-----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, P5Qri/sPUvpuA7s3wSbvxb2g/otNdEfwhB7I3apPviijz/h8VoyJ+xlHdJpTRLXO IdIXZAPLTlkYk1krWk7FxQ== 0000950152-97-004892.txt : 19970701 0000950152-97-004892.hdr.sgml : 19970701 ACCESSION NUMBER: 0000950152-97-004892 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970630 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: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-29401 FILM NUMBER: 97632519 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 S-3/A 1 COLE NATIONAL S-3/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1997. REGISTRATION STATEMENT NO. 333-29401 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- COLE NATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 34-1453189 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) --------------- 5915 Landerbrook Drive Mayfield Heights, Ohio 44124 (216) 449-4100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- WAYNE L. MOSLEY Vice President and Controller Cole National Corporation 5915 Landerbrook Drive Mayfield Heights, Ohio 44124 (216) 449-4100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: DAVID P. PORTER, Esq. THOMAS F. MCKEE, Esq. Jones, Day, Reavis & Pogue Calfee, Halter & Griswold LLP North Point 800 Superior Avenue 901 Lakeside Avenue Cleveland, Ohio 44114 Cleveland, Ohio 44114 (216) 622-8200 (216) 586-3939
--------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. --------------- If any of the securities being registered on this Form are to be offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------- CALCULATION OF REGISTRATION FEE
========================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SHARES AMOUNT OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED TO BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------- Class A Common Stock, par value $.001 per share........ 1,725,000 shares(2) $41.00 $70,725,000 $21,431.82 ==========================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c). (2) Includes 225,000 shares that may be sold to cover over-allotments. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 30, 1997 (COLE LOGO) 1,500,000 SHARES COLE NATIONAL CORPORATION CLASS A COMMON STOCK ------------------ All of the shares of Class A Common Stock, par value $.001 per share, offered hereby (the "Offering") are being offered by Cole National Corporation, a Delaware corporation (the "Company"). The Class A Common Stock ("Common Stock") is the only class of common stock outstanding and each share of Common Stock is entitled to one vote per share. The shares of Common Stock offered hereby will be listed on the New York Stock Exchange under the symbol "CNJ." On June 27, 1997, the last reported sale price of the Common Stock on the New York Stock Exchange Composite Tape was $45.00 per share. ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THE PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES OF THE COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================= UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS (1) COMPANY (2) - ------------------------------------------------------------------------------------------------- Per Share........................ $ $ $ - ------------------------------------------------------------------------------------------------- Total (3)........................ $ $ $ =================================================================================================
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Does not include expenses payable by the Company estimated at $175,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 225,000 additional shares of Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the Underwriters, subject to receipt and acceptance of the shares by them. The Underwriters reserve the right to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made against payment therefor at the offices of McDonald & Company Securities, Inc. or through the facilities of the Depository Trust Company on or about July , 1997. --------------------------------------------- Joint Lead Managers and Joint Bookrunners SMITH BARNEY INC. MCDONALD & COMPANY SECURITIES, INC. --------------------------------------------- DEUTSCHE MORGAN GRENFELL The date of this Prospectus is July , 1997 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained at prescribed rates by writing the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site, located at http://www.sec.gov, that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. The Company's Class A Common Stock is listed on the New York Stock Exchange, and reports, proxy statements and other information concerning the Company may also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement (the "Registration Statement," which term shall include any amendments thereto) on Form S-3 under the Securities Act of 1933 (the "Securities Act"), with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission, and to which reference is hereby made. For further information, reference is hereby made to the Registration Statement and the exhibits and schedules thereto. Unless the context otherwise requires, references herein to the "Company" include the Company and its direct and indirect subsidiaries. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed by the Company with the Commission pursuant to the Exchange Act are incorporated by reference in this Prospectus and shall be deemed to be a part hereof: 1. The Company's Annual Report on Form 10-K for the year ended February 1, 1997 (File No. 1-12814). 2. The Company's Quarterly Report on Form 10-Q for the period ended May 3, 1997 (File No. 1-12814). 3. The description of the Company's Common Stock set forth in the Company's Registration Statement on Form 8-A filed February 14, 1994, as amended April 6, 1994. 4. The description of the Company's Stockholders' Rights Plan set forth in the Company's Registration Statement on Form 8-A filed September 7, 1995. 5. The Company's Current Report on Form 8-K/A-1 filed December 19, 1996 (File No. 1-12814) (includes financial statements for Pearle, Inc. for the period ended September 30, 1996). All documents filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the Offering shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from their respective dates of filing. Any statement contained herein or in any document incorporated or deemed to be incorporated shall be deemed to be modified or superseded for all purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any subsequently filed document which also is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS (OTHER THAN EXHIBITS TO THE 2 4 INFORMATION THAT ARE INCORPORATED BY REFERENCE UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS INCORPORATES). REQUESTS SHOULD BE DIRECTED TO TRACY L. BURMEISTER, SECRETARY, COLE NATIONAL CORPORATION, AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICES, 5915 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124, TELEPHONE NUMBER (216) 449-4100. PERSONS REQUESTING COPIES OF EXHIBITS TO SUCH DOCUMENTS THAT WERE NOT SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS WILL BE CHARGED THE COSTS OF REPRODUCTION AND MAILING. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." 3 5 THE COMPANY Cole National Corporation (the "Company") is a leading vision care and personalization retailer. 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"). The Company also has a 20% interest in Pearle Trust BV, which has 193 optical stores in the Netherlands and Belgium. Cole Optical is the largest optical retail company in the United States in terms of number of locations. Cole Gift operates the only nationwide chain of gift stores offering "while you shop" gift personalization, key duplicating, engraving, monogramming and related merchandise. With the acquisition of Pearle, approximately 70% of the Company's net revenue is expected to be derived from Cole Optical and the remaining 30% is expected to be derived from Cole Gift. 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 Cole Vision operates principally under the "Sears Optical," "Montgomery Ward Vision Center" and "BJ's Optical Department" names. As of May 3, 1997, Cole Vision operated 1,146 locations in 46 states and Canada, including 750 departments on the premises of Sears department stores, 213 departments in Montgomery Ward stores, 76 departments in BJ's Wholesale Club stores, 24 departments located in five other retailers and 83 freestanding stores operated under the name "Sears Optical." 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. Cole Vision's product line includes a broad selection of prescription eyeglasses, contact lenses and accessories at all of its locations. At most Cole Vision locations, a doctor of optometry provides eye examination services on the premises. Each of Cole Vision's optical departments are computer linked to its five centralized manufacturing laboratories, enabling it to provide next day delivery on most eyewear when requested by its customers. At May 3, 1997, Pearle's operations consisted of 355 company-owned and 327 franchised stores located in 43 states, Canada and the Caribbean. Pearle's highly recognized brand name and slogan, Nobody Cares For Eyes More Than Pearle, have been used for over 15 years. 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 Pearle's main laboratory in Dallas, which can generally complete orders for next day delivery upon request. Like Cole Vision, a doctor of optometry provides eye examination services at the Pearle stores. While Pearle stores also sell a broad range of optical products, Pearle features well-recognized designer brand names which appeal to the more affluent and fashion-conscious consumer. Cole Vision also offers a managed vision care program, which provides 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. Recently, all Pearle company-owned and a majority of franchised locations were added to Cole Vision's managed vision care programs. COLE GIFT Cole Gift is comprised of personalization gift stores, operated by Things Remembered and CGC, offering "while you shop" gift engraving, key duplicating, glass etching and monogramming, as well as related merchandise. At May 3, 1997, Things Remembered operated 793 locations consisting of 342 kiosks, 366 in-line stores and 85 personalization superstores and CGC operated 498 departments in host stores, primarily Sears. Things Remembered and CGC each offer a broad assortment of both branded and private label gift 4 6 categories and items at prices generally ranging from $10 to $75. Most locations also offer soft goods that can be monogrammed and custom embroidered in the store or at a central fulfillment facility. The Company currently is exploring alternatives that may, if successful, allow it to reduce the costs of its existing debt financing. There can be no assurance that any of the approaches under review will be executed or, if executed, will be successful in reducing the cost of the Company's debt financing. See "Risk Factors -- Leverage." THE OFFERING Common Stock offered by the Company.................. 1,500,000 shares (1) Common Stock to be outstanding after the Offering.... 13,626,932 shares (2) NYSE symbol.......................................... CNJ
- --------------- (1) Excludes up to 225,000 shares of Common Stock to be sold if the Underwriters' over-allotment option granted by the Company is exercised in full. See "Underwriting." (2) Excludes 1,393,966 shares issuable upon the exercise of stock options and 81,574 shares issuable upon exercise of warrants held by various investors outstanding as of June 23, 1997. USE OF PROCEEDS The Company intends to use the net proceeds from the Offering for general corporate purposes, which may include reducing outstanding indebtedness. In addition, the Company may use the net proceeds to finance future acquisitions. Pending application of the net proceeds as described above, the Company may invest the net proceeds in short-term interest bearing securities. 5 7 SELECTED FINANCIAL DATA Set forth below are selected financial data of the Company for fiscal years 1992 through 1996 which have been derived from the Company's audited consolidated financial statements for those years. Also set forth below are selected summary financial data of the Company for the 13 weeks ended May 4, 1996 and May 3, 1997, which have been derived from unaudited financial statements for those periods. Results for interim periods are not necessarily indicative of full year results. See "Risk Factors--Seasonality." 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 1995 consisted of a 53-week period; all other fiscal years presented consisted of 52-week periods. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Prospectus.
