-----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, RZjTQmcNdjzb/tAPgC23ufd9c+xhyOI1O+TBBVOWm1K11LIZ5smvSe6TrBSfiS9v cUJnlDZpXXwEB7Lh9ot55Q== 0000950152-99-003772.txt : 19990503 0000950152-99-003772.hdr.sgml : 19990503 ACCESSION NUMBER: 0000950152-99-003772 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLE NATIONAL CORP /DE/ CENTRAL INDEX KEY: 0000769644 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 341453189 STATE OF INCORPORATION: DE FISCAL YEAR END: 0203 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12814 FILM NUMBER: 99606790 BUSINESS ADDRESS: STREET 1: 5915 LANDERBROOK DR CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 BUSINESS PHONE: 2164494100 MAIL ADDRESS: STREET 1: 5915 LANDERBROOK DRIVE STREET 2: SUITE 300 CITY: CLEVELAND STATE: OH ZIP: 44124 FORMER COMPANY: FORMER CONFORMED NAME: CNC HOLDING CORP/DE DATE OF NAME CHANGE: 19920703 10-K 1 COLE NATIONAL CORPORATION 10-K 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X Annual report pursuant to Section 13 or 15(d) of the Securities --- Exchange Act of 1934 for the fiscal year ended January 30, 1999, or Transition report pursuant to Section 13 or 15(d) of the Securities --- Exchange Act of 1934 for the transition period from __________ to __________. Commission file number 1-12814 COLE NATIONAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 34-1453189 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 5915 Landerbrook Drive, Mayfield Heights, Ohio 44124 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (440) 449-4100 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Stock, $.001 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 23, 1999 was approximately $229,045,000, based upon the last price reported for such date by the New York Stock Exchange. As of March 23, 1999, 14,861,857 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 10, 1999 are incorporated herein by reference into Part III. =============================================================================== 2 PART I ITEM 1. BUSINESS GENERAL Cole National Corporation was incorporated as a Delaware corporation in 1984. Cole National Corporation, primarily through the subsidiaries owned by its direct subsidiary, Cole National Group, Inc. is a leading provider of eyewear products, optometric services and personalized gifts with 2,884 retail locations in 50 states, Canada and the Caribbean. References herein to the "Company" include Cole National Corporation, its direct and indirect subsidiaries, and its predecessor companies. Cole National Corporation's businesses are conducted through two principal operating units: Cole Vision and Things Remembered. Cole Vision consists of Cole Licensed Brands, Cole Managed Vision Care and Pearle, which was acquired on November 15, 1996. Cole National Corporation believes that, based on industry data, Cole Vision is one of the largest optical retail companies in the world. Things Remembered operates the only nationwide chain of personalized gift stores. Cole National Corporation differentiates itself from other specialty retailers by providing value-added services at the point of sale at all of its retail locations. COLE VISION Cole Vision contributed 77.3% of Cole National Corporation's net revenue in fiscal 1998 with 2,066 company-owned and franchised locations throughout the United States, Canada and the Caribbean as of January 30, 1999. Cole Licensed Brands and Pearle share purchasing power and corporate support functions. The Cole Managed Vision Care programs give participants access to a network of company-owned, franchised and third-party optical locations. COLE LICENSED BRANDS Cole Licensed Brands operates principally under the "Sears Optical", "Ward's Optical", "Target Optical" and "BJ's Optical Department" names. As of January 30, 1999, Cole Licensed Brands operated 1,186 locations in 47 states and Canada, including 788 departments on the premises of Sears department stores, 179 departments in Montgomery Ward stores, 82 departments in BJ's Wholesale Club stores, 12 departments in Target stores, 121 freestanding stores operated under the name "Sears Optical" and four other locations. Retail locations are generally operated under a lease or license arrangement through which the host store collects the sales receipts, retains an agreed upon percentage of sales and remits the remainder to Cole Licensed Brands on a weekly basis. Cole Licensed Brands' locations are, in most cases, full-service retail eyecare stores offering brand name and private label prescription eyeglasses, contact lenses and accessories, with an on-premises doctor of optometry who performs complete eye examinations and prescribes eyeglasses and contact lenses. Most optical departments, which are typically 1,000 square feet in size, operate with a doctor of optometry, a department manager, and from one to seven opticians depending on store sales volume. The majority of the doctors of optometry are independent, as is often required by state law, with the remainder being employed by Cole Licensed Brands. The independent doctors sublease space and equipment from Cole Licensed Brands where permitted by law, or from the host, and retain their examination fees. Each of the retail locations is computer linked to five centralized manufacturing laboratories, which grind, cut and fit lenses to order and ship them to the stores. Cole Licensed Brands provides next day delivery on most of the eyewear it offers when requested by its customers. All of the frames and lenses used in its eyeglasses are purchased from outside suppliers, both in the United States and several foreign countries. A variety of marketing and promotional efforts, primarily newspaper, direct mail, yellow pages and host advertising, are used to build and maintain its customer base. Host advertising includes the placement of promotional material within sales circulars or credit card billings sent out by the host store to its customers. PEARLE At January 30, 1999, Pearle's operations consisted of 471 company-owned and 409 franchised stores located in 45 states, Canada, and the Caribbean. Most Pearle stores operate in either an "Express" or "Mainline" store format. Express stores contain a full surfacing lab that can 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 the main 1 3 laboratory in Dallas. At January 30, 1999, 304 of the company-owned stores and 118 of the franchised stores were Express, with the balance being Mainline. The Express stores typically are located in high traffic freestanding, strip centers and mall locations with most stores averaging 3,000 square feet. The Express stores are usually staffed with two managers and a support staff of four to eight people. Mainline stores have an average size of 1,700 square feet and are also located in freestanding buildings, or in smaller strip or regional centers. Mainline stores generally carry a smaller assortment of inventory than Express stores and are usually staffed with one manager and two to three associates. Most Pearle stores have a doctor of optometry on site with approximately 80% leasing space from Pearle on an independent basis and the remaining being direct employees of Pearle. Pearle's marketing strategy employs a wide range of media at both the national and local levels. The franchised and company-owned stores each contribute a percentage of revenues to Pearle's marketing budget with approximately half of Pearle's marketing expenditures devoted to television. Pearle's brand positioning of high quality eyecare products and services has been reinforced by an advertising and promotions program, which includes Pearle's advertising slogans, Nobody Cares for Eyes Better Than Pearle and The Doctor Is In. Pearle operates a warehouse facility in Dallas that inventories and distributes a comprehensive product line, including frames, eyeglass lenses, contact lenses, optical supplies and eyewear accessories to company-owned and franchised locations. Pearle has maintained a franchise program since 1980. Most of the franchised stores are single franchise operations, with no franchisee operating more than ten stores. With the proper financial approvals, a franchise purchase can be financed through Pearle. Currently, Pearle offers financing over periods up to ten years at variable interest rates ranging from prime plus one point to prime plus three points adjusted periodically. Each franchisee is required to enter into a franchise agreement requiring payment of an initial franchise fee. The term of the typical franchise agreement is equal to the earlier of ten years or the expiration or termination of the underlying base lease. Royalty and advertising contributions typically are based on a percentage of the franchisee's gross revenues from the retail operation and/or non-surgical professional fee revenues. The total monthly advertising contribution is distributed between Pearle's system-wide advertising fund and the local co-op market advertising fund. Franchisees are generally eligible to participate in Cole Vision's managed vision care programs. Cole National Corporation also has an approximate 24% equity interest in Pearle Europe B.V., which operates 519 company-owned and franchised optical locations in the Netherlands, Belgium, Germany and Austria. In terms of market share, Pearle Europe is the largest optical retailer in the Netherlands, Belgium and Austria, and second largest in Germany. COLE MANAGED VISION CARE In the last several years, Cole Vision has expanded its managed vision care program that provides low cost, comprehensive eyecare benefits marketed directly to large employers, HMO's and other organizations, primarily under the name "Vision One." Vision One's basic program gives plan sponsors the opportunity to offer their members a group discount at locations within the managed vision care network with minimal direct cost to the plan sponsor. An enhanced Vision One program allows plan sponsors to provide their members with prepaid eye examinations, as well as pricing discounts or reimbursements. Cole Managed Vision Care's network has over 6,000 points of service, including all Cole Vision company-owned retail locations, approximately 90% of franchised locations, 700 locations in a nationwide chain store's optical departments, and 3,000 independent ophthalmologists, making it the largest chain provider of managed vision care in the United States. Cole Managed Vision Care generated approximately 31% of Cole Vision's revenues in fiscal 1998. THINGS REMEMBERED Things Remembered contributed 22.7% of Cole National Corporation's net revenue in fiscal 1998. As of January 30, 1999, Things Remembered operated 818 stores and kiosks generally located in large, enclosed shopping malls located in 46 states. Each location carries a wide assortment of engravable items and provides "while you shop" personalization services for any occasion including holiday, business and special occasion gift events. Things Remembered offers engraving for items purchased at the store as well as for items purchased elsewhere. 2 4 Merchandise sold at Things Remembered stores consists of a broad assortment of gift categories and items at prices generally ranging from $10 to $75. Things Remembered's offering of gifts includes writing instruments, clocks, music boxes, picture frames and albums, executive desk sets and accessories, ID bracelets, glassware, lighters, keys and key rings, door knockers and Christmas ornaments. Things Remembered features brand name merchandise as well as higher margin private label merchandise. At some locations, computer-controlled embroidery equipment is utilized for the personalization of merchandise such as throws, sweaters, bathrobes, jackets, baseball caps, towels and baby blankets. These softgoods are also available in most of Things Remembered's other locations with personalization services provided from a central fulfillment facility. At January 30, 1999, Things Remembered locations consisted of 450 stores and 368 kiosks. The typical store consists of about 1,000 square feet, while kiosks, which are units generally located in the center of the common mall area, are typically 200 square feet in size. Things Remembered locations are usually operated by one or two employees during non-peak periods and up to 15 employees during the peak Christmas season. Locations typically employ a store manager on a full-time basis and a full or part-time assistant manager, while the balance of the employees is part-time sales associates. Nearly all locations are equipped with computerized engravers and key duplicating machines. Many stores also have equipment for etching glassware items. All locations are equipped with point-of-sale terminals. Most of Things Remembered's store merchandise is shipped through its centralized warehouse and distribution facility located near Youngstown, Ohio. The warehouse utilizes a computerized carousel system to automate the process of locating merchandise needed to fill a store order. HOST RELATIONSHIPS Cole National Corporation believes it has developed excellent relationships with the host stores in which Cole Licensed Brands operates. Cole National Corporation has maintained its relationships in the optical business with Sears and Montgomery Ward for over 35 years. Approximately 90% of the Sears stores and all of the BJ's Wholesale and Montgomery Ward stores that offer optometric services are operated by Cole Licensed Brands. Although leases with major hosts are terminable by either party upon relatively short notice, Cole Licensed Brands has never had a lease terminated other than in connection with a store closing, relocation or major remodeling. PURCHASING The merchandise, supplies and component parts required for the various products sold by Cole National Corporation are purchased from a large number of suppliers and manufacturers and are generally readily available. In most cases, such purchases are not made under long-term contracts. Cole National Corporation believes that the loss of any one supplier or manufacturer should not have a material adverse effect on its operations. COMPETITION Cole National Corporation operates in highly competitive businesses. Cole Vision competes with other optical companies, private ophthalmologists, optometrists and opticians and a growing number of HMOs in a highly fragmented marketplace on the basis of the patient service it provides, as well as price and product quality. In addition, Pearle competes on the basis of its highly recognized brand name and one-hour express service. Cole National Corporation believes that, based on industry data, Cole Vision is one of the largest optical retail companies in the world. Although Things Remembered operates the only nation-wide chain of gift stores offering "while you shop" gift engraving, key duplicating, glass etching and monogramming, as well as related merchandise, it competes with many other retailers that sell gift items. Things Remembered competes with such other retailers primarily on the basis of the value-added point of sale services, as well as price and product quality. Some of Cole National Corporation's competitors have greater financial resources than Cole National Corporation. 3 5 EMPLOYEES As of January 30, 1999, Cole National Corporation and its subsidiaries had approximately 9,200 full-time and 3,900 part-time employees. During October, November and December, Cole National Corporation employs additional full- and part-time employees. In fiscal 1998, approximately 3,500 additional employees were employed during such period. Approximately 150 employees at certain Pearle locations are represented by labor unions. Cole National Corporation considers its present labor relations to be satisfactory. ITEM 2. PROPERTIES Cole National Corporation leases an office in Highland Heights, Ohio, and leases its executive offices and an office in Cleveland, Ohio. During fiscal 1998, Cole National Corporation purchased a building in Twinsburg, Ohio, which comprises approximately 175,000 square feet of office space. All of Cole Vision's home office functions moved to this facility during fiscal 1998. All Cole Licensed Brands retail locations are leased or operated under a license with the host store, and none of the individual retail locations is material to operations. Leases for departments operated in Sears stores and freestanding stores operated under the name "Sears Optical" are generally for terms of 90 days and five years, respectively. Pearle leases most of their retail stores under non-cancelable operating leases with terms generally ranging from five to ten years and which generally contain renewal options for additional periods. Pearle is the principal lessee on a majority of stores operated by franchisees who sublease the facilities from Pearle. Cole Vision leases five optical laboratories, located in Knoxville, Tennessee (two labs); Memphis, Tennessee; Salt Lake City, Utah; and Richmond, Virginia, pursuant to leases expiring (including renewals at the option of Cole Vision) in 2002, 2005, 2002, 2001 and 2013, respectively. Pearle owns its Dallas Support Center, which comprises 88,721 square feet of office space and 147,336 square feet of laboratory and distribution facilities. Pearle also owns a small headquarters and laboratory in Puerto Rico. Cole Vision also leases a home office, lab and distribution center facility for its Canadian operations pursuant to leases expiring in 2000. Leases for Things Remembered stores and kiosks are generally for terms of ten and five years, respectively. During the first quarter of fiscal 1999, Things Remembered moved its home office functions to the leased facility in Highland Heights, Ohio. The office and warehouse facility that Things Remembered owns and occupied during fiscal 1998 is expected to be sold in fiscal 1999. In fiscal 1997, a 210,000 square foot warehouse and distribution facility was constructed for Things Remembered. On December 31, 1998, Things Remembered entered into an agreement with a third party for the sale and leaseback of its distribution center that expires in 2013 and includes three options to renew the lease for five-year terms. Cole National Corporation believes that its relationships with its lessors are generally good. ITEM 3. LEGAL PROCEEDINGS While Cole National Corporation is not presently involved in any material legal proceedings, from time to time during the ordinary course of business, it is threatened with, or may become a party to legal actions and other proceedings incidental to its business. Management believes that Cole National Corporation's potential exposure to such legal actions is adequately covered by its general liability insurance and reserves. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year ended January 30, 1999. 4 6 ITEM 4A. EXECUTIVE OFFICERS OF COLE NATIONAL CORPORATION (a) The following persons are the executive officers of Cole National Corporation who are not members of its Board of Directors, having been elected to their respective offices by the Board of Directors to serve until the election and qualification of their respective successors:
Name Age Office ---- --- ---------------------------------------- Leslie D. Dunn 54 Senior Vice President - Business Development, General Counsel and Secretary George H. Bernstein, Jr. 37 Executive Vice President of Strategic Planning and Chief Financial Officer Joseph Gaglioti 53 Vice President and Treasurer Wayne L. Mosley 45 Vice President and Controller
(b) The following is a brief account of the positions held during the past five years by each of the above named executive officers: Ms. Dunn has been Senior Vice President - Business Development, General Counsel and Secretary since September 1997. Prior to joining Cole National Corporation, she was a partner in the law firm of Jones Day Reavis & Pogue for more than five years. Mr. Bernstein has been Executive Vice President of Strategic Planning and Chief Financial Officer since March 1, 1999. Mr. Bernstein was the Senior Vice President and General Manager of Things Remembered from October 1997 to March 1999. Before joining Cole National Corporation, Mr. Bernstein was President of American Vision Centers, Inc., an optical retailer, from July 1996 to September 1997 and President of Hess Shoes, a footwear retailer, from February 1992 to June 1996. Mr. Gaglioti has been Vice President since 1992 and Treasurer since 1991. Mr. Gaglioti joined Cole National Corporation in 1981. Mr. Mosley has been Vice President and Controller, Assistant Secretary and Assistant Treasurer since 1992. Mr. Mosley joined Cole National Corporation in 1986. Information concerning Jeffrey A. Cole and Brian B. Smith, Cole National Corporation 's executive officers who are also Directors, will be included in Cole National Corporation's Proxy Statement for the 1999 Annual Meeting of Stockholders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Cole National Corporation's common stock is traded on the New York Stock Exchange (NYSE) under the symbol "CNJ". The following table sets forth, for the fiscal periods indicated, the high and low sales prices per share.
Fiscal 1998 Fiscal 1997 ---------------------------- -------------------------- Quarter High Low High Low ------- ----------- ------------ ------------ ----------- First $ 41 $ 32 3/4 $ 35 1/8 $ 26 1/2 Second $ 40 3/8 $ 33 $ 48 1/4 $ 33 Third $ 33 $ 16 5/8 $ 46 $ 40 3/16 Fourth $ 21 3/16 $13 3/16 $ 43 1/2 $ 27 3/4
Cole National Corporation's dividend policy has been, and for the foreseeable future will continue to be, to retain earnings to support its growth strategy. No dividends were paid during the last two fiscal years. As of March 23, 1999 there were 214 shareholders of record. 5 7 ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below reflect continuing operations only and should be read in conjunction with the consolidated financial statements and the notes thereto and other information contained elsewhere in this report (dollars in thousands, except per share amounts).
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net revenue $1,068,182 $1,000,198 $ 628,496 $ 515,892 $ 464,821 Operating income (loss) (1) $ 42,346 $ 62,864 $ (11,486) $ 43,651 $ 38,096 Income (loss) from continuing operations (1) (2) $ 14,276 $ 19,933 $ (24,698) $ 13,798 $ 23,331 Income (loss) from continuing operations per common share (1) (2) Basic $ 0.96 $ 1.48 $ (2.18) $ 1.32 $ 2.48 Diluted $ 0.94 $ 1.43 $ (2.18) $ 1.31 $ 2.44 Weighted average number of shares outstanding (000's) Basic 14,802 13,481 11,333 10,415 9,395 Diluted 15,176 13,981 11,333 10,565 9,571 Total assets $ 628,024 $ 651,384 $ 578,456 $ 296,669 $ 280,298 Working capital $ 68,695 $ 73,175 $ 56,404 $ 61,275 $ 56,628 Stockholders' equity at year end $ 145,360 $ 132,015 $ 19,718 $ 17,133 $ 3,306 Current ratio 1.38 1.35 1.26 1.68 1.64 Long-term obligations and redeemable preferred stock $ 276,013 $ 277,401 $ 317,547 $ 181,903 $ 184,388 Number of stores at year end (3) 2,884 2,833 2,657 1,834 1,741 Comparable store sales growth 3.1% 3.6% 7.2% 4.5% 5.4%
(1) Fiscal 1998 amounts include a $23,120 pretax charge for restructuring and other unusual items, of which $5,247 relates to inventory markdowns that are included in cost of sales; fiscal 1997 amounts include an $8,000 pretax charge for business integration related to the acquisition of American Vision Centers; and fiscal 1996 amounts include a $61,091 pretax charge for business integration and other non-recurring items primarily related to the acquisition of Pearle. (2) Fiscal 1998 amounts also include $6,000 of income from cash received in a nontaxable settlement of claims against the former owner of Pearle. (3) Includes Pearle and American Vision Centers franchise locations. 6 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fiscal years end on the Saturday closest to January 31 and are identified according to the calendar year in which they begin. For example, the fiscal year ended January 30, 1999 is referred to as "fiscal 1998." Fiscal 1998, 1997 and 1996 each consisted of 52-week periods. Cole National Corporation has two reportable segments: Cole Vision, which accounted for 77% of total revenue, and Things Remembered, which accounted for 23% of total revenue. Most of Cole Vision's revenue is provided by sales of prescription eyewear, accessories and services through its Cole Licensed Brands and Pearle retail locations. Cole Vision's revenue is also provided by sales of merchandise to franchisees and other outside customers, by royalties based on sales, interest income on notes receivable and initial franchise fees from franchisees and by fees from managed vision care programs. Things Remembered's revenue is provided by sales of engravable gift merchandise and personalization and other services primarily through retail stores and kiosks. See Note 12 of the Notes to Consolidated Financial Statements for further discussion of reportable segments. On January 13, 1998, the Company announced the closing of its Cole Gift Centers business that included 445 key duplicating, greeting card and gift departments on the premises of hosts' stores. Cole Gift Centers has been accounted for as a discontinued operation in the accompanying financial statements. Accordingly, the results of operations and loss on disposition of Cole Gift Centers have been excluded from the results of continuing operations. See Note 4 of the Notes to Consolidated Financial Statements for further discussion of discontinued operations. On August 5, 1997, the Company acquired all of the issued and outstanding common stock of American Vision Centers, Inc. ("AVC"). The acquisition was accounted for using the purchase method of accounting. Accordingly, AVC's results of operations, which included 80 company-owned optical stores and 75 franchised locations at January 31, 1998, have been included in the consolidated statements of operations since the date of acquisition. For the six-month period ended January 31, 1998, AVC's net revenue was approximately $25.0 million. See Notes 2 and 3 of the Notes to Consolidated Financial Statements for further discussion of this acquisition. On November 15, 1996, the Company acquired the North American and Caribbean operations of Pearle, Inc. and a minority interest in Pearle's European business. The acquisition of Pearle has been accounted for under the purchase method of accounting. Accordingly, Pearle's results of operations, which included 348 company-owned stores and 338 franchised locations at February 1, 1997, have been included in the consolidated statements of operations since the date of acquisition. For the eleven-week period ended February 1, 1997, Pearle generated net revenue of $58.3 million. See Notes 2 and 3 of the Notes to Consolidated Financial Statements for further discussion of this acquisition. RESULTS OF OPERATIONS The following is a discussion of the results of continuing operations for the three fiscal years ended January 30, 1999. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of the Form 10-K. FISCAL 1998 COMPARED TO FISCAL 1997 Net revenue increased 6.8% to $1.1 billion in fiscal 1998 from $1.0 billion in fiscal 1997. The increase in revenue was primarily attributable to the inclusion in fiscal 1998 of additional Cole Vision units, including the AVC stores acquired in August 1997, and a consolidated comparable store sales increase of 3.1%. The consolidated comparable store sales increase in fiscal 1998 reflected a comparable store sales increase of 1.6% at Cole Vision and 7.4% at Things Remembered. The Cole Vision comparable store sales increase resulted from a 3.1% increase at Cole Licensed Brands partially offset by a 0.8% decrease at Pearle. The Cole Vision sales increase reflected an increase in the number of transactions due to more locations, as the average selling price was essentially flat between years. The Pearle comparable store sales were impacted by a weaker than expected reception to marketing and merchandising programs implemented in the first quarter, as well as increased competitive pressures in the optical business and what the Company perceives may be a general softening in the retail optical market. At Things Remembered, the comparable store sales growth reflected increased sales of additional personalization and new products increasing the average transaction amount, while the number of transactions in fiscal 1998 was similar to fiscal 1997. At January 30, 1999, the Company had 2,884 retail locations including 818 Things Remembered stores, 1,186 Licensed Brands locations and 880 Pearle stores, of which 409 were franchised locations, compared to 2,833 retail locations at January 31, 1998. 7 9 Gross profit increased to $704.1 million in fiscal 1998 from $659.3 million in fiscal 1997. The gross profit increase was primarily attributable to the increased revenue at both Cole Vision and Things Remembered, partially offset by $5.2 million of inventory markdowns at Pearle in connection with restructuring its operations. Excluding the inventory markdowns, gross margins were 66.4% and 65.9% in fiscal 1998 and fiscal 1997, respectively. Gross margin at Things Remembered improved to 71.0% in fiscal 1998 from 68.7% the prior year with most of the improvement from increased personalization sales. At Cole Vision gross margins were 65.1% in both fiscal 1998 and fiscal 1997. Operating expenses increased 9.2% to $610.1 million in fiscal 1998 from $558.5 million in fiscal 1997. As a percentage of revenue, operating expenses were 57.1% in fiscal 1998 compared to 55.8% in fiscal 1997. The unfavorable expense leverage was attributable to a 0.6 percentage point increase in managed vision care expenses, a 0.6 percentage point increase in information systems costs including $2.4 million incurred in connection with the Company's Year 2000 Readiness Program (see Year 2000 below for additional information) and a 0.5 percentage point increase in advertising expenditures, partially offset by a 0.4 percentage point leverage gain in store occupancy costs. The increase in managed vision care expenses was primarily the result of increased administrative costs necessary to handle the growth in call and claims volume. The increase in advertising expenditures as a percentage of revenue was mainly due to inefficient advertising efforts at Cole Vision, a result of the optical market conditions mentioned above and the unexpected weakness of Pearle's first quarter marketing and merchandising programs. Store occupancy expenses increased as a result of more locations and higher percentage rents caused by increased comparable store sales but gained leverage from the strong comparable store sales increase at Things Remembered. Payroll costs also increased primarily because of more retail units open in 1998 and additional payroll to support increased sales, maintaining leverage to last year. Fiscal 1998 depreciation and amortization expense of $33.7 million was $3.8 million more than fiscal 1997 reflecting increased amortization of systems development costs and the AVC acquisition in fiscal 1997. Fiscal 1998 included a $23.1 million pretax charge for restructuring and other unusual items, including the inventory markdowns at Pearle, and fiscal 1997 included an $8.0 million pretax charge for non-recurring items related to the integration of AVC into the Company's operations. See Restructuring, Business Integration and Other Unusual Charges below. Operating income, excluding the charges for restructuring, business integration and other unusual charges from each year, decreased 7.6% to $65.5 million in fiscal 1998 from $70.9 million the prior year, as improved sales and earnings at Things Remembered and Cole Licensed Brands were more than offset by the disappointing results at Pearle. Net interest expense and other income for fiscal 1998 of $18.7 million decreased $9.2 million compared to fiscal 1997. The decrease was primarily attributable to the recognition of $6.0 million of other income in the third quarter of fiscal 1998 from cash received in the non-taxable settlement of certain contingencies related to several claims against and indemnifications from the former owner of Pearle, and lower interest expense following the purchase and retirement of $150.9 million of 11-1/4% Senior Notes in connection with a tender offer in September 1997, partially offset by additional interest expense on $125.0 million of 8-5/8% Senior Subordinated Notes due 2007 issued in August 1997. The income tax provisions for fiscal 1998 and 1997 include $7.4 million and $3.4 million, respectively, of income tax benefits related to the charges for restructuring and other unusual items. The effective tax rate on income excluding these charges and the $6.0 million settlement included in other income was 41.0% in fiscal 1998 and 43.0% in fiscal 1997. 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 10 of the Notes to Consolidated Financial Statements. Net income increased to $14.3 million in fiscal 1998 from a net loss of $6.2 million the prior year. The net loss in fiscal 1997 included a $14.0 million loss, net of an income tax benefit of $8.5 million, related to the operations and closing of Cole Gift Centers and a $12.2 million extraordinary loss, net of an income tax benefit of $7.5 million, recorded in the third quarter of fiscal 1997 in connection with the early extinguishment of debt. The loss on early extinguishment of debt represented the tender premium, write-off of related unamortized debt discount and other costs associated with redemption of the 11-1/4% Senior Notes. 8 10 FISCAL 1997 COMPARED TO FISCAL 1996 Net revenue increased 59.1% to $1.0 billion in fiscal 1997 from $628.5 million in fiscal 1996. The increase in revenue was primarily attributable to the acquisitions of Pearle and AOCO Limited, which operated 73 Sears locations in Canada, in November 1996, and AVC in August 1997, which accounted for $290.7 million of the increase for the fiscal year. See Notes 2 and 3 of the Notes to Consolidated Financial Statements for further discussion of the acquisitions. Consolidated comparable store sales increased 3.6% in fiscal 1997 with a 5.9% comparable store growth at Cole Vision and a 0.5% comparable store sales decline at Things Remembered. The Cole Vision comparable store sales increase resulted from a 6.1% increase at Cole Licensed Brands and a 2.5% increase at Pearle. The increase at Cole Vision was primarily a result of successful eyewear promotions and growth in managed vision care sales. The net revenue increase was also attributable to the classification of capitation and other fees associated with its growing managed vision care business as revenue. Prior to fiscal 1997, such fees were netted with operating expenses in the financial statements. For fiscal 1997, these fees were approximately $41.8 million. The opening of additional Cole Vision and Things Remembered units also contributed to the revenue increase. At January 31, 1998, the Company had 2,833 retail locations, including 831 Things Remembered stores, 1,157 Licensed Brand locations and 845 Pearle stores, of which 401 were franchised locations, compared to 2,657 retail locations at February 1, 1997. Gross profit increased to $659.3 million in fiscal 1997 from $427.3 million in fiscal 1996. The gross profit increase was primarily attributable to the acquisitions and the growth of managed vision care fees now classified as revenue. Gross margins for fiscal 1997 and fiscal 1996 were 65.9% and 68.0%, respectively. The lower gross margin percentage in fiscal 1997 resulted primarily from the addition of Pearle which operates at 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. As a result, gross margin at Cole Vision was 65.1% in fiscal 1997 compared to 66.9% in fiscal 1996. At Things Remembered, gross margin was 68.7% and 69.9% in fiscal 1997 and fiscal 1996, respectively. The lower gross margin at Things Remembered was primarily attributable to increased sales of clearance and promotional merchandise, partially offset by an increase in sales of additional personalization. Operating expenses increased 55.5% to $558.5 million in fiscal 1997 from $359.1 million in fiscal 1996. As a percentage of revenue, operating expenses decreased to 55.8% in fiscal 1997 from 57.1% 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. This was offset in part by leverage losses at Things Remembered resulting from the decline in comparable store sales. Operating expenses increased primarily because of the acquisitions and the classification of capitation and other fees as revenue. The expense increase reflected higher advertising expenditures, payroll costs, and store occupancy expenses, as well as expenses related to the growth of managed vision care. Advertising expenditures at Cole Vision were increased for optical promotions and Pearle name awareness. Payroll costs increased because of more higher-volume retail units open in 1997 and additional payroll to support increased sales. Store occupancy expenses increased primarily as a result of more locations and higher percentage rents caused by increased comparable store sales. As a percentage of revenue, payroll and store occupancy costs improved by 1.2 and 2.1 percentage points, respectively, over fiscal 1996, partially offset by the leverage loss from other operating expenses which were affected by the reclassification of managed vision care fees. Fiscal 1997 depreciation and amortization expense of $30.0 million was $11.4 million more than fiscal 1996 reflecting the acquisitions and an increase in capital expenditures. The third and fourth quarter of fiscal 1997 included a total of $8.0 million of charges for non-recurring items related to integration of AVC into the Company's operations. In the fourth quarter of fiscal 1996, a $61.1 million pretax charge was recorded for certain unusual non-recurring items primarily related to the integration and consolidation of Pearle. See Restructuring, Business Integration and Other Unusual Charges below. Operating income, excluding charges for business integration and other unusual items from each year, increased 42.9% to $70.9 million in fiscal 1997 from $49.6 million the prior year, primarily the result of the acquisitions and comparable store sales growth at Cole Vision, offset in part by soft sales performance at Things Remembered. Net interest expense for fiscal 1997 of $27.9 million increased $7.7 million compared to fiscal 1996. The increase was primarily attributable to the additional interest expense on $150.0 million of 9-7/8% Senior Subordinated Notes due 2006 issued in connection with financing the Pearle acquisition and $125.0 million of 8-5/8% Notes. This 9 11 was partially offset by a decrease in interest expense due to the purchase and subsequent retirement of $15.1 million of 11-1/4% Senior Notes in the second quarter of fiscal 1996 and the purchase and retirement of an additional $150.9 million of the 11-1/4% Senior Notes in conjunction with a tender offer in September 1997. The income tax provisions for fiscal 1997 and 1996 include $3.4 million and $20.0 million, respectively, of income tax benefits related to the charges for business integration and other unusual items. The effective tax rate on income excluding the charge for business integration and other unusual items was 43.0% in fiscal 1997 and 44.3% in fiscal 1996. This rate reflects the significant impact of non-deductible amortization of goodwill in both years. The net loss in fiscal 1997 of $6.2 million included a $14.0 million loss, net of an income tax benefit of $8.5 million, related to the operations and closing of Cole Gift Centers and a $12.2 million extraordinary loss, net of an income tax benefit of $7.5 million, recorded in the third quarter of fiscal 1997 in connection with the early extinguishment of debt. A similar charge for $0.7 million, net of an income tax benefit of $0.5 million, was recorded in the second quarter of fiscal 1996. RESTRUCTURING, BUSINESS INTEGRATION AND OTHER UNUSUAL CHARGES In the fourth quarter of fiscal 1996, the Company recorded a $61.1 million pretax charge primarily related to its acquisition of Pearle, which included costs related to the integration and consolidation of Pearle into the Company's operations, as well as other unusual charges. The charge included $15.8 million for store closings, $1.8 million for other facility closings, $21.6 million related to computer systems, which included the settlement costs of terminating an outsourcing agreement, $6.1 million for the writeoff of goodwill pursuant to Statement of Financial Accounting Standards (SFAS) No. 121 and $15.8 of other unusual charges. The other charges related to employee matters, including severance and hiring costs, costs associated with developing and implementing a new franchise agreement, and compensation costs associated with accelerated vesting of a stock option grant to executives. In connection with the 1996 business integration charge, management developed a plan, approved by the Board of Directors, that among other things identified 29 Pearle stores that would be closed and 112 in-store labs that would be taken out of stores. This plan consisted of a store-by-store analysis of profitability, size, lease term and type of lab. In addition, the Company decided to retain Pearle's distribution and central lab facilities, but close the home office facility in Dallas, Texas. The Company's intent was to close the stores, on average, over a six month period and labs, on average, over an eighteen month period following February 1, 1997. The estimated costs of closure, primarily related to lease obligations and impairment of fixed assets, were determined based upon management's and Pearle's past experience in closing stores and represented a portion of the remaining noncancellable term of the operating leases after the expected closing dates. The estimate assumed the Company would be able to avoid certain lease penalty provisions through negotiations with landlords. This resulted in an accrual of $12.9 million being recorded pursuant to EITF No. 94-3 as part of the original charge discussed above. The Company, whose integration efforts were initially focused primarily on the new franchise agreement, closed one store in each of the first and second quarters of fiscal 1997. The Company then acquired AVC in August 1997, and recorded an additional $8.0 million integration charge in fiscal 1997, which included costs of closing an additional 12 stores, six in-store labs, the AVC central lab and the AVC home office, transitional costs incurred to change the brand identity to Pearle and duplicate costs incurred through fiscal year end in connection with the consolidation of the AVC home office functions. The expected benefits of these business integration activities included a stronger franchise network and reductions in (1) home office personnel and occupancy costs, (2) purchasing costs for materials, (3) manufacturing costs upon the completion of the removal of full in-store labs and closing of the AVC lab, and (4) operating losses upon closure of certain unprofitable stores. The consolidation of Pearle's home office and purchasing functions was substantially completed in fiscal 1997, with the exception of lab systems, which are expected to be completed in fiscal 1999. The consolidation of AVC functions, including the shutdown of its central lab, was completed by the third quarter of fiscal 1998. Negotiations with various landlords throughout fiscal 1997 proved more difficult than originally anticipated. Also, due to other priorities of integrating Pearle and the acquisition of AVC in mid-fiscal 1997, the original plan was not fully implemented by the end of fiscal 1997. At the end of fiscal 1997 management reaffirmed its intent to close the remaining 27 stores and convert the 112 lab locations as soon as practicable. The estimated cost of closure was revised to equal the remaining lease liability assuming, on average, stores would be closed six months after January 31, 1998. 