 1996 ------ ------ Assets: Receivable from subsidiaries $ 65.3 $ 14.4 Investment in subsidiaries (36.1) 2.8 Note receivable Pearle Trust B.V 3.5 -- Investment in Pearle Trust B.V 1.9 -- Interest receivable .2 -- Property and equipment, net 4.7 2.4 ------ ------ Total assets $ 39.5 $ 19.6 ====== ====== Liabilities and Stockholders' Equity: Accounts payable and accrued expenses $ 15.2 $ .2 Long-term debt 4.1 2.1 Deferred income taxes .5 .2 Stockholders' equity 19.7 17.1 ------ ------ Total liabilities and stockholders' equity $ 39.5 $ 19.6 ====== ====== F-24 45 Schedule I (continued) Cole National Corporation Condensed Statements of Operations and Cash Flows 52 Weeks Ended February 1, 1997, 53 Weeks Ended February 3, 1996 and 52 Weeks Ended January 28, 1995 (Dollars in millions) February 1, February 3, January 28, 1997 1996 1995 ------ ------ ------ Revenue: Dividends from subsidiaries $ 15.4 $ 13.5 $ -- Services to affiliates .6 .3 .1 ------ ------ ------ Total revenue 16.0 13.8 .1 Operating expenses (.8) (.3) (.1) Interest income (expense) .8 -- (1.4) ------ ------ ------ Pre-tax income (loss) 16.0 13.5 (1.4) Income tax (expense) benefit (.3) -- 1.2 ------ ------ ------ Income (loss) before equity in undistributed earnings (loss) of subsidiaries and extraordinary item 15.7 13.5 (.2) Equity in undistributed earnings (loss) of subsidiaries (43.4) .3 24.7 ------ ------ ------ Income (loss) before extraordinary item (27.7) 13.8 24.5 Extraordinary loss (.6) -- (.8) ------ ------ ------ Net income (loss) (28.3) 13.8 23.7 ------ ------ ------ Adjustments to reconcile net income (loss) to cash provided (used) by operations 43.9 (13.2) (27.2) ------ ------ ------ Net cash provided (used) by operating activities 15.6 .6 (3.5) ------ ------ ------ Financing activities: Repayment of long-term debt (.3) (.3) (51.2) Proceeds from sale of common stock 26.2 -- 54.5 Cash contributed to subsidiaries -- (.3) -- Proceeds from stock option exercises .6 -- .2 ------ ------ ------ Net cash provided (used) by financing activities 26.5 (.6) 3.5 ------ ------ ------ Investing activities: Advances to affiliates (35.0) -- -- Purchase of CNG Notes (16.1) -- -- Proceeds from sale of CNG Notes 14.9 -- -- Investment in Pearle Trust B.V (6.0) -- -- Repayment of notes receivable .1 -- -- ------ ------ ------ Net cash used by investing activities (42.1) -- -- ------ ------ ------ Net change in cash -- -- -- Cash, beginning of period -- -- -- ------ ------ ------ Cash, end of period $ -- $ -- $ -- ====== ====== ====== F-25 46 Schedule I (continued) Note to Condensed Financial Information of Registrant ================================================================================ The accompanying financial information of Cole National Corporation (CNC) is as of February 1, 1997 and February 3, 1996 and for the 52 weeks ended February 1, 1997, the 53 weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995. CNC is a holding company for its wholly-owned subsidiaries, including Cole National Group, Inc. (CNG) and consisted of no other operations. This financial information should be read in connection with the Consolidated Financial Statements and notes thereto of Cole National Corporation and Subsidiaries, contained on pages elsewhere in this Form 10-K. F-26 47 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COLE NATIONAL CORPORATION May 1, 1997 By: /s/Wayne L. Mosley ---------------------------------------- Wayne L. Mosley Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. * Chairman and Chief May 1, 1997 - ----------------------------- Executive Officer and Jeffrey A. Cole Director (Principal Executive Officer and Principal Financial Officer) * President and Director May 1, 1997 - ----------------------------- Brian B. Smith /s/Wayne L. Mosley Vice President and May 1, 1997 - ----------------------------- Controller (Principal Wayne L. Mosley Accounting Officer) * Director May 1, 1997 - ----------------------------- Timothy F. Finley * Director May 1, 1997 - ----------------------------- Irwin N. Gold * Director May 1, 1997 - ----------------------------- Peter V. Handal * Director May 1, 1997 - ----------------------------- Charles A. Ratner * The undersigned, by signing his name hereto, does sign and execute this report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors of the Company and which are being filed herewith with the Securities and Exchange Commission on behalf of such officers and directors. /s/Wayne L. Mosley - --------------------------------- Wayne L. Mosley, Attorney-in-Fact S-1 48 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 3.2(ii) Amended and Restated By-Laws of the Company, incorporated by reference to Exhibit 3.2(ii) of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 3.3 Certificate of Designations of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3.3 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 4.1 Indenture dated as of September 30, 1993 between CNG and Norwest Bank Minnesota, N.A., as trustee, relating to the 11 1/4% Senior Notes due 2001 (the form of which Senior Note is included in such Indenture), incorporated by reference to Exhibit 4.1 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 4.2 The Company by this filing agrees, upon request, to file with the Commission the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 4.3 Rights Agreement dated as of August 22, 1995 by and between the Company and National City Bank as Rights Agent, incorporated by reference to Exhibit 4.3 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). X-1 49 Exhibit Number Description - ------ ----------- 4.4 Indenture dated November 15, 1996, by and among Cole National Group, Inc. and Norwest Bank Minnesota, National Association, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2006 (the form of which Senior Subordinated Note is included in such Indenture), incorporated by reference to Exhibit 4.1 of Cole National Corporation's Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.1* Employment Agreement entered into as of April 1, 1996 by and among the Company, Cole National Group, Inc., Cole Gift Centers, Inc., Cole Vision Corporation, Things Remembered, Inc. and Jeffrey A. Cole, incorporated by reference to Exhibit 10.1 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.2* Employment Agreement entered into as of April 1, 1996 by and among the Company, Cole National Group, Cole Gift Centers, Inc., Cole Vision Corporation, Things Remembered, Inc. and Brian B. Smith, incorporated by reference to Exhibit 10.2 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.3* Agreement dated March 27, 1993 between the Company and Joseph Gaglioti regarding termination of employment, incorporated by reference to Exhibit 10.8 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.4* Agreement dated April 9, 1993 between the Company and Wayne L. Mosley regarding termination of employment, incorporated by reference to Exhibit 10.9 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). X-2 50 Exhibit Number Description - ------ ----------- 10.5* 1992 Management Stock Option Plan, including forms of Nonqualified Stock Option Agreement (Time Vesting) and Nonqualified Stock Option Agreement (Performance Option), as amended, and forms of promissory notes and pledge agreements, incorporated by reference to Exhibit 10.11 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.6* Cole National Corporation 1993 Management Stock Option Plan, including forms of Nonqualified Stock Option Agreement (1993 Time Vesting) and form of secured promissory notes and stock pledge agreement, incorporated by reference to Exhibit 10.29 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.7* Form of Option Agreement for Directors of the Company, incorporated by reference to Exhibit 10.41 to the Company's Registration Statement on Form S-1 (Registration No. 33-74228). 10.8* Nonqualified Stock Option Plan for Non-employee Directors, incorporated by reference to Exhibit 10.45 to the Company's Registration Statement on Form S-1 (Registration No. 33-74228). 10.9* Form of Nonqualified Stock Option Agreement for Non-employee Directors, incorporated by reference to Exhibit 10.9 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.10* Cole National Corporation 1996 Management Stock Option Plan, including forms of Nonqualified Stock Option Agreement (1996 Time Vesting), incorporated by reference to Exhibit 10.10 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). X-3 51 Exhibit Number Description - ------ ----------- 10.11* Management Bonus Programs, incorporated by reference to Exhibit 10.14 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.12* Management Bonus Plan, incorporated by reference to Exhibit 10.30 to CNG's Registration Statement on Form S-1 (Registration No. 33-89996). 10.21* Executive Life Insurance Plan of the Company, incorporated by reference to Exhibit 10.12 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.22* Medical Expense Reimbursement Plan of the Company effective as of February 1, 1992, incorporated by reference to Exhibit 10.13 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.23 Agreement for the Allocation of Federal Income Tax Liability and Benefits among Members of the Parent Group dated August 23, 1985, as amended, incorporated by reference to Exhibit 10.26 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.24 Assignment and Assumption Agreement dated as of September 30, 1993 between the Company and CNG, incorporated by reference to Exhibit 10.24 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.25 Lease Agreement (Knoxville) dated as of November 28, 1979 by and between Tommy Hensley, as agent for the real property of Mrs. Don Siegel and Cole Vision Corporation, as amended and supplemented, incorporated by reference to Exhibit 10.15 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). X-4 52 Exhibit Number Description - ------ ----------- 10.26 Lease Agreement (Memphis) dated as of October 2, 1991 by and between Shelby Distribution Park and Cole Vision Corporation, incorporated by reference to Exhibit 10.16 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.27 Lease Agreement (Richmond) dated as of April 23, 1982 by and between Daniel, Daniel & Daniel and Cole Vision Corporation, as amended and supplemented, incorporated by reference to Exhibit 10.17 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.28 Lease for Multi-Tenancy Space (Salt Lake) dated as of October 30, 1981 by and between East Centennial Joint Venture and Cole Vision Corporation, as amended and supplemented, incorporated by reference to Exhibit 10.18 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.29 Lease Agreement (Knoxville) dated as of April 11, 1995 by and between Richard T. Fox and Cole Vision Corporation, incorporated by reference to Exhibit 10.29 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.30 Form of Lease Agreement Finite 19518 dated as of December 29, 1988 between Sears, Roebuck and Co. and Cole Vision Corporation, incorporated by reference to Exhibit 10.23 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.31 Master License Agreement dated as of October 2, 1986, between Montgomery Ward & Co., Incorporated and Cole Vision Corporation, as amended, incorporated by reference to Exhibit 10.21 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). X-5 53 Exhibit Number Description - ------ ----------- 10.32 Master License Agreement dated as of June 12, 1986, between Montgomery Ward & Co., Incorporated and Bay Cities Optical Company, as amended, incorporated by reference to Exhibit 10.22 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.33 Form of License Agreement (Optical), incorporated by reference to Exhibit 10.24 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.34 Form of License/Lease Agreement (Optical), incorporated by reference to Exhibit 10.25 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.37 Form of Indemnification Agreement for Directors of the Company, incorporated by reference to Exhibit 10.19 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.38 Form of Indemnification Agreement for Officers of the Company, incorporated by reference to Exhibit 10.20 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.39* Supplemental Retirement Benefit Plan of the Company, incorporated by reference to Exhibit 10.38 to the Company's Registration Statement on Form S-1 (Registration No. 33-74228). 