FISCAL YEAR ENDED 13 WEEKS ENDED ---------------------------------------------------- ------------------- JAN. 30, JAN. 29, JAN. 28, FEB. 3, FEB. 1, MAY 4, MAY 3, 1993 1994 1995 1996 1997(a) 1996 1997 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) OPERATING RESULTS: Net revenue................................... $428,066 $472,888 $528,049 $577,091 $683,990 $142,890 $249,530 Gross profit.................................. 304,012 331,936 363,326 394,157 462,686 98,390 163,760 Operating expenses............................ 258,534 281,188 305,470 332,471 390,518 87,352 143,343 Depreciation and amortization................. 13,581 13,516 14,892 15,730 20,129 4,235 7,815 Business integration and other non-recurring charges (b)................... -- -- -- -- 64,400 -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations................. 31,897 37,232 42,964 45,956 (12,361) 6,803 12,602 Interest expense, net......................... 22,262 21,799 23,216 21,388 22,031 5,052 8,231 Income tax provision (benefit)................ 4,165 2,361 (4,909) 10,810 (6,759) 771 1,923 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations...... $ 5,470 $ 13,072 $ 24,657 $ 13,758 $(27,633) $ 980 $ 2,448 ======== ======== ======== ======== ======== ======== ======== Earnings (loss) per share..................... $ 1.09 $ 2.47 $ 2.62 $ 1.32 $ (2.44) $ .09 $ .20 Weighted average shares outstanding (000's)... 5,004 5,283 9,395 10,415 11,333 10,435 12,019 Supplementary earnings (loss) per share (c)... $ .55 $ 1.28 $ 2.47 $ 1.32 $ (2.44) $ .09 $ .20 NUMBER OF UNITS (AT END OF PERIOD): Cole Vision................................... 769 774 938 1,013 1,138 1,022 1,146 Pearle (d).................................... -- -- -- -- 686 -- 682 Things Remembered............................. 717 737 760 778 790 782 793 CGC........................................... 594 586 589 587 501 504 498 -------- -------- -------- -------- -------- -------- -------- Total......................................... 2,080 2,097 2,287 2,378 3,115 2,308 3,119 ======== ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA (AT END OF PERIOD): Total assets.................................. $225,861 $257,944 $283,319 $300,781 $582,843 $290,672 $544,481 Long-term debt................................ 255,610 238,299 184,388 181,903 317,547 181,860 317,328 Stockholders' equity (deficit)................ (123,957) (75,070) 3,306 17,133 19,718 18,195 23,182
- --------------- (a) Includes results for Pearle from November 15, 1996 through February 1, 1997. On a pro forma basis, if the Pearle acquisition had occurred at the beginning of the period, the unaudited consolidated net revenue would have been $933.8 million and the pro forma loss from continuing operations would have improved by $1.8 million or $0.16 per share. See Note 2 to the Audited Consolidated Financial Statements included elsewhere in this Prospectus. (b) Represents a pretax charge for business integration and other non-recurring items in 1996 primarily related to the acquisition of Pearle. (c) Supplementary earnings per share have been calculated as if the offering in fiscal 1993 of Senior Notes (defined below) and the initial public offering in fiscal 1994 of the Common Stock had occurred on February 2, 1992. See the consolidated financial statements and notes thereto included elsewhere in this Prospectus. (d) Includes Pearle franchised locations. 6 8 RISK FACTORS This Prospectus and certain of the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, including those set forth in the following risk factors and elsewhere in this Prospectus. Prospective investors should consider carefully the following factors, in addition to the other information contained in this Prospectus, prior to making an investment in the Common Stock. LEVERAGE The Company owns its operating businesses through Cole National Group, Inc. ("CNG"). Although the Company itself has no outstanding indebtedness (other than capital leases), CNG remains highly leveraged and its debt service requirements are substantial. As of May 3, 1997, the Company had consolidated long-term debt of $318 million, comprised principally of $165.8 million of the 11.25% Senior Notes due 2001 (the "Senior Notes") and $150 million of the 9 7/8% Senior Subordinated Notes due 2006 (the "Notes"), and stockholders' equity of $23.2 million. The consequences of such leverage may negatively impact, without limitation, the ability of the Company (i) to obtain additional financing on favorable terms; (ii) to service existing debt; and (iii) to comply with financial and other covenants and operating restrictions imposed by the terms of the indentures governing its existing long-term indebtedness. The Company currently expects that CNG and its subsidiaries will be able to service the principal obligations on their indebtedness out of cash flow from operations. The Company has no significant principal payment obligations under any of its outstanding indebtedness until the Senior Notes mature in 2001. The ability of CNG and its subsidiaries to satisfy their obligations will be primarily dependent upon the future financial and operating performance of the subsidiaries and upon the Company's and CNG's ability to renew or refinance borrowings or to raise additional equity capital. Each of these alternatives is dependent upon financial, business and other general economic factors affecting the subsidiaries and the retailing business in particular, many of which are beyond the control of the Company and its subsidiaries. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Upon the occurrence of a "change of control" of the Company, each holder of the Senior Notes and each holder of the Notes would have the right to require the repurchase of all or any part of such holder's Senior Notes or Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereof. A "change of control" would occur if a single purchaser or purchasers acting together as a "group" (as defined under the Exchange Act) acquires (through individual market purchases, negotiated transactions, or otherwise) 50% or more of the total voting power of the voting stock of the Company on a fully diluted basis. If such an event does occur, there can be no assurance that the Company would have the ability to finance the repurchase of the Senior Notes or the Notes that are tendered to it. The Company currently is reviewing alternatives that may allow it to reduce the costs of its existing debt financing. There can be no assurance that any of the approaches under review will be executed or, if executed, will be successful in reducing the cost of the Company's debt financing. To the extent the Company repurchases or redeems Senior Notes or Notes at a premium to their current book value, such repurchases or redemptions would result in a charge to earnings which, if material, would be accounted for as an extraordinary charge. The earliest optional redemption date, for the Senior Notes, is October 1, 1998 at a redemption price of 105.625%. 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 health maintenance organizations in a highly fragmented marketplace. Pearle competes on the basis of its highly recognized brand name, one-hour express service and by offering products which appeal to the more affluent and fashion- 7 9 conscious consumer. 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. Cole Gift competes with other gift store retailers 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. RELATIONSHIPS WITH MAJOR HOST STORES All of the CGC and the vast majority of Cole Vision locations are operated under the names of their respective host stores under leases or licenses, from such host stores, that are terminable upon 60-90 days' notice. In addition, Cole Vision operates its freestanding stores under the name "Sears Optical" pursuant to a license agreement with Sears that is cancelable on 90 days notice. The Company has enjoyed excellent relationships with its major host stores for over 40 years and has never had a lease terminated, other than in connection with a store closing, relocation or major remodeling. However, there can be no assurance that relationships with major host stores will remain stable in the future or that any lease or license agreement between a host store and the Company will not be terminated or adversely changed. There could be a material adverse effect on the Company if the relationship with any major host store were to terminate or change materially. INTEGRATION OF PEARLE AND RISK OF FRANCHISING The acquisition of Pearle has been the largest acquisition made by the Company. Acquisitions of the magnitude of Pearle are inherently subject to significant risk. There can be no assurance that the Company will be able to integrate the acquired Pearle operations successfully. Although the integration has commenced, further consolidation of Cole Vision's and Pearle's operating, control and administrative systems is planned. These efforts will continue to require substantial attention from and place substantial demands upon the senior management of Cole Vision and/or the Company, as well as require the cooperation of Pearle's employees and franchisees. As a result of the acquisition of Pearle, the Company's consolidated gross margin will decline from its historical levels. 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. In addition, the Company has never operated as a franchisor and will be required to operate such business in accordance with applicable franchise laws and regulations. The Company's plans for Pearle depend, in part, on the Company's ability to continue Pearle's franchised operations, to improve Pearle's relationships with its franchisees, and to attract new franchisees. While franchisees representing over 70% of the franchised locations have agreed to enter into new franchising arrangements with the Company, the Company's flexibility in making changes to Pearle's franchised operations is limited by laws and regulations governing the relationship with the franchisees and certain other obligations. SEASONALITY The Company's business historically has been seasonal with, on average, approximately 30% of the Company's net revenue and approximately 50% of its income from operations occurring in the fourth fiscal quarter because of the importance of gift sales during the Christmas retailing season. Although the acquisition of Pearle will moderate the seasonality of the Company due to relatively lower levels of optical sales during the Christmas holiday season, the Company's business will remain seasonal. RISKS ASSOCIATED WITH FUTURE EXPANSION From time to time the Company engages in discussions regarding future acquisitions. Acquisitions can result in unforeseen difficulties and can divert a disproportionate amount of management time and attention. There can be no assurance that future acquisitions will be completed or integrated successfully. 8 10 DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company currently intends to retain earnings to support its growth strategy and does not anticipate paying dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. The operations of the Company are and are expected to be conducted through its direct and indirect subsidiaries. The covenants in certain debt instruments to which CNG or its subsidiaries are a party restrict the ability of CNG and its subsidiaries to make distributions to the Company to enable the Company to pay dividends. The amount of dividends that may be paid under each of these agreements is based in part on the operating results of the Company's subsidiaries, and there can be no assurance as to the amount or frequency of dividends that can be paid to the Company in future years. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Liquidity and Capital Resources." ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Certificate of Incorporation (the "Certificate") and By-Laws and of the Delaware General Corporation Law could have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company. In addition, the Company has adopted a stockholders' rights plan that includes certain provisions which could have similar anti-takeover effects. Any one of, or a combination of, the above anti-takeover provisions could discourage a third party from attempting to acquire control of the Company. SHARES ELIGIBLE FOR FUTURE SALE The shares of Common Stock offered hereby will be freely transferable by persons who are not affiliates of the Company without restriction or further registration under the Securities Act. Virtually all of the Common Stock, other than shares held by affiliates of the Company, are freely tradable. Shares of Common Stock held by affiliates of the Company are subject to limitations on the volume that may be sold other than sales pursuant to a registration statement under the Securities Act or an applicable exemption from registration thereunder, including sales pursuant to Rule 144 promulgated thereunder. The Company and the executive officers and Directors of the Company have agreed that, for a period of 120 days after the execution of the Underwriting Agreement, they will not, without the prior written consent of McDonald & Company Securities, Inc., offer, sell, contract to sell or otherwise dispose of any unrestricted shares of Common Stock, other equity securities of the Company or other securities convertible into or exercisable or exchangeable for any shares of Common Stock or grant options to purchase any shares of Common Stock, except in certain limited circumstances. The sale or issuance or the potential for sale or issuance of such shares could have an adverse impact on the market price of the Common Stock. POSSIBLE VOLATILITY OF STOCK PRICE The public offering price per share of Common Stock has been determined by negotiations among the Company and representatives of the Underwriters based in part on the trading price of the Common Stock on the New York Stock Exchange and may not be indicative of the price at which the Common Stock will trade after completion of the Offering. In addition, the stock market has from time to time experienced extreme price and volume volatility. These fluctuations may be unrelated to the operating performance of particular companies whose shares are traded and may adversely affect the market price of the Common Stock. The market price of the Common Stock could also be subject to significant fluctuations in response to the Company's operating results and other factors. There can be no assurance that the market price of the Common Stock will not decline below the price at which the shares of Common Stock are sold. See "Underwriting." 9 11 OTHER FACTORS AFFECTING FUTURE PERFORMANCE The Company's 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 the Company's ability to select and stock merchandise attractive to customers, general economic cycles affecting consumer spending, weather factors affecting retail operations, its quality controls in optical manufacturing and engraving, operating factors affecting customer satisfaction, the mix of goods sold, pricing and other competitive factors, and the seasonality of the Company's businesses. 10 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The following is a discussion of the results of the Company's operations for the three fiscal years ended February 1, 1997 and for the 13 week periods ended May 3, 1997 and May 4, 1996. 