10 12 This revised estimate did not differ materially from the previously established accrual and therefore no adjustment to the reserve was required. Had management's original plan corresponded to only the actual stores closed prior to January 31, 1998, the restructuring charges would have been reduced by $9.1 million and $1.6 million for the fiscal years ended February 1, 1997 and January 31, 1998, respectively. Of the facilities originally identified for closing, five stores were closed in the first quarter and one store was closed in the second quarter of fiscal 1998, and 17 full service labs were closed in the third quarter of fiscal 1998. In the third quarter of fiscal 1998, several consultants were retained to help assess various aspects of Cole National Corporation's optical operations. As a result, in the fourth quarter of 1998, the original restructuring plan was revised and a net pretax charge of $23.1 million was recorded, related to further restructuring of its Pearle business along with other unusual charges. The net pretax charge consisted of charges associated with the restructuring of $13.9 million, a reversal of previously established restructuring accruals of $12.3 million and other unusual charges totaling $21.5 million. The restructuring charge of $13.9 million relates to changes made to the Pearle operating model and structure of the home office organization. Consultants conducted market research and helped develop and implement changes to Pearle's marketing message, merchandise offerings and presentation, store locations, organizational structure and other operational opportunities. In addition, home office facilities and personnel, including Cole Managed Vision Care administration and systems were relocated and consolidated into one central facility. The results of these efforts resulted in charges for inventory writedowns related to products that will no longer be carried, severance and hiring costs primarily related to home office organizational changes, consolidation of the home office facilities, including the writeoff of fixed assets at the old facilities, consultant fees and changing the Pearle brand message through signing, production and other costs. The charge related to the inventory writedown has been reflected in cost of sales in accordance with EITF No. 96-9. As part of the revised plan, which was approved by the Board of Directors in March 1999, it was determined that certain stores originally identified for closure would either remain open or be closed at a much lower cost than originally estimated. The plan is to close 26 stores, of which nine were identified in the original store closing plan, over the next 12 months and remove surfacing equipment from full service labs of 226 stores over the next six to eighteen months. As a result of the revised plan, the expected cost of closure is estimated to approximate $1.0 million, requiring a reversal of $12.3 million of the previous accrual. The primary reasons for the significant reduction in the accrual were the passage of time of not closing stores earlier, many of the stores now will be closed at the end of their lease terms, and the shift in strategy in that only surfacing equipment would be removed from full-service stores as opposed to the original plan of completely removing labs. Management believes it will be able to implement its revised plan based on the current status of lease termination negotiations and the expected installation of new lab systems, along with a new central lab facility in 1999. For the restructuring charges recorded in 1996, 1997 and 1998, approximately $29.4 million represented non-cash charges and $34.2 million represented cash outlays through January 30, 1999, including a total of $10.6 million that had been incurred and paid during the respective periods that each charge was initially recorded. At January 30, 1999, approximately $7.1 million of restructuring reserves remained, all of which is expected to result in cash outlays over the next twelve months for lease settlement, severance and other costs incurred in fiscal 1998 but paid in fiscal 1999. The unusual charges in fiscal 1998 related to the writeoff of $8.8 million associated with the abandonment in the fourth quarter of previously capitalized system development costs (including $1.9 million of incurred costs that will be paid in the first half of fiscal 1999) and $2.7 million primarily related to restricted stock issued to two senior executive officers. Cole National Corporation also made an unconditional commitment in the fourth quarter of fiscal 1998 to contribute $10 million through 2009, with payments beginning in 2004, to a leading medical institution supporting the development of a premier eye care research and surgical facility. Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information regarding the restructuring, business integration and other unusual charges. 11 13 LIQUIDITY AND CAPITAL RESOURCES Cole National Corporation's primary source of liquidity is funds provided from operations of its operating subsidiaries. In addition, its wholly-owned subsidiary, Cole National Group, Inc. and its operating subsidiaries have 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. There were no working capital borrowings outstanding as of January 30, 1999, and the maximum amount outstanding at any time during fiscal 1998 was $13.6 million. There were no working capital borrowings outstanding during fiscal 1997. The credit facility contains covenants restricting the ability of its operating subsidiaries to, among other things, pay dividends or make other restricted payments to Cole National Corporation or Cole National Group. The credit facility permits Cole National Group's subsidiaries to pay dividends to the extent necessary to permit payment of all interest and principal on the 9-7/8% Notes and the 8-5/8% Notes when due. During the second quarter of fiscal 1997, Cole National Corporation completed a public offering of 2,587,500 shares of its common stock at an offering price of $47.00 per share. The net proceeds of approximately $116.0 million were used for general corporate purposes including reducing outstanding indebtedness and financing acquisitions, including the purchase of AVC. In August 1997, Cole National Group issued $125.0 million of 8-5/8% Notes. The net proceeds of the issuance were $121.8 million. Cole National Group also commenced a tender offer which expired on September 12, 1997, to purchase up to all of its $165.8 million outstanding 11-1/4% Senior Notes at $1,105.61 per $1,000 principal amount, plus accrued interest thereon, using the net proceeds of the 8-5/8% Notes issuance and cash on hand. A total of $151.3 million of 11-1/4% Senior Notes was tendered, with the remaining amount redeemed in October 1998. In November 1998, the Board of Directors authorized the repurchase from time to time of up to 1 million shares of common stock, or approximately 6.7% of Cole National Corporation's outstanding shares, through open market or block transactions. It is expected that the purchase price will be from internally generated funds and that the shares purchased will be used, in part, to offset dilution from stock options and in connection with other benefit plans. During fiscal 1998, 259,500 shares of common stock were repurchased for an aggregate purchase price of $5.5 million. As of January 30, 1999, Cole National Corporation had purchased a total of 279,500 shares of common stock, and has authority to purchase up to 720,500 shares of common stock in the open market and block purchases. At year end, $150.0 million of 9-7/8% Notes and $125.0 million of 8-5/8% Notes were outstanding. The 9-7/8% Notes and the 8-5/8% Notes are unsecured and mature December 31, 2006 and August 15, 2007, respectively, with no earlier scheduled redemption or sinking fund payment. Interest on the 9-7/8% Notes is payable semi-annually on each June 30 and December 31, while the interest on the 8-5/8% Notes is payable semi-annually on each February 15 and August 15. The indentures pursuant to which the 9-7/8% Notes and the 8-5/8% Notes were issued contain certain optional and mandatory redemption features and other financial covenants, including restrictions on the ability of Cole National Group to pay dividends or make other restricted payments to Cole National Corporation. The indentures permit dividend payments equal to one-half of Cole National Group's consolidated net income, provided that no default or event of default has occurred under the indentures and that Cole National Group has met a specified fixed charge coverage ratio test. The indentures also permit payments to Cole National Corporation for certain tax obligations and for administrative expenses not to exceed .25% of net sales. See Note 6 of the Notes to Consolidated Financial Statements. No significant principal payment obligations are due under its outstanding indebtedness until the 9-7/8% Notes mature in 2006. The ability of Cole National Corporation and its subsidiaries to satisfy these obligations will be primarily dependent upon future financial and operating performance of the subsidiaries and upon its ability to renew or refinance borrowings or to raise additional equity capital. Cash balances at year end were $51.1 million compared to $68.1 million at January 31, 1998. Operations generated net cash of $62.4 million in fiscal 1998, $8.0 million in fiscal 1997 and $82.8 million in fiscal 1996. The primary sources of the $54.4 million improvement in cash provided from operations in fiscal 1998 compared to fiscal 1997 were from net income tax refunds received in fiscal 1998 of $7.1 million compared to income taxes paid in fiscal 1997 of $19.9 million, $20.6 million from a decrease in accounts and notes receivable, prepaid expenses and other assets versus an increase last year and $6.8 million from a smaller increase in inventories in fiscal 1998, partially offset by a $5.5 million larger decrease in accounts payable and accrued liabilities. The $74.8 million decrease in cash 12 14 provided by operations in fiscal 1997 compared to fiscal 1996 was primarily attributable to a decrease in accounts payable and accrued liabilities of $11.8 million due in part to the payment of non-recurring charges, an increase in inventories of $11.2 million versus $3.9 million in fiscal 1996, and a decrease in accrued and deferred income taxes of $25.8 million versus an increase of $16.3 million in fiscal 1996. These cash flow decreases were partly offset by a $15.9 million decrease in the net assets of discontinued operations, increased income from operations of $13.5 million, excluding the charge for integration and other non-recurring items, and increased depreciation and amortization expense of $11.4 million. Net capital additions were $37.6 million, $32.6 million and $25.1 million in fiscal 1998, 1997 and 1996, respectively. The majority of the capital additions was for store fixtures, equipment and leasehold improvements for new stores and the remodeling of existing stores. Capital expenditures for fiscal 1998 include the purchase and furnishing of Cole Vision's headquarters office building for $15.3 million. In fiscal 1997 construction of a new warehouse and distribution facility for Things Remembered was completed at a cost of approximately $9.3 million (of which $6.6 million is included in capital expenditures in fiscal 1997). In fiscal 1998, proceeds of $8.8 million were received from the sale and leaseback of this facility and a portion of the land. In addition, the Company used $7.2 million for additional net investment in Pearle Europe in connection with Pearle Europe's acquisition in 1998 of the second largest optical retailer in Germany and the largest optical retailer in Austria. The Company also used $7.2 million for several acquisitions of local optical chains in fiscal 1998, $27.8 million for the purchase of AVC and $2.8 million for additional investment in Pearle Europe in fiscal 1997, and $157.4 million for the purchases of Pearle and AOCO Limited and $6.1 million for the investment in Pearle Europe in fiscal 1996. In addition, Cole National Corporation paid approximately $16.8 million and $17.9 million for systems development costs in 1998 and 1997, respectively. Such costs have been capitalized and are being amortized over their estimated useful lives. For fiscal 1999, management plans to expand the number of stores, as well as remodel and relocate stores, and currently estimates that capital expenditures in fiscal 1999 will be approximately $30.0 million, excluding acquisitions and systems development costs. Management estimates that it will incur approximately $13.0 million in systems development costs in 1999 that will be capitalized and subsequently amortized. Cole National Corporation believes that funds provided from operations along with funds available under the credit facility will provide adequate sources of liquidity to allow its operating subsidiaries to continue to expand the number of stores and to fund capital expenditures and systems development costs. YEAR 2000 Cole National Corporation has been working with a consultant to assess and resolve the potential impact of the Year 2000 on the ability of its computerized information systems to accurately process information that may be date-sensitive (the "Year 2000 Readiness Program"). Any of the programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. During fiscal 1998, Cole National Corporation completed the assessment of its internal critical and non-critical hardware and software. Included in the assessment was the identification of all critical and non-critical computer programs and hardware, including non-information technology systems such as HVAC, telephone and others containing embedded microcontrollers, and an evaluation of their Year 2000 readiness. Cole National Corporation utilizes over 500 separate computer information systems across its operations, many of which were recently installed and are Year 2000 ready. In addition, modifications to many other critical programs has been completed and testing of these programs is in process. Management currently believes that all critical programs and hardware will be Year 2000 ready, including testing, by the end of the third quarter of fiscal 1999. Concurrent with this internal assessment, Cole National Corporation identified and contacted critical vendors, host stores and managed health care partners with whom it does business regarding their Year 2000 readiness. Although not all responses from third parties have been received, management is not currently aware of any critical third party whose Year 2000 issues are likely to have a material effect on the Company. Cole National Corporation has not yet developed contingency plans and such plans will depend primarily on the responses from critical third parties in the event that it or critical third parties should fail to become Year 2000 ready. Cole National Corporation expects any necessary contingency plans to be completed by the end of the third quarter of fiscal 1999. 13 15 Notwithstanding that Cole National Corporation is proceeding diligently with the implementation of its own Year 2000 Readiness Program, including ascertaining Year 2000 readiness of critical third parties, the inability of it or critical third parties to effectuate timely and cost effective solutions to Year 2000 issues could have a material adverse effect on the Company. Management estimates the total cost of the Year 2000 Readiness Program will be approximately $3.5 million, including approximately $0.3 million of new hardware and software that will be capitalized. The remaining $3.2 million will be expensed as incurred (approximately $2.4 million in fiscal 1998 and $0.8 million in fiscal 1999). These costs include only external costs as internal costs, which consist primarily of payroll-related costs of employees, are not tracked separately for the Year 2000 Readiness Program. The estimate of external costs does not include costs associated with addressing and resolving issues as a result of the failure of third parties to become Year 2000 ready. NEW ACCOUNTING PRONOUNCEMENTS In fiscal 1998, SFAS No. 130 "Reporting Comprehensive Income," SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," and SFAS No. 132 "Employees Disclosures about Pensions and Other Postretirement Benefits" were adopted. Adoption of these standards did not have a material impact on the results of operations, financial position or cash flows. RECENT DEVELOPMENTS AND FORWARD-LOOKING INFORMATION The Company expects results in the first quarter of fiscal 1999 to be below last year from continuing softening of sales at Cole Vision. Certain sections of this Form 10-K Report, including this Management's Discussion and Analysis, contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. Actual results may differ materially from those forecast due to a variety of factors that can affect operating results, liquidity and financial condition, such as risks associated with the timing and achievement of the restructuring of the optical business, the timing and achievement of improvements in the operations of the optical business, the integration of acquired operations, the ability of Cole National Corporation and its suppliers, host stores, and managed care organization partners to achieve Year 2000 readiness, the ability to select and stock merchandise attractive to customers, the implementation of its store acquisition program, economic and weather factors affecting consumer spending, operating factors affecting customer satisfaction, including manufacturing quality of optical and engraved goods, the relationships with host stores and franchisees, the mix of goods sold, pricing and other competitive factors, and the seasonality of the business. Forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting Cole National Corporation. All forward-looking statements involve risk and uncertainty. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Cole National Corporation is exposed to market risk from changes in foreign currency exchange rates, which could impact its results of operations and financial condition. Foreign exchange risk arises from the Company's exposure in fluctuations in foreign currency exchange rates because Cole National Corporation's reporting currency is the United States dollar. Management seeks to minimize the exposure to foreign currency fluctuations through natural internal offsets to the fullest extent possible. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item appears on pages F-1 through F-29 of this Form 10-K and is incorporated herein by reference. Other financial statements and schedules are filed herewith as "Financial Statement Schedules" pursuant to Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 14 16 The information required by this item as to Directors will be included in Cole National Corporation's Proxy Statement under the caption "Election of Directors" and is incorporated herein by reference. The information required by this item as to executive officers who are not Directors is included in Item 4A in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be included in Cole National Corporation's Proxy Statement under the caption "Compensation of Executive Officers" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be included in Cole National Corporation's Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be included in Cole National Corporation's Proxy Statement under the caption "Compensation Committee Interlocks, Insider Participation and Certain Transactions" and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The consolidated financial statements and the related financial statement schedules filed as part of this Form 10-K are located as set forth in the index on page F-1 of this report. (a)(3) EXHIBITS See Exhibit Index on pages X-1 through X-6. (b) REPORTS ON FORM 8-K Report on Form 8-K dated January 12, 1999. 15 17 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. COLE NATIONAL CORPORATION April 30, 1999 By: /s/ Wayne L. Mosley ----------------------------------- Wayne L. Mosley Vice President and Controller PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. * Chairman and Chief April 30, 1999 - --------------------------------- Executive Officer and Jeffrey A. Cole Director (Principal Executive Officer) * President and Director April 30, 1999 - --------------------------------- Brian B. Smith * Executive Vice President of Strategic April 30, 1999 - --------------------------------- Planning and Chief Financial Officer George H. Bernstein, Jr. (Principal Financial Officer) /s/ Wayne L. Mosley Vice President and Controller April 30, 1999 - --------------------------------- (Principal Accounting Officer) Wayne L. Mosley * Director April 30, 1999 - --------------------------------- Timothy F. Finley * Director April 30, 1999 - --------------------------------- Irwin N. Gold * Director April 30, 1999 - --------------------------------- Peter V. Handal * Director April 30, 1999 - --------------------------------- Charles A. Ratner * Director April 30, 1999 - --------------------------------- Walter J. Salmon
* The undersigned, by signing his name hereto, does sign and execute this report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors of Cole National Corporation 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 16 18 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Report of Independent Public Accountants F - 2 Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998 F - 3 Consolidated Statements of Operations for the 52 weeks ended January 30, 1999, January 31, 1998, and February 1, 1997 F - 4 Consolidated Statements of Cash Flows for the 52 weeks ended January 30, 1999, January 31, 1998, and February 1, 1997 F - 5 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the 52 weeks ended January 30, 1999, January 31, 1998, and February 1, 1997 F - 6 Notes to Consolidated Financial Statements F - 7 FINANCIAL STATEMENT SCHEDULES: Report of Independent Public Accountants on the Financial Statement Schedules F - 25 Schedule I - Condensed Financial Information of Registrant F - 26 Schedule II - Valuation and Qualifying Accounts F - 29
All financial statement schedules not included have been omitted because they are not applicable or because the required information is otherwise furnished. F-1 19 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 as of January 30, 1999 and January 31, 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended January 30, 1999. These financial statements are the responsibility of Cole National Corporation'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 January 30, 1999 and January 31, 1998 and the results of their operations and their cash flows for each of the three years in the period ended January 30, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 17, 1999. F-2 20 COLE NATIONAL CORPORATION AND SUBSIDIARIES ------------------------------------------ CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars in thousands) ----------------------
January 30, January 31, 1999 1998 ---------- ------------ Assets - ------- Current assets: Cash and temporary cash investments $ 51,057 $ 68,053 Accounts receivable, less allowance for doubtful accounts of $7,189 in 1998 and $7,132 in 1997 45,561 52,030 Current portion of notes receivable 2,707 4,177 Refundable income taxes 9,556 9,520 Inventories 119,881 119,970 Prepaid expenses and other 8,582 9,195 Deferred income tax benefits 14,048 21,534 ---------- ---------- Total current assets 251,392 284,479 Property and equipment, at cost 261,605 242,966 Less - accumulated depreciation and amortization (135,731) (115,162) ----------- ---------- Total property and equipment, net 125,874 127,804 Other assets: Notes receivable, excluding current portion 32,039 25,783 Deferred income taxes and other 59,021 54,241 Intangible assets, net 159,698 159,077 ---------- ---------- Total assets $ 628,024 $ 651,384 ========== ========== Liabilities and Stockholders' Equity - ------------------------------------- Current liabilities: Current portion of long-term debt $ 1,497 $ 16,027 Accounts payable 73,065 75,271 Accrued interest 6,216 6,615 Accrued liabilities 101,791 112,434 Accrued income taxes 128 957 ---------- ---------- Total current liabilities 182,697 211,304 Long-term debt, net of discount and current portion 276,013 277,401 Other long-term liabilities 23,954 30,664 Stockholders' equity: Preferred stock - - Common stock 15 15 Paid-in capital 257,981 251,405 Accumulated deficit (101,843) (116,119) Accumulated other comprehensive loss (1,205) (1,749) Treasury stock at cost (6,084) (611) Unamoritized restricted stock awards (2,598) - Notes receivable-stock option exercise (906) (926) ---------- ---------- Total stockholders' equity 145,360 132,015 ---------- ---------- Total liabilities and stockholders' equity $ 628,024 $ 651,384 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-3 21 COLE NATIONAL CORPORATION AND SUBSIDIARIES ------------------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (Dollars in thousands, except per share amounts) ------------------------------------------------
52 Weeks Ended ------------------------------------------- January 30, January 31, February 1, 1999 1998 1997 -------------- ------------- -------- Net revenue $ 1,068,182 $ 1,000,198 $ 628,496 Costs and expenses: Cost of goods sold 364,090 340,849 201,229 Operating expenses 610,131 558,531 359,085 Depreciation and amortization 33,742 29,954 18,577 Restructuring and other unusual charges 17,873 8,000 61,091 ----------- ----------- ----------- Total costs and expenses 1,025,836 937,334 639,982 ----------- ----------- ----------- Operating income (loss) 42,346 62,864 (11,486) Interest and other (income) expense: Interest expense 27,565 30,365 21,855 Interest and other income (8,841) (2,472) (1,704) ----------- ----------- ----------- Total other (income) expense 18,724 27,893 20,151 ----------- ----------- ----------- Income (loss) from continuing operations before income taxes 23,622 34,971 (31,637) Income tax provision (benefit) 9,346 15,038 ----------- ----------- ----------- (6,939) Income (loss) from continuing operations 14,276 19,933 (24,698) ----------- ----------- ----------- Discontinued operations: Operating loss, net of income tax provision (benefit) of $(39) and $180, respectively -- (67) (2,935) Loss on disposal, net of income tax benefit of $8,500 -- (13,900) -- ----------- ----------- ----------- Loss from discontinued operations -- (13,967) (2,935) ----------- ----------- ----------- Income (loss) before extraordinary item 14,276 5,966 (27,633) Extraordinary loss on early extinguishment of debt, net of income tax benefit of $7,467 and $494, respectively -- (12,183) (682) ----------- ----------- ----------- Net income (loss) $ 14,276 $ (6,217) $ (28,315) =========== =========== =========== Earnings (loss) per common share: Basic - Income (loss) from continuing operations $ .96 $ 1.48 $ (2.18) Loss from discontinued operations -- (1.04) (.26) Extraordinary loss -- (.90) (.06) ----------- ----------- ----------- Net income (loss) $ .96 $ (.46) $ (2.50) =========== =========== =========== Diluted - Income (loss) from continuing operations $ .94 $ 1.43 $ (2.18) Loss from discontinued operations -- (1.00) (.26) Extraordinary loss -- (.87) (.06) ----------- ----------- ----------- Net income (loss) $ .94 $ (.44) $ (2.50) =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-4 22 COLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
52 Weeks Ended ----------------------------------------- January 30, January 31, February 1, 1999 1998 1997 ------------- ------------ ------------ Cash flows from operating activities: Net income (loss) $ 14,276 $ (6,217) $ (28,315) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt -- 12,183 682 Restructuring and other unusual charges 11,886 546 19,983 Depreciation and amortization 33,742 29,954 18,577 Non-cash interest, net (555) 142 440 Deferred income tax provision (benefit) 13,001 12,823 (16,194) Change in assets and liabilities net of effects from acquisitions: Decrease (increase) in accounts and notes receivable, prepaid expenses and other assets 11,131 (9,513) (4,374) Increase in inventories (4,404) (11,222) (3,935) Decrease in net assets of discontinued operations -- 19,926 4,002 Increase (decrease) in accounts payable, accrued liabilities and other liabilities (17,324) (11,812) 73,107 Increase (decrease) in accrued interest (399) (3,015) 2,580 Increase (decrease) in accrued, refundable and deferred income taxes 1,038 (25,826) 16,256 --------- --------- --------- Net cash provided by operating activities 62,392 7,969 82,809 --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment, net (37,591) (32,645) (25,148) Proceeds from sale/leaseback, net 8,835 -- -- Acquisitions of businesses, net of cash acquired (7,231) (27,926) (157,426) Investment in Pearle Europe (10,296) (2,819) (6,102) Repayment of loan by Pearle Europe 3,144 -- -- Systems development costs (16,802) (17,922) (2,933) Other, net 277 (696) 111 --------- --------- --------- Net cash used by investing activities (59,664) (82,008) (191,498) --------- --------- --------- Cash flows from financing activities: Repayment of long-term debt (16,040) (170,705) (17,105) Payment of deferred financing fees -- (3,191) (6,066) Common stock repurchased (5,473) (611) -- Net proceeds from public stock offering -- 115,878 26,202 Net proceeds from long-term debt -- 125,000 148,875 Net proceeds from exercise of stock options and warrants 1,998 2,903 546 Other (209) (323) 118 --------- --------- --------- Net cash provided (used) by financing activities (19,724) 68,951 152,570 --------- --------- --------- Cash and temporary cash investments: Net increase (decrease) during the period (16,996) (5,088) 43,881 Balance, beginning of the period 68,053 73,141 29,260 --------- --------- --------- Balance, end of the period $ 51,057 $ 68,053 $ 73,141 ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-5 23 COLE NATIONAL CORPORATION AND SUBSIDIARIES ------------------------------------------ CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - ------------------------------------------------------------------------ (Dollars in thousands) ---------------------
January 30, January 31, February 1, 1999 1998 1997 --------- --------- --------- Common Stock: Balance at beginning of period $ 15 $ 12 $ 10 Net proceeds from sale of common stock -- 3 1 Exercise of stock options -- -- 1 --------- --------- --------- Balance at end of period 15 15 12 --------- --------- --------- Paid In Capital: Balance at beginning of period 251,405 131,238 99,827 Net proceeds from sale of common stock -- 115,875 26,201 Stock options granted -- -- 4,153 Stock compensation 357 635 -- Exercise of stock options and warrants 3,577 3,657 1,057 Issuance of restricted stock 2,642 -- -- --------- --------- --------- Balance at end of period 257,981 251,405 131,238 --------- --------- --------- Accumulated Deficit: Balance at beginning of period (116,119) (109,902) (81,587) Net income (loss) 14,276 (6,217) (28,315) --------- --------- --------- Balance at end of period (101,843) (116,119) (109,902) --------- --------- --------- Accumulated Other Comprehensive Income (Loss): Balance at beginning of period (1,749) (606) -- Other comprehensive income (loss) 544 (1,143) (606) --------- --------- --------- Balance at end of period (1,205) (1,749) (606) --------- --------- --------- Treasury Stock: Balance at beginning of period (611) -- -- Common stock repurchased (5,473) (611) -- --------- --------- --------- Balance at end of period (6,084) (611) -- --------- --------- --------- Unamoritized Restricted Stock Awards: Balance at beginning of period -- -- -- Issuance of restricted stock (2,642) -- -- Amortization of restricted stock awards 44 -- -- --------- --------- --------- Balance at end of period (2,598) -- -- --------- --------- --------- Notes Receivable -- Stock Option Exercise: Balance at beginning of period (926) (1,024) (1,117) Exercise of stock options -- -- (49) Repayment of notes receivable 20 98 142 --------- --------- --------- Balance at end of period (906) (926) (1,024) --------- --------- --------- Total Stockholders' Equity $ 145,360 $ 132,015 $ 19,718 ========= ========= ========= Comprehensive Income: Net income (loss) $ 14,276 $ (6,217) $ (28,315) Cumulative translation adjustment 544 (1,143) (606) --------- --------- --------- Total comprehensive income $ 14,820 $ (7,360) $ (28,921) ========= ========= =========
The accompany notes to consolidated financial statements are an integral part of the consolidated statements. F-6 24 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 and its wholly owned subsidiaries, including Cole National Group, Inc. and its wholly owned subsidiaries (collectively, the Company). Cole National Group's subsidiaries include Pearle, Inc. which was acquired on November 15, 1996 (see Note 2). All significant intercompany transactions have been eliminated in consolidation. Fiscal years end on the Saturday closest to January 31 and are identified according to the calendar year in which they begin. Fiscal years 1998, 1997 and 1996 each consisted of 52-week periods. NATURE OF OPERATIONS - Cole National Corporation is a specialty service retailer, operating in both host and non-host environments, whose primary lines of business are eyewear products and services and personalized gifts. Cole National Corporation sells its products through 2,475 company-owned retail locations and 409 franchised locations in 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. Cole National Corporation has two reportable segments: Cole Vision and Things Remembered (see Note 12). INVENTORIES - Inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Property and Depreciation - The policy is to provide depreciation using the straight-line method over a period which is sufficient to amortize the cost of the asset over its useful life or lease term. The estimated useful lives for depreciation purposes are: Buildings and improvements 5 to 40 years Equipment 3 to 10 years Furniture and fixtures 2 to 10 years Leasehold improvements 2 to 20 years Property and equipment, at cost, consist of the following at January 30, 1999 and January 31, 1998 (000's omitted):
1999 1998 -------- ------ Land and buildings $ 23,463 $ 22,782 Furniture, fixtures and equipment 157,302 149,795 Leasehold improvements 80,840 70,389 ---------- ---------- Total property and equipment $ 261,605 $ 242,966 ========== ==========
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. F-7 25 INVESTMENT IN PEARLE EUROPE B.V. - Included in other assets is Cole National Corporation's minority investment in Pearle Europe B.V., which is in the retail optical business in Europe. The largest investor in Pearle Europe owns a 73% interest, Cole National Corporation owns a 24% interest, and Pearle Europe's management owns the remaining 3% interest. Cole National Corporation's common equity investment of $3.3 million at January 30, 1999 is accounted for using the equity method. Included in interest and other income is Cole National Corporation's equity share of Pearle Europe's earnings (loss), which totaled $0.9 million, $0.3 million and ($0.1) million in fiscal 1998, 1997, and 1996, respectively. Included in notes receivable is $13.5 million and $6.2 million of net shareholder loans receivable from Pearle Europe and its subsidiaries at January 30, 1999 and January 31, 1998, respectively. The shareholder loans provide for interest at rates ranging from 8% to 12.7%. Cole National Corporation reported interest income of $1.5 million on the notes in fiscal 1998 as compared to $0.5 million and $0.1 million in 1997 and 1996, respectively. During fiscal 1998, Cole National Corporation received interest payments against the balances accrued over the period from fiscal 1996 through fiscal 1998 totaling $0.9 million. In February 1998, Cole National Corporation repaid a $3.1 million note payable to a subsidiary of Pearle Europe and invested an additional $7.2 million in the form of 8% shareholder loans to Pearle Europe in connection with Pearle Europe's acquisition of optical operations in Germany and Austria. After these acquisitions, Pearle Europe's annualized sales are estimated to be in excess of $300.0 million. In June 1998, Pearle Europe repaid to Cole National Corporation a shareholder loan, including interest thereon, in the amount of $3.7 million. NOTES RECEIVABLE - In addition to the notes receivable from Pearle Europe are notes receivable from Pearle's franchisees throughout the U.S. The franchise notes are collateralized by inventory, equipment, and leasehold improvements at each location, 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 January 30, 1999 and January 31, 1998 (000's omitted):
1999 1998 ------ ----- Tradenames $ 46,725 $ 47,962 Goodwill 112,973 111,115 --------- ---------- $ 159,698 $ 159,077 ========= ==========
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 $2,735,000 and $1,498,500 at January 30, 1999 and January 31, 1998, respectively. Goodwill generally is being amortized on a straight-line basis over 40 years and is presented net of accumulated amortization of $37,880,000 and $34,008,000 at January 30, 1999 and January 31, 1998, respectively. Management regularly evaluates its accounting for goodwill considering primarily such factors as historical profitability, current operating profits and cash flows. Cole National Corporation believes that, at January 30, 1999, 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. F-8 26 In March 1998 the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides that direct costs to develop or obtain internal use software, including internal costs, should be capitalized and amortized over the estimated useful life of the software. Such costs incurred have been capitalized and are included in other assets. These costs are being amortized on a straight-line basis over periods ranging from two to seven years, beginning when the software is placed in service. At January 30, 1999 and January 31, 1998, these costs, net of accumulated amortization, were $34,267,000 and $23,963,000, respectively. VALUATION OF LONG-LIVED ASSETS - Long-lived assets, such as property, plant and equipment, goodwill and other intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying value of the asset. OTHER LONG-TERM LIABILITIES - Other long-term liabilities consist primarily of certain employee benefit obligations, deferred lease credits and other lease-related obligations and other obligations not expected to be paid within 12 months. Deferred lease credits are amortized on a straight-line basis over the life of the applicable lease. CAPITAL STOCK - At January 30, 1999 and January 31, 1998, there were 14,835,746 and 14,727,325, respectively, shares of common stock, par value $.001 per share, outstanding. At January 30, 1999, there were 40,000,000 and 5,000,000 authorized shares of common stock and undesignated preferred stock, respectively. FOREIGN CURRENCY TRANSLATION - The assets and liabilities of Cole National Corporation's foreign subsidiaries and its investment in Pearle Europe are translated to United States dollars at the rates of exchange on the balance sheet date. Income and expense items are translated at average monthly rates of exchange. Translation adjustments are presented as a component of accumulated other comprehensive income within stockholders' equity. 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, other revenues from franchisees such as royalties based on sales, interest income on notes receivable and initial franchise fees, and capitation and other fees associated with its growing managed vision care business. 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 Cole National Corporation and when the related store begins operations. F-9 27 ADVERTISING - Advertising production costs and other advertising costs are expensed as incurred, a portion of which are reimbursed by franchisees based on a percentage of their sales. Advertising expense is summarized as follows (000's omitted):
1998 1997 1996 -------- -------- ------ Gross advertising expense $ 82,492 $ 74,553 $ 37,427 Less: Franchisee contribution (20,244) (19,656) (4,230) --------- --------- --------- Net advertising expense $ 62,248 $ 54,897 $ 33,197 ========= ========= =========
EARNINGS PER SHARE - Statement of Financial Accounting Standards (SFAS) No. 128 requires that earnings per share be presented as two calculations: basic and diluted. Basic earnings per share for 1998, 1997 and 1996 have been based on 14,802,023; 13,480,792 and 11,333,453, respectively, weighted average number of common shares outstanding. Stock options and warrants that are outstanding are considered to be potentially dilutive common stock. Diluted earnings per share for 1998, 1997 and 1996 have been based on 15,176,469; 13,980,727 and 11,333,453, respectively, weighted average number of common shares outstanding after consideration of the dilutive effect, if any, for these common share equivalents. CASH FLOWS - For purposes of reporting cash flows, all temporary cash investments which have original maturities of three months or less, are considered 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):