10.40* Supplemental Pension Plan of the Company, incorporated by reference to Exhibit 10.48 to the Company's Registration Statement on Form S-1 (Registration No. 33-74228). 10.41 Warrant Agreement dated as of March 6, 1992 between the Company and the purchasers named therein, incorporated by reference to Exhibit 10.35 to the Company's Registration Statement on Form S-1 (Registration No. 33-74228). X-6 54 Exhibit Number Description - ------ ----------- 10.42 Warrant Agreement dated as of September 25, 1990 between the Company and the purchasers named therein, incorporated by reference to Exhibit 10.36 to the Company's Registration Statement on Form S-1 (Registration No. 33-74228). 10.43 Equity Registration Rights Agreement dated as of March 6, 1992 by and among the Company, Apollo Investment Fund, L.P., Land Free Investment Limited, former holders of the 13-1/4% Subordinated Debentures named therein, Jeffrey A. Cole, the stockholders named therein, The Prudential Life Insurance Company of America and Executive Life Insurance Company, incorporated by reference to Exhibit 10.33 to the Company's Registration Statement on Form S-1 (Registration No. 33-74228). 10.44 Consent and Amendment to Equity Registration Rights Agreement by and among the Company and the stockholders named therein, incorporated by reference to Exhibit 10.44 to the Company's Registration Statement on Form S-1 (Registration No. 33-74228). 10.45 Lease agreement (Salt Lake) dated as of November 1, 1996 by and between Gibbons Realty Company and Cole Vision Corporation, incorporated by reference to Exhibit 10.01 of Cole National Corporations Quarterly Report on Form 10-Q for the period ended November 2, 1996 (File No. 1-12814). 10.46 Credit Agreement, dated as of November 15, 1996, among Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service Corporation and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 99.1 of Cole National Corporation's Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). X-7 55 Exhibit Number Description - ------ ----------- 10.47 CNG Guarantee and Cash Collateral Agreement, dated as of November 15, 1996, by the Company and Cole National Corporation, incorporated by reference to Exhibit 99.3 of Cole National Corporation's Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.48 Guarantee and Collateral Agreement dated as of November 15, 1996, by Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service Corporation and Canadian Imperial Bank of Commerce, Incorporated by reference to Exhibit 99.4 of Cole National Corporation's Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.49** License agreement (Gift Centers and Key Departments) dated as of March 16, 1995, between Sears, Roebuck and Co. and Cole Gift Centers, Inc., as amended. 21 Subsidiaries of the Company. 23 Consent of Arthur Andersen LLP. 24 Power(s) of Attorney. 27 Financial Data Schedule. * Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K. ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT, AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.49 2 EXHIBIT 10.49 1 Exhibit 10.49 LICENSE AGREEMENT GIFT CENTERS AND KEY DEPARTMENTS FINITE 195-015, 195-080 AND 195-086 THIS LICENSE AGREEMENT (hereinafter referred to as "Agreement") is made and entered into as of the 16th day of March, 1995, by SEARS, ROEBUCK AND CO., a New York corporation ("Sears") and COLE GIFT CENTERS, INC., a Delaware corporation ("Licensee"). Sears and Licensee hereby agree as follows: LICENSE - ------- 1. Licensee is in the business described in this paragraph, and has expertise in that business and has a marketing plan for that business. Sears hereby grants Licensee the non-exclusive privilege of conducting and operating, and Licensee shall conduct and operate, pursuant to the terms, provisions and conditions contained in this Agreement, a licensed business for gift centers and/or key departments (hereinafter referred to as "Licensed Business"), at the Sears locations designated in Location Riders attached hereto and hereafter made a part of this Agreement ("Designated Sears Store(s)"). Sears will not during the Term, license any additional parties within the same Designated Sears Store(s) to sell key duplication, gift engraving or gift personalization services; however, nothing herein shall prohibit Sears from continuing any existing relationships with other licensees. TERM - ---- 2. The term ("Term") of this Agreement shall be for a two (2) year period beginning on January 1, 1995 and ending at the close of business on December 31, 1996 unless sooner terminated under any of the provisions of this Agreement. REPRESENTATION TO LICENSEE - -------------------------- 3. Sears makes no promises or representations whatsoever as to the potential amount of business Licensee can expect at any time during operation of the Licensed Business. Licensee is solely responsible for any expenses it incurs related to this Agreement, including, but not limited to, any increase in the number of Licensee's employees or any expenditures for additional facilities or equipment. AUTHORIZED SALES - ---------------- 4. (a) Licensee shall use the Licensed Business area only for the purpose authorized in this Agreement, and will offer for sale only those services and merchandise expressly authorized by this Agreement as listed on Exhibit A attached hereto and hereafter made a part of this Agreement. **** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT, AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 (b) Licensee shall maintain a stock of good quality merchandise as necessary to assure efficient operation of the Licensed Business. Merchandise offered for sale by Licensee in the Licensed Business shall at all times be subject to Sears approval. SEARS COMMISSION - ---------------- 5. (a) Licensee shall during the first year of the Term pay to Sears a commission ("Sears Commission") which shall be a sum equal to **** percent (****%) of Net Sales. In addition to such commission, an annual incentive payment is due either party per the terms of Exhibit B attached hereto and hereafter made a part of this Agreement during the first year of the Term. (b) The Sears Commission during the second year of the Term shall be an amount calculated according to the terms of Exhibit C attached hereto and hereafter made a part of this Agreement. The Sears Commission due during the second year of the Term shall be deducted at the rate of **** percent (****%) of Net Sales. The Sears Commission paid shall be reviewed at the end of each Sears fiscal quarter to determine the actual amount due in accordance with Exhibit C. Any adjustments due either party shall be paid per the terms of Exhibit C. (c) If Sears reduces the amount of space for the Licensed Business in a Designated Sears Store(s) and Licensee is forced to discontinue the sale of greeting cards due to such reduction of space, then Licensee shall pay to Sears a commission which shall be a sum equal to **** percent (****%) of Net Sales of greeting card liquidation sales at such locations. Licensee shall provide Sears with a monthly accounting of such sales for the purpose of determining Sears Commission. (d) "Net Sales" means Gross Sales from operation of the Licensed Business, less sales taxes, returns and allowances. (e) "Gross Sales" means all of Licensee's direct or indirect sales of services and merchandise from the Licensed Business, including, but not limited to, sales arising out of referrals, contacts, or recommendations obtained through the operation of the Licensed Business. 2 **** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT, AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 3 USE OF SEARS NAME - ----------------- 6. (a) Licensee shall operate the Licensed Business under the name Sears Gift Center or Sears Key Shop. Licensee shall use the name of Sears only in connection with the operation of the Licensed Business and only in a manner described herein or upon prior written approval by Sears. Licensee shall not begin any business activity under this Agreement without Sears prior written approval of any and all names that Licensee intends to use in conjunction with the Licensed Business. (b) Licensee shall only use the name of Sears, or any Sears trademark, service mark or trade name ("Sears Mark(s)"), when communicating with customers or potential customers of the Licensed Business. Licensee shall not use Sears Marks either orally or in writing when communicating with persons or entities other than customers or potential customers of the Licensed Business, including, but not limited to, use of any letterhead, checks, business cards, or contracts. All communications with persons or entities other than customers or potential customers of the Licensed Business shall be done solely in Licensee's own name. (c) Licensee shall not question, contest or challenge, either during or after the Term of this Agreement, Sears ownership of the Sears Marks, or Sears ownership in any mailing lists, credit files or other factual information compiled by Sears and made available for use by Licensee ("Sears Information"). Licensee will claim no right, title or interest in any Sears Mark or Sears Information, except the right to use the same pursuant to the terms and conditions of this Agreement, and will not register or attempt to register any Sears Mark. (d) Licensee recognizes and acknowledges that the use of any Sears Mark or Sears Information shall not confer upon Licensee any proprietary rights to any Sears Mark or Sears Information. Upon expiration or termination of this Agreement, Licensee shall immediately stop using all Sears Marks and Sears Information, and will execute all documents Sears request in order to confirm Sears ownership, or to transfer to Sears any rights Licensee may have acquired from Sears in any Sears Mark or Sears Information. (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 ownership of Sears Information or Sears Marks against infringement or appropriation by any party or parties, including Licensee. (f) Sears may register in its own name any and all of the trademarks, service marks or trade names used in operation of the Licensed Business, and Licensee's use of such names and marks shall inure to the benefit of Sears for such purposes as well as for all other purposes and such marks shall be included in the 3 4 term "Sears Marks". Licensee shall cooperate in any such registration or application for registration by Sears. (g) Licensee acknowledges that Sears Marks and Sears Information 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. Irreparable injury would be caused to Sears by such unauthorized use, and Licensee agrees that in the event of breach of this Paragraph 6 by Licensee there would be no adequate remedy at law and preliminary or permanent injunctive relief would be appropriate. (h) If Licensee learns of any manufacture or sale by any third party of products and/or services similar to those offered by Licensee that would be confusingly similar in the minds of the public to those sold by Licensee and which bear or are promoted in association with Sears Marks or any