13 WEEKS ENDED MAY 3, 1997 COMPARED TO 13 WEEKS ENDED MAY 4, 1996 Net revenue for the first quarter of fiscal 1997 increased 75% to $249.5 million from $142.9 million for the same period in fiscal 1996. The increase was primarily attributable to the acquisitions of Pearle and Sears Optical of Canada in November 1996, which accounted for $85.5 million of the increase. For the quarter, the Company's consolidated comparable store sales increased 5.4% in fiscal 1997 and 7.6% in fiscal 1996. A strong comparable store sales increase of 10.9% at Cole Vision was primarily a result of successful eyewear promotions and growth in managed vision care sales. Comparable store sales decreased 3.7% at Cole Gift which was negatively impacted by the lower levels of mall traffic and unseasonably bad weather in the early spring. In the first quarter of fiscal 1997, the Company began classifying capitation and other fees associated with its growing managed vision care business as revenue, which previously had been netted with operating expenses. The opening of additional Cole Gift and Cole Vision units also contributed to the first quarter revenue increase. At May 3, 1997, the Company had 3,119 specialty service retail locations, including 327 franchised locations, compared to 2,308 at May 4, 1996. Gross profit increased to $163.8 million in the first quarter of fiscal 1997 from $98.4 million in the same period last year. The gross profit increase was primarily attributable to the addition of Pearle, increased revenue at Cole Vision and the classification of managed vision care fees as revenue. Gross margins for the first quarter of fiscal 1997 and fiscal 1996 were 65.6% and 68.9%, respectively. The lower gross margin percentage resulted primarily from the addition of Pearle which has a lower gross margin than the Company has historically experienced due to the higher costs of in-store laboratories and lower margin wholesale sales to franchised stores. This was partially offset by revenue generated by Pearle's franchise royalties and fees, interest income on Pearle's franchise notes receivable and the managed vision care fees, each of which has no corresponding cost of goods sold. Operating expenses increased 64.1% to $143.3 million in the first quarter of fiscal 1997 from $87.4 million in fiscal 1996, but as a percentage of revenue, operating expenses decreased to 57.4% in fiscal 1997 from 61.1% in fiscal 1996. The leverage improvement was primarily a result of the addition of Pearle, which has lower operating expenses as a percentage of revenue than the rest of the Company, along with leverage gains achieved by Cole Vision's comparable store sales increase. Fiscal 1997 depreciation and amortization expense of $7.8 million was $3.6 million more than fiscal 1996 reflecting the addition of Pearle and an increase in capital expenditures. Income from operations increased 85.2% to $12.6 million for the first quarter of fiscal 1997 from $6.8 million for the same period a year ago, primarily the result of the Pearle acquisition and strong sales growth at Cole Vision, offset in part by softer sales performance at Cole Gift. Net interest expense increased $3.2 million over the first quarter of fiscal 1996 to $8.2 million. The increase was primarily attributable to the additional interest on $150.0 million of Notes issued in connection with financing the Pearle acquisition, partially offset by a decrease in interest expense due to the purchase and subsequent retirement of $15.1 million of Senior Notes in the second quarter of fiscal 1996. An income tax provision was recorded in the first quarter of both fiscal 1997 and fiscal 1996 using the Company's estimated annual effective tax rate of 44%. 11 13 Net income increased to $2.4 million for the first quarter of fiscal 1997 from $1.0 million for the first quarter of fiscal 1996. The increase was due to improvement in income from operations offset, in part, by the increase in net interest expense. The Company's business historically has been seasonal with approximately 30% of its net revenue and approximately 50% of its income from operations occurring in the fourth fiscal quarter because of the importance of gift sales during the Christmas retailing season. Although the acquisition of Pearle 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. Therefore, results of operations for interim periods are not necessarily indicative of full year results. 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. 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 CNG, by the issuance of 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 Audited 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 soft goods and the 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. 12 14 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 Audited 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. 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 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 Audited 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 soft goods 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, primarily keys, at CGC. 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. 13 15 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 the 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. 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 the first quarter of fiscal 1997 or at any time during fiscal 1996. 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. During the fourth quarter of fiscal 1996, in connection with the acquisition of Pearle, CNG issued the Notes in the aggregate amount of $150.0 million. Issuance of the Notes 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. 14 16 As of May 3, 1997, 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 Audited Consolidated Financial Statements. The Company has no significant principal payment obligations under any of its outstanding indebtedness until the Senior 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 February 1, 1997 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, $15.6 million in fiscal 1994, and used cash of $39.0 million in the first quarter of 1997 compared to $12.6 million in the first quarter of fiscal 1996. The $26.4 million increase in cash used by operations in the first quarter of fiscal 1997 as compared to the first quarter of fiscal 1996 was primarily attributable to the payment of $15.0 million of taxes due on the sale of Pearle's European operation, increased payments related to inventory disbursements, and payment of certain business integration and other non-recurring charges accrued in fiscal 1996, partially offset by an increase in net income and higher depreciation and amortization expense. 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, and $7.0 million and $3.4 million in the first quarter of fiscal 1997 and fiscal 1996, 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 capital expenditures in fiscal 1997 will exceed $30.0 million including Pearle. 15 17 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 the second quarter of 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. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information regarding the Company's directors and executive officers, who also hold comparable positions at CNG.
YEARS OF SERVICE NAME AGE WITH COMPANY POSITION - ------------------ --- ---------------- ----------------------------------------- Jeffrey A. Cole 56 28 Chairman, Chief Executive Officer, Chief Financial Officer and Director Brian B. Smith 44 15 President, Chief Operating Officer and Director Joseph Gaglioti 51 16 Vice President and Treasurer Wayne L. Mosley 43 11 Vice President and Controller Timothy F. Finley 53 5 Director Irwin N. Gold 40 5 Director Peter V. Handal 54 5 Director Charles A. Ratner 55 2 Director Walter J. Salmon 66 -- Director
Mr. Finley is Chief Executive Officer of Jos. A. Bank Clothiers, Inc. and Chairman and President of The Finley Group. Mr. Gold is a Managing Partner of Houlihan Lokey Howard & Zukin. Mr. Handal is President of COWI International Group, President of J4P Associates and President of Fillmore Leasing Company. Mr. Ratner is President and Chief Executive Officer of Forest City Enterprises, Inc. and Chairman of Forest City Rental Properties Corporation. Mr. Salmon was elected Director in June 1997 and is the Stanley Roth, Sr., Professor of Retailing at the Harvard University Graduate School of Business Administration. 16 18 UNDERWRITING In the Underwriting Agreement, the Underwriters, represented by Smith Barney Inc. and McDonald & Company Securities, Inc., as joint lead managers and joint bookrunners, and Deutsche Morgan Grenfell, Inc. (the "Representatives"), have agreed, severally, subject to the terms and conditions therein set forth, to purchase from the Company, and the Company has agreed to sell to them, the number of shares of Common Stock totalling 1,500,000 shares, set forth opposite their respective names below. The Underwriters are committed to take and pay for all shares if any shares are purchased.
NUMBER OF UNDERWRITERS SHARES ------------------------------------------------------------------ --------- Smith Barney Inc.................................................. McDonald & Company Securities, Inc................................ Deutsche Morgan Grenfell, Inc..................................... --------- Total........................................................ 1,500,000 =========
The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus. The Underwriters may allow to certain selected dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") a discount not exceeding $ per share, and the Underwriters may allow, and such selected dealers may re-allow, a discount not exceeding $ per share to other dealers who are members of the NASD. After this Offering, the public offering price and the discount to dealers may be changed by the Representatives. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 225,000 shares of Common Stock at the public offering price, less the underwriting discount, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over-allotments in the sale of the Common Stock that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase the same percentage of the option shares as the number of shares to be purchased and offered by that Underwriter in the table above bears to the total. The Company has agreed to indemnify the Underwriters against certain liabilities which may be incurred in connection with the Offering, including liabilities under the Securities Act or to contribute to payments that the Underwriters may be required to make. The Company and its directors and executive officers have agreed not to sell, transfer or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for shares of Common Stock without the consent of McDonald & Company Securities, Inc. for a period of 120 days from the date of this Prospectus, except for awards of management stock options or issuances of shares upon the exercise of outstanding warrants or stock options or pursuant to other employee benefit plans. The Representatives have advised the Company that, pursuant to Regulation M under the Exchange Act, certain persons participating in the Offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open 17 19 market. A "stabilizing bid" is a bid for or a purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is a bid for or a purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the Offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the Offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on The New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time. Smith Barney Inc. and McDonald & Company Securities, Inc. have from time to time performed various investment banking services for the Company. In 1996, Smith Barney Inc. and McDonald & Company Securities, Inc. provided financial advisory services to the Company and received customary fees in respect of such services. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Certain legal matters will be passed upon for the Underwriters by Calfee, Halter & Griswold LLP, Cleveland, Ohio. EXPERTS The audited consolidated financial statements and financial statement schedule included and incorporated by reference in this Prospectus and elsewhere in the Registration Statement to the extent and for the periods indicated in their reports have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The consolidated financial statements of Pearle, Inc. and subsidiaries as of September 30, 1996 and 1995 and for each of the years in the three-year period ended September 30, 1996 have been incorporated by reference herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the September 30, 1996 consolidated financial statements refers to a change in accounting for income taxes. 18 20 INDEX TO FINANCIAL STATEMENTS
PAGE ---- UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets at May 3, 1997 and February 1, 1997..................... F-2 Consolidated Statements of Operations for the 13 weeks ended May 3, 1997 and May 4, 1996............................................................................. F-3 Consolidated Statements of Cash Flows for the 13 weeks ended May 3, 1997 and May 4, 1996............................................................................. F-4 Notes to Consolidated Financial Statements.......................................... F-5 AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Public Accountants............................................ F-6 Consolidated Balance Sheets at February 1, 1997 and February 3, 1996................ F-7 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-8 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-9 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-10 Notes to Consolidated Financial Statements.......................................... F-11
F-1 21 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS)
MAY 3, FEBRUARY 1, 1997 1997 --------- ----------- ASSETS Current assets: Cash and temporary cash investments............................ $ 20,205 $ 73,141 Accounts receivable, less allowance for doubtful accounts of $1,632 in 1997 and $3,068 in 1996........................... 41,845 39,660 Current portion of notes receivable............................ 5,106 6,060 Inventories.................................................... 127,456 119,236 Prepaid expenses and other..................................... 8,658 7,378 Deferred income tax benefits................................... 24,948 24,948 --------- ---------- Total current assets................................... 228,218 270,423 Property and equipment, at cost.................................. 223,596 216,575 Less -- accumulated depreciation and amortization.............. (107,611) (100,918) --------- ---------- Total property and equipment, net...................... 115,985 115,657 Other assets: Notes receivable, excluding current portion.................... 25,507 27,951 Deferred income taxes and other................................ 36,534 29,504 Intangible assets, net......................................... 138,237 139,308 --------- ---------- Total assets........................................... $ 544,481 $ 582,843 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt.............................. $ 1,330 $ 1,336 Accounts payable............................................... 44,791 62,379 Accrued interest............................................... 8,706 9,630 Accrued liabilities............................................ 116,095 123,263 Accrued income taxes........................................... 6,093 21,970 --------- ---------- Total current liabilities.............................. 177,015 218,578 Long-term debt, net of discount and current portion.............. 317,328 317,547 Other long-term liabilities...................................... 26,956 27,000 Stockholders' equity: Common stock................................................... 12 12 Paid-in capital................................................ 132,714 131,238 Foreign currency translation adjustment........................ (1,066) (606) Notes receivable-stock option exercise......................... (1,024) (1,024) Accumulated deficit............................................ (107,454) (109,902) --------- ---------- Total stockholders' equity............................. 23,182 19,718 --------- ---------- Total liabilities and stockholders' equity............. $ 544,481 $ 582,843 ========= ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-2 22 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13 WEEKS ENDED ----------------------- MAY 3, MAY 4, 1997 1996 -------- -------- Net revenue........................................................ $249,530 $142,890 Costs and expenses: Cost of goods sold............................................... 85,770 44,500 Operating expenses............................................... 143,343 87,352 Depreciation and amortization.................................... 7,815 4,235 -------- -------- Total costs and expenses................................. 236,928 136,087 -------- -------- Income from operations............................................. 12,602 6,803 Interest expense, net.............................................. 8,231 5,052 -------- -------- Income before income taxes......................................... 4,371 1,751 Income tax provision............................................... 1,923 771 -------- -------- Net income......................................................... $ 2,448 $ 980 ======== ======== Earnings per share................................................. $ .20 $ .09 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-3 23 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