1998 1997 1996 -------- -------- ------ Income taxes $ 1,644 $ 19,889 $ 5,300 Interest $ 26,112 $ 33,682 $ 20,834
Fiscal 1997 cash paid for income taxes includes $15.0 million of taxes due on the sale of Pearle Holdings B.V. that were reimbursed to Cole National Corporation by the seller in connection with the Pearle acquisition in fiscal 1996 and paid by Cole National Corporation in fiscal 1997. During 1998, 1997 and 1996, non-cash financing activities included incurring $77,000, $799,000 and $2,504,000, respectively, in capital lease obligations. USE OF ESTIMATES - 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. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with the 1998 presentation. F-10 28 (2) ACQUISITIONS OF BUSINESSES On November 15, 1996, Cole National Corporation 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. Immediately following the acquisition, Cole National Corporation sold Pearle Holdings B.V., Pearle's European operations, to Pearle Trust B.V. for approximately $62 million. No gain or loss was recorded on this transaction. As more fully described in Note 1, Cole National Corporation has retained an ownership interest in Pearle Europe, the parent company of Pearle Trust B.V. 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 $24.5 million, including final adjustments of $4.3 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 deferred tax assets of $16.7 million. On a pro forma basis, if the Pearle acquisition had taken place at the beginning of fiscal 1996, the unaudited consolidated net revenues would have been $878.3 million for fiscal 1996. 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 $1.7 million or $0.15 per share from the amounts reported. 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 fiscal 1996, and do not purport to be indicative of results of operations which may occur in the future. The 1998 results include the recognition of $6.0 million of income from cash received in a nontaxable settlement of certain contingencies related to several claims against and indemnifications from the former owner of Pearle. In connection with this settlement, Cole National Corporation assumed secondary liability for approximately $10.0 million of loans to certain franchisees held by a third party. Cole National Corporation is contingently liable should any of these franchisees default, and also for prepayment penalties of up to $1.1 million. Cole National Corporation has established reserves for potential losses on the loans, which mature through 2001. The settlement also included a release of the former owner of Pearle from certain future non-tax claims related to Pearle. Cole National Corporation also made the following acquisitions, each of which has been accounted for under the purchase method of accounting. Pro forma financial results have not been presented for these acquisitions, as they did not have a material effect on results of operations. In fiscal 1998, Cole National Corporation acquired ten Buckeye Optical stores in Columbus, Ohio, and all of the issued and outstanding common stock of Management Associates, Inc., whose operations consisted of four 20/20 Eyecare stores located in Las Vegas, Nevada. The total purchase price for these acquisitions was $7.2 million. On August 5, 1997, Cole National Corporation acquired all of the issued and outstanding common stock of American Vision Centers, Inc. (AVC), whose operations consisted of 79 company-owned and 85 franchised optical stores, for an aggregate purchase price of approximately $28.9 million, including debt assumed. 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 $20.0 million. The relative fair values of the assets acquired and liabilities assumed included unfavorable leasehold interests of F-11 29 $3.4 million, accruals for involuntary severance and termination benefits of $0.5 million, write-off of deferred assets of $1.4 million and deferred tax assets of $7.5 million. In November 1996, Cole National Corporation acquired all of the issued and outstanding stock of AOCO Limited, which operated 73 Sears Optical Departments and two freestanding Vision Club stores in Canada, for a purchase price of $2.6 million. (3) RESTRUCTURING AND OTHER UNUSUAL CHARGES In the fourth quarter of fiscal 1998, Cole National Corporation began implementation of a restructuring plan and recorded a net pretax charge of $23.1 million, related to restructuring its Pearle business along with other unusual charges. The net pretax charge consisted of charges associated with the restructuring of $13.9 million, a reversal of previously established restructuring accruals of $12.3 million and other unusual charges totaling $21.5 million. The restructuring charge of $13.9 million relates to changes made to the Pearle operating model and structure of the home office organization. These changes resulted in charges for inventory write-downs related to products that will no longer be carried, severance and hiring costs primarily related to home office organizational changes, consolidation of the home office facilities, including the write-off of fixed assets at the old facilities, consultant fees and changing the Pearle brand message through signing, production and other costs. The charge related to the inventory write-down ($5.2 million) has been included in cost of sales in fiscal 1998. Additionally, Cole National Corporation had recorded restructuring and other nonrecurring charges of $8.0 million and $61.1 million in fiscal 1997 and 1996, respectively. These charges consisted primarily of costs of integrating and consolidating the recent acquisitions of both AVC and Pearle, including costs of store and other facility closings, a computer system termination fee and related asset impairment costs. The accrual established in fiscal 1996 was based in part upon the closure of certain stores and in-store labs. As part of the revised restructuring plan discussed above, it was determined that certain stores originally planned to be closed would either remain open or be closed at a much lower cost than originally estimated. In addition, management determined that, while it still plans to reduce the number of full service labs, the lease costs and equipment to be removed from the stores would be less than originally anticipated. Cole National Corporation plans to close 26 stores over the next twelve months and remove surfacing equipment from the full service labs of 226 stores over the next six to eighteen months. As a result, $12.3 million of previously established accruals have been reversed into income as a restructuring credit. During fiscal 1997, an $8.0 million pretax business integration charge associated with the AVC acquisition was recorded. Such charge included costs incurred related to the integration and consolidation of AVC into Cole National Corporation's operations, including costs of store and other facility closings, transitional costs incurred to change the brand identity to Pearle and duplicate costs incurred through fiscal year end in connection with the consolidation of the AVC home office functions. The charge consisted of $4.3 million of costs incurred in fiscal 1997, $0.7 million of asset write-downs and $3.0 million of costs accrued in accordance with EITF No. 94-3. The fiscal 1996 pretax charge of $61.1 million is primarily related to the integration and consolidation of Pearle into Cole National Corporation's operations, as well as certain other non-recurring charges, including store and other facility closings, computer systems and asset impairments. The charge consisted of $29.4 million of costs incurred in fiscal 1996, $17.4 million of asset write-downs and $14.3 million of costs accrued in accordance with EITF No. 94-3. Cole National Corporation had identified 29 unprofitable Pearle stores which it intended to close along with 112 other retail locations at which it intended to close the in-store labs and supply these locations from other facilities. In addition, Cole National Corporation decided to retain Pearle's distribution and central lab facilities, but to close Pearle's home office facility in Dallas, Texas. The charge in fiscal 1996 for store and other facility 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. The charge for computer systems was primarily for settlement costs of prematurely terminating an outsourcing agreement that was providing systems integrations and data processing services. The asset impairment charge related to goodwill associated with portions of its optical business that would not be recoverable as the carrying values of these businesses exceeded fair value, as measured by projected future discounted cash flows, in accordance with SFAS No. 121. F-12 30 Other charges in fiscal 1996 include costs related to employee matters, including duplicate costs incurred through the end of fiscal 1996 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 following summarizes the major components of the restructuring charges recorded in fiscal 1996, 1997 and 1998, along with cash and non-cash charges against the reserves (in millions):
Charges to Reserve Charges to Reserve 1996 1997 ---------------------- Remaining ---------------------- Remaining Original Non- Reserve Non- Reserve Charge Cash Cash at 2/1/97 Cash Cash at 1/31/98 ----------- --------- ----------- ----------- --------- --------- ------------ 1996 Charge - ----------------------- Store and other facilities closing $ 17.6 $(0.2) $ - $ 17.4 $ (0.6) $(0.2) $ 16.6 Computer systems 21.6 (0.5) (4.0) 17.1 (12.6) - 4.5 Asset impairment 6.1 0.0 (6.1) - 0.0 - - Other 15.8 (4.8) (6.8) 4.2 (3.5) - 0.7 ------ ----- ------- ------ ------- ----- ------ Total $ 61.1 $(5.5) $ (16.9) $ 38.7 $ (16.7) $(0.2) $ 21.8 ====== ===== ======= ====== ======= ===== ====== 1997 Charge - ----------------------- Store and other facilities closing $ 2.5 $ - $ - $ 2.5 Severance 0.9 (0.1) - 0.8 Operating costs and losses 1.7 (1.6) (0.1) - Marketing and brand conversion 1.5 (0.6) - 0.9 Other 1.4 (0.8) - 0.6 ----------- ----------- --------- ------------ Total $ 8.0 $ (3.1) $(0.1) $ 4.8 =========== =========== ========= ============ 1998 Charge - ----------------------- Facilities relocations $ 2.6 Inventory 5.2 Marketing and brand conversion 2.3 Professional fees 1.9 Severance/hiring 1.9 ----------- Total $ 13.9 =========== Charges to Reserve 1998 -------------------------------------- Remaining Non- Reserve Cash Cash Reversal at 1/30/99 --------- --------- ----------- ----------- 1996 Charge - ----------------------- Store and other facilities closing $(0.4) $ (5.7) $ (9.5) $ 1.0 Computer systems (4.0) (0.5) - - Asset impairment 0.0 0.0 - - Other (0.2) 0.0 (0.5) - ----- ------ ------- ----- Total $(4.6) $ (6.2) $ (10.0) $ 1.0 ===== ====== ======= ===== 1997 Charge - ----------------------- Store and other facilities closing $(0.4) $ - $ (2.1) $ - Severance (1.0) - 0.2 - Operating costs and losses - - - - Marketing and brand conversion (0.7) - (0.2) - Other (0.2) (0.2) (0.2) - -------- ----------- ----------- ----------- Total $(2.3) $ (0.2) $ (2.3) $ - ======== =========== =========== =========== 1998 Charge - ----------------------- Facilities relocations $(0.5) $ (0.5) $ - $ 1.6 Inventory - (5.2) - - Marketing and brand conversion (0.2) - - 2.1 Professional fees (0.8) (0.1) - 1.0 Severance/hiring (0.5) - - 1.4 -------- ----------- ----------- ----------- Total $(2.0) $ (5.8) $ - $ 6.1 ======== =========== =========== ===========
The reserves remaining at January 30, 1999 equal the amount of future expected cash outlays, which for the 1996 charge are for lease settlement costs for stores to be closed and are expected to be incurred over the next twelve months. Of the remaining cash outlays related to the 1998 charge, approximately $4.0 million had been incurred in fiscal 1998 and is expected to be paid in the first quarter of fiscal 1999. The remainder related primarily to severance arrangements and operating costs of idle facilities that will be paid through the fourth quarter of fiscal 1999. The unusual charges in fiscal 1998 related to the write-off of $8.8 million associated with the abandonment in the fourth quarter of previously capitalized system development costs (including $1.9 million of incurred costs that will be paid in the first half of fiscal 1999) and $2.7 million primarily related to restricted stock issued to two senior executive officers. See Note 8 for further discussion of the restricted stock grants. Cole National Corporation also made an unconditional commitment in the fourth quarter of fiscal 1998 to F-13 31 contribute $10.0 million through 2009, with payments beginning in 2004, to a leading medical institution supporting the development of a premier eye care research and surgical facility. This charge has been recognized as a liability in accordance with SFAS No. 116. (4) DISCONTINUED OPERATIONS On January 13, 1998, Cole National Corporation announced the closing of its Cole Gift Centers chain of personalized gift and greeting card departments located in host stores. The decision to close Cole Gift Centers was based on declining sales and profitability trends in recent years and management's desire to focus its gift retailing efforts on Things Remembered. For financial statement purposes, the assets, liabilities, results of operations and cash flows of Cole Gift Centers are included in the consolidated financial statements as discontinued operations. The estimated loss on disposal of $13.9 million (net of an applicable income tax benefit of $8.5 million) includes provisions for severance and other closing costs, inventory and other asset write-offs and estimated operating losses for the period from January 13, 1998 through February 1998 when all locations were closed. Cole Gift Centers' net revenue was $50.9 million and $55.5 million in 1997 and 1996, respectively. Consolidated interest expense that was not directly attributable to other operations of Cole National Corporation was allocated to discontinued operations based on the ratio of the net assets of discontinued operations to total net assets of Cole National Corporation plus consolidated debt of Cole National Corporation not directly attributable to other operations. As a result, the operating loss from discontinued operations includes allocated interest expense of $1.3 million and $1.9 million in fiscal 1997 and 1996, respectively. The net loss of discontinued operations also includes a non-recurring charge of $3.3 million in fiscal 1996, primarily related to the write-off of goodwill at Cole Gift Centers, in accordance with SFAS No. 121. (5) PUBLIC OFFERINGS On July 18, 1997, Cole National Corporation completed a public offering of 2,587,500 shares of its common stock at a price of $47.00 per share. Net proceeds from the offering were approximately $116.0 million. The net proceeds from the offering were used for the purchase of American Vision Centers, for Cole National Group's tender offer to purchase up to all of its $165.8 million outstanding 11-1/4% Senior Notes due 2001 (see Note 6) and for general corporate purposes, including reducing outstanding indebtedness and financing possible future acquisitions. In 1996, Cole National Corporation completed a public offering of 1,437,500 shares of common stock at a price of $19.25 per share. The net proceeds from the offering were $26.2 million. A portion of the proceeds was used to purchase $15.1 million of the 11-1/4% Senior Notes, plus accrued interest thereon (see Note 6). (6) LONG-TERM DEBT Long-term debt at January 30, 1999 and January 31, 1998 is summarized as follows (000's omitted):
1999 1998 --------- -------- 7-1/2% Obligation in connection with Industrial Revenue Bonds $ - $ 168 11-1/4% Senior Notes - 14,476 9-7/8% Senior Subordinated Notes: Face value 150,000 150,000 Unamortized discount (964) (1,041) ---------- ---------- Total 9-7/8% Senior Subordinated Notes 149,036 148,959 8-5/8% Senior Subordinated Notes 125,000 125,000 Capital lease obligations (see Note 13) 3,474 4,825 -------- ---------- 277,510 293,428 Less current portion (1,497) (16,027) ---------- ---------- Net long-term debt $ 276,013 $ 277,401 ========= ==========
F-14 32 On August 15, 1997, Cole National Group announced a tender offer to purchase up to all of its 11-1/4% Senior Notes at a price of $1,105.61 per $1,000 of principal, plus accrued interest. The tender offer expired on September 12, 1997, at which time a total of $151.3 million principal amount of the 11-1/4% Senior Notes were tendered, leaving $14.5 million outstanding. As a result of the tender offer, in the third quarter of fiscal 1997 Cole National Corporation recorded an extraordinary charge of $12.2 million, net of an income tax benefit of $7.5 million, representing the tender premium, the write-off of the related unamortized debt discount and other costs associated with redeeming the debt. The remaining 11-1/4% Senior Notes not tendered in 1997 were called and retired in October 1998. On August 22, 1997, Cole National Group issued $125.0 million of 8-5/8% Senior Subordinated Notes that mature in 2007 with no earlier scheduled redemption or sinking fund payments. Proceeds from this debt issuance of approximately $121.8 million, along with cash on hand, were used to fund the above-described tender offer. Interest on the 8-5/8% Notes is payable semi-annually on February 15 and August 15. On November 15, 1996, Cole National Group issued $150 million of 9-7/8% Senior Subordinated Notes that mature in 2006 with no earlier scheduled redemption or sinking fund payments. The 9-7/8% Notes were used to finance a portion of the Pearle acquisition (see Note 2). Interest on the 9-7/8% Notes is payable semi-annually on June 30 and December 31. The 8-5/8% Notes and the 9-7/8% Notes are general unsecured obligations of Cole National Group, subordinated in right of payment to senior indebtedness of Cole National Group and senior in right of payment to any current or future subordinated indebtedness of Cole National Group. The indentures pursuant to which the 8-5/8% Notes and the 9-7/8% Notes were issued restrict dividend payments to Cole National Corporation to 50% of Cole National Group's net income after October 31, 1993, plus amounts due to Cole National Corporation under a tax sharing agreement and for administrative expenses of Cole National Corporation not to exceed 0.25% of Cole National Group's net revenue. The indentures also contain certain optional and mandatory redemption features and other financial covenants. Cole National Group was in compliance with these covenants at January 30, 1999. Cole National Corporation recorded an extraordinary loss of $0.7 million in 1996, 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 $15.1 million of the 11-1/4% Senior Notes. At January 30, 1999, the fair value of long-term debt was approximately $282.7 million compared to a carrying value of $277.5 million. The fair value was estimated primarily by using quoted market prices. There are no significant principal payment obligations under its outstanding indebtedness until the 9-7/8% Notes mature in 2006. (7) CREDIT FACILITY Concurrent with the Pearle acquisition, the principal operating subsidiaries of Cole National Group entered into a credit facility. The credit facility replaced the existing revolving credit facility. The credit facility provides the principal operating subsidiaries of Cole National Group 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 principal operating subsidiaries of Cole National Group, 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%. Cole National Group pays a commitment fee of 0.375% per annum on the total unused portion of the facility. Additionally, the credit facility requires the principal operating subsidiaries of Cole National Group to comply with various operating covenants that restrict corporate activities, including covenants restricting the ability of the subsidiaries to incur additional indebtedness, pay dividends, prepay subordinated indebtedness, dispose of certain investments or make acquisitions. The credit facility also requires the subsidiaries to comply with certain financial covenants, including covenants regarding minimum interest F-15 33 coverage, maximum leverage and consolidated net worth. The principal operating subsidiaries of Cole National Group were in compliance with these covenants at January 30, 1999. The credit facility restricts dividend payments to Cole National Group to amounts needed to pay interest on the 9-7/8% Notes and the 8-5/8% Notes, and certain amounts related to taxes, along with up to $8.0 million plus 0.25% of Cole National Group's consolidated net revenue annually for other direct expenses of Cole National Corporation or Cole National Group. In addition, dividends of up to $20.0 million are permitted to repurchase the 8-5/8% Notes and/or the 9-7/8% Notes. No borrowings under the credit facility were outstanding as of January 30, 1999, and the maximum amount of borrowings during fiscal 1998 was $13.6 million. No borrowings under the credit facility were outstanding as of January 31, 1998, or at any time during fiscal 1997. (8) STOCK COMPENSATION AND WARRANTS The 1998 Equity and Incentive Performance Plan provides for the granting of up to 884,000 shares of common stock to officers, key employees and consultants of Cole National Corporation in the form of stock options, performance stock and performance units, restricted stock and deferred stock. At January 30, 1999, Cole National Corporation had stock options outstanding under the 1998 Equity and Incentive Performance Plan and other stock option plans and agreements. The right to exercise these options generally commences between one and five years from the date of grant and expires ten years from the date of grant. Both the number of shares and the exercise price, which was based on the market price, were fixed at the dates of grant. As of January 30, 1999, there were 219,644 shares available for future grants to officers, key employees, non-employee Directors and consultants under Cole National Corporation's various stock-based plans. A summary of the status of Cole National Corporation's stock options and related weighted average exercise prices ("Price") as of the end of fiscal 1998, 1997 and 1996, and changes during each of the fiscal years is presented below:
1998 1997 1996 ----------------------- --------------------- ---------------------- Shares Price Shares Price Shares Price ---------- -------- ---------- -------- --------- --------- Outstanding, beginning of year 1,471,906 $14.30 1,443,788 $12.29 749,297 $ 9.76 Granted 818,303 16.89 122,000 35.13 804,000 13.87 Exercised (181,701) 11.01 (80,856) 8.27 (97,787) 6.08 Canceled (21,362) 27.72 (13,026) 24.49 (11,722) 10.19 ----------- ---------- -------- Outstanding, end of year 2,087,146 15.46 1,471,906 14.30 1,443,788 12.29 ========== ========== ========== Exercisable at end of year 707,343 13.59 595,838 11.57 508,530 9.86
A summary of information for stock options outstanding at January 30, 1999 and related weighted average remaining contract life ("Life") and Price is presented below:
Options Outstanding Options Exercisable ----------------------------------------- ------------------------ Range of Exercise Prices Shares Life Price Shares Price ------------------------ ---------- --------- -------- ---------- -------- $ 3.00 42,995 3.9 years $ 3.00 42,995 $ 3.00 $ 9.75 to $16.94 1,782,223 7.8 13.27 566,223 11.38 $24.88 to $44.94 261,928 8.5 32.40 98,125 31.01 ---------- ---------- 2,087,146 7.8 15.46 707,343 13.59 ========== ==========
Payment for certain options exercised between 1993 and 1996 has been made by executing promissory notes, of which $906,000 were outstanding at January 30, 1999. The promissory notes are secured by the shares of common stock acquired and are payable on various dates through April 2001 at interest rates ranging from 5.33% to 6.37%. At January 30, 1999, 178,750 restricted shares of common stock are outstanding under awards made to two senior executives in December 1998 under the 1998 Equity and Incentive Performance Plan. Vesting may occur after the third anniversary of the grant date based upon the attainment of certain market prices for Cole National Corporation's common stock or on March 1, 2004. In connection with these restricted shares, Cole F-16 34 National Corporation also awarded 146,250 restricted shares of its treasury stock to these executives that were subsequently returned to treasury in payment of related withholding taxes. At March 7, 1999, there were warrants outstanding to purchase 2,625 shares of common stock at $1.00 per share that expire in 2000. Cole National Corporation applies APB Opinion 25 and related Interpretations in accounting for its stock-based compensation plans. In connection with the restricted stock awards described above, compensation cost of $2.3 million has been charged against income in fiscal 1998 and unamortized restricted stock awards of $2.6 million is expected to be amortized over future vesting periods. Compensation cost of $0.1 million was also charged against income in fiscal 1998 for 13,803 stock options granted in connection with certain consulting services . No compensation cost was recognized for its stock-based plans in fiscal 1997. 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 Cole National Corporation's stock-based compensation plans and agreements been determined based on the fair value at the dates of awards consistent with the method of SFAS No. 123, Cole National Corporation's net income and diluted earnings per share would have been $13,589,000 and $0.90 in fiscal 1998. Cole National Corporation's net loss and diluted loss per share would have been increased to $6,731,000 and $.48 in fiscal 1997, and $30,234,000 and $2.67 in fiscal 1996, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rates of 4.7%, 5.7% and 6.2% for grants in fiscal 1998, 1997 and 1996, respectively, volatility of 35-39%, 35% and 33% in fiscal 1998, 1997 and 1996, respectively, and expected lives of six years for options granted in all fiscal years. The weighted average fair value of options granted during fiscal 1998, 1997 and 1996 were $7.33, $15.81 and $10.87, respectively. The effects of applying SFAS No. 123 in the pro forma disclosure above are not indicative of future amounts. SFAS No. 123 does not apply to options granted prior to January 29, 1995 and additional awards in future years are anticipated. (9) STOCKHOLDERS' EQUITY In August 1995, Cole National Corporation's Board of Directors approved a Stockholders' Rights Plan. The Stockholders' Rights Plan provides for the distribution of one right for each outstanding share of Cole National Corporation'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 Cole National Corporation one one-hundredth of a share of Series A Junior Participating Preferred Stock, without par value, at a price of $180, subject to adjustment. The rights are only exercisable if a person or group buys or announces a tender offer for 15% or more of Cole National Corporation'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 Cole National Corporation) 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 Cole National Corporation in whole, but not in part, at a price of $0.01 per right, or exchanged. F-17 35 (10) INCOME TAXES The income tax provision (benefit) for continuing operations reflected in the accompanying consolidated statements of operations for fiscal 1998, 1997 and 1996 are detailed below (000's omitted):
1998 1997 1996 ------ ------ ----- Currently payable - Federal $ (5,922) $ (270) $ 7,245 State and local 1,486 1,705 2,010 Foreign 781 781 - --------- --------- --------- (3,655) 2,216 9,255 --------- --------- --------- Deferred - Federal 13,545 12,817 (16,194) Foreign (544) 5 - ---------- --------- --------- 13,001 12,822 (16,194) --------- --------- --------- Income tax provision (benefit) $ 9,346 $ 15,038 $ (6,939) ========= ========= =========
The income tax provision (benefit) for continuing operations differs from the federal statutory rate as follows (000's omitted):
1998 1997 1996 ------ ------ ----- Tax provision (benefit) at statutory rate $ 8,268 $ 12,240 $ (11,073) Tax effect of - Amortization of goodwill 1,234 1,176 897 State income taxes, net of federal tax benefit 1,095 1,216 1,306 Nontaxable settlement (2,100) - - Non-recurring charges 537 - 1,578 Other, net 312 406 353 --------- --------- --------- Tax provision (benefit) $ 9,346 $ 15,038 $ (6,939) ========= ========= =========
The tax effects of temporary differences that give rise to significant portions of Cole National Corporation's deferred tax assets and deferred tax liabilities at January 30, 1999 and January 31, 1998 are as follows (000's omitted):
1999 1998 -------- ------ Deferred tax assets: Employee benefit accruals $ 3,540 $ 3,836 Restructure accruals 2,730 8,530 Other non-deductible accruals 9,910 17,986 State and local taxes 1,790 1,352 Net operating loss carryforwards 3,449 2,918 Intangibles 5,506 5,939 Contribution carryforward 4,440 - Inventory reserves 2,348 2,633 Bad debt reserves 2,516 2,496 Other 967 928 --------- --------- Total deferred tax assets 37,196 46,618 Valuation allowance (1,141) (1,141) --------- --------- Net deferred tax assets 36,055 45,477 --------- --------- Deferred tax liabilities: Depreciation and amortization (7,856) (4,353) Other (1,728) (1,964) ---------- --------- Total deferred tax liabilities (9,584) (6,317) --------- --------- Net deferred taxes $ 26,471 $ 39,160 ========= =========
F-18 36 At January 30, 1999, Cole National Corporation has approximately $8.3 million of tax net operating loss carryforwards acquired in connection with the acquisition of American Vision Centers, which expire between 2005 and 2010. Due to the change in ownership requirements of the Internal Revenue Code, utilization of the American Vision Centers net operating loss is limited to approximately $338,000 per year. A valuation allowance of $1.1 million has been established to reduce the deferred tax asset related to the net operating loss to the amount that will likely be realized. No provision for United States federal and state income taxes has been provided for the undistributed earnings of the Company's foreign subsidiaries because those earnings are considered to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable. (11) RETIREMENT PLANS Cole National Corporation maintains a noncontributory defined benefit pension plan that covers employees who have met eligibility service requirements and are not members of certain collective bargaining units. The pension plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service and their compensation levels near retirement. Cole National Corporation's policy is to fund amounts necessary to keep the pension plan in full force and effect, in accordance with the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. Actuarial present values of benefit obligations are determined using the projected unit credit method. Pension expense for fiscal 1998, 1997 and 1996 includes the following components (000's omitted):
1998 1997 1996 ------ ------ ----- Service cost - benefits earned during the period $ 1,446 $ 637 $ 646 Interest cost on the projected benefit obligation 1,582 1,490 1,467 Less: Return on plan assets - Actual (2,494) (2,424) (1,669) Deferred 690 893 477 ----------- ---------- --------- (1,804) (1,531) (1,192) Amortization of transition asset over 17.9 years (179) (179) (179) ----------- ----------- --------- Net pension expense $ 1,045 $ 417 $ 742 =========== ========== =========
F-19 37 The following sets forth changes in the benefit obligation and the plan assets during the year and reconciles the funded status of the pension plan with the amounts recognized in the consolidated balance sheets (000's omitted):
1998 1997 ----------- ------ Change in Benefit Obligation: Benefit obligation at beginning of period $ 21,272 $ 19,046 Service cost 1,446 637 Interest cost 1,582 1,490 Actuarial gain 1,509 1,200 Benefits paid (917) (836) Expenses paid (293) (265) ---------- --------- Benefit obligation at end of period $ 24,599 $ 21,272 ========== ========= Change in Plan Assets: Fair value of plan assets at beginning of year $ 19,751 $ 16,774 Actual return on plan assets 2,494 2,808 Employer contributions 2,181 1,270 Benefits paid (917) (836) Expenses paid (293) (265) ---------- --------- Fair value of plan assets at end of year $ 23,216 $ 19,751 ========== ========= Reconciliation of Funded Status: Benefit obligation at end of period $ 24,599 $ 21,272 Fair value of plan assets, primarily money market and equity mutual funds 23,216 19,751 ---------- --------- Funded status (1,383) (1,521) Unrecognized prior service cost 81 111 Net unrecognized loss 2,052 1,204 Unamortized transition asset (1,057) (1,236) ---------- --------- Pension liability included in accrued liabilities $ (307) $ (1,442) ========== =========
The weighted average discount rate used to measure the projected benefit obligation was 7.25% in 1998 and 7.5% in 1997. 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%. Cole National Corporation has a defined contribution plan, including features under Section 401(k) of the Internal Revenue Code, which provides retirement benefits to its employees. Eligible employees may contribute up to 17% of their compensation to the plan. Prior to January 1, 1998, there was no mandatory matching of employee contributions by Cole National Corporation; effective January 1, 1998, the plan was amended to, among other things, provide for a mandatory company match of 10% of employee contributions. Total company matches of $757,000, $374,000 and $327,000 were recorded as expense for 1998, 1997 and 1996, respectively. Prior to January 1, 1998, Cole National Corporation had separate contributory profit-sharing plans for Pearle and American Vision Centers employees meeting certain service requirements as defined in the plans. Company contributions to the Pearle plan consisted of a minimum matching contribution of $861,000 and $229,000 in 1997 and 1996, respectively. There were no company contributions required or made in connection with the American Vision Centers plan in 1997. Effective January 1, 1998, eligible employees of Pearle and American Vision Centers became eligible to participate in Cole National Corporation's defined contribution plan. The Pearle and American Vision Centers plans will be merged into Cole National Corporation's plan. Cole National Corporation has two Supplemental Executive Retirement Plans that provide for the payment of retirement benefits to participating executives supplementing amounts payable under Cole National Corporation 's noncontributory defined benefit pension plan. The first plan is an excess benefit plan designed to replace benefits that would otherwise have been payable under the pension plan but that were limited as a result of certain tax law changes. The second plan is a defined contribution plan under which participants receive an annual credit based on a percentage of base salary, subject to vesting requirements. Expenses for these plans for fiscal 1998, 1997 and 1996 were $651,000, $541,000 and $468,000, respectively. F-20 38 (12) SEGMENT INFORMATION Cole National Corporation has two reportable segments: Cole Vision and Things Remembered. Most of Cole Vision's revenue is provided by sales of prescription eyewear, accessories and services through its Cole Licensed Brands and Pearle retail locations. Cole Vision's revenue is also provided by sales of merchandise to franchisees and other outside customers, by royalties based on sales, interest income on notes receivable and initial franchise fees from franchisees and by fees from managed vision care programs. The Cole Licensed Brands and Pearle segments have been aggregated in accordance with SFAS No. 131 based on the similarity of their economic characteristics, nature of products, services and production processes, types of customers, distribution methods and regulatory environment. Things Remembered's revenue is provided by sales of engravable gift merchandise, personalization and other services primarily through retail stores and kiosks. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). Performance is evaluated based on operating income from operations before interest, income taxes, and non-recurring or unusual charges. The reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Cole Vision is subject to various state regulations related to the dispensing of prescription eyewear and its relationship with the doctors of optometry. Reported segment revenue, depreciation and amortization, and income or loss, with reconciliations to consolidated amounts are as follows (000's omitted):
1998 1997 1996 ---- ---- ---- Net revenue: Cole Vision $ 826,235 $ 774,488 $ 407,504 Things Remembered 241,947 225,710 220,992 ----------- ----------- ----------- Consolidated net revenue $ 1,068,182 $ 1,000,198 $ 628,496 =========== =========== =========== Depreciation and amortization: Cole Vision $ 21,745 $ 19,514 $ 9,445 Things Remembered 10,485 8,947 8,509 ----------- ----------- ----------- Total segment depreciation and amortization 32,230 28,461 17,954 Corporate 1,512 1,493 623 ----------- ----------- ----------- Consolidated depreciation and amortization $ 33,742 $ 29,954 $ 18,577 =========== =========== =========== Income or loss: Cole Vision $ 54,267 $ 65,995 $ 37,810 Things Remembered 17,647 11,504 18,480 ----------- ----------- ----------- Total segment profit 71,914 77,499 56,290 Unallocated amounts: Unusual and non-recurring items (23,120) (8,000) (61,091) Corporate expenses (6,448) (6,635) (6,685) ------------ ----------- ----------- Consolidated operating income (loss) 42,346 62,864 (11,486) Interest and other expense, net (18,724) (27,893) (20,151) ----------- ----------- ----------- Income (loss) from continuing operations before income taxes $ 23,622 $ 34,971 $ (31,637) =========== =========== ===========
F-21 39 Reported segment assets, expenditures for capital additions and systems developments costs and acquisitions of businesses, with reconciliations to consolidated amounts, are as follows (000's omitted):
1998 1997 1996 ---- ---- ---- Segment assets: Cole Vision $ 443,089 $ 439,808 $ 364,123 Things Remembered 132,832 131,105 121,432 ----------- ----------- ----------- Total segment assets 575,921 570,913 485,555 Elimination of intercompany receivables (36,440) (11,754) (14,777) Corporate cash and temporary cash investments 34,506 54,872 64,522 Other corporate assets 54,037 37,353 26,705 Net assets of discontinued operations - - 16,451 ----------- ----------- ----------- Consolidated assets $ 628,024 $ 651,384 $ 578,456 =========== =========== =========== Expenditures for capital additions and systems development costs: Cole Vision $ 35,793 $ 34,833 $ 12,071 Things Remembered 8,228 20,496 13,392 ----------- ----------- ----------- Total segment expenditures 44,021 55,329 25,463 Elimination of intercompany transfers - (5,300) - Corporate 10,372 538 2,618 ----------- ----------- ----------- Consolidated expenditures $ 54,393 $ 50,567 $ 28,081 =========== =========== =========== Expenditures for acquisitions of businesses, net of cash acquired: Cole Vision $ 7,231 $ 27,926 $ 157,426 =========== =========== ===========
Revenue from external customers of each group of similar products and services is as follows (000's omitted):
1998 1997 1996 ---- ---- ---- Sales of optical products and services $ 759,232 $ 712,923 $ 403,496 Royalties, interest income and initial fees from franchisees 21,518 19,743 4,008 Fees from managed vision care programs 45,485 41,822 - ----------- ----------- ----------- Total Cole Vision net revenue 826,235 774,488 407,504 Retail sales of gift merchandise and services 241,947 225,710 220,992 ----------- ----------- ----------- Consolidated net revenue $ 1,068,182 $ 1,000,198 $ 628,496 =========== =========== ===========
Prior to fiscal 1997, fees from managed vision care programs were not captured separately, but were netted against operating expenses. Cole National Corporation operates primarily in the United States. Net revenue attributable to Cole Vision's Canadian operations was $27.5 million, $27.2 million and $5.6 million in fiscal 1998, 1997 and 1996, respectively. Long-lived assets located in Canada totaled $2.2 million, $2.1 million and $2.2 million in fiscal 1998, 1997 and 1996, respectively. Cole National Corporation also has an investment in and notes receivable from Pearle Europe (see Note 1). F-22 40 (13) COMMITMENTS Cole National Corporation 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, Cole Vision operates departments in various host stores paying occupancy costs solely as a percentage of sales under agreements containing short-term cancellation clauses. Generally, Cole National Corporation 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 1998, 1997 and 1996 (000's omitted):
1998 1997 1996 ------ ------ ----- Occupancy costs based on sales $ 54,563 $ 52,300 $ 46,058 All other rental expense 92,068 87,699 45,207 Sublease rental income (22,606) (21,725) (5,936) ----------- ----------- ---------- $ 124,025 $ 118,274 $ 85,329 =========== =========== ==========
At January 30, 1999 and January 31, 1998, property under capital leases consisted of $7,119,000 and $7,113,000 in equipment with accumulated amortization of $2,887,000 and $1,610,000, respectively. At January 30,1999, 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 ----------- ----------- ----------- 1999 $ 1,733 $ 75,926 $ 12,941 2000 1,569 61,154 9,474 2001 444 48,867 7,031 2002 87 39,856 5,252 2003 - 31,433 3,481 2004 and thereafter - 71,873 5,601 ----------- ----------- ----------- Total future minimum lease payments 3,833 $ 329,109 $ 43,780 =========== =========== Amount representing interest (359) ----------- Present value of future minimum lease payments $ 3,474 ===========
F-23 41 (14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly financial data for the 52 weeks ended January 30, 1999 and January 31, 1998. The fourth quarter of fiscal 1998 includes net pretax charges of $23.1 million related to restructuring and other unusual items, of which $5.2 million relates to inventory markdowns that are included in cost of sales. The third quarter of fiscal 1998 includes $6.0 million of income from cash received in a nontaxable settlement of claims against the former owner of Pearle. The third and fourth quarters of fiscal 1997 include pretax charges of $1.1 million and $6.9 million, respectively, for business integration charges related to American Vision Centers.