names, symbols, emblems, or designs or colors which would be confusingly similar in the minds of the public to Sears Marks, Licensee will promptly notify Sears. Sears may, at its sole expense, take such action as it determines, in its sole discretion, is appropriate. Licensee will cooperate and assist in such protest or legal action at Sears expense. If demanded by Sears, Licensee shall join in such protest or legal action at Sears expense. Licensee shall not undertake any protest or legal action on its own behalf without first securing Sears written permission to do so. If Sears permits Licensee to undertake such protest or legal action, such protest or legal action shall be at Licensee's sole expense. Sears shall cooperate and assist Licensee at Licensee's expense. For the purposes of this paragraph, 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. (i) Licensee shall not file suit using Sears name or undertake any legal proceeding against any customer without Sears prior written approval. (j) The provisions of this Paragraph 6 shall survive the expiration or termination of this Agreement. ADVERTISING - ----------- 7. Licensee shall advertise and actively promote the Licensed Business. Licensee shall at all times adhere to Sears Licensed Business Marketing Manual as provided to Licensee and updated from time to time ("Marketing Manual"). Prior to use in connection with the Licensed Business, Licensee shall submit to Sears Marketing Manager, Licensed Businesses, or his designee, (i) all signs and advertising copy (including, but not limited to, sales brochures, telemarketing scripts, newspaper advertisements, radio and television commercials), (ii) all sales promotional plans and devices, and (iii) all customer contract forms, guarantee certificates and other forms and materials. 4 5 Licensee will not use any such advertising material or sales promotional plan or device without Sears prior written approval. Sears has the right, in its sole discretion, to disapprove or require modification of any or all such advertising forms and other materials. PUBLICITY - --------- 8. Licensee will not issue any publicity or press release regarding its contractual relations with Sears or regarding the Licensed Business, and will refrain from making any reference to this Agreement or to Sears in any prospectus, annual report or other filing required by Federal or state law, or in the solicitation of business, without obtaining Sears prior written approval of such action. Licensee shall at all times adhere to Sears written policies regarding interaction with the media as contained in the Marketing Manual. RELATIONSHIP - ------------ 9. Licensee is an independent contractor. Nothing contained in or done pursuant to this Agreement shall be construed as creating a partnership, agency or joint venture; and neither party shall become bound by any representation, act or omission of the other party. PRICES - ------ 10. Sears has no right or power to establish or control the prices at which Licensee offers service and/or merchandise in the Licensed Business. Such right and power is retained by Licensee, however, Licensee will participate in Sears national store-wide sales and/or merchandise price off events. Licensee shall not charge customers for estimates or proposals. ASSOCIATE DISCOUNT - ------------------ 11. Sales made under this Agreement shall be offered for sale by Licensee to the employees of Sears at the same discount which Sears allows its own employees on purchases of similar merchandise. Licensee's employees who are exclusively employed to service the Licensed Business shall be entitled to receive the same discount on purchases made from Sears. BONUS CLUB - ---------- 12. Licensee shall accept Sears Card Bonus Club Bonus Certificates. Sears shall reimburse Licensee for such bonus certificates provided Licensee has followed prescribed procedures. 5 6 LICENSEE'S OBLIGATIONS - ---------------------- 13. (a) Licensee will not make purchases or incur any obligation or expense of any kind in the name of Sears. Prior to any purchases involving the Licensed Business, Licensee shall inform its vendors that Sears is not responsible for any obligations incurred by Licensee. (b) Licensee shall promptly pay all its obligations, including those for labor and material, and will not allow any liens to attach to any Sears or customer's property as a result of Licensee's failure to pay such sums. LICENSEE'S EMPLOYEES - -------------------- 14. (a) Licensee shall employ all management and other personnel necessary for the efficient operation of the Licensed Business. The Licensed Business shall be operated solely by Licensee's employees, and not by independent contractors, sub-contractors, sub-licensees or by any other such arrangement. (b) Licensee has no authority to employ persons on behalf of Sears and no employees of Licensee shall be deemed to be employees or agents of Sears. Licensee has sole and exclusive control over its labor and employee relations policies, and its policies relating to wages, hours, working conditions, or conditions of its employees. Licensee has the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, adjust grievances and discharge its employees, provided, however, that Sears may request at any time that Licensee transfer from the Licensed Business any employee who is objectionable to Sears because of risk of harm to the health, safety and/or security of Sears customers, employees or merchandise and/or whose manner impairs Sears customer relations. If Sears objects to any of Licensee's employees, and Licensee determines not to remove such employee and the conditions which caused Sears to object continue, Sears may terminate any affected location by giving thirty (30) days notice to Licensee, provided however if Licensee removes such employee within said thirty (30) day period such notice of termination shall be vitiated. (c) Licensee shall pay in a timely manner and is solely responsible for so paying, for all salaries and other compensation of its employees and will make all necessary salary deductions and withholdings from its employees' salaries and other compensation. Licensee is solely responsible for so paying 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 employees. (d) Licensee will comply with any other contract and all Federal, state and local laws, ordinances, rules and 6 7 regulations regarding its employees, including, but not limited to, Federal or state laws or regulations regarding minimum compensation, overtime and equal opportunities for employment. Without limiting the foregoing, Licensee will comply with the terms of the Federal Civil Rights Acts, Age Discrimination in Employment Act, Occupational Safety and Health Act, the Federal Fair Labor Standards Act, and the Americans with Disabilities Act, whether or not Licensee may otherwise be exempt from such acts because of its size or the nature of its business or for any other reason whatsoever. LICENSED BUSINESS AREA - ---------------------- 15. (a) The defined area of space provided by Sears for the operation of the Licensed Business ("Block Plan") will be submitted for each Designated Sears Store by Sears to Licensee. Licensee shall be solely responsible for providing final plans for the Licensed Business area subject to Sears written approval. All costs and expenses related to such plans, including, but not limited to, blueprints, etc., shall be borne by Licensee. The expense of preparing the initial space assigned to any Licensed Business location shall be divided between the parties as described on Exhibit D attached hereto and hereafter made a part of this Agreement. Licensee shall be primarily responsible for any preparations necessary for the operation of the Licensed Business. Any improvements and installations made by Sears shall be made to Sears specifications for its own departments selling comparable merchandise. All improvements or installations which vary from Sears specifications shall be at Licensee's sole expense. (b) All leasehold improvements to the Licensed Business area shall become the property of Sears at the expiration or termination of this Agreement. At the expiration or termination of this Agreement, or if Licensee vacates or abandons the Licensed Business, Licensee shall convey to Sears, without charge, good title to such 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. (c) If the Licensed Business is not fully operational within thirty (30) days after Sears has made the Licensed Business area ready for Licensee as a result of delay by Licensee, Sears may, at Sears sole option, terminate this Agreement with respect to such location and have no further obligation to Licensee; provided, however, that if the Licensed Business is not fully operational due to a delay beyond the reasonable control of Licensee, Licensee shall so inform Sears of such circumstances and an extension of time shall be negotiated between the parties, not to exceed an additional sixty (60) days. If Sears terminates this Agreement pursuant to this Paragraph 15(c), Licensee shall reimburse Sears, within ten (10) days after receipt of an invoice, for Sears cost of constructing the 7 8 Licensed Business area and of putting such space back to its condition immediately prior to the commencement of such construction. (d) Licensee agrees to operate the Licensed Business location(s) during the hours set forth in Paragraph 21. If Licensee fails to operate the location(s) during such hours for the first twelve (12) months after the Licensed Business commences operations, Sears may, at Sears sole option, terminate this Agreement with respect to such location, and Licensee shall reimburse Sears for Sears expense to construct the Licensed Business area at the rate of one twelfth (1/12) of such expense for each month or part of month the location(s) is not operated during such hours during the first twelve (12) months plus the cost of putting such space back to its condition immediately prior to being used for the Licensed Business. Licensee shall reimburse Sears within ten (10) days after receipt of an invoice for such costs and Sears shall have the right to retain the amount of such costs from the sales receipts held by Sears as described in Paragraph 28. (e) Entirely at its own expense, Licensee shall install furniture, fixtures and equipment as necessary for the efficient operation of the Licensed Business ("Licensee's Equipment"). Licensee's Equipment, and its size, design and location, shall at all times be subject to Sears approval. CONDITION OF LICENSED BUSINESS AREA - ----------------------------------- 16. (a) Licensee shall, at its expense, keep the Licensed Business area in a thoroughly clean and neat condition and shall maintain Licensee's Equipment in good order and repair. Sears shall provide routine janitorial service in the Licensed Business area, consistent with the janitorial services regularly performed in the Designated Sears Store. (b) Licensee shall maintain merchandise presentation standards consistent with Sears own standards. Licensee shall remodel the Licensed Business area per the terms of Exhibit D and the expense of such remodel shall be divided between the parties as described on Exhibit D. CHANGES OF LOCATION - ------------------- 17. Sears shall have the right, in its sole discretion, to change the location, dimensions and amount of area of the Licensed Business from time to time during the Term of this Agreement in accordance with Sears judgment as to what arrangements will be most satisfactory for the general good of the Designated Sears Store(s). In the event Sears decides to change the location of the Licensed Business, Sears will at its expense move Licensee's Equipment to the new location and the expense