13 WEEKS ENDED ----------------------- MAY 3, MAY 4, 1997 1996 -------- -------- Cash flows from operating activities: Net income....................................................... $ 2,448 $ 980 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization................................. 7,815 4,235 Non-cash interest............................................. 96 106 Change in assets and liabilities: Increase in accounts and notes receivable, prepaid expenses and other assets........................................... (1,564) (2,079) Increase in inventories..................................... (8,220) (3,610) Decrease in accounts payable, accrued liabilities and other liabilities................................................ (22,767) (3,842) Decrease in accrued interest................................ (924) (5,107) Decrease in accrued income taxes............................ (15,877) (3,278) -------- -------- Net cash used by operating activities.................... (38,993) (12,595) -------- -------- Cash flows from financing activities: Repayment of long-term debt...................................... (296) (221) Proceeds from exercise of stock options and warrants............. 841 82 Other............................................................ (152) -- -------- -------- Net cash provided (used) by financing activities......... 393 (139) -------- -------- Cash flows from investing activities: Purchases of property and equipment, net......................... (7,048) (3,406) Systems development costs........................................ (2,543) (349) Other, net....................................................... (4,745) (145) -------- -------- Net cash used by investing activities.................... (14,336) (3,900) -------- -------- Cash and temporary cash investments: Net decrease during the period................................... (52,936) (16,634) Balance, beginning of the period................................. 73,141 29,260 -------- -------- Balance, end of the period....................................... $ 20,205 $ 12,626 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 24 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES 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"). All significant intercompany transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared without audit and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes that the disclosures herein are adequate to make the information not misleading. These statements should be read in conjunction with the Company's consolidated financial statements for the fiscal year ended February 1, 1997. In the opinion of management, the accompanying financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company's financial position as of May 3, 1997 and the results of operations and cash flows for the 13 weeks ended May 3, 1997 and May 4, 1996. Inventories The accompanying interim consolidated financial statements have been prepared without physical inventories. Inventories at May 3, 1997 and May 4, 1996 were valued at the lower of first-in, first-out (FIFO) cost or market. Cash Flows Net cash flows from operating activities reflect cash payments for income taxes and interest of $17,967,126 and $9,553,000, respectively, for the 13 weeks ended May 3, 1997, and $4,095,000 and $10,323,000, respectively, for the 13 weeks ended May 4, 1996. Earnings Per Share Earnings per share for the 13 weeks ended May 3, 1997 and May 4, 1996 have been calculated based on 12,019,488 and 10,435,423, respectively, weighted average number of common shares outstanding. The impact of common stock equivalents is not material to first quarter results. In the fourth quarter of fiscal 1997 the Company will adopt Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Under SFAS 128, the Company's basic earnings per share and fully diluted earnings per share will be presented on the face of the income statement. The basic earnings per share will be determined using only the weighted average number of outstanding shares during the period. The computation for fully diluted earnings per share will include common stock equivalents and will not differ materially from current accounting requirements. For the quarter ended May 3, 1997, the number of shares used to compute basic earnings per share is the same as the weighted average number of shares used to compute primary earnings per share (shown above). (2) SEASONALITY The Company's business historically has been seasonal with approximately 30% of its net revenue and approximately 50% of its income from operations occurring in the fourth fiscal quarter because of the importance of gift sales during the Christmas retailing season. Although the acquisition of Pearle 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. Therefore, results of operations for interim periods are not necessarily indicative of full year results. (3) RECLASSIFICATIONS Certain 1996 amounts have been reclassified to conform with the 1997 presentation. F-5 25 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-6 26 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-7 27 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-8 28 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
NOTES FOREIGN RECEIVABLE CURRENCY STOCK TOTAL COMMON PAID-IN TRANSLATION OPTION ACCUMULATED STOCKHOLDERS' STOCK CAPITAL ADJUSTMENT 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-9 29 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-10 30 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. 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 ======== ========
F-11 31 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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. 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
F-12 32 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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. 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). F-13 33 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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 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 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 F-14 34 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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 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 F-15 35 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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). (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. F-16 36 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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. 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. (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 F-17 37 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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
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. F-18 38 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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. 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-19 39 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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. Actuarial present values of benefit obligations are determined using the projected unit credit method. F-20 40 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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 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. F-21 41 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (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. 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 F-22 42 COLE NATIONAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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-23 43 [THIS PAGE LEFT INTENTIONALLY BLANK] 44 [THIS PAGE LEFT INTENTIONALLY BLANK] 45 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information................. 2 Incorporation of Certain Documents by Reference.............. 2 The Company........................... 4 The Offering.......................... 5 Use of Proceeds....................... 5 Selected Financial Data............... 6 Risk Factors.......................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 11 Management............................ 16 Underwriting.......................... 17 Legal Matters......................... 18 Experts............................... 18 Index to Financial Statements......... F-1
====================================================== ====================================================== 1,500,000 SHARES COLE LOGO COLE NATIONAL CORPORATION CLASS A COMMON STOCK ------------ PROSPECTUS ------------ Joint Lead Managers and Joint Bookrunners SMITH BARNEY INC. MCDONALD & COMPANY SECURITIES, INC. ------------------------------------ DEUTSCHE MORGAN GRENFELL ====================================================== 46 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a list of the estimated expenses to be incurred by the Company in connection with the issuance and distribution of the Shares being registered hereby, other than underwriting discounts and commissions. Securities and Exchange Commission registration fee.................... $ 21,432 NASD fees.............................................................. 7,573 Printing costs......................................................... 75,000 Accounting fees and expenses........................................... 15,000 Legal fees and expenses................................................ 40,000 Miscellaneous expenses................................................. 15,995 -------- Total........................................................... $175,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article Seventh of the Company's Certificate provides that the Company will indemnify its officers, directors and each person who is or was serving or who had agreed to serve at the request of the Board of Directors or an officer of the Company as an employee or agent of the Company or as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise to the full extent permitted by the General Corporation Law of the State of Delaware (the "DGCL") or any other applicable laws as from time to time may be in effect and that the Company may enter into agreements which provide for indemnification greater or different from that provided in the Certificate. In addition, the Company has provided in Article Eighth of its Certificate that no director will be personally liable to the Company or its stockholders for or with respect to any acts or omissions in the performance of his or her duty as a director, to the full extent permitted by the DGCL or any other applicable laws as from time to time may be in effect. The Certificate further provides that any repeal or modification of Article Seventh or Article Eighth will not adversely affect the right or protection existing under such provision prior to such repeal or modification. Subsection (a) of the Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor, by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under standards similar to those set forth in the paragraph above, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine that despite the adjudication of liability but in view of all the circumstances II-1 47 of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 further provides that, to the extent that a director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, he will be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) will be made by a corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of Section 145; that expenses incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount unless it is ultimately determined that he is not entitled to be indemnified by the corporation; that indemnification provided for by Section 145 will not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that a corporation is empowered to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him and incurred by him in such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under Section 145. The Company has entered into indemnity agreements (the "Indemnity Agreements") with the current Directors and executive officers of the Company and expects to enter into similar agreements with any Director or those executive officers designated by the Board of Directors of the Company elected or appointed in the future at the time of their election or appointment. Pursuant to the Indemnity Agreements, the Company will indemnify a Director or officer of the Company (the "Indemnitee") if the Indemnitee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the Indemnitee is or was a Director or officer of the Company, or is or was serving at the request of the Company in certain capacities with another entity, against any and all costs, charges and expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such proceeding. Indemnity is available to the Indemnitee unless it proved by clear and convincing evidence that the Indemnitee's action or failure to act was not in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. The Indemnity Agreements mandate advancement of expenses to the Indemnitee if the Indemnitee provides the Company with a written promise that (i) he has reasonably incurred or will reasonably incur actual expenses in defending an actual civil, criminal, administrative, or investigative action, suit, proceeding or claim and (ii) he will repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Company. In addition, the Indemnity Agreements provide various procedures and presumptions in favor of the Indemnitee's right to receive indemnification under the Indemnity Agreement. Under the Company's Director and Officer Liability Insurance Policy, each director and certain officers of the Company are insured against certain liabilities which might arise in connection with their respective positions with the Company. II-2 48 ITEM 16. EXHIBITS. The following Exhibits are filed herewith and made a part hereof:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement 4.1 Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1(i) of the Company's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 4.2 Amended and Restated By-Laws of the Company is incorporated herein by reference to Exhibit 3.2(ii) of the Company's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 4.3 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) is incorporated herein by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 4.4 Rights Agreement dated as of August 22, 1995 by and between the Company and National City Bank as Rights Agent, is incorporated herein by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 4.5 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) is incorporated herein by reference to Exhibit 4.1 of the Company's Report on Form 8-K filed with the Commission on December 2, 1996 (File No. 1-12814). 4.6 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 total assets of the Company and its subsidiaries on a consolidated basis. 5.1* Opinion of Jones, Day, Reavis & Pogue as to the validity of the securities being offered. 23.1* Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of KPMG Peat Marwick LLP. 24.1* Power(s) of Attorney.
- --------------- * Previously filed. ITEM 17. UNDERTAKINGS. The undersigned Company hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Company's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In II-3 49 that event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide public offering thereof. II-4 50 SIGNATURES Pursuant to the requirements of the Securities Act, the Company certifies that it has reasonable grounds to believe that it meets the requirements for filing a Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on June 30, 1997. COLE NATIONAL CORPORATION By: /s/ WAYNE L. MOSLEY ---------------------------------- WAYNE L. MOSLEY VICE PRESIDENT AND CONTROLLER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ---------------------------------------- ------------------------------------------------------ * Chairman and Chief Executive June 30, 1997 - ---------------------------------------- Officer and Director (Principal JEFFREY A. COLE Executive Officer and Principal Financial Officer) * President, Chief Operating June 30, 1997 - ---------------------------------------- Officer and Director BRIAN B. SMITH /s/ WAYNE L. MOSLEY Vice President and Controller June 30, 1997 - ---------------------------------------- (Principal Accounting Officer) WAYNE L. MOSLEY * Director June 30, 1997 - ---------------------------------------- TIMOTHY F. FINLEY * Director June 30, 1997 - ---------------------------------------- IRWIN N. GOLD * Director June 30, 1997 - ---------------------------------------- PETER V. HANDAL * Director June 30, 1997 - ---------------------------------------- CHARLES A. RATNER * Director June 30, 1997 - ---------------------------------------- WALTER J. SALMON
* The undersigned by signing his name hereto, does sign and execute this Registration Statement 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 II-5 51 EXHIBIT INDEX
PAGINATION BY EXHIBIT SEQUENTIAL NUMBERING NUMBER DESCRIPTION OF DOCUMENT SYSTEM ------ -------------------------------------------------------- -------------------- 1.1 Form of Underwriting Agreement. 4.1 Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1(i) of the Company's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 4.2 Amended and Restated By-Laws of the Company is incorporated herein by reference to Exhibit 3.2(ii) of the Company's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 4.3 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) is incorporated herein by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 4.4 Rights Agreement dated as of August 22, 1995 by and between the Company and National City Bank as Rights Agent, is incorporated herein by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 4.5 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) is incorporated herein by reference to Exhibit 4.1 of the Company's Report on Form 8-K filed with the Commission on December 2, 1996 (File No. 1-12814). 4.6 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 total assets of the Company and its subsidiaries on a consolidated basis. 5.1* Opinion of Jones, Day, Reavis & Pogue as to the validity of the securities being offered. 23.1* Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of KPMG Peat Marwick LLP. 24.1* Power(s) of Attorney.