Fiscal 1998 - ------------------------------------------------------------------------------------------------------------------------ ($ in thousands, except per share amounts) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- Net revenue $ 271,828 $ 267,611 $ 256,654 $ 272,089 Gross margin 181,539 178,479 171,744 172,330 Net income (loss) 6,112 9,800 9,062 (10,698) Earnings (loss) per common share: Basic - 0.41 0.66 0.61 (0.72) Diluted - 0.40 0.64 0.60 (0.72)
Fiscal 1997 - ------------------------------------------------------------------------------------------------------------------------ ($ in thousands, except per share amounts) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- Net revenue $ 239,686 $ 242,163 $ 252,744 $ 265,605 Gross margin 157,274 161,001 166,232 174,842 Income from continuing operations 3,354 7,228 3,535 5,816 Income (loss) from discontinued operations, net (906) 130 (841) (12,350) Extraordinary item, net -- -- (12,183) -- ----------- ----------- ----------- ----------- Net income (loss) $ 2,448 $ 7,358 $ (9,489) $ (6,534) =========== =========== =========== =========== Earnings (loss) per common share: Basic - Income from continuing operations $ .28 $ .58 $ .24 $ .40 Income (loss) from discontinued operations, net (.08) .01 (.05) (.84) Extraordinary item, net -- -- (.83) -- ----------- ----------- ----------- ----------- Net income (loss) $ .20 $ .59 $ (.64) $ (.44) =========== =========== =========== =========== Diluted - Income from continuing operations $ .27 $ .56 $ .23 $ .38 Income (loss) from discontinued operations, net (.07) .01 (.05) (.81) Extraordinary item, net -- -- (.80) -- ----------- ----------- ----------- ----------- Net income (loss) $ .20 $ .57 $ (.62) $ (.43) =========== =========== =========== ===========
F-24 42 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULES To COLE NATIONAL CORPORATION: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Cole National Corporation and Subsidiaries included in this Form 10-K and have issued our report thereon dated March 17, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedules are the responsibility of Cole National Corporation's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 17, 1999. F-25 43 SCHEDULE I COLE NATIONAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT ================================================================================ COLE NATIONAL CORPORATION CONDENSED BALANCE SHEETS JANUARY 30, 1999 AND JANUARY 31, 1998 (Dollars in millions)
1999 1998 ------ ----- Assets: Receivable from subsidiaries $ 68.8 $ 89.1 Refundable income taxes 8.4 9.5 Investment in subsidiaries 48.4 27.7 Notes receivable and investment in Pearle Europe 16.9 7.8 Property and equipment, net 12.8 4.0 Other 5.7 1.4 ---------- --------- Total assets $ 161.0 $ 139.5 ========== ========= Liabilities and Stockholders' Equity: Accounts payable and accrued expenses $ 3.2 $ 3.9 Long-term debt 2.4 3.3 Deferred income taxes - .3 Other long term liabilities 10.0 - Stockholders' equity 145.4 132.0 ---------- ---------- Total liabilities and stockholders' equity $ 161.0 $ 139.5 ========== =========
F-26 44 SCHEDULE I (CONTINUED)
COLE NATIONAL CORPORATION CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS 52 WEEKS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 (Dollars in millions) January 30, January 31, February 1, 1999 1998 1997 --------- ---------- ---------- Revenue: Dividends from subsidiaries $ - $ - $ 15.4 ------- ------- ------ Services to affiliates 2.7 1.8 .6 Total revenue 2.7 1.8 16.0 Operating expenses (12.7) (1.8) (.8) Interest income 1.4 .3 .8 ------- ------- ------ Pre-tax income (loss) (8.6) .3 16.0 Income tax benefit (expense) 2.6 (.2) (.3) ------- ------- ------ Income (loss) before equity in undistributed earnings (loss) of subsidiaries and extraordinary item (6.0) .1 15.7 Equity in undistributed earnings (loss) of subsidiaries 20.3 (6.3) (43.4) ------- ------- ------ Income (loss) before extraordinary item 14.3 (6.2) (27.7) Extraordinary loss -- -- (.6) Net income (loss) 14.3 (6.2) (28.3) ------- ------- ------ Adjustments to reconcile net income (loss) to cash provided (used) by operating activities (14.2) (18.8) 43.9 ------- ------- ------ Net cash provided (used) by operating activities .1 (25.0) 15.6 ------- ------- ------ Financing activities: Repayment of long-term debt (.9) (1.0) (.3) Proceeds from sale of common stock -- 115.9 26.2 Common stock repurchased (5.5) (.6) -- Proceeds from stock option exercises 2.0 2.9 .6 ------- ------- ------ Net cash provided (used) by financing activities (4.4) 117.2 26.5 ------- ------- ------ Investing activities: Advances from (to) affiliates 21.2 (61.7) (35.0) Purchase of property and equipment (9.7) -- -- Purchase of Cole National Group Notes -- -- (16.1) Acquisition of business -- (27.8) -- Proceeds from sale of Cole National Group Notes -- -- 14.9 Investment in Pearle Europe (10.3) (2.8) (6.0) Repayment of notes receivable 3.1 .1 .1 ------- ------- ------ Net cash provided (used) by investing activities 4.3 (92.2) (42.1) ------- ------- ------ Net change in cash -- -- -- Cash, beginning of period -- -- -- ------- ------- ------ Cash, end of period $ -- $ -- $ -- ======= ======= ======
F-27 45 SCHEDULE I (CONTINUED) NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT =============================================================================== The accompanying financial information of Cole National Corporation is as of January 30, 1999 and January 31, 1998, and for the 52 weeks ended January 30, 1999, January 31, 1998 and February 1, 1997. Cole National Corporation is a holding company for its wholly-owned subsidiaries, including Cole National Group, Inc. and consisted of no other operations. This financial information should be read in connection with the Consolidated Financial Statements and notes thereto of Cole National Corporation and subsidiaries, contained on pages elsewhere in this Form 10-K. F-28 46 SCHEDULE II COLE NATIONAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS 52 WEEKS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 (DOLLARS IN MILLIONS)
Additions ------------------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period - ------------------------------------ --------------- --------------- --------------- --------------- ---------------- JANUARY 30, 1999 Allowance for Doubtful Accounts $ 7.1 $ 0.9 $ - $ 0.(A) $ 7.2 Franchise Repurchase Reserve 6.7 - - 1.5(A) 5.2 Discontinued Operation Reserve 1.3 - - 1.3(B) - JANUARY 31, 1998 Allowance for Doubtful Accounts 6.6 1.1 1.8(C) 2.4(A) 7.1 Franchise Repurchase Reserve 5.5 0.6 1.5(C) 0.9(A) 6.7 Discontinued Operation Reserve - 1.3 - - 1.3 FEBRUARY 1, 1997 Allowance for Doubtful Accounts 0.8 0.2 5.7(D) 0.1(A) 6.6 Franchise Repurchase Reserve - - 5.5(D) - 5.5
(A) Receivable balances written off, net of recoveries. (B) Discontinued operation charges taken against the reserve. (C) Purchase price accounting reserves created as a result of the acquisition of AVC. (D) Purchase price accounting reserves created as a result of the acquisition of Pearle. Reserve balances presented in the Notes to Consolidated Financial Statements are not represented in this schedule. F-29 47 EXHIBIT INDEX ------------- EXHIBIT NUMBER DESCRIPTION - -------- ----------- 3.1 (i) Restated Certificate of Incorporation of the Company, incorporated by reference to Exhibit 3.1 (i) of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 3.1(ii) Certificate of Amendment of the Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1(ii) to Cole National Corporation's Annual Report on Form 10-K for the period ended January 31, 1998 (File No. 1-12814). 3.2(ii) Amended and Restated By-Laws of the Company, incorporated by reference to Exhibit 3.2(ii) of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 3.3 Certificate of Designations of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3.3 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 4.1 Indenture dated November 15, 1996, by and among Cole National Group, Inc. and Norwest Bank Minnesota, National Association, as trustee, relating to the 9 7/8% Senior Subordinated Notes Due 2006 (the form of which Senior Subordinated Note is included in such Indenture), incorporated by reference to Exhibit 4.1 of Cole National Corporation's Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 4.2 Indenture, dated August 22, 1997, between Cole National Group, Inc. and Norwest Bank Minnesota, National Association, as Trustee, relating to the 8-5/8% Senior Subordinated Notes Due 2007, incorporated by reference to Exhibit 4.4 of Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 333-34963). 4.3 Rights Agreement dated as of August 22, 1995 by and between the Company and National City Bank as Rights Agent, incorporated by reference to Exhibit 4.3 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 4.4 Amendment No. 1, dated as of August 21, 1997, to the Rights Agreement, dated as of August 22, 1995, between the Company and National City Bank, as Rights Agent, incorporated by reference to Exhibit 4.1 of Cole National Corporation's current report on Form 8-K, filed with the Securities and Exchange Commission on August 22, 1997 (File No. 1-12814). 4.5 Cole National Corporation by this filing agrees, upon request, to file with the Commission the instruments defining the rights of holders of long-term debt of Cole National Corporation and its subsidiaries where the total amount of securities authorized thereunder does not exceed 10% of the total assets of Cole National Corporation and its subsidiaries on a consolidated basis. 10.1* Employment Agreement entered into as of December 17, 1998 by and among Cole National Corporation, Cole National Group, Inc., Cole Vision Corporation, Pearle, Inc., Things Remembered, Inc. and Jeffrey A. Cole. X-1 48 EXHIBIT NUMBER DESCRIPTION - -------- ------------ 10.2* Employment Agreement entered into as of April 1, 1996 by and among Cole National Corporation, Cole National Group, Cole Gift Centers, Inc., Cole Vision Corporation, Things Remembered, Inc. and Brian B. Smith, incorporated by reference to Exhibit 10.2 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.3* Agreement dated March 27, 1993 between Cole National Corporation and Joseph Gaglioti regarding termination of employment, incorporated by reference to Exhibit 10.8 to CNG's Registration Statement on Form S-1 (Registration No. 33-66342). 10.4* Agreement dated April 9, 1993 between Cole National Corporation and Wayne L. Mosley regarding termination of employment, incorporated by reference to Exhibit 10.9 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.5* 1992 Management Stock Option Plan, including forms of Nonqualified Stock Option Agreement (Time Vesting) and Nonqualified Stock Option Agreement (Performance Option), as amended, and forms of promissory notes and pledge agreements, incorporated by reference to Exhibit 10.11 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.6* Cole National Corporation 1993 Management Stock Option Plan, including forms of Nonqualified Stock Option Agreement (1993 Time Vesting) and form of secured promissory notes and stock pledge agreement, incorporated by reference to Exhibit 10.29 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.7* Form of Option Agreement for Directors of the Company, incorporated by reference to Exhibit 10.41 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.8* Amended and Restated Nonqualified Stock Option Plan for Non-employee Directors, incorporated by reference to Exhibit A to Cole National Corporation 's Proxy Statement for the 1997 Annual Meeting (File No. 1-12814). 10.9* Form of Nonqualified Stock Option Agreement for Non-employee Directors, incorporated by reference to Exhibit 10.9 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.10* Cole National Corporation 1996 Management Stock Option Plan, including forms of Nonqualified Stock Option Agreement (1996 Time Vesting), incorporated by reference to Exhibit 10.10 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.11* Management Incentive Bonus Program, incorporated by reference to Exhibit 10.11 to Cole National Corporation's Annual Report on Form 10-K for the period ended January 31, 1999 (File No. 1-12814). 10.12* Form of Nonqualified Stock Option Agreement (1997 Time Vesting), incorporated by reference to Exhibit 10.12 to Cole National Corporation's Annual Report on Form 10-K for the period ended January 31, 1998 (File No. 1-12814). 10.13* Executive Life Insurance Plan of Cole National Corporation, incorporated by reference to Exhibit 10.12 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). X-2 49 EXHIBIT NUMBER DESCRIPTION - --------- ----------- 10.14* Medical Expense Reimbursement Plan of Cole National Corporation effective as of February 1, 1992, incorporated by reference to Exhibit 10.13 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.15 Agreement for the Allocation of Federal Income Tax Liability and Benefits among Members of the Parent Group dated August 23, 1985, as amended, incorporated by reference to Exhibit 10.26 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.16 Assignment and Assumption Agreement dated as of September 30, 1993 between the Company and Cole National Group, incorporated by reference to Exhibit 10.24 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.17 Lease Agreement (Knoxville) dated as of November 28, 1979 by and between Tommy Hensley, as agent for the real property of Mrs. Don Siegel and Cole Vision Corporation, as amended and supplemented, incorporated by reference to Exhibit 10.15 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.18 Lease Agreement (Memphis) dated as of October 2, 1991 by and between Shelby Distribution Park and Cole Vision Corporation, incorporated by reference to Exhibit 10.16 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.19 Lease Agreement (Richmond) dated as of April 23, 1982 by and between Daniel, Daniel & Daniel and Cole Vision Corporation, as amended and supplemented, incorporated by reference to Exhibit 10.17 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.20 Lease for Multi-Tenancy Space (Salt Lake) dated as of October 30, 1981 by and between East Centennial Joint Venture and Cole Vision Corporation, as amended and supplemented, incorporated by reference to Exhibit 10.18 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.21 Lease Agreement (Knoxville) dated as of April 11, 1995 by and between Richard T. Fox and Cole Vision Corporation, incorporated by reference to Exhibit 10.29 of Cole National Corporation's Annual Report on Form 10-K for the year ended February 3, 1996 (File No. 1-12814). 10.22 Form of Lease Agreement Finite 19518 dated as of December 29, 1988 between Sears, Roebuck and Co. and Cole Vision Corporation, incorporated by reference to Exhibit 10.23 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.23 Master License Agreement dated as of October 2, 1986, between Montgomery Ward & Co., Incorporated and Cole Vision Corporation, as amended, incorporated by reference to Exhibit 10.21 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). X-3 50 EXHIBIT NUMBER DESCRIPTION - -------- ----------- 10.24 Master License Agreement dated as of June 12, 1986, between Montgomery Ward & Co., Incorporated and Bay Cities Optical Company, as amended, incorporated by reference to Exhibit 10.22 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.25 Form of License Agreement (Optical), incorporated by reference to Exhibit 10.24 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.26 Form of License/Lease Agreement (Optical), incorporated by reference to Exhibit 10.25 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.27 Form of Indemnification Agreement for Directors of Cole National Corporation, incorporated by reference to Exhibit 10.19 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.28 Form of Indemnification Agreement for Officers of Cole National Corporation, incorporated by reference to Exhibit 10.20 to Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 33-66342). 10.29* Supplemental Retirement Benefit Plan of Cole National Corporation, incorporated by reference to Exhibit 10.38 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.30* Supplemental Pension Plan of Cole National Corporation, incorporated by reference to Exhibit 10.48 to Cole National Corporation 's Registration Statement on Form S-1 (Registration No. 33-74228). 10.31 Warrant Agreement dated as of September 25, 1990 between Cole National Corporation and the purchasers named therein, incorporated by reference to Exhibit 10.36 to Cole National Corporation 's Registration Statement on Form S-1 (Registration No. 33-74228). 10.32 Lease agreement (Salt Lake) dated as of November 1, 1996 by and between Gibbons Realty Company and Cole Vision Corporation, incorporated by reference to Exhibit 10.01 of Cole National Corporations Quarterly Report on Form 10-Q for the period ended November 2, 1996 (File No. 1-12814). 10.33 Credit Agreement, dated as of November 15, 1996, among Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service Corporation and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 99.1 of Cole National Corporation's Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.34 First Amendment to the Credit Agreement, dated as of January 13, 1997, among Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc., and Pearle Service Corporation and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.33 of Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 333-34963). X-4 51 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.35 Second Amendment to Credit Agreement, dated as of August 8, 1997, among Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service Corporation and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.34 of the Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 333-34963). 10.36 Cole National Group, Inc. Guarantee and Cash Collateral Agreement, dated as of November 15, 1996, by the Company and Cole National Corporation, incorporated by reference to Exhibit 99.3 of Cole National Corporation's Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.37 Guarantee and Collateral Agreement dated as of November 15, 1996, by Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service Corporation and Canadian Imperial Bank of Commerce, Incorporated by reference to Exhibit 99.4 of Cole National Corporation's Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.38 Form of Cole National Corporation 401(k) Savings Plan, incorporated by reference to Exhibit 4.1 of Cole National Corporation's Registration Statement on Form S-8, filed with the Commission on November 20, 1997 (Registration No. 333-40609). 10.39* Agreement, dated August 4, 1997, between the Company and Leslie D. Dunn regarding termination of employment, incorporated by reference to Exhibit 10.37 of Cole National Group, Inc.'s Registration Statement on Form S-1 (Registration No. 333-34963). 10.40* Form of Cole National Corporation Non Qualified Stock Option Agreement (Non employee Directors), incorporated by reference to Exhibit 10.5 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended August 2, 1997 (File No. 1-12814). 10.41* Form of Cole National Corporation Non Employee Director Equity and Deferred Compensation Plan, incorporated by reference to Exhibit B to Cole National Corporation's definitive Proxy Statement dated May 6, 1997 (File No. 1-12814). 10.42* Form of Cole National Corporation Non Employee Director Equity and Deferred Compensation Plan Participation Agreement Plan Year 1997, incorporated by reference to Exhibit 10.7 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended August 2, 1997 (File No. 1-2814). 10.43 Form of Cole National Corporation's 1998 Equity and Performance Incentive Plan, incorporated by reference to Exhibit A to Cole National Corporation's definitive Proxy Statement dated May 1, 1998 (File No. 1-12814). 10.44 Third Amendment to the Credit Agreement, dated as of May 15, 1998, among Cole Vision Corporation and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.1 of Cole National Corporation's Quarterly Report on Form 10-Q for the period ended May 2, 1998 (File No. 1-12814). 10.45 Fourth Amendment to the Credit Agreement, dated as of March 5, 1999, among Cole Vision Corporation, Things Remembered, Inc. and Pearle, Inc., and Canadian Imperial Bank of Commerce. X-5 52 EXHIBIT NUMBER DESCRIPTION -------- -------------- 10.46* Nonqualified Stock Option Agreement between Cole National Corporation and Jeffrey A. Cole dated as of December 17, 1998. 10.47* Nonqualified Stock Option Agreement between Cole National Corporation and Brian B. Smith dated as of December 17, 1998. 10.48* Form of Nonqualified Stock Option Agreement for Executive Officers (other than Messrs. Cole and Smith) under the Cole National Corporation 1998 Equity Performance and Incentive Plan. 10.49* Restricted Stock Agreement between Cole National Corporation and Jeffrey A. Cole dated as of December 17, 1998. 10.50* Restricted Stock Agreement between Cole National Corporation and Brian B. Smith dated as of December 17, 1998. 10.51* Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan dated as of December 17, 1998. 10.52* Instrument Designating Participants of the Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan dated December 17, 1998. 10.53* Cole National Group, Inc. Deferred Compensation Plan effective as of February 1, 1999. 10.54* Amendment No. 1, dated as of December 17, 1998, to the Cole National Group, Inc. Supplemental Pension Plan. 21 Subsidiaries of Cole National Corporation. 24 Power(s) of Attorney. 27 Financial Data Schedule. * Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K. EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (as amended, modified or otherwise supplemented from time to time, the "AGREEMENT") is entered into as of December 17, 1998 among Cole National Corporation, a Delaware corporation ("PARENT"), Cole National Group, Inc., a Delaware corporation ("CNG"), Cole Vision Corporation, a Delaware corporation ("COLE VISION"), Pearle, Inc., a Delaware Corporation ("PEARLE"), Things Remembered, Inc., a Delaware corporation ("THINGS REMEMBERED") (collectively, CNG, Cole Vision, Pearle and Things Remembered are the "SUBSIDIARIES"), and Jeffrey A. Cole, an individual residing in the State of Ohio ("COLE"). PRELIMINARY STATEMENTS: A. Cole is currently serving as an employee of Cole Vision and Things Remembered pursuant to an Employment Agreement dated April 1, 1996 among Cole, the Parent and the Subsidiaries (the "EMPLOYMENT Agreement"), and presently is the Chairman and Chief Executive Officer of the Parent and Chairman of the Board of each of the Subsidiaries. B. The parties desire to provide for the eventual transition of Mr. Cole from his present positions to retirement. C. Cole and the parties desire to terminate the Employment Agreement and to enter into a new agreement providing for the employment of Cole with the Subsidiaries. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: AGREEMENT: 1. EMPLOYMENT. Each of the Subsidiaries hereby employs Cole, and Cole hereby accepts employment with each of the Subsidiaries, on the terms and conditions set forth in this Agreement. 2. TERM. (a) The term (the "TERM") of Cole's employment under this Agreement will be for three (3) years commencing on the date of this Agreement (the "EFFECTIVE DATE") and ending on its third anniversary; PROVIDED, HOWEVER, that on the first anniversary of the Effective Date and on each succeeding anniversary of the Effective Date until and including the anniversary that falls in the year in which Cole turns 65 years of age, the Term will be automatically extended by an additional year, unless 60 days prior to any such succeeding anniversary either Cole or the Subsidiaries has given the other written notice to the contrary (which notice is not rescinded before such anniversary date) or this Agreement has otherwise been terminated as provided in this Agreement. 2 (b) Cole's services to the Subsidiaries under this Agreement will not be terminated by Cole or any of the Subsidiaries (while such entity remains a subsidiary of Parent) unless such termination is with respect to his services to all of the Subsidiaries. 3. POSITIONS AND DUTIES. (a) Cole will serve in such offices or positions to which he is elected or appointed by the Board of Directors of each of the Subsidiaries and the Parent. Cole initially will serve as Chairman of the Board of Directors of each of the Subsidiaries and of Parent and as Chief Executive Officer of CNG and Parent. Cole's service as an officer or director of the Parent and of any of the direct or indirect, wholly or partially owned subsidiaries of the Parent or of any of the Subsidiaries, will be encompassed within any reference made in this Agreement to employment with the Subsidiaries. (b) Cole will, subject to the powers and authority reserved in or by the Board of Directors of the Parent and of the respective Subsidiaries, have the authority and responsibility customarily attending each corporate office held by him pursuant to Section 3(a). In addition, Cole will hold such other offices in and perform such other executive and administrative duties for the Parent as he and the Board of Directors of Parent agree are appropriate. Cole shall devote his principal time, energy, and attention, consistent with past practices, to the affairs and operations of the Parent and the Subsidiaries, but may engage in any unrelated business and activities that are not prohibited by Section 8 of this Agreement. 4. COMPENSATION. During the Term: (a) SALARY. The Subsidiaries shall pay Cole an aggregate annual base salary (from all of the Subsidiaries combined) not less than his current aggregate base salary of $725,000, subject to such increases that the Board of Directors of each of the Subsidiaries, with the concurrence of the Board of Directors of the Parent, may grant to him as a result of merit, performance, inflation or otherwise. (b) BONUS. Cole will receive bonuses from time to time in accordance with the existing bonus programs for senior management of the Subsidiaries or Parent or any future bonus programs adopted for senior management of the Subsidiaries or Parent. Cole will participate in such programs at a level to be fixed from time to time by either (a) the Board of Directors of each of the Subsidiaries, with the concurrence of the Board of Directors or appropriate compensation committee of the Board of Directors of the Parent, or (b) the Board of Directors or appropriate compensation committee of the Board of Directors of the Parent. Such participation may be more favorable but will in no event be less favorable than the participation of any other similarly situated participant. In the event that Cole would be eligible to participate in more than one bonus program for a particular year, Cole will participate in each such program to the extent of his allocable salary with respect to such Subsidiary. (c) EXPENSES AND ALLOWANCES. Cole is authorized, in carrying out his responsibilities and duties under this Agreement, to incur reasonable business expenses for the benefit of the Subsidiaries, including business expenses for transportation, entertainment, travel, lodging, club memberships and expenses and similar items, all of comparable types and at comparable levels to those he has previously incurred in his employment with the Subsidiaries. 2 3 Cole will be provided with a current model automobile, of comparable style and quality to that which has previously been provided to him in his employment with the Subsidiaries. All such expenses referred to above will either be paid directly by the Subsidiaries or the Subsidiaries shall promptly reimburse Cole for expenditures upon the submission, from time to time, of itemized accountings for such expenditures. To the extent such expenses and allowances are not attributable to duties performed on behalf of a single Subsidiary, such expenses and allowance are to be allocated among the Subsidiaries on the basis described in Section 10. Cole will also be permitted to make personal use of the corporate aircraft consistent with current practice to the extent one is available and not otherwise required for corporate business. Parent shall also reimburse Cole for up to $15,000 per year for personal tax, estate and financial planning. (d) VACATIONS. Cole will be entitled to 5 weeks of vacation in each calendar year or such greater amount of vacation as may be permitted under the employment policies of the Subsidiaries in effect from time to time; PROVIDED, HOWEVER, that the Subsidiaries will not be obligated to provide, and Cole will not be entitled to receive, in the aggregate, more vacation time than that permitted under the most permissive employment policy of any of the Subsidiaries in effect from time to time. (e) INSURANCE AND EMPLOYEE BENEFIT PLANS. Cole will be entitled to have group term and other term life insurance maintained on his life by the Subsidiaries, the beneficiary of which Cole will be allowed to designate, at least in such amounts as are currently maintained on his life on the Effective Date. Such life insurance policy, or any successor policy or policies thereto, will not be terminated by the Subsidiaries without first offering Cole the right to purchase the same at the cash surrender value thereof, if any. Cole will also be entitled to participate in any of the employee compensation and pension and welfare benefit plans and arrangements in which senior management or executive employees of the Subsidiaries participate from time to time (including without limitation, retirement plans and supplemental arrangements; sick pay plans and medical expense and medical reimbursement plans; disability benefit and accident insurance plans; and employee discount and loan programs, employee savings and investment plans and stock ownership plans (collectively, the "EMPLOYEE PLANS")), as the same may be modified, supplemented or replaced without material reduction in total value of the benefits to Cole. Cole will participate in such Employee Plans at a level to be fixed from time to time by the Board of Directors of each of the Subsidiaries, with the concurrence of the Board of Directors of the Parent; such participation may be more favorable but shall in no event be less favorable than the participation of any other similarly situated participant. It is the Parent's current intention to obtain (prior to June 30, 1999) collateral assignment split-dollar life insurance in the amount of $4 million for Cole. When such split-dollar insurance has been put into place, the obligation to maintain separate group term and other term life insurance will terminate. 5. DEATH OR DISABILITY DURING EMPLOYMENT. (a) If Cole dies or is disabled during the term of this Agreement, the Subsidiaries shall pay to Cole, in lieu of the compensation described in Section 4(a) and 4(b) of this Agreement, in case of his disability, or to the beneficiary or beneficiaries designated by Cole in case of his death, or if Cole is legally incompetent or no such designation of death beneficiary has been made, then to Cole's personal representative, an amount (from all of the Subsidiaries combined), equal to the greater of (i) the 3 4 aggregate compensation that would otherwise be payable to Cole pursuant to Section 4(a) and 4(b) of this Agreement for the full fiscal year in which his death or disability occurred as if Cole were not dead or disabled, his employment continued for the full fiscal year and his bonus were an amount equal to the average of Cole's bonus for the five (5) consecutive fiscal years preceding the fiscal year in which his death or disability occurred, or (ii) the product of (A) seventy-five percent (75) of the amount determined pursuant to clause (i) immediately preceding and (B) the number of years from the first day of the month in which this death or disability occurs through the date of termination of the remaining Term (the "TERMINATION DATE") (for which it will be assumed that the automatic extension of the Agreement under Section 2(a) of this Agreement will be discontinued upon such death or disability, if such automatic extension has not already discontinued pursuant to Section 2(a)), prorated on the basis of a 360 day year for partial years. The amount so determined will be paid in equal monthly installments commencing in the month in which Cole's death or disability occurs through the earlier of the Termination Date or the cessation of his disability. The obligations of the Subsidiaries under this Section 5(a) are to be offset by and reduced to the extent of any other corresponding death or disability benefits (excluding life insurance), if any, that the Parent or the Subsidiaries, or any of them, provide at their expense to Cole under benefit plans or arrangements in place at the time of his death or disability. Cole is entitled to receive, in the aggregate, the greater of (x) the benefits specified in this Section 5(a) excluding any such offset or (y) the benefits to which he would otherwise be entitled under other benefit plans or arrangements. (b) For the purpose of this Agreement, Cole will be considered disabled only when and if (i) he is adjudicated legally incompetent by a court of competent jurisdiction, or (ii) (A) a physician selected by Cole or his legal guardian and reasonably satisfactory to the Board of Directors of the Parent certifies that Cole suffers from a physical or mental disability; and (B) as a result of such disability the Board of Directors of the Parent, in the exercise of its reasonable judgment based on such physician's report, determines that Cole is unable to perform his duties under this Agreement for at least ninety (90) days out of a one hundred twenty (120) successive day period. For the purpose of determining whether he is disabled, Cole agrees that, if requested by Parent, he will submit to a physical examination not more frequently than once every year during the Term by a physician mutually acceptable to Cole and the Board of Directors of the Parent, the costs of such examination to be paid by the Subsidiaries. (c) In the event of Cole's disability during the term of this Agreement, he will (i) continue to be treated as an active employee for purposes of those Employee Plans that provide life insurance and medical insurance, and will be entitled to continue participation in such Employee Plans at levels and costs to him that are at least as favorable as those provided to other active senior management or executive employees (other than any executive officers who are named or employed, at any time following the commencement of Cole's disability, to fill positions with the Subsidiaries of substantially equivalent rank as the positions held by Cole immediately prior to the commencement of his disability) and, in any case, that are no less favorable than the levels and costs provided to Cole at the commencement of such disability; (ii) continue to receive all the benefits and allowances provided in Section 4(c); and (iii) continue to accrue benefit and vesting service under the Cole National Corporation Retirement Plan and any supplemental retirement or supplemental pension plan (the "RETIREMENT PLANS"), in either case, until the earlier of the Termination Date or the cessation of his disability. With respect to the benefits described in clause (iii) above, the Subsidiaries shall provide Cole with a benefit equal to 4 5 the difference between (x) the benefit he would otherwise have accrued under the Retirement Plans if such additional service were actually credited to him under the Retirement Plans (assuming for this purpose that the compensation earned by Cole in the year prior to his disability), and (y) the benefit he actually accrues under the Retirement Plans for the period of his disability. Such benefit is to be provided from the Subsidiaries' general assets. (d) In the event of Cole's death during the Term, the Subsidiaries shall continue to provide Cole's eligible dependents with coverage under those Employee Plans, if any, that then provide medical insurance at levels and costs to such dependents that are no less favorable than the levels and costs provided to such dependents at Cole's death for the period from Cole's date of death until the date on which Cole would have attained age 65; PROVIDED, HOWEVER, that the Subsidiaries will not be required to expend amounts for such benefits in any year (expressed in terms of premium costs to the Subsidiaries) in excess of the annual cost of such benefits at the time of Cole's death increased over time by annual adjustments equal to the change in the Consumer Price Index (or any replacement index) as published from time to time by the United States government. 