for preparing the new space for occupancy by Licensee shall be allocated between the parties as described on Exhibit D. 8 9 If a change in location is requested or initiated by Licensee, then Licensee shall bear all expense involved in moving Licensee's Equipment and the expense for preparing the new space for occupancy by Licensee shall be allocated between the parties as described on Exhibit D. UTILITIES - --------- 18. Sears shall furnish, at reasonable hours, and except as otherwise provided, without expense to Licensee, light and electric power for the operation of the Licensed Business, 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. TELEPHONE - --------- 19. (a) If requested by Licensee, Sears will arrange for telephone service for the Licensed Business for local telephone service, and Licensee shall pay the entire cost of the installation of the telephone equipment necessary to provide such service. Licensee shall also pay the entire cost of the telephone service furnished to the Licensed Business, including for stores with a switchboard, a proportional share of the switchboard expense. Such charges shall be consistent with Sears charges to its own merchandising departments for similar service. Stores without switchboards shall be based solely on the cost to Sears of telephone service. Licensee shall arrange with the appropriate telephone company for direct billing to Licensee of all long distance calls. (b) All telephone numbers used in connection with the Licensed Business shall be separate from phone numbers used by Licensee 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 shall immediately cease to use such numbers and shall transfer such numbers to Sears or to any party Sears designates, and Licensee shall immediately notify the telephone company of any such transfer. (c) All white and yellow page telephone listings for the Licensed Business shall be approved by Sears prior to placement; provided, however, approval is not required for listings consisting only of Licensee's name and address. Sears may, at its sole option, require that any telephone number listed in any telephone directory using Sears name be billed through a Sears store or office. 9 10 STANDARDS - --------- 20. (a) Licensee shall provide Sears with copies of its written procedures and policies establishing minimum standards of quality and/or performance. Licensee shall immediately advise Sears of any changes in its standards. Without limiting Paragraph 24, Licensee shall observe no less than such minimum standards of quality and/or performance. Sears may visit Licensee's offices, work sites and/or other place of business at any reasonable time for the purpose of verifying Licensee's compliance with its standards of quality and/or performance. (b) Licensee shall conduct its operations in an honest, courteous and efficient manner and shall present a neat, business like appearance, including adherence by Licensees' employees to a reasonable dress code. Licensee shall abide by reasonable safety and security rules and regulations of Sears in effect from time to time. (c) Licensee shall also conduct its operations in an honest and ethical manner at all times. In dealing with Sears associates and Sears customers, Licensee shall adhere to ethical standards no less than those described in the "A Guide To Business Conduct For Sears Licensed Business Associates" as provided to Licensee and updated from time to time. HOURS - ----- 21. The Licensed Business shall be kept open for business and operated during the same business hours that the Designated Sears Store is open for business, except to the extent prevented by circumstances beyond the control of Sears or Licensee. ACCESS TO LICENSED BUSINESS AREA - -------------------------------- 22. Licensee shall have access to the Licensed Business area at all times that the Designated Sears Store is open to customers for business and at all other times as the appropriate Store General Manager approves. Sears shall be furnished with keys to the Licensed Business area and shall have access to the Licensed Business area at all times. PHYSICAL INVENTORY - ------------------ 23. Sears may, solely at Sears discretion, not open any Designated Sears Store at any time to take a physical inventory of Sears property. Licensee waives any claim it may have against Sears for damages resulting from such closing. CUSTOMER ADJUSTMENT - ------------------- 24. (a) All of the work and services performed by Licensee in connection with the Licensed Business shall be of a high standard of workmanship, and all of the merchandise sold in the 10 11 Licensed Business shall be of high quality. Licensee shall at all times maintain a general policy of "Satisfaction Guaranteed" to customers and shall adjust all complaints of and controversies with customers arising out of the operation of the Licensed Business. In any case in which an adjustment is unsatisfactory to the customer, Sears shall have the right, at Licensee's expense, to make such further adjustment as Sears deems necessary under the circumstances, and any adjustment made by Sears shall be conclusive and binding upon Licensee. Sears may deduct the amounts of any such adjustments from the sales receipts held by Sears as described in Paragraph 28. (b) Licensee shall maintain files pertaining to customer complaints and their adjustment and make such files available to Sears. CASH REGISTER - ------------- 25. (a) At its expense, Sears shall furnish a cash register for use in the Licensed Business. 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. Such cash register shall be comparable to those used by Sears in its own merchandise departments, and shall have the capability of processing SearsCharge and any other credit cards Sears may accept from time to time. Licensee 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. (b) Licensee agrees to accept and process SearsCharge payments from customers at the cash register. Licensee, when not servicing another customer (including production work on pending customer orders), also agrees to ring Sears merchandise transactions when requested by a customer; provided, however, that if the number of Sears customer transactions is exceeding five percent (5%) of any Licensed Business location's total transactions, then Sears field management and Licensee's field management shall work together to review and adjust, if appropriate, the requirements of this Paragraph 25 (b) as it applies to the Licensed Business location in question. CHECKS - ------ 26. (a) All checks or money orders which Licensee accepts from customers shall be made payable to Sears or Sears, Roebuck and Co.. Licensee shall make certain that all checks are filled out correctly, having the customer's signature, date, and the correct amount (in both locations), and be verified in accordance with Sears policies in effect from time to time. Checks which are deficient in any of the above areas may be charged back to Licensee, and Licensee shall reimburse Sears for any of Sears Commission lost as a result of Licensee's failure to obtain a properly filled out and verified check. 11 12 (b) Sears shall not be entitled to Sears Commission for those checks that have all of the above information but which are not paid upon presentment. Any and all losses which may be sustained by reason of nonpayment of any checks upon presentment shall be borne by Licensee, and Sears shall have no liability with respect to such checks, provided that Sears will make whatever effort it deems reasonable to collect all such checks prior to charging back such checks to Licensee. CREDIT SALES - ------------ 27. (a) With the approval of the Credit Central designated by Sears, sales may be made by Licensee on such of Sears regularly established credit plans 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 earned by Sears in connection with any credit sale shall be payable to or credited in any way to Licensee. All losses sustained by Sears as a result of non-payment of a Sears credit account shall be borne by Sears, provided that Licensee has complied with Sears credit policies and procedures. Except for non-payment of a Sears credit account, Sears shall have no liability whatsoever to Licensee for Sears failure to properly accept or reject a customer's charge. (b) Licensee agrees to accept those third party credit cards which Sears approves from time to time. Sears will notify Licensee of all approved third party credit cards. (c) Licensee 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. Licensee shall not modify, in any way, the terms and conditions of Sears credit plans. SALES RECEIPTS - -------------- 28. At the close of each business day, Licensee shall submit an accounting of the Gross Sales and the returns, allowances and customer adjustments made during such day by Licensee to the head cashier of the Sears unit designated by Sears, together with the gross amount, in cash, of all cash sales, and all credit sales documents for transactions completed that day. An account shall be kept by both Licensee and Sears. Sears may retain out of such receipts the proper amount of the Sears Commission payable under this Agreement together with any other sums due Sears from Licensee. The remaining balance shall be payable to Licensee at the regular settlement set forth in Paragraph 29. 12 13 SETTLEMENT - ---------- 29. (a) A settlement between the parties shall be made at the end of each Sears fiscal month for all cash and credit transactions of Licensee during such period, in accordance with Sears customary accounting procedures. Advances against the settlement shall be made in accordance with Sears customary accounting procedures. Such advances shall be deducted and reconciled in the next regular settlement. Such settlement will be done through the Sears Accounting Center designated by Sears. (b) Licensee shall reimburse Sears at each settlement for all invoiced expenses, including any advertising expense, incurred by Sears at Licensee's request, 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's sales receipts the amount of such expenses with interest, if any, due Sears. AUDIT - ----- 30. Licensee shall keep and maintain books and records which accurately reflect the sales made by Licensee under this Agreement and the expenses which Licensee 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 regarding this Agreement. Such books and records shall be kept and maintained according to generally accepted accounting principles. REPORTS - ------- 31. (a) If requested by Sears, Licensee shall provide to Sears reports 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. (b) Licensee shall submit the Annual Report on Form 10-K of Cole National Corp., its parent corporation, to Sears within ninety (90) days after the close of Licensee's fiscal year. LIENS - ----- 32. Licensee shall not allow any liens, claims or encumbrances to attach to Sears premises. In the event any lien, claim or encumbrance attaches to any of Sears premises, Licensee shall immediately take all necessary action to cause such lien, claim or encumbrance to be released, or Sears, at its option, may take such action and charge Licensee or withhold from sales receipts all expenses, including attorneys' fees, incurred by Sears in removing such liens. 