- --------------- * Previously filed. II-6 EX-1.1 2 EXHIBIT 1.1 1 Exhibit 1.1 1,500,000 Shares COLE NATIONAL CORPORATION (a Delaware corporation) Class A Common Stock (Par Value $.001 Per Share) UNDERWRITING AGREEMENT ---------------------- July _____, 1997 SMITH BARNEY INC. McDONALD & COMPANY SECURITIES, INC. DEUTSCHE MORGAN GRENFELL, INC. as Representatives of the Several Underwriters c/o McDonald & Company Securities, Inc. McDonald Investment Center Cleveland, Ohio 44114 Ladies and Gentlemen: Cole National Corporation, a Delaware corporation (the "Company") confirms its agreement with Smith Barney Inc. ("Smith Barney"), McDonald & Company Securities, Inc. ("McDonald"), Deutsche Morgan Grenfell, Inc. ("Deutsche") and each of the other underwriters named in Schedule A hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Smith Barney, whom McDonald and Deutsche are acting as representatives (in such capacity, Smith Barney, McDonald and Deutsche shall hereinafter be referred to as the "Representatives"), with respect to the sale by the Company of 1,500,000 shares of Class A Common Stock, par value $.001 per share (the "Common Stock"), of the Company, and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock set forth in said Schedule A, aggregating 1,500,000 shares of Common Stock, and with respect to the grant by the Company of the option described in Section 2(b) hereof to purchase all or any part of 225,000 shares of Common Stock, par value $.001 per share, solely to cover over-allotments, in each case except as may otherwise be provided in the Pricing Agreement, as hereinafter defined. The aforesaid 1,500,000 shares of Common Stock (the "Initial Securities") to be purchased by the Underwriters and all or any part of the 225,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the "Option Securities") are collectively hereinafter called the "Securities." 2 Prior to the purchase and public offering of the Securities by the Underwriters, the Representatives, acting on behalf of the several Underwriters, shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the form of an exchange of any standard form of written telecommunication between the Company and the Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Securities will be governed by this Underwriting Agreement (this "Agreement"), as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-29401) and a related preliminary prospectus for the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), and has filed such amendments thereto, if any, and such amended preliminary prospectuses as may have been required to the date hereof. Such registration statement (as amended, if applicable) and the prospectus constituting a part thereof (including the documents incorporated therein by reference pursuant to Item 12 of Form S-3 under the 1933 Act and the information, if any, deemed to be part thereof pursuant to Rule 430A(b) of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations")), as from time to time amended or supplemented pursuant to the 1933 Act or otherwise, are hereinafter referred to as the "Registration Statement" and the "Prospectus," respectively, except that if any revised prospectus shall be provided to the Underwriters by the Company in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations), the term "Prospectus" shall refer to such revised Prospectus from and after the time it is first provided to the Underwriters for such use. Any reference herein to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated therein by reference pursuant to Item 12 of Form S-3 under the 1933 Act. The Company understands that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after the Registration Statement becomes effective and the Pricing Agreement has been executed and delivered. SECTION 1. REPRESENTATIONS AND WARRANTIES. (a) The Company represents and warrants to each Underwriter as of the date hereof and as of the date of the Pricing Agreement (such latter date being hereinafter referred to as the "Representation Date") as follows: (i) The Company has been subject to the requirements of Section 12 or 15(d) of the Securities Exchange Act of 1934 (the "1934 Act") for a period of at least 12 months prior to the initial filing of the Registration Statement and has filed all the material required to be filed pursuant to Section 13, 14 or 15(d) of the 1934 Act for a period of at least 12 calendar months immediately preceding the initial filing of the Registration Statement and through and including the Representation Date in a timely 2 3 manner and otherwise satisfies all applicable requirements for the use of Form S-3 under the 1933 Act in connection with the transactions contemplated hereby and by the Registration Statement. (ii) The documents incorporated by reference in the Prospectus, when they were filed with the Commission, conformed in all material respects to the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and none of such documents contained at the date of such filing an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (iii) At the time the Registration Statement becomes effective and at the Representation Date, the Registration Statement will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations, and the Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters by the Company for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time it is first provided to the Underwriters for such use) and at the Closing Time referred to in Section 2, will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through the Representatives expressly for use in the Registration Statement or Prospectus. (iv) The accountants who certified the financial statements and supporting schedules included or incorporated by reference in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (v) The financial statements included or incorporated by reference in the Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as at the dates indicated and the results of their operations for the periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; and the supporting schedules incorporated by reference in the Registration Statement present fairly the information required to be stated therein. (vi) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there 3 4 has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vii) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of Delaware with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise. (viii) Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise; all of the issued and outstanding capital stock of each such subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through one or more direct or indirect subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. (ix) The Company has the authorized, issued and outstanding capitalization set forth in the Prospectus; except as otherwise set forth in the Registration Statement, the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the shares of Common Stock to be issued and sold by the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company in the manner contemplated by this Agreement, will be validly issued and fully paid and non-assessable; the issuance of shares of Common Stock contemplated by this Agreement is not subject to preemptive or other similar rights; the Common Stock conforms in all material respects to all statements relating thereto contained in the Prospectus; the certificates for the Securities are in due and proper form; 4 5 and the holders of the Securities will not be subject to personal liability by reason of being such holders. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) Neither the Company nor any of its subsidiaries is in violation of its respective charter or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, loan agreement or note or in any material contract, lease or other instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject; the consummation of the transactions contemplated herein and by the Pricing Agreement has been duly authorized by the Company by all necessary corporate action and the issuance, sale and delivery of the shares of Common Stock to be issued and sold by the Company and the execution, delivery and performance of this Agreement by the Company will not, except for the equity registration rights agreement, dated March 6, 1992, between the Company and the parties therein, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries or any applicable law, administrative regulation or administrative or court decree. (xii) No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors which might be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise. (xiii) There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which, considered singly or in the aggregate, may result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, or which may materially and adversely affect the properties or assets thereof or which may materially or adversely affect the consummation of this Agreement or the Pricing Agreement; all pending legal or governmental proceedings to which the Company or any 5 6 subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material; and there are no contracts or documents of the Company or any of its subsidiaries which are required to be filed as exhibits to the Registration Statement by the 1933 Act or by the 1933 Act Regulations which have not been so filed. (xiv) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, the patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, "intellectual property") presently employed by them in connection with the business now operated by them, except where the failure to own or possess or have the ability to acquire any such intellectual property would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise. (xv) No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the sale of the Securities hereunder, except such as may be required under the 1933 Act or the 1933 Act Regulations, which qualification has been obtained, or state and foreign securities laws. (xvi) The Company and its subsidiaries possess such material certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise. (xvii) All United States federal income tax returns of the Company and each of its subsidiaries required by law to be filed have been filed and all taxes shown by the said returns or otherwise assessed which are due and payable have been paid, except assessments against which appeals have been or will be promptly taken. The United States 6 7 federal income tax returns of the Company and its subsidiaries on a consolidated basis through the fiscal year ended February 13, 1996 have been filed and no assessment in connection therewith has been made against the Company, and the United States federal income tax return for the fiscal year ended February 3, 1997 will be filed on or before October 15, 1997 (the date on which such return is required by law to be filed) or pursuant to any extension or extensions that may be granted thereon. The Company and its subsidiaries have filed all other tax returns which are required to have been filed by them pursuant to applicable state, local or other law except (i) with respect to such taxes as are being contested in good faith and (ii) insofar as the failure to file such returns individually and in the aggregate would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Company or its subsidiaries, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The charges, accruals and reserves on the consolidated books of the Company in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy which would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise. (xviii) The Company and its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with management's general or specific authorization, and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xix) Except for such rights which have been waived in writing or as to which the failure to comply with would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise or on the transactions contemplated hereby: (a) there are no holders of securities (debt or equity) of the Company or any of its subsidiaries, or holders of rights, options or warrants to obtain securities of the Company or any of its subsidiaries, who, by reason of the filing of the Registration Statement under the 1933 Act, have the right to request the Company or any of its subsidiaries to register under the 1933 Act securities held by them; and (b) the Company and its subsidiaries have complied in all material respects with all of the terms of any of their outstanding agreements relating to the rights of any holder of securities to have securities registered under the Registration Statement. Except as described in the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and there are no commitments, plans or arrangements to issue, any shares of Common Stock or any security convertible into or exchangeable or exercisable for any shares of Common Stock. 7 8 (xx) The Company and its subsidiaries have good title to all properties owned by them, in each case free and clear of all liens, encumbrances and defects except (A) as do not materially interfere with the use made and proposed to be made of such properties, (B) as referred to in the Registration Statement (including the Notes to the Consolidated Financial Statements included therein) or (C) as could not reasonably be expected to materially and adversely affect the condition, financial or otherwise, or the earnings or business affairs of the Company and its subsidiaries considered as one enterprise. (xxi) Except as disclosed in the Registration Statement, the Company and its subsidiaries are in material compliance with all applicable existing federal, state and local laws and regulations relating to protection of human health or the environment or imposing liability or standards of conduct concerning any Hazardous Material (as hereinafter defined) ("Environmental Laws"), except, in each case, where such noncompliance, singly or in the aggregate, would not have a material and adverse effect on the condition, financial or otherwise, or the earnings or business affairs of the Company and its subsidiaries considered as one enterprise. The term "Hazardous Material" means (A) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (B) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (C) any petroleum or petroleum product, (D) any polychlorinated biphenyl and (E) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environmental Law. (xxii) There is no alleged liability, or to the best knowledge and information of the Company, potential liability (including, without limitation, alleged or potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) of the Company or its subsidiaries arising out of, based on or resulting from (A) the presence or release into the environment of any Hazardous Material at any location at which the Company or any of its subsidiaries has previously conducted or is currently conducting any business (whether or not owned by the Company or its subsidiaries) or has previously owned or currently owns any property, or (B) any violation or alleged violation of any Environmental Law, (X) which alleged or potential liability is required to be disclosed in the Registration Statement, other than as disclosed therein, or (Y) which alleged or potential liability, singly or in the aggregate, would have a material and adverse effect on the condition, financial or otherwise, or the earnings or business affairs of the Company and its subsidiaries considered as one enterprise. (xxiii) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 8 9 (xxiv) The Company and each of its subsidiaries maintain reasonably adequate insurance with respect to their properties and business against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. (xxv) The