6. OTHER TERMINATION. (a) Upon the termination of Cole's employment with the Subsidiaries except: (i) a termination by reason of his death or disability as provided in Section 5; or (ii) his voluntary resignation (other than (x) a voluntary resignation that occurs following Constructive Termination, or (y) such resignation tendered pursuant to Section 6(c)); or (iii) the expiration of the Term; or (iv) termination "for cause"; the Subsidiaries shall pay Cole at the time of such termination, in a lump sum, an amount equal to the sum of: (A) three times (3x) Cole's aggregate annual base salary as in effect under Section 4(a) at the time of such termination, plus (B) three times (3x) an amount equal to the average of Cole's bonus for the five (5) fiscal years preceding the fiscal year of such termination (the "TERMINATION PAYMENT"), plus (C) the average of Cole's bonus for the five (5) consecutive fiscal years preceding the fiscal year of such termination prorated for the months in the current fiscal year prior to the termination. If such termination is "for cause," nothing will be payable pursuant to this Section 6(a). For purposes of this Agreement, Cole's termination will be "for cause" only if there 5 6 is a final, non-appealable order in a proceeding before a court of competent jurisdiction or a final order in an administrative proceeding before the Securities and Exchange Commission (a "PROCEEDING") finding that Cole (i) committed any willful misconduct, fraud or criminal activity (excluding traffic violations or other minor offenses) which commission is materially inimical to the interests of any of the Subsidiaries or the Parent, whether for his personal benefit or in connection with his duties for the Parent or the Subsidiaries or (ii) intentionally or knowingly violated any antifraud provision of the federal or state securities laws ("ADVERSE FINAL ORDER"). Cole's employment under this Agreement may be terminated immediately by the Board of Directors of each of the Subsidiaries if such Boards reasonably believe that Cole has committed any of the acts referred to in the previous sentence, PROVIDED THAT if Cole's termination is alleged by the Subsidiaries to be for cause, the Subsidiaries shall deposit, at the time of such termination, the amount otherwise payable to Cole if said termination were not for cause, with an escrow agent reasonably satisfactory to Cole and the Subsidiaries. Such amount is to be invested from time to time in 90 day U.S. Treasury obligations or such other investments as Cole and the Subsidiaries mutually may approve. The principal amount, plus interest earned thereon, will be distributed by the escrow agent to the Subsidiaries if an Adverse Final Order is entered, or to Cole on the earlier of (i) the time when there has been entered in a Proceeding a final, non-appealable order on the merits of the matter, which is not an Adverse Final Order or, (ii) the expiration of sixty (60) days after Cole's termination if, at the end of such period, there is not pending any Proceeding and no Adverse Final Order has been entered. The fees of the escrow agent will be paid by Cole if an Adverse Final Order is entered and otherwise by the Subsidiaries. Cole and the Subsidiaries shall provide the escrow agent with customary indemnities and shall jointly execute and deliver customary and reasonable escrow instructions. (b) Upon the expiration of the Term and other termination of Cole's employment without cause other than (i) a termination by reason of his death as provided in Section 5 or (ii) his voluntary resignation (other than (x) a voluntary resignation that occurs following Constructive Termination, or (y) such resignation tendered pursuant to Section 6(c)), the Subsidiaries shall, for the period from the expiration of the Term or other termination of Cole's employment without cause until his death: (A) continue to provide Cole and his eligible dependents with coverage under those Employee Plans that provide life insurance, medical insurance, medical expense and reimbursement at levels and costs to the beneficiary that are no less favorable than the levels and costs provided to Cole immediately prior to the time of his termination of employment under this Agreement; PROVIDED, HOWEVER, that the Subsidiaries will not be required to expend amounts for such benefits in any year in excess of the annual cost of such benefits at the time of such termination increased over time by annual adjustments equal to the change in the Consumer Price Index (or any replacement index) as published from time to time by the United States government, and 6 7 (B) provide Cole with an office at the headquarters of Parent, comparable to his office at the time of his termination, for his use, and provide Cole with secretarial services substantially equivalent to those provided to him prior to termination, and (C) provide Cole with continuing financial, estate and tax consulting services in an amount not to exceed $15,000 per year; and (D) provide Cole with title to the automobile then provided to him under the Subsidiaries' automobile leasing program; and (E) for the period from Cole's termination of employment to the earlier of his death or the occurrence of a change of control, provide Cole with continuing access to the corporate aircraft, if any, for personal use for a maximum of 50 flight hours per year and otherwise on a basis consistent with the policy applicable to him prior to his termination of employment. (F) Notwithstanding the foregoing provisions of this Section 6(b), upon the expiration of the Term or other termination of employment without cause other than (i) a termination by reason of his death as provided in Section 5 or (ii) his voluntary resignation (other than (x) a voluntary resignation that occurs following Constructive Termination, or (y) such resignation tendered pursuant to Section 6(c)), Cole may elect at any time, by written notice to the Subsidiaries, to receive in lieu of the benefits to be provided under (A), (B), (C), (D) and (E) of this Section 6(b), a lump sum payment from the Subsidiaries in an amount equal to the then present value of the benefits to be provided to Cole and his eligible dependents under (A), (B), (C) and (E) of this Section 6(b). The foregoing sum shall be referred to as the "Benefit Payment". For purposes of this Section 6(b)(F), present value and life expectancy for purposes of determining the Benefit Payment shall be determined using the mortality tables and interest rates used on the date hereof under the Parent's qualified defined benefit retirement plan, and such other factors as may be determined by the actuary providing services with respect to such Plan on such date, or such other actuary as may be selected by Cole and reasonably satisfactory to the Subsidiaries. (c) In the event of a "CHANGE OF CONTROL," which will be deemed to have taken place upon the occurrence of any of the following: (i) the Parent merges into itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving or resulting corporation immediately after such transaction are owned in the aggregate by the former stockholders of the Parent immediately prior to such transaction; 7 8 (ii) all or substantially all the assets accounted for on the Consolidated Balance Sheet of the Parent are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly or indirectly beneficially held in the aggregate by the former stockholders of the Parent immediately prior to such transaction or series of transactions; (iii) A person, within the meaning of Section 3(a)(9) or 13(d)(3) (as in effect on the date of this Agreement) of the Securities Exchange Act of 1934, become the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934) of (i) 15% or more of the voting power of the then outstanding voting securities of the Parent or (ii) 35% or more of the voting power of the then-outstanding voting securities of the Parent; PROVIDED, HOWEVER, that the foregoing does not apply to any such acquisition that is made by (w) any subsidiary of the Parent; (x) any employee benefit plan of the Parent or any Subsidiary; or (y) any person or group of which employees of the Parent or of any Subsidiary control a greater than 25% interest unless the Board of Directors of the Parent determines that such person or group is making a "hostile acquisition;" or (z) any person or group of which Cole is an affiliate; or (iv) a majority of the members of the Board of Directors of the Parent or of any Subsidiary are not Continuing Directors, where a "CONTINUING DIRECTOR" is any member of the Board of Directors of the Parent or, with respect to a Subsidiary, of such Subsidiary who (x) was a member of the Board of Directors of the Parent or, with respect to a Subsidiary, of such Subsidiary on the date of this Agreement or (y) was nominated for election or elected to such Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election; Cole may terminate his employment with the Subsidiaries for any reason, or without reason, during the ninety (90) day period commencing six (6) months after such change of control, on which termination the Subsidiaries shall pay Cole, in a lump sum, the sum of the Termination Payment, plus at the election of Cole, to be made as provided in Section 6(b)(F), the Benefit Payment. 8 9 (d) The provisions of this Section 6 are in lieu of and not in addition to, any benefits Cole would otherwise be entitled to receive under any severance policy in effect or hereafter adopted by the Subsidiaries unless such Employee Plan or policy specifically provides otherwise. (e) As used in this Agreement, "Constructive Termination" means either (i) a substantial, nonconsensual adverse change in Cole's employment duties (which will, however, not include the relinquishment of Cole's status as Chief Executive Officer if he remains the Chairman of the Board of the Parent), or (ii) the moving of the Parent's executive headquarters more than 50 miles from its present location without Cole's consent. (f) Following Cole's termination of employment, if a change of control occurs, and if Cole is then receiving the benefits and payments provided for in Section 6(b)(A), (B), (C), (D), and (E), Cole may elect, in the manner specified in Section 6(b)(F), the Benefit Payment. 7. EXCISE TAX GROSS-UP. (a) In the event that it is determined (as provided in this Agreement) that any payment or distribution by the Subsidiaries pursuant to or for the benefit of Cole pursuant to the terms of this Agreement or otherwise (a "PAYMENT"), would be subject to the excise tax imposed by Section 4999 (or any successor thereto) of the Internal Revenue Code of 1986, as amended (the "CODE"), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "EXCISE TAX"), then Cole will be entitled to receive an additional payment or payments (collectively, a "GROSS-UP PAYMENT"). The Gross-Up Payment will be in an amount such that, after payment by Cole of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment equal to the Excise Tax, Cole retains a portion of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 7(e), all determinations required to be made under this Section 7, including whether an Excise Tax is payable by Cole and the amount of such Excise Tax, and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, will be made be a nationally recognized firm of certified public accountants (the "ACCOUNTING FIRM") selected by Cole and approved by the Parent (such approval not to be unreasonably withheld). Cole shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Subsidiaries and Cole within 15 calendar days after the effective date of Cole's termination of employment, if applicable, or such earlier time or times as may be requested by the Subsidiaries or Cole. If the Accounting Firm determines that any Excise 9 10 Tax is payable by Cole, the Subsidiaries shall pay the required Gross-Up Payment to Cole within five business days after receipt of the aforesaid determination and calculations. If the Accounting Firm determines that no Excise Tax is payable by Cole, it shall, at the same time as it makes such determination, furnish Cole with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment to be paid by the Subsidiaries within such 15 calendar-day period will be binding upon the Subsidiaries and Cole. As a result of the uncertainty in the application of Section 4999 (or any successor thereto) of the Code at the time of the initial determination by the Accounting Firm under this Agreement, it is possible that Gross-Up Payment that will not have been made by the Subsidiaries should have been made ("UNDERPAYMENT"), or that Gross-Up Payments will be made that are subsequently refunded as overpayments of the amounts actually due ("OVERPAYMENTS"), consistent with the calculations required to be made under this Agreement. In the event that the Subsidiaries exhaust their remedies pursuant to Section 7(e) and Cole thereafter is required to make payment of any excise Tax, Cole shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Subsidiaries and Cole as promptly as possible. Any such Underpayment shall be promptly paid by the Subsidiaries to or for the benefit of Cole within three calendar days after receipt of such determination and calculations. In the event that Cole receives any refund of an Overpayment for which he has previously been reimbursed by the Subsidiaries, Cole shall promptly pay an amount equal to the amount of such refund to the Subsidiaries within three calendar days after receipt of such determination and calculations. (c) The Subsidiaries and Cole shall each cooperate with the Accounting Firm in connection with the preparation and issuance of the determination provided for in Section 7(b). Such cooperation will include, without limitation, providing the Accounting Firm access to and copies of any books, records and documents in the possession of the Subsidiaries or Cole, as the case may be, that are reasonably requested by the Accounting Firm. Cole will provide the Subsidiaries and the Accounting Firm, copies of portions of such returns, other filings or correspondence relating to the payment of any Excise Tax as the Subsidiaries and the Accounting Firm may reasonably request. (d) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations provided for in Section 7(b) shall be paid by Cole. The Subsidiaries shall reimburse Cole for his payment of such costs and expenses within five business days after receipt from Cole of a statement therefor and evidence of his payment thereof. (e) Cole shall notify the Subsidiaries in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Subsidiaries of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after Cole receives notice of such claim and shall apprise the Subsidiaries of the nature of such claim and the date on which such 10 11 claim is requested to be paid. Cole shall not pay such claim prior to the earlier of (i) the expiration of the 30 calendar-day period following the date on which he gives such notice to the Subsidiaries or (ii) the date that any payment of taxes with respect to such claim is due. If the Subsidiaries notify Cole in writing prior to the expiration of such period that they desire to contest such claim Cole shall: (i) give the Subsidiaries any information reasonably requested by the Subsidiaries relating to such claim; (ii) take such action in connection with contesting such claim as the Subsidiaries reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Subsidiaries; (iii) cooperate with the Subsidiaries in good faith in order effectively to contest such claim; and (iv) permit the Subsidiaries to participate in any proceeding relating to such claim; PROVIDED, HOWEVER, that the Subsidiaries shall bear and pay directly all costs and expenses (including additional interest and penalties incurred in connection with such contest) and shall indemnify and hold Cole harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 7(e), the Subsidiaries will control all proceedings taken in connection with such contest and, at their sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conference with the taxing authority in respect of such claim (but Cole may participate therein at his own cost and expense) and may, at their sole option, either direct Cole to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Cole agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Subsidiaries determine; PROVIDED, HOWEVER, that if the Subsidiaries direct Cole to pay the tax claimed and sue for a refund, the Subsidiaries shall advance the amount of such payment to Cole on an interest-free basis and shall indemnify and hold Cole harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and FURTHER PROVIDED that any extension of the statute of limitations relating to payment of taxes for the taxable year of Cole with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Susidiaries' control of such contest will be limited to issues with respect to which a Gross-Up Payment would be payable under this Agreement, and Cole will be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 11 12 (f) If, after the receipt by Cole of an amount advanced by the Subsidiaries pursuant to Section 7(e), Cole receives any refund with respect to such claim, Cole shall (subject to the Subsidiaries' complying with the requirements of Section 7(e)) promptly pay to the Subsidiaries the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Cole of any amount advanced by the Subsidiaries pursuant to Section 7(e), a determination is made that Cole is not entitled to any refund with respect to such claim and the Subsidiaries do not notify Cole in writing of their intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance will be forgiven and will not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 8. (a) CONFIDENTIALITY. During the Term and at any time thereafter, Cole shall not disclose, furnish, disseminate, make available, or, except in the ordinary course of performing his duties on behalf of the Subsidiaries or the Parent, use any trade secrets or confidential business and technical information of the Subsidiaries, the Parent, any direct or indirect, wholly or partially owned subsidiaries of the Parent or any of the Subsidiaries, or customers of any of the Subsidiaries, without limitation as to when it was acquired by him or whether it was compiled or obtained by or furnished to him while he was employed by the Subsidiaries. Such trade secrets and confidential business and technical information are considered to include, without limitation, the vendor lists, vendor terms and programs, merchandise costs, financial statistics, research data, or any other statistics and plans contained in monthly and annual review books, profit plans, capital plans, critical issues, annual plans, strategic plans, or merchandising, marketing, real estate, or store operations plans. Cole specifically acknowledges that all such information, whether reduced to writing or maintained in his mind or memory and whether compiled by the Subsidiaries and/or the Parent and/or him, derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from its disclosure or use, that reasonable efforts have been put forth by the Subsidiaries or the Parent to maintain the secrecy of such information, that such information is and will remain the sole property of the Subsidiaries or the Parent and that any retention and use of such information during or after the termination of his employment relationship with the Subsidiaries or the Parent (except in the course of performing his duties) under this Agreement will constitute a misappropriation of the trade secrets of the Subsidiaries on the Parent; PROVIDED, HOWEVER, that his restriction will not apply to information which is in the public domain or otherwise made public by other through no fault of Cole, or as may be required by law. (b) NON-COMPETITION. Except as may otherwise be approved in advance by the Parent's Board of Directors, during the Term and for the period during which he receives consulting fees pursuant to Section 9(a), and for a period of three (3) years after the termination of his employment either for cause or by his voluntary 12 13 resignation, Cole shall not compete, directly or indirectly with any of the Subsidiaries or the Parent. Without limiting the generally of the foregoing, Cole shall not: (i) enter into or engage in any business which competes with business of any of the Subsidiaries or the Parent; (ii) solicit customers, business, patronage, or orders for, or sell, any products in competition with, or for any business that competes with, the business of any of the Subsidiaries or the Parent; or (iii) divert, entice, or otherwise take away any customers, business, patronage or orders of any of the Subsidiaries or the Parent or attempt to do so; or (iv) promote or assist, financially or otherwise, any person, firm, association, partnership, corporation, or any other entity engaged in any business which he competes with the business of any of the Subsidiaries or the Parent. For the purposes of this Section 8(b), Cole understands, acknowledges and agrees that he will be competing if he engages in any or all of the activities set forth in this Section 8(b) directly as an individual for his own account, or indirectly as a partner, joint venture, employee, agent, salesman, consultant, officer and/or director of any firm, association, corporation, or other entity, or as a stockholder of any corporation in which he owns, directly or indirectly, individually or in the aggregate, more than one percent (1%) of the outstanding stock. (c) NON-SOLICITATION. During the Term and for the period during which he receives consulting fees pursuant to Section 9(a), and for a period of three (3) years after the termination of his employment either for cause or by his voluntary resignation, Cole shall not directly or indirectly solicit or induce or attempt to solicit or induce any employee(s) or any sales representative(s), agent(s) or consultant(s) of any of the Subsidiaries, the Parent or any direct or indirect, wholly or partially owned subsidiaries of the Parent or any of the Subsidiaries to terminate their employment, representation or other association with such entity. (d) COOPERATION AND ASSISTANCE. During the Term and thereafter, Cole will provide reasonable cooperation to the Parent and the Subsidiaries in litigation and regulatory matters that relate to events that occurred during his periods of employment with the Parent, the Subsidiaries and its or their predecessors, and will provide reasonable assistance to the Parent and the Subsidiaries with matters relating to their corporate history from the periods of his employment with them or their predecessors. Cole will be entitled to reasonable additional compensation and reimbursement of reasonable costs and expenses relating to any such cooperation or assistance that occurs following the Term. 13 14 (e) REMEDIES. Cole expressly acknowledges and agrees that the remedy at law for any breach by him of his obligations under this Section 8 will be inadequate and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, he acknowledges and agrees that upon his violation of any obligation in this Section 8, the Subsidiaries and/or Parent will be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach without the necessity of proof of actual damage. Nothing in this Agreement will be deemed to limit the remedies of the Subsidiaries or the Parent at law or in equity for any breach by Cole of any of the obligations in this Section 8 that may be pursued or availed of by the Subsidiaries or the Parent. 9. POST-RETIREMENT CONSULTING SERVICES. Upon expiration of the Term or if Cole voluntarily resigns from all offices and positions he holds at such time with Parent and Subsidiaries (other than (x) a voluntary resignation that occurs following Constructive Termination, or (y) if such resignation is tendered pursuant to Section 6(c)), Cole will provide consulting services to the Parent and the Subsidiaries upon the following terms and provisions: (a) until the earlier of Cole's death or the tenth anniversary of Cole's termination of employment (but in no event after the date on which he turns 75), the Subsidiaries shall pay Cole a consulting fee of at least $150,000 per year for the first three (3) years; $100,000 for the next four (4) years, and $75, 000 for the next three (3) years of such consulting period whether or not they use Cole's services pursuant to Section 9(b); and (b) Cole shall make himself available to provide such reasonable consulting services as are agreed upon at the time of such resignation or the expiration of the Term, but not more than 30 days per year, such services to be provided upon reasonable notice and with all travel and other legitimate business expenses to be reimbursed.; and (c) Such other terms and conditions as may be agreed. If, after Cole becomes a consultant under this Section 9, there is a change of control as defined in Section 6(c), the obligations of Parent and Subsidiary for the remaining term of the consulting arrangement under this Section 9 will accelerate and will be paid immediately to Cole in a lump sum, and Cole's obligations under this Section 9 will terminate. 10. DIVISION OF OBLIGATIONS. (a) Subject to Sections 10(b) and 10(c), the performance of the obligations of the Subsidiaries to Cole under this Agreement is allocated among the Subsidiaries as follows: 14 15 (b) In the event that any of the Subsidiaries ceases to be a direct or indirect subsidiary of the Parent, such Subsidiary will thereupon be relieved of any obligations under this Agreement and the performance of the Subsidiaries' obligations to Cole under this Agreement will be reallocated, without reducing the amount of aggregated compensation or benefits payable under this Agreement, by the Board of Directors of the Parent; PROVIDED, HOWEVER, that in the event that both Cole Vision and Things Remembered cease to be direct or indirect subsidiaries of the Parent, provision will be made, immediately prior to such event, by such subsidiaries or by the Parent, to provide Cole with financial assurances (which may include the establishment of an escrow or trust fund, or the provision of letters of credit from financial institutions reasonably to Cole) on terms reasonably acceptable to Cole for the fulfillment of the monetary obligations of the Subsidiaries under this Agreement. Except for such financial assurances, nothing in this Section 10 is to be construed as restricting the Parents' right to dispose of its interests in the Subsidiaries (except as may be provided in other agreements with Cole). (c) With respect to any obligations of the Subsidiaries not expressed directly in monetary terms, including, without limitation, those described in Sections 4(c), 4(e), 5 and 6(b), each of the Subsidiaries shall bear its proportionate percentage as provided in Sections 10(a) or 10(b), as applicable. (d) CNG hereby guarantees the performance by each of the Subsidiaries of its obligations under this Agreement. (e) Each of the obligations incurred under this Agreement by the Subsidiaries will be borne PRO RATA by each Subsidiary in its proportionate share as provided in this Section 10, and each of the Subsidiaries will be entitled to contributions from the other Subsidiaries for any amounts paid in connection with any of the obligations in excess of such Subsidiary's respective proportionate share. This Section 10(e) is intended only to define the relative rights of the Subsidiaries, and nothing set forth in this Section 10(e) is intended to or will impair the obligations of the Subsidiaries to pay to Cole amounts in connection with the obligations as and when the same become due and payable under this Agreement in accordance with the terms of this Agreement. (f) In the event that all of the Subsidiaries cease to be direct or indirect subsidiaries of the Parent, the obligations of the Subsidiaries to provide continuing health insurance and life insurance benefits pursuant to any section of the Agreement must be satisfied by delivery to Cole of any annuity in an amount and with terms reasonably acceptable to Cole (or his dependents or legal guardian, as applicable) and to the Board of Directors of the Parent. 11. TERMINATION OF EXISTING AGREEMENT. Immediately upon the effectiveness of this Agreement, the Employment Agreement shall terminate. Such termination shall not (a) prejudice any rights Cole many have under such Employment 15 16 Agreement relating to obligations to have been performed by the Parent or the Subsidiaries prior to the date of this Agreement and (b) cause Cole to receive or become eligible for any additional payments or rights that might otherwise be triggered by a termination of the Employment Agreement or the termination of Cole's employment under this Agreement. 12. CHARTER PROVISIONS. (a) The Certificates of Incorporation and By-laws of each Parent and of the Subsidiaries with respect to indemnification and limitations on liability of officers and directors may not be amended insofar as they relate to Cole without his consent (which will not be unreasonably withheld). (b) During the Term and for a period of five years following the termination of Cole's employment with the Subsidiaries (other than termination for cause), Parent will not change its corporate name without the consent of Cole. This Section 12(b) will not apply if Cole has been terminated "for cause" or following a change of control. The Parent acknowledges and agrees that the remedy at law to Cole from a breach by the Parent of this provision will be inadequate and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, the Parent acknowledges and agrees that upon Parents' violation of this provision, (i) Cole will be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach without the necessity of proof of actual damage and in addition, (ii) Cole will be released from further obligations under Section 8. Nothing in this Agreement will be deemed to limit the remedies of Cole at law or in equity for any breach by Parent of any of the obligations in this provision that may be pursued or availed of by Cole. 13. CHOICE OF LAW. This Agreement was entered into, and the negotiations proceeding this Agreement were conducted in Cleveland, Ohio, and this Agreement is intended to be performed within the State of Ohio, which is the principal residence of Cole. Accordingly, the validity and interpretation of this Agreement will be determined in accordance with the internal laws of the State of Ohio. 14. NOTICES. Any notices required or permitted to the given under this Agreement is to be in writing and either given by personal delivery or deemed to be delivered three (3) days after deposit, postage pre-paid, in the U.S. certified or registered mail, return receipt requested, addressed as follows: If to the Subsidiaries: Cole National Corporation 5915 Landerbrook Drive Mayfield Hts., Ohio 44124 Attention: General Counsel If to Cole: Jeffrey A. Cole 5200 Three Village Drive Lyndhurst, Ohio 44124 16 17 or at such other address as is specified in written notice given in the manner required in this Agreement. 15. WAIVER OF BREACH. The waiver by either the Subsidiaries or Cole of a breach of any provision of this Agreement will not operate or be construed as a waiver of any subsequent breach by either party. 16. BINDING EFFECT. This Agreement will be binding upon and shall inure to the benefit of both Cole and the Subsidiaries and their respective successors, heirs and legal representatives, but neither this Agreement nor any rights under this Agreement may be assigned by Cole or the Subsidiaries without the written consent of the other. 17. SEVERABILITY. If any portion of this Agreement is invalid or illegal, such invalidity or illegality will not render this Agreement invalid or illegal as a whole but the invalid or illegal portions are to be stricken herefrom and the remainder of this Agreement will be binding on the parties and their successors and assigns as if such invalid or illegal provisions were never included in this Agreement from the first instance. 18. AMENDMENTS. No amendment or variation of the terms of this Agreement will be valid unless the same are in writing signed by all parties. 19. SECTION REFERENCES. Unless otherwise specified, all references in this Agreement to section will be construed to refer to sections of this Agreement. 20. SETOFF. The obligations to pay Cole following termination of his employment may be setoff at the Parent's election by the amount of any payments then owing to the Parent or any of its subsidiaries pursuant to loans then outstanding from the Parent or any of its subsidiaries, but only to the extent, and when and as, such payments become due in accordance with the terms of such loans (including by any acceleration events). Cole may, from time to time, elect to not make any payment under such loans when due by notifying the lender in advance of the due date for such loan payment of his election to forego a payment then due to him under this Agreement in the amount of such loan payment. 17 18 This Employment Agreement has been executed by the parties on the date and year first above written. COLE NATIONAL CORPORATION By: /s/ Leslie D. Dunn -------------------------------- Title: Sr. Vice President COLE NATIONAL GROUP, INC. By: /s/ Leslie D. Dunn -------------------------------- Title: Sr. Vice President PEARLE, INC. By: /s/ Leslie D. Dunn -------------------------------- Title: Sr. Vice President COLE VISION CORPORATION By: /s/ Leslie D. Dunn -------------------------------- Title: Sr. Vice President THINGS REMEMBERED, INC. By: /s/ Leslie D. Dunn -------------------------------- Title: Sr. Vice President /s/ Jeffrey A. Cole ----------------------------------- Jeffrey A. Cole 18 EX-10.45 3 EXHIBIT 10.45 1 Exhibit 10.45 EXECUTION COPY FOURTH AMENDMENT FOURTH AMENDMENT, dated as of March 5, 1999 (this "AMENDMENT"), to the Credit Agreement, dated as of November 15, 1996 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among COLE VISION CORPORATION, a Delaware corporation ("COLE VISION"), THINGS REMEMBERED, INC., a Delaware corporation ("THINGS REMEMBERED") and PEARLE, INC., a Delaware corporation ("PEARLE"; Cole Vision, Things Remembered and Pearle each being referred to as a "BORROWER" and collectively as the "BORROWERS"), the several banks and other financial institutions from time to time parties thereto (collectively, the "LENDERS") and CANADIAN IMPERIAL BANK OF COMMERCE, a Canadian-chartered bank acting through its New York Agency, as administrative agent for the Lenders thereunder (in such capacity, the "ADMINISTRATIVE AGENT"). W I T N E S S E T H: WHEREAS, the Borrowers, the Lenders and the Administrative Agent are parties to the Credit Agreement; WHEREAS, the Borrowers have requested that the Administrative Agent and the Lenders amend the Credit Agreement as set forth herein; and WHEREAS, the Administrative Agent and the Lenders are willing to effect such amendment, but only upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Borrowers, the Lenders and the Administrative Agent hereby agree as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms defined in the Credit Agreement shall have such meanings when used herein. 2. AMENDMENT TO SUBSECTION 1.1. Subsection 1.1 of the Credit Agreement is hereby amended by changing the definition of "EBITDA" to read in its entirety as follows: "`EBITDA': for any period, with respect to CNG and its Subsidiaries on a consolidated basis, determined in accordance with GAAP, an amount equal to the sum of (a) Net Income for such period, plus (b) income taxes, excluding income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales or other dispositions of assets permitted under subsection 8.6, plus (c) Interest Expense for such period, plus (d) depreciation for such period, plus (e) 2 2 amortization for such period, plus (f) any other non-cash items (including minority interests) reducing Net Income for such period, plus (g) amortization of deferred financing costs and expenses for such period, minus (h) all non-cash items increasing Net Income for such period, minus (i) all cash payments made in such period in respect of restructuring charges deducted in calculating Net Income for such period or any prior period (excluding any such cash payments made in respect of (i) the $8,000,000 pre-tax business integration charge associated with the AVC acquisition taken by CNG during fiscal 1997, (ii) the $61,100,000 pre-tax charge for certain unusual and non-recurring items related to the Pearle acquisition taken by CNG in the fourth quarter of fiscal 1996 and (iii) the $25,000,000 pre-tax restructuring charge taken by CNG in the fourth quarter of fiscal 1998).". 3. AMENDMENT TO SUBSECTIONS 8.1(a) AND 8.1(b). Subsections 8.1(a) and 8.1(b) of the Credit Agreement are hereby amended by deleting such subsections in their entirety and substituting in lieu thereof the following: "(a) LEVERAGE RATIO. Permit the Leverage Ratio as of the end of each fiscal quarter of CNG ending on or about any of the dates set forth below to be greater than the ratio set forth opposite such date below:
FISCAL QUARTER ENDING LEVERAGE RATIO --------------------- -------------- January 31, 1997 3.85 to 1.00 April 30, 1997 3.75 to 1.00 July 31, 1997 3.60 to 1.00 October 31, 1997 3.45 to 1.00 January 31, 1998 3.25 to 1.00 April 30, 1998 3.10 to 1.00 July 31, 1998 2.95 to 1.00 October 31, 1998 2.80 to 1.00 January 31, 1999 2.80 to 1.00 April 30, 1999 2.80 to 1.00 July 31, 1999 2.80 to 1.00 October 31, 1999 2.80 to 1.00 January 31, 2000 2.80 to 1.00 Thereafter 2.80 to 1.00
(b) ADJUSTED INTEREST COVERAGE RATIO. Permit the Adjusted Interest Coverage Ratio as of the end of each fiscal quarter of CNG ending on or about any of the dates set forth below to be less than the ratio set forth opposite such date below: 3 3
ADJUSTED FISCAL QUARTER ENDING INTEREST COVERAGE RATIO January 31, 1997 1.40 to 1.00 April 30, 1997 1.50 to 1.00 July 31, 1997 1.55 to 1.00 October 31, 1997 1.60 to 1.00 January 31, 1998 1.65 to 1.00 April 30, 1998 1.70 to 1.00 July 31, 1998 1.75 to 1.00 October 31, 1998 1.80 to 1.00 January 31, 1999 1.75 to 1.00 April 30, 1999 1.75 to 1.00 July 31, 1999 1.75 to 1.00 October 31, 1999 1.75 to 1.00 January 31, 2000 1.75 to 1.00 Thereafter 1.75 to 1.00".
4. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby confirms, reaffirms and restates the representations and warranties made by it in Section 5 of the Credit Agreement, PROVIDED that each reference to the Credit Agreement therein shall be deemed to be a reference to the Credit Agreement after giving effect to this Amendment. Each Borrower represents and warrants that, after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. 5. EFFECTIVENESS. This Amendment shall be effective upon execution and delivery by each of the Borrowers, the Administrative Agent and the Majority Lenders. 6. CONTINUING EFFECT OF CREDIT AGREEMENT. This Amendment shall not constitute a waiver, amendment or modification of any other provision of the Credit Agreement not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of the Borrowers that would require a waiver or consent of the Lenders or the Administrative Agent. Except as expressly amended or modified herein, the provisions of the Credit Agreement are and shall remain in full force and effect. 7. COUNTERPARTS. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Amendment signed by all the parties shall be lodged with the Borrowers and the Administrative Agent. 4 4 8. PAYMENT OF EXPENSES. The Borrowers agree, jointly and severally, to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of this Amendment and any other documents prepared in connection herewith, and the consummation and administration of the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 9. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COLE VISION CORPORATION By: /s/ J. Gaglioti --------------------------------- Title: THINGS REMEMBERED, INC. By: /s/ J. Gaglioti --------------------------------- Title: PEARLE, INC. By: /s/ J. Gaglioti --------------------------------- Title: 5 5 CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as Administrative Agent By: /s/ Katherine Bass --------------------------- Title: Authorized Signatory CIBC INC. By: /s/ Katherine Bass --------------------------- Title: Executive Director 6 6 CREDIT SUISSE FIRST BOSTON By: /s/ Joel Glodowski -------------------------- Title: Managing Director By: /s/ Robert Hetu -------------------------- Title: Vice President 7 8 FIRST UNION NATIONAL BANK By: /s/ Anne Marie Fitzsimmons Hughes ----------------------------------- Title: Vice President 8 10 NATIONAL CITY BANK By: /s/ Chris D. Thorton --------------------------- Title: Vice President EX-10.46 4 EXHIBIT 10.46 1 Exhibit 10.46 COLE NATIONAL CORPORATION Nonqualified Stock Option Agreement (1998 Plan/Time Vesting/Senior Executive) This Nonqualified Stock Option Agreement (this "Agreement") is entered into between the individual optionee named on the signature page hereof (the "Optionee") and Cole National Corporation, a Delaware corporation (the "Company"), as of the Grant Date shown on the signature page. Certain capitalized terms used herein are defined in Paragraph 8. WHEREAS, the Board of Directors of the Company has authorized a grant of stock options on the terms hereof to the Optionee, who is employed in the capacity shown on the signature page; and WHEREAS, the stock option granted by this Agreement is intended as a nonqualified stock option and will not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986. NOW, THEREFORE, the Company hereby grants to the Optionee options (the "Options") pursuant to the Company's 1998 Equity Performance and Incentive Plan (the "Plan") to purchase the number of shares of Common Stock, par value $.001 per share, of the Company ("Common Stock") shown as the Original Award on the signature page hereof; and agrees to cause certificates for any shares purchased hereunder to be delivered to the Optionee upon payment of the purchase price in full, all subject, however, to the terms and conditions of the Plan and the terms and conditions hereinafter set forth. 2 2 1. EXERCISE. (a) Except as otherwise provided herein, the Options (until terminated as hereinafter provided) will become vested and exercisable as follows:
AMOUNT VESTED DATE EXERCISABLE ------------- ---------------- 1/3 of the Original Award The first date commencing on or after the first anniversary of the Grant Date on which the Stock Price has averaged at least 133% of the Exercise Price for a continuous period of 21 Trading Days ending on such date; and 1/3 of the Original Award The first date commencing on or after the first anniversary of the Grant Date on which the Stock Price has averaged at least 167% of the Exercise Price for a continuous period of 21 Trading Days ending on such date; and 1/3 of the Original Award The first date commencing on or after the first anniversary of the Grant Date on which the Stock Price has averaged at least 200% of the Exercise Price for a continuous period of 21 Trading Days ending on such date. All Unvested Shares Fifth anniversary of the Grant Date
To the extent exercisable, the Options may be exercised in whole or in part from time to time. (b) Upon the occurrence of a Change in Control prior to the fifth anniversary of the date of this Agreement, the Options, in addition to any vesting pursuant to the provisions of Paragraph 1(a) above, will become exercisable in full as to any then Unvested Shares immediately prior to the consummation of such Change in Control. (c) If a Termination Event occurs prior to the fifth anniversary of the Grant Date, the Options will, in addition to any prior vesting pursuant to Paragraph 1(a) above, immediately become exercisable in full with respect to all Unvested Shares. 3 3 (d) If the Optionee dies or becomes permanently disabled while in the employ of the Company or any Subsidiary, or the Optionee with the consent of the Company's Board of Directors or the Compensation Committee thereof (the "Compensation Committee") retires under a retirement plan of the Company or any Subsidiary the Options will, in addition to any vesting pursuant to Paragraph 1(a) above, immediately become exercisable in full with respect to that portion of the Unvested Shares shown below: Prior to the first anniversary of the Grant Date 1/3rd On or after the first anniversary but prior to the second anniversary of the Grant Date 2/3rds Thereafter All (e) Any exercise of the Options must be made in writing by the Optionee delivered to the Secretary of the Company. 2. EXERCISE PRICE AND PAYMENT; RELOAD OPTIONS. (a) The Options will be exercisable for Vested Shares (whether such vesting occurs pursuant to Paragraph 1(a), 1(b), 1(c) or 1(d)) at the Exercise Price shown on the signature page hereof. (b) The Exercise Price for any shares may be paid (i) in cash or by check, (ii) if approved by the Compensation Committee prior to such exercise, by delivery to the Company of a promissory note or notes of the Optionee; PROVIDED, HOWEVER, that the principal amount of such notes for all optionees outstanding at any one time pursuant to the Plan, the Company's 1996 Management Stock Option Plan, the Company's 1993 Management Stock Option Plan and the Company's 1992 Management Stock Option Plan shall not in the aggregate exceed $3,000,000, (iii) by actual or constructive transfer to the Company of Mature Shares, or (iv) by a combination of such methods of payment. 4 4 (c) If the Optionee pays the Exercise Price of shares by delivery of Mature Shares, additional option rights ("Reload Option Rights") shall, subject to the provisions hereinafter set forth, be automatically granted to the Optionee equal to the sum of (i) the number of Mature Shares transferred to the Company with respect to such Exercise Price and (ii) the number of shares of Common Stock surrendered to the Company in payment of the Withholding Amount associated with the Options exercised through the delivery of Mature Shares. Reload Option Rights shall be granted as set forth in this Paragraph 2(c) with respect to Optionee's exercise of Options prior to their termination pursuant to Paragraph 3. In no event, however, shall Reload Option Rights be granted unless the remainder of the original ten (10) year term of the option being exercised is greater than six (6) months at the time of such exercise. Reload Option Rights will not be granted with respect to any Options that have been transferred by the original Optionee. Reload Option Rights shall not be exercisable during the six (6) month period immediately following the date of grant of such Reload Option Rights. The Exercise Price of such Reload Option Rights shall be one hundred (100) percent of the Stock Price per share on the day of the exercise of the Options to which such Reload Option Rights relate. Such Reload Option Rights shall terminate at such time as the Options being exercised would have terminated had they not been exercised. Such Reload Option Rights will be evidenced by an agreement in form substantially the same as this Agreement, with appropriate changes. 3. TERMINATION. The Options will terminate and all Unvested and Vested Options then outstanding will be forfeited on the earliest of the following dates: (a) On the date on which the Optionee voluntarily resigns (unless otherwise provided in a written agreement relating to employment) or ceases to be an employee of the Company or a Subsidiary by reason of termination of employment for Cause; 5 5 (b) Subject to possible extension pursuant to Paragraph 3(c) below, five years after either (i) the date on which the Optionee ceases to be an employee of the Company or a Subsidiary by reason of retirement under a retirement plan of the Company or a Subsidiary at or after the earliest voluntary retirement age provided for in such retirement plan or retirement at an earlier age with the consent of the Company's Board of Directors or the Compensation Committee or (ii) the date of permanent disability of the Optionee if the Optionee becomes permanently disabled while an employee of the Company or a Subsidiary; (c) Five years after the date of the death of the Optionee if the Optionee dies while an employee of the Company or a Subsidiary or one year after the date of death of the Optionee if the Optionee dies during the fifth year of the five year period referred to in Paragraph 3(b) above; (d) One year after the date of a Termination Event; or (e) Ten years from the date on which these Options were granted. 4. TRANSFERABILITY. Unless otherwise approved by the Compensation Committee following a request from the Optionee or the Optionee's guardian or legal representative, the Options are not transferable by the Optionee otherwise than by will or the laws of descent and distribution if the recipient of the Options enters into an agreement with the Company (in form and substance acceptable to the Company) agreeing to be bound by the provisions of this Agreement as if such transferee were the Optionee. If exercised during the lifetime of the Optionee, the Options are exercisable only by the Optionee or by the Optionee's guardian or legal representative or by any transferee authorized as provided in this paragraph. 5. SECURITIES LAWS. The Options are not exercisable if such exercise would involve a violation of any applicable federal, state or other securities law, and the Company hereby 6 6 agrees to make reasonable efforts to comply with such securities laws. The Options are not exercisable unless under said laws at the time of exercise the shares of Common Stock or other securities purchasable hereunder are exempt, are the subject matter of an exempt transaction, or are registered in accordance with such laws. 6. ADJUSTMENTS. (a) The Board of Directors or the Compensation Committee shall make such adjustment in the option price and in the number or kind of shares of Common Stock or other securities covered by the Options as such Board or Committee may in good faith determine is equitably required to prevent dilution or enlargement of the rights of the Optionee that otherwise would result from (i) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, or (ii) any merger, consolidation, spin-off, split-off, spin-out, split up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights to purchase securities, or (iii) any distribution to the holders of the Common Stock of rights or warrant to purchase equity interests of the Company, or (iv) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Board of Directors or the Compensation Committee, in its discretion, may provide in substitution for any or all outstanding awards under the Options such alternative consideration as it, in good faith, may determine to be equitable in the circumstances and may require in connection therewith the surrender of all awards so replaced. (b) In the event that any provision of this Agreement would result in a calculation of a number of shares in amounts other than a whole number, the number of shares so calculated will be reduced or increased to the nearest whole number (rounding 0.50 up), with the effect of any such rounding deemed to attach to the last group of shares to be so calculated (with calculations to be conducted in alphabetical or numerical order, as applicable). 7 7 7. WITHHOLDING. If the Company is required to withhold any federal, state, local or foreign tax in connection with the exercise of the Options, it will be a condition to such exercise that the Optionee pay or make provision satisfactory to the Company for payment of all such taxes. Upon exercise of any Options, Optionee shall surrender to the Company, by the Company withholding from the shares of Common Stock to be issued upon such exercise to the Optionee in satisfaction of the Withholding Amount, shares of Common Stock that have value in the aggregate that is equal to such Withholding Amount. In the event that Optionee desires to have an amount greater than the Withholding Amount withheld, the excess over the Withholding Amount must be paid to the Company in cash. 8. DEFINITIONS. The following capitalized terms have meanings as set forth below. "Cause" means gross neglect of duty, dishonesty, conviction of a felony, disloyalty, intoxication, drug addiction, or other similar misconduct adverse to the best interests of the Company; PROVIDED THAT if the Optionee is party to an employment agreement which contains a more restrictive definition of "Cause" or "for cause," such more restrictive definition will apply for purposes of this Agreement. "Change in Control" means if at any time any of the following events shall have occurred: (a) the Company merges into itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving or resulting corporation immediately after such transaction are directly or indirectly beneficially owned in the aggregate by the former stockholders of the Company immediately prior to such transaction; 8 8 (b) all or substantially all the assets accounted for on the consolidated balance sheet of the Company are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly or indirectly beneficially held in the aggregate by the former stockholders of the Company immediately prior to such transaction or series of transactions; (c) A person, within the meaning of Section 3(a)(9) or 13(d)(3) (as in effect on the date hereof) of the Securities Exchange Act of 1934, becomes the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934) of (i) 15% or more but less than 35% of the voting power of the then-outstanding voting securities of the Company without the prior approval by the Board, or (ii) 35% or more of the voting power of the then-outstanding voting securities of the Company; PROVIDED, HOWEVER, that the foregoing does not apply to any such acquisition that is made by (w) any subsidiary of the Company; (x) any employee benefit plan of the Company or any Subsidiary or (y) any person or group of which employees of the Company or of any Subsidiary control a greater than 25% interest unless the Board of Directors of the Company determines that such person or group is making a "hostile acquisition;" (d) A majority of the members of the Board of Directors of the Company or of any Subsidiary are not Continuing Directors, where a "Continuing Director" is any member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary who (x) was a member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary on the date hereof or (y) was nominated for election or elected to such Board of 9 9 Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Exercise Price" means the exercise price per share indicated as the Exercise Price per share on the signature page hereof. "Grant Date" means the date of the Board or Compensation Committee action awarding the Options to the Optionee as indicated on the signature page hereof. "Mature Shares" means (x) nonforfeitable, unrestricted shares of Common Stock that have been owned by the Optionee for more than six (6) months prior to the date of exercise, or (y) shares of Restricted Stock or other shares of Common Stock that are forfeitable or subject to restrictions on transfer, including, without limitation, shares of Common Stock issued pursuant to the earn out of Performance Shares or Performance Units, in each instance issued under the Plan, or (z) such other Company securities as the Company's chief accounting officer, upon consultation with the Company's independent accountants, determines will not adversely affect the Company's tax or accounting position by accepting. "Original Award" means the number of shares of Common Stock indicated as the Original Award on the signature page hereof. "Person" means any corporation, partnership, limited liability company, association, firm, other entity or individual(s). "Stock Price" means the closing price of the Common Stock on the principal exchange on which the Common Stock is traded. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (or a group of corporations that themselves are Subsidiaries) other than the last corporation in the unbroken chain owns stock 10 10 possessing fifty percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. For purposes of this Agreement, the continuous employment of the Optionee with the Company or a Subsidiary will not be deemed interrupted, and the Optionee will not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of his employment among the Company and its Subsidiaries. "Termination Event" means the Optionee's ceasing to be an employee of the Company or its continuing Subsidiaries by reason of either (i) termination of the Optionee's employment without Cause or (ii) following Constructive Termination (as such term is defined in the Employment Agreement Optionee, the Company and certain of the Company's subsidiaries entered into as of the date of this Agreement). "Trading Days" means days on which the principal exchange on which the Common Stock is traded is open for trading, regardless of whether actual trading in the Common Stock occurs. "Unvested Shares" means, as of any given time, those shares of Common Stock relating to the Options that are not, at the time in question, otherwise permitted, under the terms of this Agreement, to be acquired pursuant to the exercise of the Options. "Vested Shares" means, as of any given time, those shares of Common Stock relating to the Options that are, at the time in question, otherwise permitted, under the terms of this Agreement, to be acquired pursuant to the exercise of the Options. "Withholding Amount" means the minimum amount of withholding taxes, including Federal, state and local income taxes and social security and medicare taxes required to be withheld by the Company by the applicable taxing authorities as the result of the exercise of an Option. 11 11 9. ACKNOWLEDGMENT. The undersigned Optionee hereby acknowledges receipt of an executed original of this Agreement and accepts the Options granted hereunder. 12 Nonqualified Stock Option Agreement (1998 Plan/Employee) -------------------------------- EXECUTED at Cleveland, Ohio as of the date first set forth above. COLE NATIONAL CORPORATION By /s/ LESLIE D. DUNN -------------------------------- Title Senior Vice President /s/ JEFFREY A. COLE -------------------------------- OPTIONEE Name of Optionee: Jeffrey A. Cole ------------------------------------ Name of Employer: Cole National Group, Inc. ------------------------------------ Position: Chairman and Chief Executive Officer ------------------------------------ Number of Shares in the Original Award: 250,000 ------------------------------------ Date of Board Resolution authorizing this Option: December 17, 1998 ------------------------------------ Exercise Price per Share: $15.45 ------------------------------------ EX-10.47 5 EXHIBIT 10.47 1 Exhibit 10.47 COLE NATIONAL CORPORATION Nonqualified Stock Option Agreement (1998 Plan/Time Vesting/Senior Executive) This Nonqualified Stock Option Agreement (this "Agreement") is entered into between the individual optionee named on the signature page hereof (the "Optionee") and Cole National Corporation, a Delaware corporation (the "Company"), as of the Grant Date shown on the signature page. Certain capitalized terms used herein are defined in Paragraph 8. WHEREAS, the Board of Directors of the Company has authorized a grant of stock options on the terms hereof to the Optionee, who is employed in the capacity shown on the signature page; and WHEREAS, the stock option granted by this Agreement is intended as a nonqualified stock option and will not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986. NOW, THEREFORE, the Company hereby grants to the Optionee options (the "Options") pursuant to the Company's 1998 Equity Performance and Incentive Plan (the "Plan") to purchase the number of shares of Common Stock, par value $.001 per share, of the Company ("Common Stock") shown as the Original Award on the signature page hereof; and agrees to cause certificates for any shares purchased hereunder to be delivered to the Optionee upon payment of the purchase price in full, all subject, however, to the terms and conditions of the Plan and the terms and conditions hereinafter set forth. 2 2 1. EXERCISE. (a) Except as otherwise provided herein, the Options (until terminated as hereinafter provided) will become vested and exercisable as follows:
AMOUNT VESTED DATE EXERCISABLE ------------ ---------------- 1/3 of the Original Award The first date commencing on or after the first anniversary of the Grant Date on which the Stock Price has averaged at least 133% of the Exercise Price for a continuous period of 21 Trading Days ending on such date; and 1/3 of the Original Award The first date commencing on or after the first anniversary of the Grant Date on which the Stock Price has averaged at least 167% of the Exercise Price for a continuous period of 21 Trading Days ending on such date; and 1/3 of the Original Award The first date commencing on or after the first anniversary of the Grant Date on which the Stock Price has averaged at least 200% of the Exercise Price for a continuous period of 21 Trading Days ending on such date. All Unvested Shares Fifth anniversary of the Grant Date
To the extent exercisable, the Options may be exercised in whole or in part from time to time. (b) Upon the occurrence of a Change in Control prior to the fifth anniversary of the date of this Agreement, the Options, in addition to any vesting pursuant to the provisions of Paragraph 1(a) above, will become exercisable in full as to any then Unvested Shares immediately prior to the consummation of such Change in Control. (c) If a Termination Event occurs prior to the fifth anniversary of the Grant Date, the Options will, in addition to any prior vesting pursuant to Paragraph 1(a) above, immediately become exercisable in full with respect to all Unvested Shares. 3 3 (d) If the Optionee dies or becomes permanently disabled while in the employ of the Company or any Subsidiary, or the Optionee with the consent of the Company's Board of Directors or the Compensation Committee thereof (the "Compensation Committee") retires under a retirement plan of the Company or any Subsidiary the Options will, in addition to any vesting pursuant to Paragraph 1(a) above, immediately become exercisable in full with respect to that portion of the Unvested Shares shown below: Prior to the first anniversary of the Grant Date 1/3rd On or after the first anniversary but prior to the second anniversary of the Grant Date 2/3rds Thereafter All (e) Any exercise of the Options must be made in writing by the Optionee delivered to the Secretary of the Company. 2. EXERCISE PRICE AND PAYMENT; RELOAD OPTIONS. (a) The Options will be exercisable for Vested Shares (whether such vesting occurs pursuant to Paragraph 1(a), 1(b), 1(c) or 1(d)) at the Exercise Price shown on the signature page hereof. (b) The Exercise Price for any shares may be paid (i) in cash or by check, (ii) if approved by the Compensation Committee prior to such exercise, by delivery to the Company of a promissory note or notes of the Optionee; PROVIDED, HOWEVER, that the principal amount of such notes for all optionees outstanding at any one time pursuant to the Plan, the Company's 1996 Management Stock Option Plan, the Company's 1993 Management Stock Option Plan and the Company's 1992 Management Stock Option Plan shall not in the aggregate exceed $3,000,000, (iii) by actual or constructive transfer to the Company of Mature Shares, or (iv) by a combination of such methods of payment. 4 4 (c) If the Optionee pays the Exercise Price of shares by delivery of Mature Shares, additional option rights ("Reload Option Rights") shall, subject to the provisions hereinafter set forth, be automatically granted to the Optionee equal to the sum of (i) the number of Mature Shares transferred to the Company with respect to such Exercise Price and (ii) the number of shares of Common Stock surrendered to the Company in payment of the Withholding Amount associated with the Options exercised through the delivery of Mature Shares. Reload Option Rights shall be granted as set forth in this Paragraph 2 (c) with respect to Optionee's exercise of Options prior to their termination pursuant to Paragraph 3. In no event, however, shall Reload Option Rights be granted unless the remainder of the original ten (10) year term of the option being exercised is greater than six (6) months at the time of such exercise. Reload Option Rights will not be granted with respect to any Options that have been transferred by the original Optionee. Reload Option Rights shall not be exercisable during the six (6) month period immediately following the date of grant of such Reload Option Rights. The Exercise Price of such Reload Option Rights shall be one hundred (100) percent of the Stock Price per share on the day of the exercise of the Options to which such Reload Option Rights relate. Such Reload Option Rights shall terminate at such time as the Options being exercised would have terminated had they not been exercised. Such Reload Option Rights will be evidenced by an agreement in form substantially the same as this Agreement, with appropriate changes 3. TERMINATION. The Options will terminate and all Unvested and Vested Options then outstanding will be forfeited on the earliest of the following dates: (a) On the date on which the Optionee voluntarily resigns (unless otherwise provided in a written agreement relating to employment) or ceases to be an employee of the Company or a Subsidiary by reason of termination of employment for Cause; 5 5 (b) Subject to possible extension pursuant to Paragraph 3(c) below, five years after either (i) the date on which the Optionee ceases to be an employee of the Company or a Subsidiary by reason of retirement under a retirement plan of the Company or a Subsidiary at or after the earliest voluntary retirement age provided for in such retirement plan or retirement at an earlier age with the consent of the Company's Board of Directors or the Compensation Committee or (ii) the date of permanent disability of the Optionee if the Optionee becomes permanently disabled while an employee of the Company or a Subsidiary; (c) Five years after the date of the death of the Optionee if the Optionee dies while an employee of the Company or a Subsidiary or one year after the date of death of the Optionee if the Optionee dies during the fifth year of the five year period referred to in Paragraph 3(b) above; (d) One year after the date of a Termination Event; or (e) Ten years from the date on which these Options were granted. 4. TRANSFERABILITY. Unless otherwise approved by the Compensation Committee following a request from the Optionee or the Optionee's guardian or legal representative, the Options are not transferable by the Optionee otherwise than by will or the laws of descent and distribution if the recipient of the Options enters into an agreement with the Company (in form and substance acceptable to the Company) agreeing to be bound by the provisions of this Agreement as if such transferee were the Optionee. If exercised during the lifetime of the Optionee, the Options are exercisable only by the Optionee or by the Optionee's guardian or legal representative or by any transferee authorized as provided in this paragraph. 5. SECURITIES LAWS. The Options are not exercisable if such exercise would involve a violation of any applicable federal, state or other securities law, and the Company hereby 6 6 agrees to make reasonable efforts to comply with such securities laws. The Options are not exercisable unless under said laws at the time of exercise the shares of Common Stock or other securities purchasable hereunder are exempt, are the subject matter of an exempt transaction, or are registered in accordance with such laws. 6. ADJUSTMENTS. (a) The Board of Directors or the Compensation Committee shall make such adjustment in the option price and in the number or kind of shares of Common Stock or other securities covered by the Options as such Board or Committee may in good faith determine is equitably required to prevent dilution or enlargement of the rights of the Optionee that otherwise would result from (i) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, or (ii) any merger, consolidation, spin-off, split-off, spin-out, split up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights to purchase securities, or (iii) any distribution to the holders of the Common Stock of rights or warrant to purchase equity interests of the Company, or (iv) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Board of Directors or the Compensation Committee, in its discretion, may provide in substitution for any or all outstanding awards under the Options such alternative consideration as it, in good faith, may determine to be equitable in the circumstances and may require in connection therewith the surrender of all awards so replaced. (b) In the event that any provision of this Agreement would result in a calculation of a number of shares in amounts other than a whole number, the number of shares so calculated will be reduced or increased to the nearest whole number (rounding 0.50 up), with the effect of any such rounding deemed to attach to the last group of shares to be so calculated (with calculations to be conducted in alphabetical or numerical order, as applicable). 7 7 7. WITHHOLDING. If the Company is required to withhold any federal, state, local or foreign tax in connection with the exercise of the Options, it will be a condition to such exercise that the Optionee pay or make provision satisfactory to the Company for payment of all such taxes. Upon exercise of any Options, Optionee shall surrender to the Company, by the Company withholding from the shares of Common Stock to be issued upon such exercise to the Optionee in satisfaction of the Withholding Amount, shares of Common Stock that have value in the aggregate that is equal to such Withholding Amount. In the event that Optionee desires to have an amount greater than the Withholding Amount withheld, the excess over the Withholding Amount must be paid to the Company in cash. 8. DEFINITIONS. The following capitalized terms have meanings as set forth below. "Cause" means gross neglect of duty, dishonesty, conviction of a felony, disloyalty, intoxication, drug addiction, or other similar misconduct adverse to the best interests of the Company; PROVIDED THAT if the Optionee is party to an employment agreement which contains a more restrictive definition of "Cause" or "for cause," such more restrictive definition will apply for purposes of this Agreement. "Change in Control" means if at any time any of the following events shall have occurred: (a) the Company merges into itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving or resulting corporation immediately after such transaction are directly or indirectly beneficially owned in the aggregate by the former stockholders of the Company immediately prior to such transaction; 8 8 (b) all or substantially all the assets accounted for on the consolidated balance sheet of the Company are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly or indirectly beneficially held in the aggregate by the former stockholders of the Company immediately prior to such transaction or series of transactions; (c) A person, within the meaning of Section 3(a)(9) or 13(d)(3) (as in effect on the date hereof) of the Securities Exchange Act of 1934, becomes the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934) of (i) 15% or more but less than 35% of the voting power of the then-outstanding voting securities of the Company without the prior approval by the Board, or (ii) 35% or more of the voting power of the then-outstanding voting securities of the Company; PROVIDED, HOWEVER, that the foregoing does not apply to any such acquisition that is made by (w) any subsidiary of the Company; (x) any employee benefit plan of the Company or any Subsidiary or (y) any person or group of which employees of the Company or of any Subsidiary control a greater than 25% interest unless the Board of Directors of the Company determines that such person or group is making a "hostile acquisition;" (d) A majority of the members of the Board of Directors of the Company or of any Subsidiary are not Continuing Directors, where a "Continuing Director" is any member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary who (x) was a member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary on the date hereof or (y) was nominated for election or elected to such Board of 9 9 Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Exercise Price" means the exercise price per share indicated as the Exercise Price per share on the signature page hereof. "Grant Date" means the date of the Board or Compensation Committee action awarding the Options to the Optionee as indicated on the signature page hereof. "Mature Shares" means (x) nonforfeitable, unrestricted shares of Common Stock that have been owned by the Optionee for more than six (6) months prior to the date of exercise, or (y) shares of Restricted Stock or other shares of Common Stock that are forfeitable or subject to restrictions on transfer, including, without limitation, shares of Common Stock issued pursuant to the earn out of Performance Shares or Performance Units, in each instance issued under the Plan, or (z) such other Company securities as the Company's chief accounting officer, upon consultation with the Company's independent accountants, determines will not adversely affect the Company's tax or accounting position by accepting. "Original Award" means the number of shares of Common Stock indicated as the Original Award on the signature page hereof. "Person" means any corporation, partnership, limited liability company, association, firm, other entity or individual(s). "Stock Price" means the closing price of the Common Stock on the principal exchange on which the Common Stock is traded. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (or a group of corporations that themselves are Subsidiaries) other than the last corporation in the unbroken chain owns stock 10 10 possessing fifty percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. For purposes of this Agreement, the continuous employment of the Optionee with the Company or a Subsidiary will not be deemed interrupted, and the Optionee will not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of his employment among the Company and its Subsidiaries. "Termination Event" means the Optionee's ceasing to be an employee of the Company or its continuing Subsidiaries by reason of either (i) termination of the Optionee's employment without Cause or (ii) following a substantial nonconsensual adverse change in the Optionee's employment duties. "Trading Days" means days on which the principal exchange on which the Common Stock is traded is open for trading, regardless of whether actual trading in the Common Stock occurs. "Unvested Shares" means, as of any given time, those shares of Common Stock relating to the Options that are not, at the time in question, otherwise permitted, under the terms of this Agreement, to be acquired pursuant to the exercise of the Options. "Vested Shares" means, as of any given time, those shares of Common Stock relating to the Options that are, at the time in question, otherwise permitted, under the terms of this Agreement, to be acquired pursuant to the exercise of the Options. "Withholding Amount" means the minimum amount of withholding taxes, including Federal, state and local income taxes and social security and medicare taxes required to be withheld by the Company by the applicable taxing authorities as the result of the exercise of an Option. 9. ACKNOWLEDGMENT. The undersigned Optionee hereby acknowledges receipt of an executed original of this Agreement and accepts the Options granted hereunder. 11 Nonqualified Stock Option AGREEMENT (1998 PLAN/EMPLOYMENT) -------------------------------- EXECUTED at Cleveland, Ohio as of the date first set forth above. COLE NATIONAL CORPORATION By /s/ LESLIE D. DUNN -------------------------------- Title SR. VICE PRESIDENT -------------------------------- /s/ BRIAN B. SMITH -------------------------------- OPTIONEE Name of Optionee: BRIAN B. SMITH ------------------------------------- Name of Employer: COLE NATIONAL GROUP, INC. ------------------------------------- Position: PRESIDENT AND CHIEF OPERATING OFFICER ------------------------------------- Number of Shares in the Original Award: 150,000 ------------------------------------- Date of Board Resolution authorizing this Option: DECEMBER 17, 1998 ------------------------------------- Exercise Price per Share: $15.45 ------------------------------------- EX-10.48 6 EXHIBIT 10.48 1 Exhibit 10.48 COLE NATIONAL CORPORATION Nonqualified Stock Option Agreement (1998 Plan/Time Vesting/Senior Executive) This Nonqualified Stock Option Agreement (this "Agreement") is entered into between the individual optionee named on the signature page hereof (the "Optionee") and Cole National Corporation, a Delaware corporation (the "Company"), as of the Grant Date. Certain capitalized terms used herein are defined in Paragraph 8. WHEREAS, the board of Directors of the Company has authorized a grant of stock options on the terms hereof to the Optionee, who is employed in the capacity shown on the signature page; and NOW, THEREFORE, the Company hereby grants to the Optionee options (the "Options") pursuant to the Company's 1998 Equity Performance and Incentive Plan (the "Plan") to purchase the number of shares of Common Stock, par value $.001 per share, of the Company ("Common Stock") shown as the Original Award on the signature page hereof; and agrees to cause certificates for any shares purchased hereunder to be delivered to the Optionee upon payment of the purchase price in full, all subject, however, to the terms and conditions of the Plan and the terms and conditions hereinafter set forth. 1. EXERCISE. (a) Except as otherwise provided herein, the Options (until terminated as hereinafter provided) will become vested and exercisable as follows: 2 2
Amount Vested Date Exercisable ------------- ---------------- ----------------------------------- ----------------------------------------------------------- 1/4 of the Original Award The first anniversary of the Grant Date; and ----------------------------------- ----------------------------------------------------------- 1/4 of the Original Award The second anniversary of the Grant Date; and ----------------------------------- ----------------------------------------------------------- 1/4 of the Original Award The third anniversary of the Grant Date; and ----------------------------------- ----------------------------------------------------------- All Unvested Shares The fourth anniversary of the Grant Date ----------------------------------- -----------------------------------------------------------