13 14 MUTUAL WAIVER - ------------- 33. Licensee and Sears waive any and all claims that either may have against the other, their respective agents, officers, and employees for any loss or damage that may occur to any property whatsoever of the other in or about the Licensed Business area or the Designated Sears Store, because of the actual or alleged negligence, act or omission of any owner, tenant, licensee or occupant of the premises at which the Licensed Business may be located; or because of any damage caused by any casualty from any cause whatsoever, including, but not limited to, fire, water, snow, steam, gas or odors in or from such store or store premises, or because of the leaking of any plumbing, or because of any accident or event which may occur in such store or upon store premises; or because of the actual or alleged acts or omissions of any janitors or other persons in or about such store or store premises or from any other such cause whatsoever. In addition, all property insurance policies of the type described in Paragraph 35 (a) (4) carried by either party covering the Licensed Business area or the Designated Sears Store, including, but not limited to, contents and fire insurance, shall expressly waive any right on the part of the insurer against the other party for damage to or destruction of the Licensed Business area, the Designated Sears Store, or other property resulting from the acts, omissions or negligence of the other party. INDEMNITY BY LICENSEE - --------------------- 34. Licensee covenants that it will protect, defend, hold harmless and indemnify Sears, its directors, officers, employees and/or agents, from and against any and all expenses, claims, actions, liabilities, penalties, attorneys' fees, damages and losses of any kind whatever (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 Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in the Licensed Business, lack of repair in or about the area occupied by the Licensed Business, operation of or defects in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; 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 or its agents or employees, whether or not such act is within the scope of the employment of such agents or employees. This indemnity shall not apply to the extent any injury or damage is caused by Sears negligence. Licensee's indemnity shall survive the expiration or termination of this Agreement. 14 15 INSURANCE - --------- 35. (a) Licensee shall, at its sole expense, obtain and maintain during the Term of this Agreement the following policies of insurance from companies having a rating of at least A-VII or better in the current BEST'S INSURANCE REPORTS published by A.M. Best Company and adequate to fully protect Sears as well as Licensee 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 covering all costs, benefits and liabilities under Workers Compensation and similar laws which may accrue in favor of any person employed by Licensee for all states in which Licensee operates, and Employer's Liability insurance with limits of liability of at least $100,000 per accident or disease and $500,000 aggregate by disease. Such insurance shall contain a waiver of subrogation in favor of Sears. Limits of liability requirements for Employer's Liability may be satisfied by a combination of Employer's Liability and Umbrella Excess Liability policies. (2) Commercial General Liability insurance, including but not limited to, premises/operations liability, contractual liability, personal and advertising injury liability, and products and completed operations liability, with limits of at least $500,000 for bodily injury and property damage combined. Sears shall be named as an additional insured. Limits of liability requirements may be satisfied by a combination of Commercial General Liability and Umbrella Excess Liability policies. (3) Automobile Liability insurance, for owned, non-owned and hired automobiles used in connection with the Licensed Business, with limits of at least $500,000 for bodily injury and property damage combined. If no vehicles are owned or leased by Licensee, The Commercial General Liability insurance shall be extended to provide insurance for non-owned and hired automobiles. Limits of liability requirements may be satisfied by a combination of Automobile Liability and Umbrella Excess Liability policies. (4) "All Risk" Property insurance upon all buildings, building improvements and supplies on the premises, including those perils generally covered on a "Cause of Loss - Special Form", including fire, extended coverage, windstorm, vandalism, malicious mischief, sprinkler leakage, water damage, accidental collapse, flood, and earthquake, in an amount equal to at least 90% of the full replacement cost, with a coverage extension for increased cost of construction, including a waiver of subrogation in favor of Sears. 15 16 (5) Bailee's insurance for customer property in the care, custody or control of Licensee, in an amount equal to the maximum value, at any one time, of such property. (b) Licensee'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 written notice to Sears. (c) Licensee shall furnish Sears with certificates of insurance or, at Sears request, Sears may review, at Licensee's home office, copies of policies, prior to execution of this Agreement and each policy renewal during the Term of this Agreement. If Licensee does not provide Sears with such certificates of insurance or, if such policies do not afford the coverage provided for herein, Sears will so advise Licensee, and if Licensee does not furnish evidence of acceptable coverage within fifteen (15) days, Sears shall have the right to immediately terminate this Agreement upon written notice to Licensee. (d) If Licensee's policies of insurance expire or are canceled during the Term of this Agreement or are materially modified, Licensee shall promptly notify Sears of such expiration, cancellation or material modification. If such policies of insurance are materially modified such that, in Sears opinion, such policies do not afford adequate protection to Sears, Sears will so advise Licensee. If Licensee does not furnish evidence of acceptable replacement coverage within fifteen (15) days after the expiration or cancellation of coverage or the notification from Sears that modified policies are not sufficient, Sears shall have the right, at its option, to immediately terminate this Agreement upon written notice to Licensee. (e) Any approval by Sears of any of Licensee's insurance policies or shall not relieve Licensee of any responsibility under this Agreement, including liability for claims in excess of described limits. (f) Licensee retains the right to self-insure certain types of insurance coverage required by Paragraph 35 (a) (4) and (5) of this Agreement and subject to approval of Sears, the insurance coverage required by (1) through (3) of Paragraph 35 (a). MUTUAL RIGHT OF TERMINATION - --------------------------- 36. Either party may terminate this Agreement, or any location, 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 sixty (60) days' prior written notice. The notice shall specify the termination date. 16 17 SUB-LICENSE OR ASSIGNMENT BY LICENSEE - ------------------------------------- 37. Notwithstanding any other provision contained in this Agreement, this Agreement is not transferable by Licensee in whole or in part without Sears prior written consent and Licensee shall not sub-license the license granted herein to any person or entity. Any transfer or attempt to transfer by Licensee 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's business or any other transaction (including sales of stock) which shifts the rights or liabilities of Licensee to another controlling interest shall be such a transfer. RIGHT TO TERMINATION ON DEFAULT BY LICENSEE - ------------------------------------------- 38. If a petition is filed either by or against Licensee in any bankruptcy or insolvency proceeding, or if any property of Licensee passes into the hands of any receiver, assignee, officer of the law or creditor, or if Licensee vacates, abandons, or ceases to operate under this Agreement, or fails to secure and maintain appropriate insurance coverage as set forth in Paragraph 35, or if Licensee fails to comply with any material provision or condition of this Agreement, then Sears may give notice of its intention to terminate this Agreement, and this Agreement will automatically terminate, without penalty and without liability for any damages as a result of such termination, if Licensee fails to cure the default(s) causing such right to terminate within five (5) business days of such notice of termination. RIGHT TO TERMINATION ON CLOSING OF STORE - ---------------------------------------- 39. Sears may, solely at Sears discretion, terminate this Agreement with respect to any affected Licensed Business location without notice, due to the closing of the Designated Sears Store. Licensee shall not be entitled to any notice of such store closing prior to a public announcement of such closing. Licensee waives any claim it may have against Sears for damages, if any, incurred as a result of such closing. RIGHT OF TERMINATION AFTER FIRE - ------------------------------- 40. If any Designated Sears Store is damaged by fire or any other casualty so that the Licensed Business area becomes untenantable, this Agreement may be terminated with respect to such Licensed Business location, without penalty and without liability for any damages as a result of such termination, 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 may resume the conduct of business as soon as possible. 17 18 SUBJECT TO STORE LEASES - ----------------------- 41. If any Designated Sears Store is leased to Sears or is the subject of an easement agreement, this Agreement shall be subject to all of the terms, agreements and conditions contained in such lease or easement agreement. In the event of the termination of any such lease by expiration of time or otherwise, this Agreement shall immediately terminate with respect to affected Licensed Business locations. FUTURE OBLIGATIONS - ------------------ 42. After the termination of this Agreement by expiration of time or otherwise, Licensee 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: (1) enter into an agreement for the operation of a similar business with any person or organization Sears chooses, including, but not limited to, Licensee or any of Licensee's counterparts, (2) directly operate a similar business itself, or (3) terminate the operation of the business. GOODWILL - -------- 43. Licensee acknowledges that the commission rate established by this Agreement takes into consideration that all good will generated by the operation of the Licensed Business inures completely to the benefit of Sears and that Licensee has no right or interest in such good will. "Good Will" includes all ownership rights in any information regarding the customers of the Licensed Business. CUSTOMER INFORMATION - -------------------- 44. The Sears Information and any customer list developed by Licensee, its employees or agents from the operation of, or from records generated as a result of the operation of the Licensed Business (collectively, the "Customer Information"), are deemed exclusively owned by Sears. Licensee shall not use, permit use, disclose or permit disclosure of such Customer Information for any purpose except the performance of this Agreement. Licensee shall at all times maintain any such Customer Information, including lists, physically separate and distinct from any customer information Licensee may maintain that is unrelated to the Licensed Business. Licensee shall not reproduce, release or in any way make available or furnish, either directly or indirectly, to any person, firm, corporation, association or organization at any time, any such Customer 18 19 Information which will or may be used to solicit sales or business from such customers, including but not limited to the type of sales or business covered by this License Agreement. Upon expiration or termination of this Agreement for any reason, Licensee shall immediately deliver all copies of lists of customers and copies