shares of Common Stock outstanding prior to the Representation Date have been duly listed on the New York Stock Exchange ("NYSE") and the shares of Common Stock to be issued and sold by the Company pursuant to the Agreement will at the Closing Time be duly authorized for listing on the NYSE, subject only to official notice of issuance. (xxvi) The Company has furnished the Representatives letters from each of the executive officers and directors of the Company pursuant to which such persons have agreed during a period of 120 days from the date hereof that, without the prior written consent of McDonald, such persons will not sell, offer to sell, contract to sell, or otherwise dispose of, directly or indirectly, any shares of Common Stock, any other equity security of the Company, or any security convertible into or exchangeable or exercisable for shares of Common Stock, beneficially owned by such person or with respect to which such person has the power of disposition, other than as bona fide gifts. (b) Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby. SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING. (a) On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each Underwriter, and each Underwriter, severally and not jointly, agrees to purchase from the Company, at the price agreed upon by the Representatives and the Company as set forth in the Pricing Agreement, the number of shares of Common Stock set forth in Schedule A opposite the name of such Underwriter (except as otherwise provided in the Pricing Agreement). (i) If the Company has elected not to rely upon Rule 430A under the 1933 Act Regulations, the initial public offering price of the Securities and the purchase price of the Securities to be paid by the several Underwriters shall be agreed upon and set forth in the Pricing Agreement, dated the date hereof, and an amendment to the Registration Statement and the Prospectus will be filed before the Registration Statement becomes effective. (ii) If the Company has elected to rely upon Rule 430A under the 1933 Act Regulations, the initial public offering price of the Securities and the purchase price of the Securities to be paid by the several Underwriters shall be determined by agreement among the Representatives and the Company and set forth in the Pricing Agreement. In 9 10 the event that such prices have not been agreed upon and the Pricing Agreement has not been executed and delivered by all parties thereto by the close of business on the fourth business day following the date of this Agreement, this Agreement shall terminate forthwith, without liability of any party to any other party, unless otherwise agreed to by the Company and the Representatives. (b) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to 225,000 shares of Common Stock at the price per share set forth in the Pricing Agreement. The option hereby granted will expire 30 days after (i) the date the Registration Statement becomes effective, if the Company has elected not to rely on Rule 430A under the 1933 Act Regulations or (ii) the date of the Pricing Agreement, if the Company has elected to rely on Rule 430A under the 1933 Act Regulations, and may be exercised in whole or in part from time to time (but not more than twice) only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representatives to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of payment (a "Date of Delivery") shall be determined by the Representatives, but shall not be later than seven full Business Days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined, unless otherwise agreed by the Representatives and the Company. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriters bears to the total number of Initial Securities (except as otherwise provided in the Pricing Agreement), subject in each case to such adjustments as the Representatives in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of McDonald & Company Securities, Inc., McDonald Investment Center, Cleveland, Ohio or at such other place as shall be agreed upon by the Representatives and the Company, at 10:00 A.M. on the third business day (unless postponed in accordance with the provisions of Section 10) following the date the Registration Statement becomes effective (or, if the Company has elected to rely upon Rule 430A, the third business day after execution of the Pricing Agreement), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives and the Company (such time and date of payment and delivery being herein called the "Closing Time"); provided, however, that if the Registration Statement becomes effective later than 4:30 p.m., Eastern Time, on any date, then, subject to the foregoing, the Closing Time shall be the fourth business day thereafter (or, if the Company has elected to rely upon Rule 430A, and the Pricing Agreement is not executed until after 4:30 p.m., Eastern Time, on any date, the fourth business day after execution of the Pricing Agreement). In addition, in the event that any or all of the Option Securities are to be purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices of McDonald & 10 11 Company Securities, Inc., or at such other place as shall be agreed upon by the Representatives and the Company on each Date of Delivery as specified in the notice from the Representatives to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to the account designated by the Company, against delivery of the Securities to the Underwriters. The certificates representing Securities shall be in such denominations and registered in such names as the Representatives may request in writing at least two business days before the Closing Time. It is understood that each Underwriter has authorized the Representatives, for their account, to accept delivery of, receipt for, and make payment of the purchase price for, the Securities which it has agreed to purchase. The Representatives may (but shall not be obligated to) make payment of the purchase price for the Securities to be purchased by any Underwriter whose check has not been received by the Closing Time, but such payment shall not relieve such Underwriter from its obligations hereunder. The Securities will be made available for examination and packaging by the Underwriters not later than 10:00 A.M. on the last business day prior to the Closing Time at such place as the Underwriters may designate in New York, New York. SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each Underwriter as follows: (a) The Company will notify the Underwriters immediately, and confirm the notice in writing, (i) of the effectiveness of the Registration Statement and any amendment thereto (including any post-effective amendment), (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the suspension of the qualification of the Securities for offering or sale, in any jurisdiction, or the threatening or initiation of any proceeding for that purpose. The Company will make every reasonable effort to prevent the issuance of any stop order or any order preventing or suspending the use of any preliminary prospectus or suspending such qualification and, if any stop order or any order preventing or suspending the use of any preliminary prospectus or suspending such qualification is issued, to obtain the lifting thereof at the earliest possible moment. (b) The Company will give the Underwriters notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Securities which differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act Regulations), will furnish the Underwriters with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which counsel for the Underwriters and counsel for the Company mutually agree shall not be filed or used. 11 12 (c) The Company will deliver to the Underwriters one signed copy of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and will also deliver to the Underwriters conformed copies of the Registration Statement as originally filed and of each amendment thereto (without exhibits). (d) The Company will furnish to each Underwriter, from time to time during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request for the purposes contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or the 1934 Act Regulations. (e) If any event shall occur as a result of which counsel for the Company and counsel for the Underwriters mutually agree that it is necessary to amend or supplement the Prospectus in order to make the Prospectus not misleading in light of the circumstances existing at the time it is delivered to a purchaser or if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the 1933 Act, the 1933 Act Regulations, the 1934 Act or the 1934 Act Regulations, the Company will forthwith amend or supplement the Prospectus (in form and substance mutually satisfactory to counsel for the Underwriters and counsel for the Company and in compliance with the 1933 Act and the 1933 Act Regulations) so that, as so amended or supplemented, the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time it is delivered to a purchaser, not misleading and will comply with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, and the Company will furnish to the Underwriters a reasonable number of copies of such amendment or supplement. (f) The Company will endeavor, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as the Representatives may designate; PROVIDED, HOWEVER, that the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect, for a period of not less than one year from the effective date of the Registration Statement. (g) The Company will make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the 1933 Act Regulations) covering a twelve month period beginning not later than the first day of the Company's fiscal quarter next following the "effective date" (as defined in said Rule 158) of the Registration Statement. (h) If, at the time that the Registration Statement becomes effective, any information shall have been omitted therefrom in reliance upon Rule 430A of the 1933 Act 12 13 Regulations, then immediately following the execution of the Pricing Agreement, the Company will prepare, and file or transmit the filing with the Commission in accordance with such Rule 430A and Rule 424(b) of the 1933 Act Regulations, copies of an amended Prospectus, or, if required by such Rule 430A, a post-effective amendment to the Registration Statement (including an amended Prospectus), containing all information so omitted. (i) The Company, during the period when the Prospectus is required to be delivered under the 1933 Act, will file all documents required to be filed with the Commission pursuant to Sections 13, 14 or 15 of the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. (j) The Company will effect the listing of the Common Stock issued and sold pursuant to this Agreement on the NYSE. (k) During a period of 120 days from the date hereof, the Company will not, without the prior written consent of McDonald, sell, offer to sell, contract to sell, or otherwise dispose of, directly or indirectly, any shares of Common Stock, any other equity security of the Company or any security convertible into or exchangeable or exercisable for Common Stock (except for shares of Common Stock issued pursuant to this Agreement and the Pricing Agreement, the grant of options or the issuance of shares of Common Stock upon the exercise of outstanding options under the Company's existing stock option plans and the issuance of shares of Common Stock upon the exercise of outstanding warrants or upon the conversion of outstanding capital stock pursuant to the terms thereof). (l) The Company will use all commercially reasonable efforts to do and perform all things required or necessary to be done and performed by it under this Agreement prior to the Closing Time and will satisfy all conditions precedent to the delivery of the Securities. SECTION 4. PAYMENT OF EXPENSES. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the printing and filing and delivery to the Underwriters of copies of the Registration Statement as originally filed and of each amendment thereto, during the period specified in Section 3(d) hereof (excluding any fees, costs or expenses of counsel to the Underwriters), (ii) the printing of this Agreement and the Pricing Agreement, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, (iv) the fees and disbursements of the Company's counsel and accountants, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey, which counsel fees shall not exceed $8,000, (vi) the printing and delivery to the Underwriters of copies of the Registration Statement as originally filed and each amendment thereto, of the preliminary prospectuses, and of the Prospectus and any amendments or supplements thereto, (vii) the printing and delivery to the Underwriters of the Blue Sky Survey, (viii) the fees and expenses of the Company's transfer agent, (ix) the fee of the National 13 14 Association of Securities Dealers, Inc. and (x) the fees and expenses incurred in connection with the listing of the Securities on the NYSE. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5 or Section 9(a)(i), the Company shall reimburse the Underwriters for all of their out-of-pocket expenses relating to the transactions contemplated hereby, including the reasonable fees and disbursements of counsel for the Underwriters. SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company herein contained, to the performance by the Company of its obligations hereunder, and to the following further conditions: (a) The Registration Statement shall have become effective not later than 5:30 P.M. on the date hereof, or with the consent of the Representatives, at a later time and date, not later, however, than 5:30 P.M. on the first business day following the date hereof, or at such later time and date as may be approved by the Underwriters; and at the Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. If the Company has elected to rely upon Rule 430A of the 1933 Act Regulations, the price of the Securities and any price related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the 1933 Act Regulations within the prescribed time period, and prior to Closing Time the Company shall have provided evidence satisfactory to McDonald of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the 1933 Act Regulations. (b) At the Closing Time the Underwriters shall have received: (i) An opinion, dated the Closing Time, of Jones, Day, Reavis & Pogue, counsel for the Company and its subsidiaries, substantially in the form set forth on Annex I attached hereto. (ii) An opinion, dated the Closing Time, from Charles J. Ibold, Esq., General Counsel of Cole Gift Centers, Inc. and Things Remembered, Inc., substantially in the form set forth on Annex II attached hereto. (iii) An opinion, dated the Closing Time, from David J. Sherriff, Esq., General Counsel of Cole Vision Corporation, substantially in the form set forth on Annex III attached hereto. (iv) An opinion, dated the Closing Time, of Calfee, Halter & Griswold LLP, counsel for the Underwriters, in form and substance reasonably satisfactory to the Underwriters. 