To the extent exercisable, the Options may be exercised in whole or in part from time to time. (b) Upon the occurrence of a Change in Control prior to the fourth anniversary of the date of this Agreement, the Options, in addition to any vesting pursuant to the provisions of Paragraph 1(a) above, will become exercisable in full as to any then Unvested Shares immediately prior to the consummation of such Change in Control. (c) If a Termination Event occurs prior to the fourth anniversary of the Grant Date, the Options will, in addition to any prior vesting pursuant to Paragraph 1(a) above, immediately become exercisable in full with respect to those Unvested Shares that would have vested on the next succeeding anniversary of the Grant Date (if the Termination Event occurs on an anniversary of the Grant Date, no additional Options will become exercisable besides those that became exercisable as of that anniversary). Thereupon, all remaining Unvested Options will be forfeited and cancelled. (d) If a Sale Event occurs prior to the fourth anniversary of the Grant Date and the Optionee is not a Full-Time Employee of the Company or a continuing Subsidiary immediately after the Sale Event, the Options will, in addition to any prior vesting pursuant to Paragraph 1(a) above, immediately become exercisable in full with respect to those Unvested Shares that would have vested on the next succeeding anniversary of the Grant Date (if the Sale 3 3 Event occurs on an anniversary of the Grant Date, no additional Options will become exercisable besides those that became exercisable as of that anniversary). Thereupon, all remaining Unvested Options will be forfeited and cancelled. (e) If the Optionee dies or becomes permanently disabled while in the employ of the Company or any Subsidiary, or the Optionee retires under a retirement plan of the Company or any Subsidiary, the Options will, in addition to any vesting pursuant to Paragraph 1(a) above, immediately become exercisable in full with respect to those Unvested Shares that would have vested on the next succeeding anniversary of the Grant Date (if the event occurs on an anniversary of the Grant Date, no additional Options will become exercisable besides those that became exercisable as of that anniversary). Thereupon, all remaining Unvested Options will be forfeited and cancelled. (f) Any exercise of the Options must be made in writing by the Optionee delivered to the Secretary of the Company. 2. EXERCISE PRICE AND PAYMENT; RELOAD OPTIONS. (a) The Options will be exercisable for Vested Shares (whether such vesting occurs pursuant to Paragraph 1(a), 1(b), 1(c), 1(d) or 1(e)) at the Exercise Price shown on the signature page hereof. (b) The Exercise Price for any shares may be paid (i) in cash or by check, (ii) if approved by the Compensation Committee prior to such exercise, by delivery to the Company of a promissory note or notes of the Optionee; PROVIDED, HOWEVER, that the principal amount of such notes for all optionees outstanding at any one time pursuant to the Plan, the Company's 1996 Management Stock Option Plan, the Company's 1993 Management Stock Option Plan and the Company's 1992 Management Stock Option Plan shall not in the aggregate 4 4 exceed $3,000,000, (iii) by actual or constructive transfer to the Company of Mature Shares, or (iv) by a combination of such methods of payment. (c) If, at a time at which the Optionee is a Full-time Employee, the Optionee pays the Exercise Price of shares by delivery of Mature Shares, additional option rights ("Reload Option Rights") shall, subject to the provisions hereinafter set forth, be automatically granted to the Optionee equal to the sum of (i) the number of Mature Shares transferred to the Company with respect to such Exercise Price and (ii) the number of shares of Common Stock surrendered to the Company in payment of the Withholding Amount associated with the Options exercised through delivery of Mature Shares. In no event, however, shall Reload Option Rights be granted unless the remainder of the original ten (10) year term of the option being exercised is greater than six (6) months at the time of such exercise. Such Reload Option Rights shall not be exercisable during the six (6) month period immediately following the date of grant of such Reload Option Rights. The Exercise Price of such Reload Option Rights shall be one hundred (100) percent of the Stock Price per share on the day of the exercise of the Options to which such Reload Option Rights relate. Such Reload Option Rights shall terminate at such time as the Options being exercised would have terminated had they not been exercised. Such Reload Option Rights will be evidenced by an agreement in form substantially the same as this Agreement, with appropriate changes. Reload Option Rights will not be granted with respect to any Options that have been transferred by the original Optionee. 3. TERMINATION. The Options will terminate and all Unvested and Vested Options then outstanding will be forfeited on the earliest of the following dates: 5 5 (a) On the date on which the Optionee voluntarily resigns (unless otherwise provided in a written agreement relating to employment) or ceases to be an employee of the Company or a Subsidiary by reason of termination of employment for Cause; (b) Subject to possible extension pursuant to Paragraph 3(c) below, five years after either (i) the date on which the Optionee ceases to be an employee of the Company or a Subsidiary by reason of retirement under a retirement plan of the Company or a Subsidiary at or after the earliest voluntary retirement age provided for in such retirement plan or retirement at an earlier age with the consent of the Company's Board of Directors or the Compensation Committee or (ii) the date of permanent disability of the Optionee if the Optionee becomes permanently disabled while an employee of the Company or a Subsidiary; (c) Five years after the date of the death of the Optionee if the Optionee dies while an employee of the Company or a Subsidiary or one year after the date of death of the Optionee if the Optionee dies during the fifth year of the five year period referred to in Paragraph 3(b) above; (d) One year after the date of a Termination Event; (e) On the first anniversary of the date of a Sale Event if the Optionee is not a Full-Time Employee of the Company or a continuing Subsidiary immediately after the Sale Event; (f) Immediately (x) upon the Optionee accepting employment with a Competitor without the prior written approval of the Company's Chief Executive Officer or (y) 6 6 upon a material breach by the Optionee of any applicable agreement with the Company or a Subsidiary relating to non-competition, non-solicitation or maintaining of Company confidences; or (g) Ten years from the Grant Date. 4. TRANSFERABILITY. Unless otherwise approved by the Compensation Committee following a request from the Optionee or the Optionee's guardian or legal representative, the Options are not transferable by the Optionee otherwise than by will or the laws of descent and distribution. If another type of transfer is approved by the Compensation Committee, a transfer will only be effective when the transferee of the Options enters into an agreement with the Company (in form and substance acceptable to the Company) agreeing to be bound by the provisions of this Agreement as if such transferee were the Optionee. If exercised during the lifetime of the Optionee, the Options are exercisable only by the Optionee or by the Optionee's guardian or legal representative, or by an transferee authorized as provided in this Paragraph. 5. SECURITIES LAWS. The Options are not exercisable if such exercise would involve a violation of any applicable federal, state or other securities law, and the Company hereby agrees to make reasonable efforts to comply with such securities laws. The Options are not exercisable unless under said laws at the time of exercise the shares of Common Stock or other securities purchasable hereunder are exempt, are the subject matter of an exempt transaction, or are registered in accordance with such laws. 6. ADJUSTMENTS. (a)The Board of Directors or the Compensation Committee shall make such adjustment in the option price and in the number or kind of shares of 7 7 Common Stock or other securities covered by the Options as such Board or Committee may in good faith determine is equitably required to prevent dilution or enlargement of the rights of the Optionee that otherwise would result from (i) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, or (ii) any merger, consolidation, spin-off, split-off, spin-out, split up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights to purchase securities, or (iii) any distribution to the holders of the Common Stock of rights or warrant to purchase equity interests of the Company, or (iv) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Board of Directors or the Compensation Committee, in its discretion, may provide in substitution for any or all outstanding awards under the Options such alternative consideration as it, in good faith, may determine to be equitable in the circumstances and may require in connection therewith the surrender of all awards so replaced. (b) In the event that any provision of this Agreement would result in a calculation of a number of shares in amounts other than a whole number, the number of shares so calculated will be reduced or increased to the nearest whole number (rounding 0.50 up), with the effect of any such rounding deemed to attach to the last group of shares to be so calculated (with calculations to be conducted in alphabetical or numerical order, as applicable). 7. WITHHOLDING. If the Company is required to withhold any federal, state, local or foreign tax in connection with the exercise of the Options, it will be a condition to such exercise that the Optionee make provision satisfactory to the Company for payment of all such taxes. Upon exercise of any Options, Optionee shall surrender to the Company, by the Company 8 8 withholding from the shares of Common Stock to be issued upon such exercise to the Optionee, in satisfaction of the Withholding Amount, shares of Common Stock that have value in the aggregate that is equal to such Withholding Amount. In the event that the Optionee desires to have an amount greater than the Withholding Amount withheld, the excess over the Withholding Amount must be paid to the Company in cash. 8. DEFINITIONS. The following capitalized terms have meanings as set forth below. "Cause" means gross neglect of duty, dishonesty, conviction of a felony, disloyalty, intoxication, drug addiction, or other similar misconduct adverse to the best interests of the Company. "Change in Control" means if at any time any of the following events shall have occurred: (a) the Company merges into itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving or resulting corporation immediately after such transaction are directly or indirectly beneficially owned in the aggregate by the former stockholders of the Company immediately prior to such transaction; (b) all or substantially all the assets accounted for on the consolidated balance sheet of the Company are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly 9 9 or indirectly beneficially held in the aggregate by the former stockholders of the Company immediately prior to such transaction or series of transactions; (c) A person, within the meaning of Section 3(a)(9) or 13(d)(3) (as in effect on the date hereof) of the Securities Exchange Act of 1934, becomes the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934) of (i) 15% or more but less than 35% of the voting power of the then- outstanding voting securities of the Company without the prior approval by the Board, or (ii) 35% or more of the voting power of the then-outstanding voting securities of the Company; PROVIDED, HOWEVER, that the foregoing does not apply to any such acquisition that is made by (w) any subsidiary of the Company; (x) any employee benefit plan of the Company or of any Subsidiary or (y) any person or group of which employees of the Company or of any Subsidiary control a greater than 25% interest unless the Board of Directors of the Company determines that such person or group is making a "hostile acquisition;" (d) A majority of the members of the Board of Directors of the Company or of any Subsidiary are not Continuing Directors, where a "Continuing Director" is any member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary who (x) was a member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary on the date hereof or (y) was nominated for election or elected to such Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Competitor" means any Person that competes with any then-existing business of the Company or any Subsidiary. 10 10 "Exercise Price" means the exercise price per share indicated as the Exercise Price per share on the signature page hereof. "Full-time Employee" means a person having the status of a full-time employee of the Company or a Subsidiary working at least 20 hours a week, including a person who is on a short-term disability, parental or other leave under an applicable benefit plan or other approved leave. "Grant Date" means the date of the Board or Compensation Committee action awarding the Options to the Optionee as indicated on the signature page hereof. "Mature Shares" means (x) nonforfeitable, unrestricted shares of Common Stock that have been owned by the Optionee for more than six (6) months prior to the date of exercise, or (y) shares of restricted stock or other shares of Common Stock that are forfeitable or subject to restrictions on transfer, including, without limitation, shares of Common Stock issued pursuant to the earn out of performance shares or performance units, which shares have been owned by the Optionee for more than six (6) months and that the Company agrees to accept as consideration, or (z) such other Company securities as the Company's chief accounting officer, upon consultation with the Company's independent accountants, determines will not adversely affect the Company's tax or accounting position by accepting. "Original Award" means the number of shares of Common Stock indicated as the Original Award on the signature page hereof. "Person" means any corporation, partnership, limited liability company, association, firm, other entity or individual(s). 11 11 "Sale Event" means the consummation of a sale or other event by which the Subsidiary by which the Optionee is primarily employed ceases to be a Subsidiary of the Company. "Stock Price" means the closing price of the Common Stock on the principal exchange on which the Common Stock is traded. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (or a group of corporations that themselves are Subsidiaries) other than the last corporation in the unbroken chain owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. For purposes of this Agreement, the continuous employment of the Optionee with the Company or a Subsidiary will not be deemed interrupted, and the Optionee will not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of his employment among the Company and its Subsidiaries. "Termination Event" means the Optionee's ceasing to be an employee of the Company or its Subsidiaries by reason of termination by the employer of the Optionee's employment without Cause. "Trading Days" means days on which the principal exchange on which the Common Stock is traded is open for trading, regardless whether actual trading in the Common Stock occurs. 12 12 "Unvested Shares" means, as of any given time, those shares of Common Stock relating to the Options that are not, at the time in question, otherwise permitted, under the terms of this Agreement, to be acquired pursuant to the exercise of the Options. "Vested Shares" means, as of any given time, those shares of Common Stock relating to the Options that are, at the time in question, otherwise permitted, under the terms of this Agreement, to be acquired pursuant to the exercise of the Options. "Withholding Amount" means the minimum amount of withholding taxes including Federal, state and local income taxes and social security and Medicare taxes required to be withheld by the Company by the applicable taxing authorities, as the result of the exercise of an Option. 9. ACKNOWLEDGMENT. The undersigned Optionee hereby acknowledges receipt of an executed original of this Agreement and accepts the Options granted hereunder. 13 13 Nonqualified Stock Option Agreement (1998 Plan/Senior Executive) -------------------------------------- EXECUTED at Cleveland, Ohio as of the date first set forth above. COLE NATIONAL CORPORATION By:____________________________________ Title:_________________________________ _______________________________________ OPTIONEE Name of Optionee: _______________________________________ Name of Employer: _______________________________________ Position: _______________________________________ Number of Shares in the Original Award: _______________________________________ Date of Board Resolution authorizing this Option: _______________________________________ Exercise Price per Share: _______________________________________ EX-10.49 7 EXHIBIT 10.49 1 Exhibit 10.49 COLE NATIONAL CORPORATION Restricted Stock Agreement -------------------------- THIS RESTRICTED STOCK AGREEMENT (as amended, modified or supplemented from time to time, this "AGREEMENT") is made by and between Cole National Corporation, a Delaware corporation (the "COMPANY"), and Jeffrey A. Cole, an individual residing in the State of Ohio (the "GRANTEE"). PRELIMINARY STATEMENTS: A. The Grantee is an employee of Cole National Group, Inc., a Delaware corporation, Cole Vision Corporation, a Delaware corporation, and Things Remembered, Inc., a Delaware corporation; and B. The execution of a restricted stock agreement in the form hereof has been authorized by a resolution of the Special Compensation Committee (the "COMMITTEE") of the Board of Directors of the Company (the "BOARD"); NOW, THEREFORE, in consideration of the Grantee's acceptance of the terms and conditions of this Agreement, and subject to the terms of this Agreement, the Company hereby grants to the Grantee 225,000 shares (together with all other shares of Common Stock that become subject to this Agreement, collectively, the "SHARES") of the Company's common stock, par value $.001 per share ("COMMON STOCK"), 123,750 Shares (the "PLAN SHARES") of which are granted pursuant to and are subject to the terms and conditions of the Company's 1998 Equity and Incentive Performance Plan (the "PLAN"),and 101,250 of which are to be issued out of the Company's treasury solely pursuant to this Agreement (the "NON-PLAN SHARES"): AGREEMENT: 1. ISSUANCE OF COMMON STOCK. The Shares will be issued on the date of this Agreement as fully paid and nonassessable shares and will be represented by certificates registered in the name of the Grantee and bearing a legend referring to the restrictions set forth in this Agreement. 2. RESTRICTION ON TRANSFER OF COMMON STOCK. The Shares may not be transferred, sold, pledged, exchanged, assigned or otherwise encumbered or disposed of by the Grantee, except to the Company, until they have become nonforfeitable in accordance with Section 3 of this Agreement; PROVIDED, HOWEVER, that the Grantee's interest in the Shares may be transferred at any time by will or the laws of descent and distribution if the recipient of the Shares enters into an agreement with the Company (in form and substance acceptable to the Company) agreeing to be bound by the provisions of this Agreement as if such transferee were the Grantee. Any purported transfer, encumbrance or other disposition of the Shares that is in violation of this Section 2 will be 2 null and void, and the other party to any such purported transaction will not obtain any rights to or interest in the Shares. When and as permitted by the Plan, the Committee or the Board may waive the restrictions set forth in this Section 2 with respect to all or any portion of the Shares granted under the Plan. 3. VESTING OF COMMON STOCK. (a) Except as set forth in Section 4, the Non-Plan Shares are nonforfeitable. The Plan Shares will become nonforfeitable upon the occurrence of the following:
Amount Nonforfeitable Date Nonforfeitable --------------------- ------------------- 1/3 of the Plan Shares On the first date on or after March 1, 2002 on which the Stock Price has averaged at least 133% of the Initial Price for a continuous period of 21 consecutive Trading Days ending on such date. 1/3 of the Plan Shares On the first date on or after March 1, 2002 on which the Stock Price has averaged at least 167% of the Initial Price for a continuous period of 21 consecutive Trading Days ending on such date. 1/3 of the Plan Shares On the first date on or after March 1, 2002 on which the Stock Price has averaged at least 200% of the Initial Price for a continuous period of 21 consecutive Trading Days ending on such date. All Plan Shares not otherwise March 1, 2004. Nonforfeitable
For purposes of this Agreement, the continuous employment of the Grantee with the Company or a Subsidiary will not be deemed to have been interrupted, and the Grantee will not be deemed to have ceased to be an employee of the Company or a Subsidiary, by reason of the transfer of his employment among the Company and its subsidiaries or a leave of absence approved by the Committee. (b) Notwithstanding the provisions of Section 3(a), all of the Shares will immediately become nonforfeitable if a Change in Control occurs after the Grant Date. "CHANGE OF CONTROL" means if at any time any of the following events has occurred: (i) the Company merges itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving corporation immediately after such transaction are directly or indirectly 2 3 beneficially owned in the aggregate by the former stockholders of the Company immediately prior to such transaction; (ii) all or substantially all the assets accounted for on the Consolidated Balance Sheet of the Company are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly or indirectly beneficially held in the aggregate by the former stockholders of the Company immediately prior to such transaction or series of transactions; (iii) a person, within the meaning of Section 3(a)(9) or 13(d)(13) (as in effect on the date of the award) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), becomes the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Exchange Act) of (i) 15% or more but less than 35% of the voting power of the then-outstanding voting securities of the Company without prior approval of the Company's Board, or (ii) 35% or more of the voting power of the then-outstanding voting securities of the Company; PROVIDED, HOWEVER, that the foregoing does not apply to any such acquisition that is made by (w) any Subsidiary of the Company (x) any employee benefit plan of the Company or any Subsidiary or (y) any person or group of which employees of the Company or of any Subsidiary control a greater than 25% interest unless the Board determines that such person or group is making a "hostile acquisition;" (iv) a majority of the members of the Board or of any Subsidiary are not Continuing Directors, where a "CONTINUING DIRECTOR" is any member of the Board or, with respect to a Subsidiary, of such Subsidiary who (x) was a member of the Board or, with respect to a Subsidiary, of such Subsidiary on the date of the award or (y) was nominated for election or elected to such Board with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. (c) Notwithstanding the provisions of Section 3(a), all of the Shares will immediately become nonforfeitable if the Grantee (i) dies or becomes disabled (as defined in the Plan) while in the employ of the Company or a Subsidiary after the Grant Date, or (ii) with the consent of the Board or the Committee, retires after the Grant Date from the Company or a Subsidiary under a retirement plan of the Company of any Subsidiary, or (iii) suffers Constructive Termination (as such term is defined in the Employment Agreement among Grantee, the Company and certain of the Company's subsidiaries, entered into as of the date of this Agreement), or (iv) the Term of such Employment Agreement ends prior to March 1, 2004, or (v) Grantee's employment is terminated without cause. 3 4 4. TERMINATION OF RIGHTS AND FORFEITURE OF COMMON STOCK. Except for Shares that have become nonforfeitable, all of the Shares will be forfeited if the Grantee ceases to be employed by the Company or a Subsidiary at any time prior to the fifth anniversary of the Grant Date, unless the Committee determines to provide otherwise at the time of the cessation of the Grantee's employment. All of the Non-Plan Shares will be forfeited on the 31st day after the Grant Date, if Grantee fails to comply with Section 14. In the event of a forfeiture, any certificate(s) representing the Shares will be canceled. 5. DIVIDEND, VOTING AND OTHER RIGHTS. (a) Except as otherwise provided in this Agreement, the Grantee will have all of the rights of a stockholder with respect to the Shares, including the right to vote the Shares and receive any dividends that may be paid thereon; provided, however, that any additional shares of Common Stock or other securities that the Grantee may become entitled to receive pursuant to a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, separation or reorganization or any other change in the capital structure of the Company will be subject to the same restrictions as the Shares. (b) Cash dividends, if any, and any other distributions paid on the Shares will be sequestered by the Company until such time as such Shares become nonforfeitable in accordance with Section 3 and will, to the extent practicable, be deemed to be reinvested (at the Stock Price on the dividend payment date) on an immediate basis in additional shares of Common Stock from the Company's treasury, which will be subject to the same restrictions as the underlying Shares granted under this Agreement. If Shares are forfeited pursuant to Section 4, all dividends and other distributions, together with the earnings thereon, with respect to such Shares will likewise be forfeited. 6. RETENTION OF STOCK CERTIFICATE(S) BY COMPANY. Any certificates representing Shares will be held in custody by the Company together with a stock power endorsed in blank by the Grantee with respect thereto, until those shares have become nonforfeitable in accordance with Section 3. 7. COMPLIANCE WITH LAW. The Company shall make reasonable efforts to comply with all applicable federal, state and other applicable securities laws; provided, however, notwithstanding any other provision of this Agreement, the Company will not be obligated to issue any securities pursuant to this Agreement if the issuance thereof would result in a violation of any such law. Grantee acknowledges that Grantee is an executive officer of the Company, has complete access to the Company's financial and other information, is fully capable of making an investment decision concerning the Company's Common Stock without assistance of third parties, and has no intention to distribute any of the Shares to third parties. 8. WITHHOLDING TAXES. If the Company is required to withhold any federal, state, local or foreign tax in connection with any issuance of restricted or nonrestricted shares of Common Stock or other securities pursuant to this Agreement, the Grantee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. 4 5 9. RIGHT TO TERMINATE EMPLOYMENT. No provision of this Agreement will limit in any way whatsoever any right that the Company or a Subsidiary may otherwise have to terminate the employment of the Grantee at any time. 10. RELATION TO OTHER BENEFITS. Any economic or other benefit to the Grantee under this Agreement or the Plan shall not be taken into account in determining any benefits to which the Grantee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a Subsidiary and shall not affect the amount of any insurance coverage available to any beneficiary under any insurance plan covering employees of the Company or a Subsidiary. 11. AMENDMENTS. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Grantee with respect to the Shares or other securities covered by this Agreement without the Grantee's consent. 12. SEVERABILITY. In the event that one or more of the provisions of this Agreement are invalidated for any reason by a court of competent jurisdiction, any provision so invalidated will be deemed to be separable from the other provisions hereof, and the remaining provisions hereof will continue to be valid and fully enforceable. 13. GOVERNING LAW. This Agreement is made under, and will be construed in accordance with, the laws of the State of Ohio without regard to conflict of law principles of such state. 14. TAXES. Grantee will make a proper election under Section 83(b) of the Internal Revenue Code of 1986, as amended, no later than 30 days after the date of this Agreement with respect to all of the Shares. 15. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "GRANT DATE" means the date of the Board or Committee action awarding the Shares to the Grantee as indicated on the signature page of this Agreement. "INITIAL PRICE" means $15.45. "STOCK PRICE" means the closing price of the Common Stock on the principal exchange on which the Common Stock is traded. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of such corporations (or a group of corporations that themselves are Subsidiaries) other than the last corporation in the unbroken chain owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 5 6 "TRADING DAYS" means days on which the principal exchange on which the Common Stock is traded is open for trading, regardless of whether actual trading in the Common Stock occurs. This Restricted Stock Agreement has been executed by the parties at Cleveland, Ohio as of December 17, 1998. COLE NATIONAL CORPORATION By: /s/ Leslie D. Dunn -------------------------- Name: Leslie D. Dunn Tittle: Sr. Vice President /s/ Jeffrey A. Cole ------------------------------- Jeffrey A. Cole EX-10.50 8 EXHIBIT 10.50 1 Exhibit 10.50 COLE NATIONAL CORPORATION Restricted Stock Agreement -------------------------- THIS RESTRICTED STOCK AGREEMENT (as amended, modified or supplemented from time to time, this "AGREEMENT") is made by and between Cole National Corporation, a Delaware corporation (the "COMPANY"), and Brian B. Smith, an individual residing in the State of Ohio (the "GRANTEE"). PRELIMINARY STATEMENTS: A. The Grantee is an employee of Cole National Group, Inc., a Delaware corporation, Cole Vision Corporation, a Delaware corporation, and Things Remembered, Inc., a Delaware corporation; and B. The execution of a restricted stock agreement in the form hereof has been authorized by a resolution of the Special Compensation Committee (the "COMMITTEE") of the Board of Directors of the Company (the "BOARD"); NOW, THEREFORE, in consideration of the Grantee's acceptance of the terms and conditions of this Agreement, and subject to the terms of this Agreement, the Company hereby grants to the Grantee 100,000 shares (together with all other shares of Common Stock that become subject to this Agreement, collectively, the "SHARES") of the Company's common stock, par value $.001 per share ("COMMON STOCK"), 55,000 Shares (the "PLAN SHARES") of which are granted pursuant to and are subject to the terms and conditions of the Company's 1998 Equity and Incentive Performance Plan (the "PLAN"),and 45,000 of which are to be issued out of the Company's treasury solely pursuant to this Agreement (the "NON-PLAN SHARES"): AGREEMENT: 1. ISSUANCE OF COMMON STOCK. The Shares will be issued on the date of this Agreement as fully paid and nonassessable shares and will be represented by certificates registered in the name of the Grantee and bearing a legend referring to the restrictions set forth in this Agreement. 2. RESTRICTION ON TRANSFER OF COMMON STOCK. The Shares may not be transferred, sold, pledged, exchanged, assigned or otherwise encumbered or disposed of by the Grantee, except to the Company, until they have become nonforfeitable in accordance with Section 3 of this Agreement; PROVIDED, HOWEVER, that the Grantee's interest in the Shares may be transferred at any time by will or the laws of descent and distribution if the recipient of the Shares enters into an agreement with the Company (in form and substance acceptable to the Company) agreeing to be bound by the provisions of this Agreement as if such transferee were the Grantee. Any purported transfer, encumbrance or other disposition of the Shares that is in violation of this Section 2 will be 2 null and void, and the other party to any such purported transaction will not obtain any rights to or interest in the Shares. When and as permitted by the Plan, the Committee or the Board may waive the restrictions set forth in this Section 2 with respect to all or any portion of the Shares granted under the Plan. 3. VESTING OF COMMON STOCK. (a) Except as set forth in Section 4, the Non-Plan Shares are nonforfeitable. The Plan Shares will become nonforfeitable upon the occurrence of the following:
Amount Nonforfeitable Date Nonforfeitable --------------------- ------------------- 1/3 of the Plan Shares On the first date on or after March 1, 2002 on which the Stock Price has averaged at least 133% of the Initial Price for a continuous period of 21 consecutive Trading Days ending on such date. 1/3 of the Plan Shares On the first date on or after March 1, 2002 on which the Stock Price has averaged at least 167% of the Initial Price for a continuous period of 21 consecutive Trading Days ending on such date. 1/3 of the Plan Shares On the first date on or after March 1, 2002 on which the Stock Price has averaged at least 200% of the Initial Price for a continuous period of 21 consecutive Trading Days ending on such date. All Plan Shares not otherwise March 1, 2004. Nonforfeitable
For purposes of this Agreement, the continuous employment of the Grantee with the Company or a Subsidiary will not be deemed to have been interrupted, and the Grantee will not be deemed to have ceased to be an employee of the Company or a Subsidiary, by reason of the transfer of his employment among the Company and its subsidiaries or a leave of absence approved by the Committee. (b) Notwithstanding the provisions of Section 3(a), all of the Shares will immediately become nonforfeitable if a Change in Control occurs after the Grant Date. "CHANGE OF CONTROL" means if at any time any of the following events has occurred: (i) the Company merges itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving corporation immediately after such transaction are directly or indirectly 2 3 beneficially owned in the aggregate by the former stockholders of the Company immediately prior to such transaction; (ii) all or substantially all the assets accounted for on the Consolidated Balance Sheet of the Company are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly or indirectly beneficially held in the aggregate by the former stockholders of the Company immediately prior to such transaction or series of transactions; (iii) a person, within the meaning of Section 3(a)(9) or 13(d)(13) (as in effect on the date of the award) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), becomes the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Exchange Act) of (i) 15% or more but less than 35% of the voting power of the then-outstanding voting securities of the Company without prior approval of the Company's Board, or (ii) 35% or more of the voting power of the then-outstanding voting securities of the Company; provided, however, that the -------- ------- foregoing does not apply to any such acquisition that is made by (w) any Subsidiary of the Company (x) any employee benefit plan of the Company or any Subsidiary or (y) any person or group of which employees of the Company or of any Subsidiary control a greater than 25% interest unless the Board determines that such person or group is making a "hostile acquisition;" (iv) a majority of the members of the Board or of any Subsidiary are not Continuing Directors, where a "CONTINUING DIRECTOR" is any member of the Board or, with respect to a Subsidiary, of such Subsidiary who (x) was a member of the Board or, with respect to a Subsidiary, of such Subsidiary on the date of the award or (y) was nominated for election or elected to such Board with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. (c) Notwithstanding the provisions of Section 3(a), all of the Shares will immediately become nonforfeitable if the Grantee (i) dies or becomes disabled (as defined in the Plan) while in the employ of the Company or a Subsidiary after the Grant Date, or (ii) with the consent of the Board or the Committee, retires after the Grant Date from the Company or a Subsidiary under a retirement plan of the Company of any Subsidiary, or (iii) terminates his employment following Constructive Termination (as such term is defined in Section 15 hereof), or (iv) the Term of the Employment Agreement dated April 1, 1996 among the Grantee, the Company and certain Subsidiaries ends prior March 1, 2004 and no new employment agreement has been entered into, or (v) Grantee's employment is terminated without cause. 3 4 4. TERMINATION OF RIGHTS AND FORFEITURE OF COMMON STOCK. Except for Shares that have become nonforfeitable, all of the Shares will be forfeited if the Grantee ceases to be employed by the Company or a Subsidiary at any time prior to the fifth anniversary of the Grant Date, unless the Committee determines to provide otherwise at the time of the cessation of the Grantee's employment. All of the Non-Plan Shares will be forfeited on the 31st day after the Grant Date, if Grantee fails to comply with Section 14. In the event of a forfeiture, any certificate(s) representing the Shares will be canceled. 5. DIVIDEND, VOTING AND OTHER RIGHTS. (a) Except as otherwise provided in this Agreement, the Grantee will have all of the rights of a stockholder with respect to the Shares, including the right to vote the Shares and receive any dividends that may be paid thereon; provided, however, that any additional shares of Common Stock or other securities that the Grantee may become entitled to receive pursuant to a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, separation or reorganization or any other change in the capital structure of the Company will be subject to the same restrictions as the Shares. (b) Cash dividends, if any, and any other distributions paid on the Shares will be sequestered by the Company until such time as such Shares become nonforfeitable in accordance with Section 3 and will, to the extent practicable, be deemed to be reinvested (at the Stock Price on the dividend payment date) on an immediate basis in additional shares of Common Stock from the Company's treasury, which will be subject to the same restrictions as the underlying Shares granted under this Agreement. If Shares are forfeited pursuant to Section 4, all dividends and other distributions, together with the earnings thereon, with respect to such Shares will likewise be forfeited. 6. RETENTION OF STOCK CERTIFICATE(S) BY COMPANY. Any certificates representing Shares will be held in custody by the Company together with a stock power endorsed in blank by the Grantee with respect thereto, until those shares have become nonforfeitable in accordance with Section 3. 7. Compliance with Law. The Company shall make reasonable efforts to comply with all applicable federal, state and other applicable securities laws; provided, however, notwithstanding any other provision of this Agreement, the Company will not be obligated to issue any securities pursuant to this Agreement if the issuance thereof would result in a violation of any such law. Grantee acknowledges that Grantee is an executive officer of the Company, has complete access to the Company's financial and other information, is fully capable of making an investment decision concerning the Company's Common Stock without assistance of third parties, and has no intention to distribute any of the Shares to third parties. 8. Withholding Taxes. If the Company is required to withhold any federal, state, local or foreign tax in connection with any issuance of restricted or nonrestricted shares of Common Stock or other securities pursuant to this Agreement, the Grantee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. 4 5 9. RIGHT TO TERMINATE EMPLOYMENT. No provision of this Agreement will limit in any way whatsoever any right that the Company or a Subsidiary may otherwise have to terminate the employment of the Grantee at any time. 10. RELATION TO OTHER BENEFITS. Any economic or other benefit to the Grantee under this Agreement or the Plan shall not be taken into account in determining any benefits to which the Grantee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a Subsidiary and shall not affect the amount of any insurance coverage available to any beneficiary under any insurance plan covering employees of the Company or a Subsidiary. 11. AMENDMENTS. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Grantee with respect to the Shares or other securities covered by this Agreement without the Grantee's consent. 12. SEVERABILITY. In the event that one or more of the provisions of this Agreement are invalidated for any reason by a court of competent jurisdiction, any provision so invalidated will be deemed to be separable from the other provisions hereof, and the remaining provisions hereof will continue to be valid and fully enforceable. 13. GOVERNING LAW. This Agreement is made under, and will be construed in accordance with, the laws of the State of Ohio without regard to conflict of law principles of such state. 14. TAXES. Grantee will make a proper election under Section 83(b) of the Internal Revenue Code of 1986, as amended, no later than 30 days after the date of this Agreement with respect to all of the Shares. 15. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "CONSTRUCTIVE TERMINATION" means a substantial, nonconsensual adverse change in Grantee's employment duties. "GRANT DATE" means the date of the Board or Committee action awarding the Shares to the Grantee as indicated on the signature page of this Agreement. "INITIAL PRICE" means $15.45. "STOCK PRICE" means the closing price of the Common Stock on the principal exchange on which the Common Stock is traded. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of such corporations (or a group of corporations that themselves are Subsidiaries) other than the last corporation in the unbroken chain owns stock 5 6 possessing fifty percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TRADING DAYS" means days on which the principal exchange on which the Common Stock is traded is open for trading, regardless of whether actual trading in the Common Stock occurs. This Restricted Stock Agreement has been executed by the parties at Cleveland, Ohio as of December 17, 1998. COLE NATIONAL CORPORATION By: ------------------------------- Name: Title: /s/ ------------------------------------ Brian B. Smith 6 7 Addendum to Restricted Stock Agreement between Cole National Corporation and Brian B. Smith dated December 17, 1998 This Addendum ("Addendum") to Restricted Stock Agreement ("Restricted Stock Agreement") between Cole National Corporation ("Company") and Brian B. Smith ("Grantee") dated December 17, 1998 is made by Company and Grantee and is a part of such Restricted Stock Agreement. 1. If and when Grantee should succeed Jeffery A. Cole as Chief Executive Officer of the Company, the Company intends to grant Grantee an additional 50,000 shares ("Additional Shares") of Company common stock, par value $.001 per share ("Common Stock") on substantially the same terms and conditions as the Shares granted pursuant to the Restricted Stock Agreement except that: (a) the date March 1, 2002 in Section 3 of the Restricted Stock Agreement shall be changed to a date three (3) years from the date of such future grant of Additional Shares; (b) the date March 1, 2004 in Section 3 of the Restricted Stock Agreement shall be changed to a date five (5) years from the date of such future grant of the Additional Shares; (c) "Initial Price" in Section 15 of the Restricted Stock Agreement shall be defined to mean with respect to the Additional Shares the closing price of the Common Stock on the principal exchange on which the Common Stock is traded on the date the Additional Shares are granted in the future; and (d) none of the terms of the restricted Stock Agreement shall apply to the Additional Shares until such Additional Shares are actually granted if and when Grantee succeeds Jeffrey A. Cole as Chief Executive Officer of the Company. This Addendum to Restricted Stock Agreement has been executed by the parties at Cleveland, Ohio as of December 17, 1998. COLE NATIONAL CORPORATION By ------------------------------ Name: Title: ------------------------------ Brian B. Smith 7 EX-10.51 9 EXHIBIT 10.51 1 Exhibit 10.51 COLE NATIONAL GROUP, INC. 1999 SUPPLEMENTAL RETIREMENT BENEFIT PLAN WHEREAS, Cole National Group, Inc. (the "Company") and certain related corporations desire to provide supplemental retirement benefits for certain highly compensated and management employees, in consideration of services performed and to be performed by such employees for the Company and the related corporations. NOW, THEREFORE, the Company hereby adopts and publishes this 1999 Supplemental Retirement Benefit Plan, which shall contain the following terms and conditions: ARTICLE I PREFACE ------- SECTION 1.1. EFFECTIVE DATE. The effective date of this Plan is January 1, 1999. SECTION 1.2. PURPOSE OF THE PLAN. The purpose of this Plan is to provide additional retirement benefits for certain management and highly compensated employees of the Company (and other participating Employers). SECTION 1.3. GOVERNING LAW. This Plan shall be regulated, construed and administered under the laws of the State of Ohio, except when preempted by federal law. SECTION 1.4. GENDER AND NUMBER. For purposes of interpreting the provisions of this Plan, the masculine gender shall be deemed to include the feminine, the feminine gender shall be deemed to include the masculine, and the singular shall include the plural, unless otherwise clearly required by the context. SECTION 1.5. SEVERABILITY. If any provision of this Plan or the application thereof to any circumstances(s) or person(s) is held to be invalid by a court of competent jurisdiction, the remainder of the Plan and the application of such provision to other circumstances or persons shall not be affected thereby. ARTICLE II DEFINITIONS ----------- SECTION 2.1. The following words and phrases when used in this Plan with initial capital letters shall have the following respective meanings, unless the context clearly indicates otherwise. 