of all other such Customer Information to Sears; and Licensee, its officers, employees, successors and assigns, shall not use any such Customer Information to solicit any of such customers. Licensee shall protect all such Customer Information from destruction, loss or theft during the term of this Agreement, and until all copies of customer lists and copies of all other Customer Information are turned over to Sears. Licensee acknowledges that there is no adequate remedy at law for violation by Licensee of this Paragraph 44 and, in the event of breach of this Paragraph 44, preliminary or permanent injunctive relief would be appropriate. SEARS OPTION TO PURCHASE LICENSEE'S EQUIPMENT - --------------------------------------------- 45. In the event of the termination of this Agreement by expiration of time or otherwise, Sears shall have the right, but not the obligation, to purchase from Licensee, and Licensee shall convey and sell to Sears, such items of Licensee's Equipment as Sears may designate in a written notice given to Licensee at least twenty (20) days prior to the effective date of such termination. Sears shall pay Licensee the fair market value of such items as of the effective date of such termination. In the event that Licensee and Sears are unable to agree upon such fair market value, at Sears option, such value shall be ascertained by an independent appraiser mutually acceptable to Licensee and Sears. Any fee of such appraiser shall be borne equally by Licensee and Sears. At any time, Sears may waive its right to purchase and have no obligation to Licensee. ACTIONS UPON TERMINATION OR EXPIRATION - -------------------------------------- 46. Upon the termination of this Agreement by expiration of time or otherwise, Licensee shall, at its expense, immediately remove all of Licensee's Equipment (except such of Licensee's Equipment as may be purchased by Sears as provided in Paragraph 45) from Sears premises and shall, without delay and at Licensee's expense, repair any damage to Sears premises caused by such removal. SURVIVAL OF OBLIGATIONS - ----------------------- 47. 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 Licensed Business before termination. 19 20 LICENSES, LAWS, ORDINANCES - -------------------------- 48. Licensee 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 in connection with the operation of the Licensed Business. Licensee shall comply fully with all applicable Federal, state and local laws, ordinances, rules and regulations, including, but not limited to, all rules and regulations of the Federal Trade Commission. FEES, TAXES - ----------- 49. Licensee shall, at its expense, pay and discharge all license fees, 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 in connection with the operation of the Licensed Business, excluding, however, all taxes and assessments applicable to Sears income from Sears Commission or applicable to Sears property. REMEDIES CUMULATIVE - ------------------- 50. 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 - ------- 51. The provisions of this Agreement shall be binding upon Licensee and upon Licensee's successors and assigns and shall be binding upon and inure to the benefit of Sears, its successors and assigns. ASSIGNMENT BY SEARS - ------------------- 52. Sears may assign this Agreement to any successor or affiliate of Sears or any assignee which may result from any merger, consolidation or reorganization, or to another company which acquires all or substantially all of the business or assets of Sears, without the consent of Licensee. CONFIDENTIALITY - --------------- 53. (a) Information furnished by Sears to Licensee or which becomes known to Licensee through Licensees operation of the Licensed Business or Licensees relationship with Sears is confidential and proprietary to Sears (collectively, the 20 21 "Confidential Information"). All such Confidential Information shall be held in utmost confidence by Licensee. All Confidential Information, including, but not limited to, information regarding Sears stores, and any other information not specifically designated by Sears for release to the public that may come into the possession of Licensee during the Term of this Agreement shall be delivered to Sears upon request by Sears to Licensee without making or retaining copies or portions of the Confidential Information. (b) The terms and content of this Agreement, including but not limited to, exhibits attached hereto, and any other agreements entered into pursuant to this Agreement shall at all times remain confidential between Sears and Licensee and shall not be revealed to any third party without the prior written consent of the other party except as required under law or regulation or is permitted by this Agreement. (c) The provisions of this Paragraph 53 shall survive the expiration or termination of this Agreement. NOTICES - ------- 54. All notices 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 to Sears shall be addressed to: SEARS, ROEBUCK AND CO. Attention: Vice President and General Manager, Licensed Businesses, Department 725 E3-359B 3333 Beverly Road Hoffman Estates, Illinois 60179 Notices given by Sears to Licensee shall be addressed to: COLE GIFT CENTERS, INC. Attention: President 5340 Avion Park Drive Highland Heights, Ohio 44143 (216) 473-2000 Notices if so sent by mail shall be deemed to have been given when deposited in the mail or with the private courier. SEVERABILITY - ------------ 55. If any provision in this Agreement is held to be invalid, illegal or unenforceable by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this 21 22 Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been included. GOVERNING LAWS - -------------- 56. This Agreement shall be interpreted and governed by the internal substantive laws of the State of Illinois. ENTIRE AGREEMENT - ---------------- 57. This Agreement sets forth the entire agreement and understanding between the parties with respect to the Licensed Business. This Agreement shall not be supplemented, modified or amended except by a written instrument signed by duly authorized representatives of Licensee and Sears, and no person has or shall have the authority to supplement, modify or amend this Agreement in any other manner. PARAGRAPH TITLES - ---------------- 58. 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. AGREEMENT SUPERSEDED - -------------------- 59. This Agreement supersedes the License Agreements made and entered into as of January 15, 1989 and January 1, 1990, by and between Sears and COLE KEY CORPORATION ("Superseded Agreements"). Such Superseded Agreements shall be deemed terminated as of the close of business on December 31, 1994, provided however, that Licensee shall be responsible for any and all obligations of the Licensee under the Superseded Agreements arising out of the operation of the Licensed Business prior to the termination of the Superseded Agreements. 22 23 IN WITNESS WHEREOF, the parties have executed this Agreement or caused this Agreement to be executed on their behalf by duly authorized officers or representatives. SEARS, ROEBUCK AND CO. By: /s/ Kenneth Hux ------------------------------------------ Vice President and General Manager, Licensed Businesses COLE GIFT CENTERS, INC. By: /s/ Suzanne Sutter ------------------------------------------ President 23 24 EXHIBIT A --------- AUTHORIZED MERCHANDISE AND/OR SERVICES The following items, merchandise lines and/or services are authorized for sale by Licensee in the Licensed Business. 1. 24 25 EXHIBIT B --------- 1995 ANNUAL INCENTIVE SCHEDULE
Total Annual Net Sales (000) Annual Incentive (000) - ---------------------------- ---------------------- **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Incentive amounts for annual Net Sales less than **** are due to Sears by Licensee. Incentive amounts for annual Net Sales more than **** are due to Licensee by Sears. Incentive payments for annual sales between plateaus will be calculated by interpolating the difference between the corresponding incentive amounts. If annual Net Sales exceed ****, the incentive amount will be **** percent ****%) of Sears Commission in excess of ****. Incentive amounts due either party are payable by January 31, 1996. **** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT, AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 25 26 EXHIBIT C --------- COMMISSION SCHEDULE The following Commission Rates shall be applicable to the portion of Net Sales within the described Sales Range:
Sales Range Commission Rate ----------- --------------- **** ****% **** ****% **** ****% **** ****% **** ****% **** ****%
Commission rates shall be calculated per department. Sears Commissions shall be deducted at the rate of **** percent ****%) of Net Sales and will be adjusted at the end of each Sears fiscal quarter per the above schedule. Sears Commission adjustments due either party will be made on the next regularly scheduled settlement. **** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT, AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 26 27 EXHIBIT D --------- NEW DEPARTMENT - -------------- Sears will be responsible for the following in the construction of a new department: 1. Perimeter walls, painted standard Sears colors. 2. Ceiling containing standard Sears fluorescent lighting. 3. Standard electrical outlets within the department. 4. Floor covered with Sears standard carpet/tile. Licensee will be responsible for all furniture, fixtures, equipment, displays, cabinets, counters, plumbing (if requested), shelving, sinks, and other such items. Licensee will also be responsible for any non-standard walls, wall coverings, ceilings, lighting and electrical within the department. RELOCATED DEPARTMENT - -------------------- If a department is required to relocate by Sears or if Licensee requests (and Sears agrees) that the department be relocated, the financial responsibilities for the relocation will be the same as for a New Department with the following exceptions. 