14 15 (v) In giving their opinions required by subsections (b)(i), (ii), (iii) and (iv), respectively, of this section, Jones, Day, Reavis & Pogue, Charles J. Ibold, Esq., David J. Sherriff, Esq. and Calfee, Halter & Griswold shall each additionally state that although such counsel has not undertaken to determine independently the accuracy, completeness and fairness of the statements contained in the Registration Statement or in the Prospectus and takes no responsibility therefor, such counsel has participated in discussions and meetings with officers and other representatives of the Company and discussions with the auditors for the Company in connection with the preparation of the Registration Statement and the Prospectus. Such counsel has not, however, undertaken to determine independently and, therefore, does not assume any responsibility, explicitly or implicitly, for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus. Nothing has come to such counsel's attention that has caused such counsel to believe that (A) the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or (B) the Prospectus, at the Closing Time, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that in each case such counsel need not express any opinion or belief with respect to the financial statements or other financial data contained in the Registration Statement or the Prospectus. (c) At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Underwriters shall have received a certificate of the Chairman and Chief Executive Officer of the Company and the chief financial or chief accounting officer of the Company, dated as of the Closing Time, to the effect that (A) there has been no such material adverse change, (B) the representations and warranties in Section 1 are true and correct with the same force and effect as though expressly made at and as of the Closing Time, (C) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time, and (D) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened by the Commission. (d) At the time of the execution of this Agreement, the Underwriters shall have received from each of Arthur Andersen LLP and KPMG Peat Marwick LLP, independent certified public accountants, a letter dated such date, in form and substance previously approved by the Representatives, with respect to the financial statements and certain financial information contained or incorporated by reference in the Registration Statement and the Prospectus. (e) At the Closing Time, the Underwriters shall have received from each of Arthur Andersen LLP and KPMG Peat Marwick LLP, independent certified public accountants, 15 16 a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (d) of this Section, except that the specified date referred to shall be a date not more than five days prior to the Closing Time. (f) At the Closing Time, the Representatives shall have been furnished with such documents and opinions as it may reasonably require for the purpose of enabling counsel for the Underwriters to pass upon the issuance and sale of the Securities as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters. (g) At the time of the execution of this Agreement, the Representatives shall have received from each of the executive officers and directors of the Company a letter in which each such person agrees during a period of 120 days from the date hereof, that such person will not, without the prior written consent of McDonald, sell, offer to sell, contract to sell, or otherwise dispose of, directly or indirectly, any shares of Common Stock, any other equity security of the Company or any security convertible into or exchangeable or exercisable for shares of Common Stock, beneficially owned by such person or with respect to which such person has the power of disposition, other than as bona fide gifts. (h) In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representatives shall have received: (i) A certificate, dated such Date of Delivery, of the Chairman and Chief Executive Officer of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(c) hereof remains true and correct as of such Date of Delivery. (ii) An opinion, dated such Date of Delivery, of Jones, Day, Reavis & Pogue, counsel for the Company and its Subsidiaries, substantially in the form set forth on Annex I attached hereto. (iii) An opinion, dated such Date of Delivery, from Charles J. Ibold, Esq., General Counsel of Cole Gift Centers, Inc. and Things Remembered, Inc., substantially in the form set forth on Annex II attached hereto. (iv) An opinion, dated such Date of Delivery, from David J. Sherriff, Esq., General Counsel of Cole Vision Corporation, substantially in the form set forth on Annex III attached hereto. 16 17 (v) An opinion, dated such Date of Delivery, of Calfee, Halter & Griswold LLP, counsel for the Underwriters, in form and substance reasonably satisfactory to the Underwriters. (vi) A letter from Arthur Andersen LLP, in form and substance satisfactory to the Representatives and dated such Date of Delivery, substantially the same in form and substance as the letter furnished to the Underwriters pursuant to Section 5(e) hereof, except that the "specified date" in the letter furnished pursuant to this Section 5(h)(vi) shall be a date not more than five days prior to such Date of Delivery. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Representatives by notice to the Company at any time at or prior to Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4. Notwithstanding any such termination, the provisions of Sections 6 and 7 shall remain in effect. SECTION 6. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act, and each officer and director of each Underwriter and any such controlling person to the extent and in the manner set forth as follows: (i) against any and all loss, liability, claim, damage, and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be part of the Registration Statement pursuant to Rule 430A(b) of the 1933 Act regulations, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation; or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including, subject to Section 6(c) hereof, the fees and disbursements of counsel chosen by the Underwriters), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by a governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement 17 18 or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; PROVIDED, HOWEVER, that this indemnity agreement shall not apply (A) to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives expressly for use in the Registration Statement or Prospectus and (B) with respect to the Prospectus or any preliminary prospectus to the extent that any loss, liability, claim, damage or expense results from the fact that such Underwriter sold Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus (and any amendment or supplement thereto) in any case where such delivery is required by the 1933 Act if the Company previously furnished copies thereof to such Underwriter and the loss, liability, claim, damage or expense results from an untrue statement or omission of a material fact contained in the Prospectus or any preliminary prospectus which was corrected in the Prospectus (or any amendment or supplement thereto). (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action. In no event shall the indemnifying parties be liable for fees and expenses (which fees and expenses shall be reasonable) of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances; PROVIDED, HOWEVER, that if an indemnified party shall have been advised in writing by counsel selected to represent the indemnified parties that an actual or potential conflict of interest exists between the position of that indemnified party and other indemnified parties, the indemnified party in question shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party, and the indemnifying parties shall be responsible for the reasonable fees and expenses of such separate counsel. 18 19 SECTION 7. CONTRIBUTION. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 6 is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company and one or more Underwriters, as incurred, in such proportions that the Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus bears to the initial public offering price appearing thereon and the Company is responsible for the balance; PROVIDED, HOWEVER, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act, and each officer and director of any Underwriter and of any such control person, shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Company. SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties and agreements contained in this Agreement and the Pricing Agreement, or contained in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Underwriters. SECTION 9. TERMINATION OF THE AGREEMENT. (a) The Representatives may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States, or any new outbreak of hostilities or material escalation thereof or other calamity or crisis, the effect of which is such as to make it, in the judgment of the Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in the Common Stock has been suspended by the Commission, or if trading generally on either the American Stock Exchange or the New York Stock Exchange has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of said Exchanges or by order of the Commission or any other governmental authority, or if a banking moratorium has been declared by either federal, New York or Ohio authorities. 19 20 (b) If this Agreement is terminated pursuant to this Section 9, such termination shall be without liability of any party to any other party except as provided in Section 4. Notwithstanding any such termination, the provisions of Sections 6 and 7 shall remain in effect. SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more of the Underwriters shall fail at Closing Time to purchase the Initial Securities which it or they are obligated to purchase under this Agreement and the Pricing Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements with such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of Initial Securities, the non-defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of Initial Securities, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in the termination of this Agreement, either the Representatives or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. The Underwriters shall have the right to amend Schedule A hereto by making such substitutions or corrections as indicated in the Pricing Agreement. SECTION 11. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunications. Notices to the Underwriters shall be directed to the Representatives, in care of McDonald & Company Securities, Inc. at 2100 McDonald Investment Center, Cleveland, Ohio 44114, attention: Daniel F. Austin, Vice Chairman, and notices to the Company shall be directed to it at 5915 Landerbrook Drive, Mayfield Heights, Ohio 44124, attention: Wayne L. Mosley, Vice President and Controller, telecopy number (216) 461-3489; and SECTION 12. PARTIES. This Agreement and the Pricing Agreement shall each inure to the benefit of and be binding upon the Underwriters and the Company and their 20 21 respective successors. Nothing expressed or mentioned in this Agreement or the Pricing Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or the Pricing Agreement or any provision herein and therein contained. This Agreement and the Pricing Agreement and all conditions and provisions hereof and thereof are intended to be for the sole and exclusive benefit of the Underwriters and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No Purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. GOVERNING LAWS AND TIME. This Agreement and the Pricing Agreement shall be governed by and construed in accordance with the internal laws of the State of Ohio without giving effect to principles of conflict of laws. Specified times of day refer to Cleveland Time. As used herein, the term "business day" means any day on which the New York Stock Exchange is open for business. 21 22 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriters and the Company in accordance with its terms. Very truly yours, COLE NATIONAL CORPORATION By: ---------------------------- Name: Title: CONFIRMED AND ACCEPTED as of the date first above written: SMITH BARNEY INC. McDONALD & COMPANY SECURITIES, INC. DEUTSCHE MORGAN GRENFELL, INC. BY: McDONALD & COMPANY SECURITIES, INC. By: ---------------------------------- Name: Title: For themselves and as Representatives of the other Underwriters in Schedule A hereto. 22 23 SCHEDULE A Number of Shares Underwriters to be Purchased - ------------ --------------- Smith Barney Inc. McDonald & Company Securities, Inc. Deutsche Morgan Grenfell, Inc. Total 1,500,000 ========= 24 Exhibit A 1,250,000 Shares COLE NATIONAL CORPORATION (A Delaware corporation) CLASS A COMMON STOCK (Par Value $.001 Per Share) PRICING AGREEMENT ----------------- July ____, 1997 SMITH BARNEY INC. McDONALD & COMPANY SECURITIES, INC. DEUTSCHE MORGAN GRENFELL, INC. as Representatives of the Several Underwriters c/o McDonald & Company Securities, Inc. McDonald Investment Center Cleveland, Ohio 44114 Ladies and Gentlemen: Reference is made to the Underwriting Agreement, dated July __, 1997 (the "Underwriting Agreement"), relating to the purchase by the several Underwriters named in Schedule A thereto, for whom Smith Barney Inc., McDonald & Company Securities, Inc. and Deutsche Morgan Grenfell, Inc. are acting as representatives, of the above shares of the Class A Common Stock, par value $.001 per share, of Cole National Corporation (the "Company"). Pursuant to Section 2 of the Underwriting Agreement, the Company agrees with the Underwriters as follows: 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $_____. 2. The purchase price per share for the Securities to be paid by the several Underwriters shall be $_____, being an amount equal to the initial public offering price set forth above less $____ per share. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all 25 counterparts, will become a binding agreement among the Underwriters and the Company in accordance with its terms. Very truly yours, COLE NATIONAL CORPORATION By: --------------------------------- Its: --------------------------------- CONFIRMED AND ACCEPTED as of the date first above written: SMITH BARNEY INC. McDONALD & COMPANY SECURITIES, INC. DEUTSCHE MORGAN GRENFELL, INC. BY McDONALD & COMPANY SECURITIES, INC. By: ----------------------------------- Name: Title: For themselves and as Representatives of the other Underwriters in Schedule A to the Underwriting Agreement. 