1. Sears will absorb **** percent (****%) of the un-depreciated cost of furniture and fixtures that cannot be used in the new location. A five year straight line method of depreciation will be used to determine the un-depreciated cost. REMODELED DEPARTMENT - -------------------- Licensee shall at its sole expense remodel the department at the same time Sears remodels the Designated Sears Store. **** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT, AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 27 28 LOCATION RIDER APPROVAL GIFT CENTERS AND KEY DEPARTMENTS FINITE #195015 & 195086 & 195115 & 195215 THIS LOCATION APPROVAL RIDER is made and entered into as of December 19, 1996, by and between SEARS, ROEBUCK AND CO., a New York corporation, (hereinafter called "Sears") and COLE GIFT CENTERS, INC. (hereinafter called "Licensee"). Reference is made to the License Agreement, entered into on the 16th day of March, 1995, ("License Agreement") by and between Sears and Licensee wherein Sears licenses Licensee to have the privilege of conducting and operating, and Licensee agrees to operate, pursuant to the terms, provisions and conditions contained in the License Agreement, a licensed business for gift centers and/or key departments (hereinafter referred to as "Licensed Business"), at locations in those Sears stores designated by Location Riders. Sears and Licensee hereby agree that the following concession location(s) are approved: REGION DIST. STORE LOCATION - ------ ----- ----- -------- See Attached List The License Agreement, as so amended, is hereby ratified and confirmed including any mutual rights of termination. IN WITNESS WHEREOF, Sears and Licensee have signed this Location Approval Rider as of the above date by their duly authorized officers or agents. SEARS, ROEBUCK AND CO. By -------------------------------- Vice President & General Manager Licensed Businesses COLE GIFT CENTERS, INC. By /s/ Suzanne Sutter -------------------------------- President Suzanne Sutter 29 COLE GIFT LOCATIONS REGION DIST STORE LOCATION STATE - ------ ---- ----- -------- ----- SW 241 1158 HONOLULU HI NW 243 1009 SEATTLE WA NW 243 1059 SEATTLE/AURORA WA NW 243 1069 REDMOND WA NW 243 1099 FEDERAL WAY WA NW 243 1109 LYNNWOOD WA NW 243 1129 TACOMA WA NW 243 1139 TUKWILA WA NW 243 2309 SILVERDALE WA NW 244 1079 PORTLAND OR SW 245 1208 FRESNO CA SW 245 1228 SACRAMENTO/ARDEN CA SW 245 1288 STOCKTON CA SW 245 1318 BAKERSFIELD CA SW 245 1408 SACRAMENTO CA SW 245 1538 CITRUS HEIGHTS CA SW 245 1618 MODESTO CA SW 245 1978 RENO NV SW 245 2138 SANTA BARBARA CA SW 246 1019 PLEASANTON CA SW 246 1039 OAKLAND CA SW 246 1199 SAN MATEO CA SW 246 1238 MOUNTAIN VIEW CA SW 246 1248 HAYWARD CA SW 246 1368 CONCORD CA SW 246 1468 CUPERTINO CA SW 246 1478 SAN BRUNO CA SW 246 1488 EASTRIDGE/SAN JOSE CA SW 246 1658 SANTA ROSA CA SW 246 1688 SALINAS CA SW 246 1958 SAN JOSE CA SW 246 2308 SANTA CRUZ CA SW 247 1298 RIVERSIDE CA SW 247 1328 LAS VEGAS NV SW 247 1358 CHULA VISTA CA SW 247 1398 SAN BERNARDINO CA SW 247 1438 EL CAJON CA SW 247 1648 NORTH SAN DIEGO CA SW 247 1668 LAS VEGAS MEADOWS NV SW 247 1678 CARLSBAD CA 2 30 SW 247 1758 ESCONDIDO CA SW 247 1868 MORENO VALLEY CA SW 248 1008 LOS ANGELES/BOYLE CA SW 248 1018 BALDWIN/LOS ANGELES CA SW 248 1048 PASADENA CA SW 248 1068 PALMDALE CA SW 248 1088 GLENDALE CA SW 248 1168 LOS ANGELES VALLEY CA SW 248 1178 SANTA MONICA CA SW 248 1179 CANOGA PARK CA SW 248 1189 WEST COVINA CA SW 248 1209 LONG BEACH CA SW 248 1268 BUENA PARK CA SW 248 1278 TORRANCE CA SW 248 1309 DOWNEY CA SW 248 1378 ORANGE CA SW 248 1388 COSTA MESA CA SW 248 1448 OXNARD CA SW 248 1508 NORTHRIDGE CA SW 248 1518 CERRITOS CA SW 248 1548 LAGUNA HILLS CA SW 248 1568 CARSON CA SW 248 1598 CITY OF INDUSTRY CA SW 248 1608 WESTMINSTER CA SW 248 1638 BREA CA SW 248 1748 MONTCLAIR CA SW 248 1838 BURBANK CA SW 248 2318 THOUSAND OAKS CA NW 249 1029 SPOKANE WA NW 249 1118 SALT LAKE CITY UT NW 249 1558 MURRAY UT NW 249 1718 OGDEN UT NW 250 1031 DENVER/CHERRY CREEK CO NW 250 1071 DENVER/WESTLAND CO NW 250 1141 AURORA CO NW 250 1221 COLORADO SPRINGS CO NW 250 1271 DENVER/SOUTHWEST CO SW 251 1078 EAST MESA AZ SW 251 1287 ALBUQUERQUE NM SW 251 1317 EL PASO TX SW 251 1338 TUCSON AZ SW 251 1458 SCOTTSDALE AZ SW 251 1588 PHOENIX AZ SW 251 1628 MESA AZ 3 31 NW 252 1032 BROOKLYN CENTER MN NW 252 1040 EAU CLAIRE WI NW 252 1052 SAINT PAUL MN NW 252 1112 MINNETONKA MN NW 252 1122 MAPLEWOOD MN NW 252 1132 BURNSVILLE MN NW 252 1142 EDEN PRAIRIE MN NW 252 1722 BLOOMINGTON MN NW 252 2082 FARGO ND NW 252 2500 DULUTH MN CN 253 1012 DES MOINES IA CN 253 1041 OMAHA NE CN 253 1072 WATERLOO IA CN 253 2191 LINCOLN NE CN 253 2212 CEDAR RAPIDS IA CN 254 1101 OVERLAND PARK KS CN 254 1161 WICHITA KS CN 254 2131 SALINA KS SC 255 1211 OKLAHOMA CITY OK SC 255 1247 LUBBOCK TX SC 255 1261 MIDWEST CITY OK SC 255 2177 WICHITA FALLS TX SC 256 1097 SAN ANTONIO TX SC 256 1137 AUSTIN/HANCOCK TX SC 256 1167 SAN ANTONIO/CENTRAL PARK TX SC 256 1217 CORPUS CHRISTI TX SC 256 1277 SAN ANTONIO/INGRAM PARK TX SC 256 1307 ABILENE TX SC 256 1357 AUSTIN/BARTON CREEK TX SC 256 1397 ODESSA TX SC 256 1427 SAN ANTONIO/ROLLING OAKS TX SC 256 2507 McALLEN TX SC 257 1057 DALLAS/VALLEY VIEW TX SC 257 1076 LEWISVILLE TX SC 257 1077 SHREVEPORT LA SC 257 1117 FORT WORTH TX SC 257 1177 ARLINGTON TX SC 257 1187 MESQUITE TX SC 257 1207 RICHARDSON TX SC 257 1227 DALLAS/REDBIRD TX SC 257 1267 FORT WORTH TX SC 257 1297 HURST TX SC 257 1337 PLANO TX SC 257 2147 IRVING TX 4 32 SC 258 1017 HOUSTON TX SC 258 1067 HOUSTON/MEMORIAL TX SC 258 1107 PASADENA TX SC 258 1127 HOUSTON/SHEPHERD TX SC 258 1197 HOUSTON/WESTWOOD TX SC 258 1237 HOUSTON/GREENSPOINT TX SC 258 1257 HOUSTON/BAYBROOK TX SC 258 1327 BAYTOWN TX SC 258 1377 HOUSTON/WILLOWBROOK TX SC 258 1407 BEAUMONT TX SC 258 1417 HOUSTON/DEERBROOK TX SC 258 1457 HOUSTON/WOODLANDS TX CN 259 1062 BROOKFIELD WI CN 259 1082 GREENDALE WI CN 259 1102 MILWAUKEE/NORTH RIDGE WI CN 259 2990 ROCKFORD/CHERRYVALE IL CN 260 1020 CHICAGO/79TH STREET IL CN 260 1030 CHICAGO/WESTERN AVENUE IL CN 260 1090 CHICAGO/HARLEM IL CN 260 1290 NILES/GOLF MILL IL CN 260 1300 OAKBROOK IL CN 260 1380 CHICAGO/IRVING PARK IL CN 260 1510 CALUMET CITY IL CN 260 1570 SCHAUMBURG IL CN 260 1620 VERNON HILLS IL CN 260 1650 MERRILLVILLE IN CN 260 1660 AURORA/FOX VALLEY IL CN 260 1740 JOLIET IL CN 260 1750 ORLAND PARK IL CN 260 1820 WEST DUNDEE IL CN 260 1840 CHICAGO RIDGE IL CN 260 1921 MATTESON IL CN 261 1182 ST. PETERS MO CN 261 1270 SAINT LOUIS/CRESTWOOD MO CN 261 1330 EVANSVILLE/WASHINGTON SQ IN CN 261 1500 SAINT ANN MO CN 261 1630 FLORISSANT MO CN 261 1640 FAIRVIEW HEIGHTS IL CN 261 1690 CHESTERFIELD MO CN 261 1780 SPRINGFIELD IL SC 262 1016 LITTLE ROCK AR SC 262 1026 MEMPHIS/RALEIGH SPRINGS TN SC 262 1186 MEMPHIS/POPLAR TN SC 262 1206 NORTH LITTLE ROCK AR 5 33 SC 262 1316 NASHVILLE/HICKORY HOLLOW TN SC 262 1386 NASHVILLE TN SC 262 2806 MEMPHIS/HICKORY RIDGE TN SC 263 1086 BATON ROUGE LA SC 263 1106 JACKSON MS SC 263 1226 NEW ORLEANS/CLEARVIEW LA SC 263 1286 GRETNA/OAKWOOD LA SC 263 1306 HATTISBURG MS SC 263 1347 LAFAYETTE LA NC 264 1140 GRAND RAPIDS MI NC 264 1170 LANSING MI NC 264 1590 SAGINAW MI NC 264 1800 MISHAWAKA/UNIVERSITY PARK IN NC 264 1830 FORT WAYNE/GLENBROOK MI NC 265 1100 FLINT MI NC 265 1180 PONTIAC MI NC 265 1220 TOLEDO OH NC 265 1250 LINCOLN PARK MI NC 265 1450 ROSEVILLE MI NC 265 1460 LIVONIA MI NC 265 1490 TROY MI NC 265 1700 DEARBORN MI NC 265 1720 STERLING HEIGHTS MI NC 265 1760 NOVI MI CN 266 1470 GREENWOOD IN CN 266 1540 LAFAYETTE IN SQUARE/INDIANAPOLIS CN 266 1580 LEXINGTON KY CN 266 1600 INDIANAPOLIS/CASTLETON IN SQUARE CN 266 1790 LOUISVILLE/OKOLONA KY CN 266 1850 LOUISVILLE/OXMOOR KY CN 266 1980 LAFAYETTE IN CN 266 2160 CLARKSVILLE IN CN 267 1202 BEAVER CREEK/DAYTON OH CN 267 1280 SPRINGDALE OH CN 267 1370 COLUMBUS/EASTLAND OH CN 267 1440 COLUMBUS/NORTHLAND OH CN 267 1560 DAYTON MALL OH CN 267 1610 CINCINNATI/NORTHGATE OH CN 267 1730 FLORENCE KY CN 267 1810 CINCINNATI/EASTGATE OH SE 268 1115 HAMILTON PL. TN MALLI CHATTANOOGA 6 34 SE 268 1185 ASHEVILLE NC SE 268 1315 CHATTANOOGA/NORTHGATE TN SE 268 1395 KNOXVILLE/WEST TOWN TN SE 268 1675 KNOXVILLE/EAST TOWN TN SE 268 1804 BARBOURSVILLE WV SE 268 1954 CHARLESTON WV SE 268 2265 JOHNSON CITY TN SE 268 2825 KINGSPORT TN SC 269 1096 PENSACOLA FL SC 269 1126 MONTGOMERY AL SE 269 1136 BIRMINGHAM AL SC 269 1266 BIRMINGHAM EAST/CENTURY AL PLAZA SC 269 2056 FORT WALTON BEACH FL SC 269 2166 HUNTSVILLE AL SC 269 2805 PANAMA CITY FL SE 270 1145 COLUMBUS GA SE 270 1155 ATLANTA/COBB/KENNESAW GA SE 270 1275 ATLANTA/NORTHLAKE GA SE 270 1385 ATLANTA/CUMBERLAND MALL GA SE 270 1435 MACON GA SE 270 1565 ATLANTA/SOUTHLAKE GA SE 270 1685 ATLANTA/GWINNETT PL GA SE 270 1695 ALPHARETTA GA NC 271 1051 STRONGSVILLE OH NC 271 1310 ELYRIA OH NC 271 1350 MENTOR OH NC 271 1410 CANTON OH NC 271 143? MIDDLEBURG HEIGHTS OH NC 271 1474 YOUNGSTOWN OH NC 271 1520 AKRON/CHAPEL HILL OH NC 271 1530 RICHMOND HEIGHTS OH NC 271 1670 ROLLING ACRES/AKRON OH NC 271 1710 NORTH OLMSTED OH NC 271 1770 NORTH RANDALL OH NC 272 1504 WILLIAMSVILLE NY NC 272 1694 ERIE PA NC 272 1984 HAMBURG/BUFFALO NY NC 272 2134 BUFFALO/WALDEN NY NC 272 2744 HORSEHEADS/ELMIRA NY NC 273 1034 ROSS PARK/PITTSBURGH PA NC 273 1334 PITTSBURGH/SOUTH HILLS PA NC 273 1344 PITTSBURGH/PENN CENTER PA NC 273 1594 MONACA PA 7 35 NC 273 1714 GREENSBURG PA NC 273 1824 WEST MIFFLIN PA SE 274 1025 DANVILLE VA SE 274 1245 CHARLOTTE/SOUTHPARK NC SE 274 1335 GREENSBORO NC SE 274 1375 WINSTON/SALEM NC SE 274 1515 CHARLOTTE/EASTLAND NC SE 274 1545 SPARTANBURG SC SE 274 1595 GREENVILLE SC SE 274 1974 ROANOKE VA SE 274 2105 BURLINGTON NC SE 275 1035 AUGUSTA GA SE 275 1066 JACKSONVILLE/AVENUES FL SE 275 1305 SAVANNAH GA SE 275 1325 CHARLESTON SC HEIGHTS/NORTHWOODS SE 275 1455 WILMINGTON NC SE 275 1485 JACKSONVILLE/ORANGE PARK FL SE 275 1525 COLUMBIA SC SE 275 1585 TALLAHASSEE FL SE 275 1635 JACKSONVILLE FL SE 275 1665 GAINESVILLE FL SE 275 2815 ALBANY GA SE 275 2855 CHARLESTON SC SE 276 1005 LAKE WALES FL SE 276 1006 OCALA FL SE 276 1007 BRANDON FL SE 276 1075 DAYTONA BEACH FL SE 276 1175 MERRITT ISLAND FL SE 276 1225 ORLANDO/COLONIAL FL SE 276 1285 ORLANDO/SOUTH FL SE 276 1295 SAINT PETERSBURG FL SE 276 1355 ALTAMONTE SPRINGS FL SE 276 1415 NORTH CLEARWATER FL SE 276 1465 TAMPA/UNIVERSITY MALL FL SE 276 1495 FORT MYERS FL SE 276 1505 TAMPA BAY CENTER FL SE 276 1625 SARASOTA FL SE 276 1955 LAKELAND FL SE 276 2885 PORT RICHEY FL SE 277 1055 CORAL SPRINGS FL SE 277 1125 MIAMI/CORAL GABLES FL SE 277 1195 FT. LAUDERDALE FL SE 277 1205 POMPANO BEACH FL 8 36 SE 277 1345 MIAMI/WESTLAND/HIALEAH FL SE 277 1365 MIAMI/CUTLER RIDGE FL SE 277 1535 PLANTATION FL SE 277 1645 BOCA RATON FL SE 277 1655 MIAMI/AVENTURA FL SE 277 1705 WEST PALM BEACH FL SE 277 1715 MIAMI/INTERNATIONAL FL SE 277 1765 PALM BEACH GARDENS FL SE 277 1775 PEMBROKE PINES FL NC 279 1154 ALLENTOWN/WHITEHALL PA NC 279 1353 DEWITT/SYRACUSE NY NC 279 1534 SCRANTON PA NC 279 1623 SYRACUSE/CLAY NY NC 279 1784 JOHNSON CITY NY NC 279 2074 STROUDSBURG PA NC 279 2473 AUBURN NY NC 279 2603 NEW HARTFORD NY NC 279 2644 MUNCY PA NC 279 2683 WATERTOWN NY NE 280 1013 GLEN BURNIE MD NE 280 1224 HARRISBURG PA NE 280 1634 BALTIMORE/WEST MD NE 280 1644 LANCASTER PA NE 280 1854 PARKVILLE MD NE 280 1864 HUNT VALLEY/COCKEYSVILLE MD NE 281 1074 WALDORF MD NE 281 1284 ALEXANDRIA VA NE 281 1304 WHITE OAK/SILVER SPRINGS MD NE 281 1424 BETHESDA MD NE 281 1604 LANDOVER MD NE 281 1754 GAITHERSBURG MD NE 281 1773 SALISBURY MD NE 281 1814 FAIR OAKS/FAIRFAX VA NE 281 1844 COLUMBIA MD NE 281 2664 FREDERICK MD SE 282 1045 DURHAM NC SE 282 1065 GLEN ALLEN VA SE 282 1135 RICHMOND/CLOVER LEAF VA SE 282 1265 VIRGINIA BEACH VA SE 282 1274 RICHMOND VA SE 282 1405 FAYETTEVILLE NC SE 282 1445 RICHMOND/REGENCY SQUARE VA SE 282 1575 HAMPTON VA SE 282 1615 CHESAPEAKE VA 9 37 SE 282 1805 RALEIGH NC SE 282 2225 GOLDSBORO NC SE 282 2635 ROCKYMOUNT NC SE 282 2755 JACKSONVILLE NC NC 283 1093 SPRINGFIELD MA NC 283 1103 ALBANY NY NC 283 1113 ORANGE CT NC 283 1183 WATERBURY CT NC 283 1193 WATERFORD CT NC 283 1273 HOLYOKE MA NC 283 1303 DANBURY CT NC 283 1333 POUGHKEEPSIE NY NC 283 1443 MANCHESTER CT NC 283 2343 LANESBORO/PITTSFIELD MA NC 283 2353 KINGSTON NY NE 284 1003 SALEM NH NE 284 1313 NASHUA NH NE 284 2183 SOUTH PORTLAND ME NE 284 2443 MANCHESTER NH NE 284 2583 BANGOR ME NE 284 2663 PORTSMOUTH NH NE 285 1033 NORTH ATTLEBORO MA NE 285 1053 SAUGUS MA NE 285 1083 WARWICK RI NE 285 1123 DEDHAM MA NE 285 1133 LEOMINSTER MA NE 285 1163 BURLINGTON MA NE 285 1213 AUBURN MA NE 285 1253 PEABODY MA NE 285 1283 BRAINTREE MA NE 285 1343 CAMBRIDGE MA NE 285 1403 NATICK MA NE 285 2233 BROCKTON MA NE 286 1114 BROOKLYN NY NE 286 1264 HICKSVILLE NY NE 286 1324 BAY SHORE NY NE 286 1364 LAKE GROVE NY NE 286 1404 MASSAPEQUA NY NE 286 1444 WHITE PLAINS NY NE 286 1794 EAST NORTHPORT NY NE 286 1924 VALLEY STREAM NY NE 286 1944 YORKTOWN HEIGHTS NY NE 286 2933 NEW HYDE PARK NY NE 287 1064 LANGHORNE/OXFORD VALLEY PA 10 38 NE 287 1084 PHILADELPHIA/COTTMAN PA AVENUE NE 287 1174 UPPER DARBY PA NE 287 1254 WILMINGTON/PRICES CORNER DE NE 287 1354 WILLOW GROVE PA NE 287 1454 CORNWELLS HEIGHTS PA NE 287 1464 DEPTFORD NJ NE 287 1484 READING PA NE 287 1494 MOORESTOWN NJ NE 287 1554 MAYS LANDING/HAMILTON NJ NE 287 1654 MEDIA PA NE 287 1734 LAWRENCEVILLE NJ NE 287 1834 NORTH WALES PA NE 287 1853 CONCORD MALL DE NE 287 1884 KING OF PRUSSIA PA NE 287 2374 VINELAND NJ NE 287 2484 POTTSTOWN PA NE 288 1044 JERSEY CITY/NEWPORT NJ NE 288 1094 HACKENSACK NJ NE 288 1204 FREEHOLD NJ NE 288 1294 WATCHUNG NJ NE 288 1314 NEW BRUNSWICK NJ NE 288 1323 MIDDLETOWN NY NE 288 1414 NANUET NY NE 288 1434 WAYNE NJ NE 288 1574 MIDDLETOWN NJ 11 39 LOCATION RIDER APPROVAL OUTSIDE KEY SHOPS FINITE #195080 THIS LOCATION APPROVAL RIDER is made and entered into as of December 6, 1996, by and between SEARS, ROEBUCK AND CO., a New York corporation, (hereinafter called "Sears") and COLE GIFT CENTERS, INC. (hereinafter called "Licensee"). Reference is made to the License Agreement, entered into on the 16th day of March, 1995, ("License Agreement") by and between Sears and Licensee wherein Sears licenses Licensee to have the privilege of conducting and operating, and Licensee agrees to operate, pursuant to the terms, provisions and conditions contained in the License Agreement, a licensed business for gift centers and/or key departments (hereinafter referred to as "Licensed Business"), at locations in those Sears stores designated by Location Riders. Sears and Licensee hereby agree that the following concession location(s) are approved: REGION DIST. STORE LOCATION - ------ ----- ----- -------- See Attached List The License Agreement, as so amended, is hereby ratified and confirmed including any mutual rights of termination. IN WITNESS WHEREOF, Sears and Licensee have signed this Location Approval Rider as of the above date by their duly authorized officers or agents. SEARS, ROEBUCK AND CO. By ---------------------------------- Vice President & General Manager Licensed Businesses COLE GIFT CENTERS, INC. By /s/ Suzanne Sutter ---------------------------------- President Suzanne Sutter 40 OUTSIDE KEY SHOP LOCATIONS REGION DIST STORE LOCATION STATE - ------ ---- ----- -------- ----- SC 262 1016 LITTLE ROCK AR SC 255 1021 TULSA/YALE OK NW 250 1031 DENVER/CHERRY CREEK CO SC 257 1057 DALLAS/VALLEY VIEW TX NW 243 1059 SEATTLE/AURORA WA CN 259 1062 BROOKFIELD WI SC 258 1067 HOUSTON/MEMORIAL TX NW 250 1071 DENVER/WESTLAND/ LAKEWOOD CO NE 288 1094 HACKENSACK NJ SC 258 1107 PASADENA TX NW 250 1111 COLORADO SPRINGS CO NW 249 1118 SALT LAKE CITY UT SC 258 1127 HOUSTON/SHEPHERD TX NC 264 1140 GRAND RAPIDS MI NE 285 1163 BURLINGTON MA SC 256 1167 SAN ANTONIO/ CENTRAL PARK TX NC 264 1170 LANSING MI NC 265 1220 TOLEDO OH NE 280 1224 HARRISBURG PA SE 282 1265 VIRGINIA BEACH VA SW 248 1268 BUENA PARK CA SW 251 1287 ALBUQUERQUE NM NC 271 1310 ELYRIA OH SW 245 1318 BAKERSFIELD CA SW 247 1328 LAS VEGAS NV SW 251 1338 TUCSON AZ SW 246 1368 CONCORD CA CN 267 1370 COLUMBUS/EASTLAND OH SW 248 1378 ORANGE CA CN 260 1380 CHICAGO/IRVING PARK IL NE 281 1424 BETHESDA MD NC 271 1430 MIDDLEBURG HEIGHTS OH CN 267 1440 COLUMBUS/NORTHLAND OH NC 265 1490 TROY MI NC 271 1520 AKRON/CHAPEL HILL OH NC 264 1830 FORT WAYNE/GLENBROOK MI NC 271 1474 YOUNGSTOWN OH NW 249 2118 PROVO UT NW 250 2281 PUEBLO CO 2 41 AGREEMENT TO AMEND EXTEND LICENSE AGREEMENT Finite #195015 & 195086 & 195115 & 195215 & 195080 THIS AGREEMENT is made as of the January 9, 1997, by and between SEARS, ROEBUCK AND CO., a New York corporation (herein called "Sears"), and COLE GIFTS CENTERS, INC., a Delaware corporation ("Licensee"). Reference is made to the License Agreement dated the 16th day of March, 1995, by and between Sears and Licensee, wherein Sears licensed to Licensee a certain area in the Sears retail stores designated in Location Riders. The License Agreement, as the same may heretofore have been extended, amended, modified and/or supplemented, is referred to hereinafter as the "License". Whereas, the parties desire to extend the Term of the License and to amend the License, Sears and Licensee agree as follows: 1. The Term of said License shall be and hereby is extended until December 31, 1998. 2. The Sears commission for sales made under the License between 12/29/96 through 12/27/97 ("Sears 1997 Fiscal Year") shall be per the terms of Exhibit E attached hereto and hereafter made a part of the License. The License Agreement, as so amended, is hereby ratified and confirmed, including any mutual rights of termination. IN WITNESS WHEREOF, the parties have signed this Agreement to Amend and Extend License Agreement as of the above date by their duly authorized officer or agents. SEARS, ROEBUCK AND CO. By: -------------------------------------- Vice President and General Manager Licensed Businesses COLE GIFT CENTERS, INC. By: /s/ Suzanne Sutter -------------------------------------- President 42 EXHIBIT E --------- 1997 COMMISSION SCHEDULE The following Commission Rates shall be applicable to the portion of Net Sales within the described Sales Range: Sales Range Commission Rate ----------- --------------- **** ****% **** ****% **** ****% **** ****% **** ****% **** ****% Commission rates shall be calculated per department. Sears Commissions shall be deducted at the rate of **** percent (****%) of Net Sales and will be adjusted at the end of each Sears fiscal quarter per the above schedule. Sears Commission adjustments due either party will be made on the next regularly scheduled settlement. **** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT, AND SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-21 3 EXHIBIT 21 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF COLE NATIONAL CORPORATION State of Names Subsidiaries Corporation Name Incorporation Do Business Under - ---------------- ------------- ----------------- Cole National Group, Inc. Delaware Cole Managed Vision, Inc. Delaware Bay Cities Optical Company California Montgomery Ward Vision Center Cole Lens Supply, Inc. Delaware Contact Lens Supply Contact Lens Supply Co. Cole Vision Corporation Delaware Sears Optical Elder-Beerman Optical Montgomery Ward Vision Center BJ's Optical Department Phar-Mor Optical Target Optical Optical Factory Outlet Cole Vision Canada, Inc. New Brunswick, Sears Optical Canada Vision Club Cole Vision Services, Inc. Delaware Western States Optical, Inc. Washington Sears Optical Cole Gift Centers, Inc. Delaware Keys N' Engraved Gifts The Keyshop The Keyshop (at Sears, Venture & Montgomery Ward) The Gift Center The Gift Center at Sears Personally Yours Keys N' Things Things Remembered, Inc. Delaware Things Remembered Things Remembered- Engraved Gifts Things Engraved HQ Gifts Gifts Remembered 2 (Continued) EXHIBIT 21 LIST OF SUBSIDIARIES OF COLE NATIONAL CORPORATION State of Names Subsidiaries Corporation Name Incorporation Do Business Under - ---------------- ------------- ----------------- Cole Management Delaware Services, Inc. Pearle, Inc. Delaware Pearle Service Corporation Delaware Pearle VisionCare, Inc. California Pearle Vision (HMO) Pearle Vision Center of Commonwealth Pearle Vision Center Puerto Rico, Inc. of Puerto Rico Pearle Vision Express Pearle Express Pearle Vision Center Canada Limited Ontario, Canada Pearle Vision Center Pearle Vision, Inc. Delaware Pearle Vision Pearle Vision Center Pearle Vision Express Pearle Eyelab Express Pearle Eye-Tech Express Pearle Express Pearle Vision Managed Care HMO of Texas, Inc. Texas EX-23 4 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed registration Statements on Form S-8 (Registration Statement No. 33-99552). ARTHUR ANDERSEN LLP Cleveland, Ohio, April 30, 1997. EX-24 5 EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY COLE NATIONAL CORPORATION KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Cole National Corporation, a Delaware corporation, hereby constitutes and appoints Jeffrey A. Cole, Wayne L. Mosley and Joseph Gaglioti, 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, 1997, 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 to said attorney or attorneys-in-fact, and each of them, full power and authority to do so 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 the undersigned 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. Executed as of the 14th day of April, 1997. /s/ Timothy F. Finley ----------------------------------- Timothy F. Finley Director 2 POWER OF ATTORNEY COLE NATIONAL CORPORATION KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Cole National Corporation, a Delaware corporation, hereby constitutes and appoints Jeffrey A. Cole, Wayne L. Mosley and Joseph Gaglioti, 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, 1997, 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 to said attorney or attorneys-in-fact, and each of them, full power and authority to do so 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 the undersigned 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. Executed as of the 17th day of April, 1997. /s/ Irwin N. Gold ----------------------------------- Irwin N. Gold Director 3 POWER OF ATTORNEY COLE NATIONAL CORPORATION KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Cole National Corporation, a Delaware corporation, hereby constitutes and appoints Jeffrey A. Cole, Wayne L. Mosley and Joseph Gaglioti, 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, 1997, 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 to said attorney or attorneys-in-fact, and each of them, full power and authority to do so 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 the undersigned 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. Executed as of the 24th day of April, 1997. /s/ Peter V. Handal ----------------------------------- Peter V. Handal Director 4 POWER OF ATTORNEY COLE NATIONAL CORPORATION KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Cole National Corporation, a Delaware corporation, hereby constitutes and appoints Jeffrey A. Cole, Wayne L. Mosley and Joseph Gaglioti, 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, 1997, 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 to said attorney or attorneys-in-fact, and each of them, full power and authority to do so 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 the undersigned 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. Executed as of the 16th day of April, 1997. /s/ Brian B. Smith ----------------------------------- Brian B. Smith President and Director 5 POWER OF ATTORNEY COLE NATIONAL CORPORATION KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Cole National Corporation, a Delaware corporation, hereby constitutes and appoints Jeffrey A. Cole, Wayne L. Mosley and Joseph Gaglioti, 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, 1997, 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 to said attorney or attorneys-in-fact, and each of them, full power and authority to do so 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 the undersigned 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. Executed as of the 24th day of April, 1997. /s/ Charles A. Ratner ----------------------------------- Charles A. Ratner Director 6 POWER OF ATTORNEY COLE NATIONAL CORPORATION KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Cole National Corporation, a Delaware corporation, hereby constitutes and appoints Jeffrey A. Cole, Wayne L. Mosley and Joseph Gaglioti, 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, 1997, 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 to said attorney or attorneys-in-fact, and each of them, full power and authority to do so 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 the undersigned 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. Executed as of the 24th day of April, 1997. /s/ Jeffrey A. Cole ----------------------------------- Jeffrey A. Cole Chairman and Chief Executive Officer and Director (Principal Executive Officer and Principal Financial Officer) EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLDATED STATEMENT OF INCOME FILED AS PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K. 1,000 12-MOS FEB-01-1997 FEB-04-1997 FEB-01-1997 73,141 0 48,788 3,068 119,236 270,423 216,575 100,918 582,843 218,578 317,547 12 0 0 19,706 582,843 683,990 683,990 221,304 696,351 0 0 23,735 (34,392) (6,759) (27,633) 0 (682) 0 (28,315) (2.50) 0
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