26 Annex I Form of Opinion of Jones, Day, Reavis & Pogue -------------------------- (i) Each of the Company and the direct and indirect subsidiaries of the Company (collectively, "Subsidiaries") is duly incorporated, validly existing, and in good standing under the laws of the state of its respective incorporation, and each of the Company and the Subsidiaries has the corporate power and authority to own or lease its properties and to conduct its business as described in the Prospectus, and the Company has the corporate power and authority to execute, deliver and perform its obligations under the Underwriting Agreement. (ii) Each of the Company and Cole National Group, Inc. is duly qualified to do business and is in good standing in all jurisdictions where it is required to be so qualified, except where the failure to be so qualified would not individually or in the aggregate have a material adverse effect on the business, condition (financial or other), results of operations or properties of the Company and the direct and indirect subsidiaries of the Company taken as a whole. (iii) The authorized capital stock of the Company consists of: (a) 24,000,000 shares of Class A Common Stock, $.001 par value per share ("Class A Common Stock"), of which upon completion of this offering 13,625,030 shares are issued and outstanding; and (b) 1,000,000 shares of Preferred Stock, without par value, none of which shares are issued and outstanding. Except as otherwise stated in the Prospectus, all of the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Securities to be issued and sold by the Company pursuant to the Underwriting Agreement have been duly authorized for issuance and sale to the Underwriters pursuant to the Underwriting Agreement and, when issued and delivered by the Company in the manner contemplated by the Underwriting Agreement, will be validly issued and fully paid and nonassessable. The issuance of the Securities to be issued and sold by the Company is not subject to preemptive or other similar statutory rights or contractual preemptive or other similar contractual rights pursuant to any contract or agreement filed as an exhibit to either the Registration Statement or any document incorporated therein by reference pursuant to Item 12 of Form S-3 under the Securities Act of 1933 and by which the Company is bound. (iv) Except for the order of the Commission declaring the Registration Statement effective, and permits and similar authorizations required under the securities or Blue Sky laws of certain jurisdictions, and a listing application for the Securities filed with the New York Stock Exchange, and except for such consents that are required and have been received, no consent, approval, authorization or other order from, and no filing with or notice to, any Ohio or Federal regulatory body, administrative agency, or other Ohio or Federal governmental authority, and no filing with or notice to, to the best of our knowledge, any other person or entity, is 27 required for the due authorization, execution, delivery and performance by the Company of the Underwriting Agreement. (v) The Underwriting Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except as rights to indemnity and contribution thereunder may be limited under applicable securities laws. (vi) All of the outstanding capital stock of each of the Subsidiaries has been duly authorized and validly issued and is fully paid and nonassessable and is owned, directly or indirectly, by the Company, and, to the best of our knowledge, is free and clear of any security interest, adverse claims, lien or encumbrance, and there are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in any subsidiary. (vii) The Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (viii) The execution and delivery by the Company of the Underwriting Agreement and the performance of its obligations thereunder will not (A) result in the violation of any Delaware corporate, Ohio or Federal statute or regulation, or any order or decree known to us of any court or governmental authority binding upon the Company or any of its subsidiaries or their property, (B) except for the equity registration rights agreement dated March 6, 1992 between the Company and the parties therein, conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default or in creation of a lien under any of the provisions of the Company's or any of its subsidiaries' Certificates of Incorporation or Bylaws or any indenture, mortgage, deed of trust, loan agreement or other agreement filed as an exhibit to the Registration Statement and by which the Company is bound, or (C) result in the creation of any lien upon any of the properties or assets of the Company or any of its subsidiaries. We have participated in the preparation of the Registration Statement and Prospectus. From time to time we have had discussions with officers, Directors and employees of the Company, Arthur Andersen LLP and KPMG Peat Marwick LLP, the independent accountants who examined certain of the consolidated financial statements of the Company and its subsidiaries included in the Registration Statement and Prospectus, and your representatives concerning the information contained in the Registration Statement and Prospectus and the proposed responses to various items in Form S-3. Based thereupon we are of the opinion that the Registration Statement, the Prospectus and each amendment or supplement thereto and the documents incorporated by reference therein comply as to form in all material respects with the requirements of the Securities Act of 1933 or the Securities Exchange Act of 1934, as applicable, and the applicable rules and regulations thereunder (except for the operating statistics, financial statements and the notes thereto, financial schedules, other financial, statistical and accounting data included therein and except for the information referred to under the caption "Experts" as having been included or incorporated by reference in the Registration Statement and Prospectus on the authority of Arthur Andersen LLP and KPMG Peat Marwick LLP, each as experts). 28 We further are of the opinion that the statements contained in Item 15 in part II of the Registration Statement, insofar as they purport to summarize the provisions of the documents referred to therein, present fair summaries of such provisions. We do not know of any litigation or any governmental proceedings or investigations, pending or threatened, required to be described in the Prospectus that are not described as required, or of any contracts or other documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described and filed as required. The Registration Statement has become effective under the Securities Act of 1933; any required filing of the Prospectus or any supplement thereto pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or threatened by the Commission. We have not independently verified and are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness (except as set forth in the third preceding paragraph above) of the information contained in the Registration Statement and Prospectus or incorporated therein by reference. Based upon the participation and discussions described above, however, no facts have come to our attention that cause us to believe that the Registration Statement (except for the operating statistics, financial statements and the notes thereto, financial schedules, other financial, statistical and accounting data included or incorporated by reference therein and except for the information referred to under the caption "Experts" as having been included in the Registration Statement and Prospectus on the authority of Arthur Andersen LLP, as experts, as to all of which we express no view), at the time it became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (with the foregoing exceptions), at such time or on the date hereof included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 29 Annex II Form of Opinion of Charles J. Ibold (i) Each of Cole Gift Centers, Inc. ("Cole Gift") and Things Remembered, Inc. ("TRI"); (Cole Gift and TRI are collectively referred to as the "Company") and TRI's Subsidiary (defined as Cole Management Services, Inc.) is duly incorporated, validly existing, and in good standing under the laws of the state of its respective incorporation, with corporate power and authority to own or lease its properties and to conduct its business as described in the Prospectus. Each of the Company and TRI's Subsidiary is duly qualified to do business and is in good standing in all jurisdictions where it is required to be so qualified, except where the failure to be so qualified would not individually or in the aggregate have a material adverse effect on the business. condition (financial or other), results of operations or properties of the Company and TRI's Subsidiary taken as a whole. (ii) Except as disclosed in the Registration Statement and the Prospectus, there is no action, suit, investigation or proceeding, governmental or otherwise, pending or, to the best of my knowledge, threatened against Cole National Corporation, Cole National Group, Inc., the Company or TRI's Subsidiary, (A) in which an injunction or order has been entered preventing the issuance or sale of the Securities, (B) that seeks to restrain, enjoin or prevent the issuance of the Securities or any of the transactions contemplated thereby, or (C) questions the legality or validity of any such transaction or that seeks to recover damages or obtain other relief in connection with any such transaction. (iii) Neither Cole Gift, TRI nor TRI's Subsidiary is in violation of its Certificate or Incorporation or Bylaws. Except as set forth in the Prospectus, I am not aware of (A) the existence of any default (or any event the occurrence of which with notice or lapse of time, or both, would constitute a default) under any bond, indenture, mortgage, deed of trust, note, loan or credit agreement or other material agreement or instrument filed as an exhibit to either the Registration Statement or any document incorporated therein by reference pursuant to Item 12 of Form S-3 under the 1933 Act and to which the Company or TRI's Subsidiary is a party or to which any of them or their property or assets is subject or (B) the issuance of any notice or pendency or threat of any investigation or review by any governmental entity with respect to (1) any alleged violation by the Company or TRI's Subsidiary of any statute, law, ordinance, rule, regulation, judgment decree or order of any governmental entity, agency or body, or (2) any alleged failure by the Company or TRI's Subsidiary to have all permits, certificates, licenses, approvals and other authorizations required in connection with the operation of its business, which, with respect to clauses (A) and (B) herein would (individually or in the aggregate) have a material adverse effect on the business, condition (financial or other), results of operations or properties of the Company and TRI's Subsidiary taken as a whole. 30 I have reviewed and read the Registration Statement and Prospectus. I have not, however, independently verified and am not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the information contained in the Registration Statement and Prospectus or incorporated by reference therein. Based upon my review of the Registration Statement and Prospectus described above, however, no facts have come to my attention that cause me to believe that the Registration Statement (except for the operating statistics, financial statements and the notes thereto, financial schedules, other financial, statistical and accounting data included therein and except for the information referred to under the caption "Experts" as having been included or incorporated by reference in the Registration Statement and Prospectus on the authority of Arthur Andersen LLP and KPMG Peat Marwick LLP, as experts, as to all of which I express no view), at the time it became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (with the foregoing exceptions) as of its date or on the date hereof included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. There is no litigation or governmental proceedings or investigations, pending, or, to the best of my knowledge, threatened against the Company or TRI's Subsidiary, required to be described in the Registration Statement and the Prospectus that are not described as required, or of any contracts or other documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described and filed as required. 31 Annex III Form of Opinion of David J. Sherriff (i) Each of Cole Vision Corporation (the "Company") and the Subsidiaries (defined as Pearle, Inc., Western States Optical, Inc., Bay Cities Optical Company, Cole Vision Services, Inc., Cole Management Services, Inc. and Cole Lens Supply, Inc.) is duly incorporated, validly existing, and in good standing under the laws of the state of its respective incorporation, with corporate power and authority to own or lease its properties and to conduct its business as described in the Prospectus. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing in all jurisdictions where it is required to be so qualified, except where the failure to be so qualified would not individually or in the aggregate have a material adverse effect on the business, condition (financial or other), results of operations or properties of the Company and the Subsidiaries taken as a whole. (ii) Except as disclosed in the Registration Statement and the Prospectus, there is no action, suit, investigation or proceeding, governmental or otherwise, pending or, to the best of my knowledge, threatened against the Company or any of the Subsidiaries, (A) in which an injunction or order has been entered preventing the issuance or sale of the Securities, (B) that seeks to restrain, enjoin or prevent the issuance of the Securities or any of the transactions contemplated thereby, or (C) questions the legality or validity of any such transaction or that seeks to recover damages or obtain other relief in connection with any such transaction. (iii) Neither the Company nor any of the Subsidiaries is in violation of their respective Certificate of Incorporation or Bylaws. Except as set forth in the Prospectus, I am not aware of (A) the existence of any default (or any event the occurrence of which with notice or lapse of time, or both, would constitute a default) under any bond, indenture, mortgage, deed of trust, note, loan or credit agreement or other material agreement or instrument filed as an exhibit to either the Registration Statement or any document incorporated therein by reference pursuant to Item 12 of Form S-3 under the 1933 Act and to which the Company or any of the Subsidiaries is a party or to which any of them or their property or assets is subject or (B) the issuance of any notice or pendency or threat of any investigation or review by any governmental entity with respect to (1) any alleged violation by the Company or any of the Subsidiaries of any statute, law, ordinance, rule, regulation, judgment decree or order of any governmental entity, agency or body, or (2) any alleged failure by the Company or any of the Subsidiaries to have all permits, certificates, licenses, approvals and other authorizations required in connection with the operation of its business, which, with respect to clauses (A) and (B) herein would (individually or in the aggregate) have a material adverse effect on the business, condition (financial or other), results of operations or properties of the Company and the Subsidiaries taken as a whole. 32 I have reviewed and read the Registration Statement and Prospectus. I have not, however, independently verified and am not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the information contained in the Registration Statement and Prospectus or incorporated therein by reference. Based upon my review of the Registration Statement and Prospectus described above, however, no facts have come to my attention that cause me to believe that the Registration Statement (except for the operating statistics, financial statements and the notes thereto, financial schedules, other financial, statistical and accounting data included or incorporated by reference therein and except for the information referred to under the caption "Experts" as having been included in the Registration Statement and Prospectus on the authority of Arthur Andersen LLP and KPMG Peat Marwick LLP, as experts, as to all of which I express no view), at the time it became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (with the foregoing exceptions) as of its date or on the date hereof included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. There is no litigation or governmental proceedings or investigations, pending, or, to the best of my knowledge, threatened against the Company or any of the Subsidiaries, required to be described in the Registration Statement and the Prospectus that are not described as required, or of and contracts or other documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described and filed as required. EX-23.2 3 EXHIBIT 23.2 1 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP Cleveland, Ohio, June 30, 1997. EX-23.3 4 EXHIBIT 23.3 1 Exhibit 23.3 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Pearle, Inc.: We consent to the use of our report incorporated by reference and to the reference to our firm under the heading "Experts" in the prospectus. Our report refers to a change in accounting for income taxes in 1994. /s/ KPMG Peat Marwick LLP Dallas, Texas June 30, 1997 -----END PRIVACY-ENHANCED MESSAGE-----