2 SECTION 2.1(1). "BENEFICIARY" shall mean such person or persons (natural or otherwise) as may be designated by the Participant as his Beneficiary under this Plan. Such a designation may be made, and may be revoked or changed at any time including after the Participant is in pay status (without the consent of any previously designated Beneficiary), only by an instrument (in form acceptable to the Company) signed by the Participant and filed with the Secretary of the Company prior to the Participant's death. In the absence of such a designation and at any other time when there is no existing Beneficiary designated by the Participant to whom payment is to be made pursuant to his designation, his Beneficiary shall be his surviving spouse or, if none, his estate. A person designated by a Participant as his Beneficiary who or which ceases to exist shall not be entitled to any part of any payment thereafter to be made to the Participant's Beneficiary unless the Participant's designation specifically provided to the contrary. If two or more persons designated as a Participant's Beneficiary are in existence, the amount of any payment to the Beneficiary under this Plan shall be divided equally among such persons unless the Participant's designation specifically provided to the contrary. SECTION 2.1(2). "Cause" shall mean gross neglect of duty, dishonesty, conviction of a felony, disloyalty, intoxication, drug addiction, or other similar misconduct adverse to the best interests of the Company; provided that if the Participant is party to an employment agreement which contains a more restrictive definition of "Cause" or "for cause", such more restrictive definition shall apply for purposes of this Plan. SECTION 2.1(3). "CHANGE OF CONTROL" shall mean the occurrence of any of the following events: (a) the Parent merges into itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving or resulting corporation immediately after such transaction are directly or indirectly beneficially owned in the aggregate by the former stockholders of the Parent immediately prior to such transaction; (b) all or substantially all the assets accounted for on the Consolidated Balance Sheet of the Parent are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly or indirectly beneficially held in the aggregate by the former stockholders of the Parent immediately prior to such transaction or series of transactions; (c) A person, within the meaning of Section 3(a)(9) of 13(d)(3) (as in effect on the date hereof) of the Securities Exchange Act of 1934, becomes the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934) of (i) 15% or more but less than 35% of the voting power of the then-outstanding voting securities of the Parent without the prior approval by the Board, or (ii) 35% or more of the voting power of the then-outstanding voting 3 3 securities of the Parent; PROVIDED, HOWEVER, that the foregoing does not apply to any such acquisition that is made by (w) any subsidiary of the Parent; (x) any employee benefit plan of the Parent or any Subsidiary or (y) any person or group of which employees of the Parent or of any Subsidiary control a greater than 25% interest unless the Board of Directors of the Parent determines that such person or group is making a "hostile acquisition;" (d) A majority of the members of the Board of Directors of the Parent or of any Subsidiary are not Continuing Directors, where a "Continuing Director" is any member of the Board of Directors of the Parent or, with respect to a Subsidiary, of such Subsidiary who (x) was a member of the Board of Directors of the Parent or, with respect to a Subsidiary, of such Subsidiary on the date hereof or (y) was nominated for or elected to such Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. SECTION 2.1(4). "CODE" shall mean the Internal Revenue Code of 1986, as it has been and may be amended from time to time. SECTION 2.1(5). "CONTROLLED GROUP" shall mean the Company and each other entity, the employees of which, together with the employees of the Company, are required to be treated as if they were employed by a single employer under Section 414 of the Code. SECTION 2.1(6). "DISABILITY" shall mean a disability as defined under any long term disability plan maintained by an Employer. SECTION 2.1(7). "EMPLOYER(S)" shall mean the Company and/or any other member of the Controlled Group which shall adopt this Plan pursuant to Section 6.4. SECTION 2.1(8). "INSTRUMENT OF ADOPTION AND INSTRUMENT DESIGNATING PARTICIPANTS" shall mean the Instruments referred to in Section 6.4 by which an Employer, among other things, evidences its adoption of the Plan. SECTION 2.1(9). "PARENT" shall mean Cole National Corporation. SECTION 2.1(10). "PARTICIPANT" shall mean each employee of an Employer (a) who is either a highly compensated or a management employee, (b) who is designated by the Board of Directors of the Company, on the recommendation of the Chief Executive Officer of the Company, as a Participant in this Plan and, (c) who as a result of such participation, is entitled to a Supplemental Retirement Benefit hereunder. Each employee who is so designated as a Participant under this Plan shall be notified in writing of such fact by the Company. Once an employee has been designated as a Participant, he shall remain a Participant unless and until the Board of Directors of the Company revokes his Participant status. Upon the revocation of Participant status, a former Participant shall remain as an inactive Participant until all vested Supplemental Retirement Benefits have been paid to him or his Beneficiary. 4 4 SECTION 2.1(11). "PENSION PLAN" shall mean the Cole National Group, Inc. Retirement Plan, as such plan may be amended from time to time. SECTION 2.1(12). "PLAN" shall mean this 1999 Cole National Group, Inc. Supplemental Retirement Benefit Plan, as it may be amended from time to time. SECTION 2.1(13). "SUBSIDIARY" shall mean a corporation, company or other entity (i) more than 50 percent of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but more than 50 percent of whose ownership interest representing the right generally to make decisions for such other entity is, now or hereafter, owned or controlled, directly or indirectly, by the Company except that for purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, "Subsidiary" means any corporation in which at the time the Company owns or controls, directly or indirectly, more than 50 percent of the total combined voting power represented by all classes of stock issued by such corporation. SECTION 2.1(14). "SUPPLEMENTAL RETIREMENT BENEFIT" shall mean the retirement benefit determined under Article III. SECTION 2.1(15). "UNRELATED PARTY" shall mean any person, or any group of persons acting together, other than (a) a member of the Controlled Group, or its directors or officers, or (b) any nominee holder for any stock exchange. ARTICLE III SUPPLEMENTAL RETIREMENT BENEFIT ------------------------------- SECTION 3.1. AMOUNT OF SUPPLEMENTAL RETIREMENT BENEFIT. Each Participant or Beneficiary of a deceased Participant shall be entitled to a Supplemental Retirement Benefit, which shall be determined as set forth in the Instrument Designating Participants applicable to the Participant. SECTION 3.2. TIME OF PAYMENT. A Participant's (or Beneficiary's) Supplemental Retirement Benefit shall commence at the same time and under the same conditions as the benefits payable to the Participant (or Beneficiary) under the Pension Plan. SECTION 3.3. EARLY RETIREMENT REDUCTIONS. A Participant's Supplemental Retirement Benefit shall be reduced or increased for early or delayed retirement as provided for in the Instrument Designating Participants applicable to the Participant. 5 5 SECTION 3.4. FORM OF PAYMENT. The Supplemental Retirement Benefit shall be payable in the same form and for the same duration as the benefits payable to the Participant (or Beneficiary) under the Pension Plan. 6 6 SECTION 3.5. LIABILITY FOR PAYMENT. The Employer by which the Participant was employed at the time of his termination of employment with the Controlled Group shall pay the Supplemental Retirement Benefit to the Participant and/or his Beneficiary, but such Employer's liability hereunder shall be limited to its proportionate share of such Supplemental retirement benefit, determined as hereinafter provided. If the Participant's Pension Benefits payable to the Participant and/or his Beneficiary under the Pension Plan are based on the Participant's employment with more than one Employer, the amount of the Supplemental Retirement Benefit shall be shared by all such Employers (by reimbursement to the Employer making such payment) as may be agreed to between them in good faith, taking into consideration the Participant's credited service and annual compensation paid by each such Employer and as will permit the deduction (for purposes of federal income taxes) by each such Employer of its portion of the payments made and to be made hereunder. ARTICLE IV VESTING ------- SECTION 4.1. VESTING. A Participant shall be vested in his Supplemental Retirement Benefit in accordance with the vesting provisions of the Pension Plan. ARTICLE V MISCELLANEOUS ------------- SECTION 5.1. LIMITATION ON RIGHTS OF PARTICIPANTS AND BENEFICIARIES - NO LIEN. This Plan is an unfunded, nonqualified plan and the entire cost of this Plan shall be paid from the general assets of one or more of the Employers. No trust has been established for the Participants or Beneficiaries. No liability for the payment of benefits under the Plan shall be imposed upon any officer, director, employee, or stockholder of an Employer. Nothing contained herein shall be deemed to create a lien in favor of any Participant or Beneficiary on any assets of any Employer. The Employers shall have no obligation to purchase any assets that do not remain subject to the claims of the creditors of the Employers for use in connection with the Plan. Each Participant and Beneficiary shall have the status of a general unsecured creditor of the Employers and shall have no right to, prior claim to, or security interest in, any assets of the Company or any Employer. SECTION 5.2. NONALIENATION. No right or interest of a Participant or his Beneficiary under this Plan shall be anticipated, assigned (either at law or in equity) or alienated by the Participant or his Beneficiary, nor shall any such right or interest be subject to attachment, garnishment, levy, execution or other legal or equitable process or in any manner be liable for or subject to the debts of any Participant or Beneficiary. If any Participant or Beneficiary shall attempt to or shall alienate, sell, transfer, assign, pledge or otherwise encumber his benefits under the Plan or any part thereof, or if by reason of his bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him, then the 7 7 Company may terminate his interest in any such benefit and hold or apply it to or for his benefit or the benefit of his spouse, children or other person or persons in fact dependent upon him, or any of them, in such a manner as the Company may deem proper; PROVIDED, HOWEVER, that the provisions of this sentence shall not be applicable to the surviving spouse of any deceased Participant if the Company consents to such inapplicability, which consent shall not unreasonably be withheld. SECTION 5.3. EMPLOYMENT RIGHTS. Employment rights shall not be enlarged or affected hereby. The Employers shall continue to have the right to discharge or retire a Participant, with or without cause. SECTION 5.4. INSTRUMENTS OF ADOPTION/INSTRUMENT DESIGNATING PARTICIPANTS. Any member of the Controlled Group may become an Employer hereunder with the written consent of the Company if it executes an "Instrument of Adoption" evidencing its adoption of the Plan and files a copy thereof with the Company. Such Instrument of Adoption may be subject to such terms and conditions as the Company requires or approves and shall include a designation of the Participants in the Plan. In addition, with the consent of the Company, such Instrument of Adoption may contain specific provisions which apply to some or all of the employees of an Employer. Any such specific provisions which apply to the employees of the Company shall be specified in an Instrument Designating Participants. An Employer who ceases to exist or who is no longer a member of the Controlled Group shall automatically cease being a participating Employer hereunder. SECTION 5.5. ADMINISTRATION OF PLAN. (a) The Company shall be responsible for the general administration of the Plan and for carrying out the provisions hereof and, for purposes of the Employee Retirement Income Security Act of 1974, as amended, the Company shall be the plan sponsor and the plan administrator. The Chief Executive Officer of the Company shall interpret where necessary, in his reasonable and good faith judgment, the provisions of the Plan and, except as otherwise provided in the Plan, shall determine the rights and status of Participants and Beneficiaries hereunder (including, without limitation, the amount of any Supplemental Retirement Benefit to which a Participant or Beneficiary may be entitled under the Plan). Notwithstanding the foregoing, the President of the Company or such other person designated by the Board of Directors of the Company shall have the sole right to interpret the Plan with respect to any matter that relates solely to the Chief Executive Officer. (b) The Chief Executive Officer of the Company and the Company each may, from time to time, delegate all or part of the administrative powers, duties and authorities delegated to it under this Plan to such person or persons, office or committee as it shall select. SECTION 5.6. CLAIMS PROCEDURE. Whenever there is denied, whether in whole or in part, a claim for benefits under the Plan filed by any person (herein referred to as the "Claimant"), the plan administrator shall transmit a written notice of such decision to the 8 8 Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and statement advising the Claimant that, within 60 days of the date on which he receives such notice, he may obtain review of such decision in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his authorized representative may request that the claim denial be reviewed by filing with the plan administrator a written request therefor, which request shall contain the following information: (a) the specific portions of the denial of his claim which the Claimant requests the plan administrator to review; (b) a statement by the Claimant setting forth the basis upon which he believes the plan administrator should reverse the previous denial of his claim for benefits and accept his claim as made; and (c) any written material which the Claimant desires the plan administrator to examine in its consideration of his position as stated pursuant to Subsection (b) above. Within 60 days of the date the Claimant files the written request for review, the plan administrator shall designate a named fiduciary to conduct a full and fair review of the decision denying the Claimant's claim for benefits. Within 60 days of the date of such review, the named fiduciary shall render its written decision on review, written in a manner calculated to be understood by the Claimant, specifying the reasons and Plan provisions upon which its decision was based. SECTION 5.7. EFFECT ON OTHER BENEFITS. Benefits payable to or with respect to a Participant under any Employer sponsored (qualified or nonqualified) plan, if any, are in addition to those provided under this Plan. SECTION 5.8. PAYMENT TO GUARDIAN. If a benefit payable hereunder is payable to a minor, to a person declared incompetent or to a person incapable of handling the disposition of his property, the Company may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Company may require such proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Employers from all liability with respect to such benefit. ARTICLE VI AMENDMENT AND TERMINATION ------------------------- SECTION 6.1. AMENDMENT. The Board of Directors of the Company does hereby reserve the right to amend, at any time, any or all of the provisions of the Plan for all Employers, without the consent of any other Employer or any Participant, Beneficiary or any 9 9 other person. Any such amendment shall be expressed in an instrument executed by the Chief Executive Officer of the Company and shall become effective as of the date designated in such instrument or, if no such date is specified, on the date of its execution. SECTION 6.2. TERMINATION. (a) The Board of Directors of the Company does hereby reserve the right to terminate the Plan at any time for any or all Employers, without the consent of any other Employer or of any Participant, Beneficiary or any other person. Such termination shall be expressed in an instrument executed by the Chief Executive Officer of the Company and shall become effective as of the date designated in such instrument, or if no date is specified, on the date of its execution. Any other Employer which shall have adopted the Plan may, with the written consent of the Board of Directors of the Company, elect separately to withdraw from the Plan and such withdrawal shall constitute a termination of the Plan as to it, but it shall continue to be an Employer for the purposes hereof as to Participants or Beneficiaries to whom it owes obligations hereunder. Any such withdrawal and termination shall be expressed in an instrument executed by an officer of the terminating Employer and shall become effective as of the date designated in such instrument or, if no date is specified, on the date of its execution. Notwithstanding the foregoing, if an Employer ceases to exist or is no longer a member of the Controlled Group, such action shall automatically constitute a termination of the Plan as to such Employer. (b) Upon any termination of the Plan, each affected Participant's Supplemental Retirement Benefit shall be 100% vested and shall be distributed to him (or his Beneficiary) as otherwise provided in Article III. SECTION 6.3. LIMITATIONS ON AMENDMENT AND TERMINATION. Notwithstanding the foregoing provisions of this Article, no amendment or termination of the Plan shall, without the consent of the Participant (or, in the case of his death, his Beneficiary), adversely affect the vested Supplemental Retirement Benefit under the Plan of any Participant or Beneficiary as such Supplemental Retirement Benefit exists on the date of such amendment or termination. IN WITNESS WHEREOF, Cole National Group, Inc. has executed this Supplemental Retirement Benefit Plan this ___ day of ____________, 1998. COLE NATIONAL GROUP, INC. By: ___________________________________ Title:_________________________________ EX-10.52 10 EXHIBIT 10.52 1 Exhibit 10.52 INSTRUMENT DESIGNATING PARTICIPANTS OF THE COLE NATIONAL GROUP, INC. 1999 SUPPLEMENTAL RETIREMENT BENEFIT PLAN 1. PARTICIPANTS. Cole National Group, Inc. (the "Company") hereby adopts the Cole National Group, Inc. 1999 Supplemental Retirement Benefit Plan (the "Plan") effective as of January 1, 1999, for the benefit of the following employee: Jeffrey A. Cole. 2. SPECIAL PROVISIONS. (a) For purposes of calculating the benefit payable to Jeffrey A. Cole in accordance with the Plan, the benefit formula used shall be the same as the formula used for purposes of calculating benefits under the Cole National Group, Inc. Retirement Plan (the "Pension Plan") except that instead of using final five year average salary, the sum of base compensation and bonus for the calendar year during which the sum of base compensation and bonus earned was the highest shall be used. (b) For purposes of calculating the benefit payable to Jeffrey A. Cole in accordance with the Plan, Jeffrey A. Cole shall be credited with years of service equal to (i) the number of years of service he is credited with under the Pension Plan, plus (ii) the number of years Jeffrey A. Cole served as a non-employee director and paid consultant of the Company. For purposes of (ii) in the previous sentence, the number of years Jeffrey A. Cole served as a non-employee director and paid consultant of the Company is eight. (c) For purposes of calculating the benefit payable to Jeffrey A. Cole in accordance with the Plan, the minimum annual benefit payable to Jeffrey A. Cole commencing on or after Jeffery A. Cole's attainment of age 65 shall be the amount determined by the formula "A-B," where: A= the greater of: (i) $474,000 or (ii) the amount determined based on the Company's regular Pension Plan formula but using Jeffrey A. Cole's salary and annual bonus using the highest year commencing in 1998 or thereafter, and reflecting service from 1969 on, and B= the sum of (i) the annualized amounts, if any, payable to Jeffrey A. Cole in accordance with the Pension Plan and the Cole National Group, Inc. Supplemental Pension Plan, (ii) the installment payment to be paid to Jeffrey A. Cole from the Cole National Group, Inc. Supplemental Retirement Benefit Plan, and (iii) the annualized amount, if any, payable to Jeffrey A. Cole's former spouse pursuant to any qualified domestic relations order applicable to the Pension Plan and/or the Cole National Group, Inc. Supplemental Pension Plan for the year for which the benefit payable to Jeffrey A. Cole is being calculated in accordance with the Plan. 2 (d) The minimum annual benefit payable to Jeffrey A. Cole commencing prior to Jeffrey A. Cole's attainment of age 65 shall be the amount determined by the formula "(A-B) x C," where: A= the greater of (i) $474,000 or (ii) the amount determined based on the Company's regular Pension Plan formula but using Jeffrey A. Cole's salary and annual bonus using the highest year commencing in 1998 or thereafter, and reflecting service from 1969 on, B= the sum of (i) the annualized amounts, if any, payable to Jeffrey A. Cole in accordance with the Pension Plan and the Cole National Group, Inc. Supplemental Pension Plan, (ii) the installment payment to be paid to Jeffrey A. Cole from the Cole National Group, Inc. Supplemental Retirement Benefit Plan, and (iii) the annualized amount, if any, payable to Jeffrey A. Cole's former spouse pursuant to any qualified domestic relations order applicable to the Pension Plan and/or the Cole National Group, Inc. Supplemental Pension Plan for the year for which the benefit payable to Jeffrey A. Cole is being calculated in accordance with the Plan, C= the early retirement reduction factors set forth in Attachment A to this Instrument. (e) In computing benefits under (c) and (d) above, (i) Jeffrey A. Cole retires after he suffers a constructive termination, or (ii) there has been a change of control (as each such term is defined in his Employment Agreement with the Company and certain of its subsidiaries, dated the 17th day of December, 1998), then he will be credited with three additional years of service in making the calculations above and his retirement will be deemed to have been made with the consent of the Special Compensation Committee of the Company's Board of Directors. Further, if Jeffrey A. Cole elects to receive payments under the Cole National Group, Inc. Supplemental Retirement Benefit Plan in a form other than annual installments over a ten-year period (as permitted by such plan) then the calculations in (c) and (d) above shall be adjusted so that such payments under the Plan will equal, on an actuarial present value basis, the payments that otherwise would have been due him if he had elected the ten-year installment payout of the Cole National Group, Inc. Supplemental Retirement Benefit Plan. (f) Notwithstanding Section 3.4 of the Plan, Jeffrey A. Cole's Supplemental Retirement Benefit shall be payable in a one time lump sum cash payment, in a series of up to 20 annual installments with interest credited and compounded quarterly on the unpaid balance at the interest rate specified from time-to-time under the Cole National Group, Inc. Supplemental Retirement Benefit Plan, but not less than such rate specified at the date of his termination of employment or retirement, or in the same form and for the same duration as the benefits payable to the Participant (or Beneficiary) under the Pension Plan, as elected by Jeffrey A. Cole. Any form of payment of Jeffrey A. Cole's benefits shall be actuarially equivalent to the minimum annual benefit calculated under (c) and (d) above. Jeffrey A. Cole's election of the form of payment of his benefits shall be made by written notice filed with the Company at least one year prior to his voluntary termination of employment with, or retirement from, the Company. Any 2 3 such election may be changed by Jeffrey A. Cole at any time and from time to time without the consent of any other person by filing a later signed written election with the Company; provided that any election made less than one year prior to his voluntary termination of employment or retirement shall not be valid, and in such case payment shall be made in accordance with his prior election. In the absence of any effective election, Jeffrey A. Cole's Supplemental Retirement Benefit shall be payable in a one time lump sum cash payment. Jeffrey A. Cole shall be permitted to designate a beneficiary or beneficiaries for purposes of the Plan (on a form provided by the Company) to receive a benefit in the event that (i) he dies prior to his commencement of benefits under the Plan, or (ii) he dies after commencement of benefits under the Plan but before any lump sum elected is paid, or with any remaining elected installments unpaid. The benefit payable to Jeffrey A. Cole's beneficiary or beneficiaries in the event that he dies prior to his commencement of benefits under the Plan shall be a one time lump sum cash payment in an amount equal to the then actuarial present value of the accrued benefit that would have been payable to Jeffrey A. Cole as if he had commenced payment of his benefits under the Plan on the day before the day he died and as if he had attained not less than age 63, but counting service and compensation only through the date of his death, and as if he had elected a one time lump sum cash payment. Dated as of December 17, 1998 COLE NATIONAL GROUP, INC. By:____________________________ Title:_________________________ 3 4 ATTACHMENT A TO THE INSTRUMENT DESIGNATING PARTICIPANTS OF THE COLE NATIONAL GROUP, INC. 1999 SUPPLEMENTAL RETIREMENT BENEFIT PLAN FOR JEFFREY A. COLE -------------------------------- If Jeffrey A. Cole retires before age 65, the following early retirement reduction factors apply:
----------------- --------------------------------------- ---------------------------------------- If retirement is with the consent of If retirement is without the consent the Special Compensation Committee of of the Special Compensation Committee Age at the Company's Board of of the Company's Board of Retirement* Directors Directors ----------------- --------------------------------------- ---------------------------------------- 57 0.28 0.28 ----------------- --------------------------------------- ---------------------------------------- 58 0.34 0.34 ----------------- --------------------------------------- ---------------------------------------- 59 0.40 0.40 ----------------- --------------------------------------- ---------------------------------------- 60 0.90 0.47 ----------------- --------------------------------------- ---------------------------------------- 61 0.92 0.56 ----------------- --------------------------------------- ---------------------------------------- 62 0.94 0.65 ----------------- --------------------------------------- ---------------------------------------- 63 0.96 0.96 ----------------- --------------------------------------- ---------------------------------------- 64 0.98 0.98 ----------------- --------------------------------------- ---------------------------------------- 65 1.00 (no reduction) 1.00 (no reduction) ----------------- --------------------------------------- ---------------------------------------- * Add three additional years (maximum age is 65) if there has been a Constructive Termination or a change of control.
EX-10.53 11 EXHIBIT 10.53 1 Exhibit 10.53 COLE NATIONAL GROUP, INC. DEFERRED COMPENSATION PLAN FOR EXECUTIVES AND OTHER SENIOR MANAGEMENT EFFECTIVE FEBRUARY 1, 1999 2 ARTICLE 1-- INTRODUCTION 1.1 PURPOSE OF PLAN The Employer has adopted the Plan set forth herein to provide a means by which certain employees may elect to defer receipt of designated percentages or amounts of their Compensation and to provide a means for certain other deferrals of Compensation. 1.2 STATUS OF PLAN The Plan is intended to be "a plan that is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of Sections 201(2) and 301(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA") and shall be interpreted and administered to the extent possible in a manner consistent with that intent. ARTICLE 2 -- DEFINITIONS Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context: 2.1 ACCOUNT means, for each Participant, the account established for his or her benefit under Section 5.1. 2.2 BENEFICIARY means the person or persons entitled, under Section 7.4, to receive amounts payable under the Plan upon the death of the Participant. 2.3 CHANGE OF CONTROL means if at any time any of the following events shall have occurred: (a) the Company merges into itself, or is merged or consolidated with, another corporation and as a result of such merger or consolidation less than 51% of the voting power of the then-outstanding voting securities of the surviving or resulting corporation immediately after such transaction are directly or indirectly beneficially owned in the aggregate by the former stockholders of the Company immediately prior to such transaction; (b) all or substantially all the assets accounted for on the consolidated balance sheet of the Company are sold or transferred to one or more corporations or persons, and as a result of such sale or transfer less than 51% of the voting power of the then-outstanding voting securities of such corporation or person immediately after such sale or transfer is directly or indirectly beneficially held in the aggregate by the former stockholders of the Company immediately prior to such transaction or series of transactions; 3 (c) A person, within the meaning of Section 3(a)(9) or 13(d)(3) (as in effect on the date hereof) of the Securities Exchange Act of 1934, becomes the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934) of (i) 15% or more but less than 35% of the voting power of the then-outstanding voting securities of the Company without the prior approval by the Board, or (ii) 35% or more of the voting power of the then-outstanding voting securities of the Company; PROVIDED, HOWEVER, that the foregoing does not apply to any such acquisition that is made by (w) any subsidiary of the Company; (x) any employee benefit plan of the Company or any Subsidiary or (y) any person or group of which employees of the Company or of any Subsidiary control a greater than 25% interest unless the Board of Directors of the Company determines that such person or group is making a "hostile acquisition;" (d) A majority of the members of the Board of Directors of the Company or of any Subsidiary are not Continuing Directors, where a "Continuing Director" is any member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary who (x) was a member of the Board of Directors of the Company or, with respect to a Subsidiary, of such Subsidiary on the date hereof or (y) was nominated for election or elected to such Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. 2.4 CODE means the Internal Revenue Code of 1986, as amended from time to time. Reference to any section or subsection of the Code includes reference to any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection. 2.5 COMPANY means Cole National Corporation, a Delaware corporation. 2.6 CNG means Cole National Group, Inc., a Delaware corporation. 2.7 COMPENSATION means: for an employee other than a self-employed individual, the employee's earned income, wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment, including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, cash bonuses, fringe benefits, reimbursements or other expense allowances under a non-accountable plan (as described in Section 1.62-2(c) of the Treasury Regulations) and elective deferrals and amounts excluded from the gross income of the employee under Sections 125, 402(e)(3), 402(h) or 403(b) of the Code and excluding the following: 4 (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or contributions under a "simplified employee pension" plan (within the meaning of Section 408(k) of the Code) to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (b) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or other property) held by the employee either becomes freely "transferable" or is no longer subject to a "substantial risk of forfeiture" (both quoted terms within the meaning of Section 83(a) of the Code); (c) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; (d) other amounts which received special tax benefits, or contributions made (whether or not under a salary reduction agreement) towards the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludable from the gross income of the employee); and (e) Imputed life insurance income, moving costs, company car, severance and educational assistance benefits. 2.8 DISCRETIONARY MATCHING CONTRIBUTION means a discretionary additional contribution made by the Employer as described in Section 4.3. 2.9 EFFECTIVE DATE means February 1, 1999. 2.10 ELECTION FORM means the participation election form as approved and prescribed by the Plan Administrator. 2.11 ELECTIVE DEFERRAL means the portion of Compensation that is deferred by a Participant under Section 4.1. 2.12 ELIGIBLE EMPLOYEE means on the Effective Date or on any entry date thereafter, each employee of the Employer who is an Executive who has completed 90 days of service with his Employer or who is an Executive or a senior management person selected by the Compensation Committee of the Board of Directors of CNG, in its sole discretion. 2.13 EMPLOYER means CNG, any successor to all or a major portion of CNG's assets or business that assumes the obligations of CNG, and each other entity that is affiliated with CNG, which adopts the Plan with the consent of CNG, provided that CNG shall have the sole power to amend this Plan pursuant to Section 9.1 and to terminate this Plan pursuant 5 to Section 9.2 and shall be the Plan Administrator if no other person or entity is so serving of any time. 2.14 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference to any section or subsection of ERISA includes reference to any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection. 2.15 EXECUTIVE means an employee of an Employer at the position of director or higher. 2.16 INSOLVENT means either (i) the Employer is unable to pay its debts as they become due, or (ii) the Employer is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. 2.17 MANDATORY MATCHING CONTRIBUTION means a contribution for the benefit of a Participant as described in Section 4.2. 2.18 PARTICIPANT means any Eligible Employee who participates in the Plan in accordance with Article 3. 2.19 PLAN means Cole National Group, Inc. Deferred Compensation Plan for Executives and other Senior Management and all amendments thereto. 2.20 PLAN ADMINISTRATOR means the Chief Executive Officer of CNG or such person or persons as he may, in his sole discretion, delegate. 2.21 PLAN YEAR means, for the first Plan Year, the 11-month period commencing February 1, 1999 and ending December 31, 1999 and for each Plan Year thereafter the 12-month period commencing January 1 and ending December 31. 2.22 SUBSIDIARY means a corporation, company or other entity (i) more than 50 percent of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but more than 50 percent of whose ownership interest representing the right generally to make decisions for such other entity is, now or hereafter, owned or controlled, directly or indirectly, by the Company. 2.23 TOTAL AND PERMANENT DISABILITY means the total and permanent inability to meet the requirements of the Participant's customary employment which can be expected to last for a continuous period of not less than 12 months. 2.24 TRUST means the trust established by the Employer that identifies the Plan as a plan with respect to which assets are to be held by the Trustee. 6 2.25 TRUSTEE means the trustee or trustees under the Trust. ARTICLE 3 - PARTICIPATION 3.1 COMMENCEMENT OF PARTICIPATION Any Eligible Employee who elects to defer part of his or her Compensation in accordance with Section 4.1 shall become a Participant in the Plan as of the date such deferrals commence in accordance with Section 4.1. 3.2 CONTINUED PARTICIPATION A Participant in the Plan shall continue to be a Participant so long as any amount remains credited to his or her Account. ARTICLE 4 -- ELECTIVE AND MATCHING DEFERRALS 4.1 ELECTIVE DEFERRALS An individual who is an Eligible Employee on the Effective Date and who has elected to defer the maximum amount permissible to the Cole National Corporation 401(k) Plan, the Cole National Corporation 401(k) Plan for Former NuVision Locations or the Cole National Corporation 401(k) Plan for Employees of Pearle Vision Centers may, by completing an Election Form and filing it with the Plan Administrator prior to the Effective Date or within 30 days following the Effective Date, elect to defer a percentage of between 1% and 100% or a dollar amount of his Compensation for a Plan Year payable to the Participant with respect to services performed after the Effective Date and after the date on which the individual files the Election Form. Any individual who becomes an Eligible Employee after the Effective Date may, by completing an Election Form and filing it with the Plan Administrator within 30 days following the date on which the Plan Administrator gives such individual written notice that the individual is an Eligible Employee, elect to defer a percentage of between 1% and 100% or a dollar amount of his Compensation for a Plan Year payable to the Participant with respect to services performed after the date on which he files the Election Form. Any Eligible Employee who has not otherwise initially elected to defer Compensation in accordance with this paragraph 4.1 may elect to defer a percentage of between 1% and 100% or a dollar amount of his Compensation for a Plan Year commencing with Compensation paid in the next succeeding Plan Year, by completing an Election Form prior to the first day of such succeeding Plan Year. In addition, a Participant may defer all or part of the amount of any elective deferral or matching contribution made on his or her behalf to the Cole National Corporation 401(k) Plan, the Cole National Corporation 401(k) Plan for Former NuVision locations or the Cole National Corporation 401(k) Plan for Employees of Pearle Vision Centers for the prior Plan Year but treated as an excess deferral, an excess contribution or otherwise limited by the application of the limitations of sections 401(k), 401(m), 415 or 402(g) of the Code, so long as the Participant so indicates on an Election Form. 7 For purposes of any cash bonus paid to a Participant, such Participant may make a special election of a different percentage or dollar amount of such cash bonus than his election with regard to other Compensation. The special election described in the preceding sentence must be made in the Plan Year prior to the Plan Year for which the cash bonus is earned by a Participant. A Participant's Compensation shall be reduced in accordance with the Participant's election hereunder (including a special election with regard to cash bonuses) and amounts deferred hereunder shall be paid by the Employer to the Trust as soon as administratively feasible and credited to the Participant's Account as of the date the amounts are received by the Trustee. An election to defer a percentage or dollar amount of Compensation for any Plan Year (including a special election with regard to cash bonuses) shall apply for subsequent Plan Years unless changed or revoked. A Participant may change or revoke his or her deferral election as of the first day of any Plan Year by giving written notice to the Plan Administrator before such first day (or any such earlier date as the Plan Administrator may prescribe). A Participant may change or revoke his or her special deferral election with regard to cash bonuses as of any date in a Plan Year that is prior to the Plan Year for which the cash bonus is earned by the Participant. 4.2 MANDATORY MATCHING CONTRIBUTIONS Following the end of each Plan Year, the Employer shall contribute to the Trust Mandatory Matching Contributions equal to ten percent of the first ten percent of Compensation deferred by each Participant who is employed by an Employer on the last day of the Plan Year for which such contribution is being made or who terminated employment with the Employer as a result of a Total and Permanent Disability or who died or retired during the Plan Year for which such contribution is being made pursuant to Section 4.1 during the preceding Plan Year. Each Mandatory Matching Contribution will be credited, as of the later of the date it is received by the Trustee or the date the Trustee receives from the Plan Administrator such instructions as the Trustee may reasonably require to allocate the amount received among the asset accounts maintained by the Trustee, to the Participants' Accounts pro rata in accordance with the amount of Elective Deferrals of each Participant, which are taken into account in calculating the Mandatory Matching Contribution. 4.3 DISCRETIONARY MATCHING CONTRIBUTIONS In addition to other contributions provided for under the Plan, the Employer may, in its sole discretion, select one or more Eligible Employees to receive a Discretionary Matching Contribution to his or her Account on such terms as the Employer shall specify at the time it makes the contribution. For example, the Employer may contribute an amount to a Participant's Account and condition the payment of that amount and income, 8 gain or loss thereon upon the Participant remaining employed by the Employer for an additional specified period of time. The terms specified by the Employer shall supersede any other provision of this Plan as regards Discretionary Matching Contributions and earnings with respect thereto. 4.4 COLE NATIONAL CORPORATION COMMON STOCK All Mandatory Matching Contributions and Discretionary Matching Contributions shall be made by the Employer in notional Cole National Corporation Common Stock unless otherwise determined by the Employer. All Mandatory Matching Contributions and Discretionary Matching Contributions made in notional Cole National Corporation Common Stock shall remain invested in notional Cole National Corporation Common Stock until distributed pursuant to Article VII. If any portion of a Participant's Account is invested in notional Cole National Corporation Common Stock, such Participant shall have the right to instruct the Trustee to vote the shares of Cole National Corporation Common Stock held for such Participant under the Plan and Trust in accordance with the Participant's directions. If a Participant fails to direct the Trustee, the Trustee shall vote all shares for which it does not receive instructions in the same proportion as the shares for which it did receive instructions. In the event of a tender offer, a Participant whose Account is invested in notional Cole National Corporation Common Stock shall have the right to instruct the Trustee as to whether or not to tender the shares of Cole National Corporation Common Stock held for such Participant under the Plan and Trust. If the Trustee receives no instruction from a Participant, the Trustee will not tender the shares of Cole National Common Stock held for such Participant under the Plan and Trust. ARTICLE 5 -- ACCOUNTS 5.1 ACCOUNTS The Plan Administrator shall establish an Account for each Participant reflecting Elective Deferrals, Mandatory Matching Contributions and Discretionary Matching Contributions made for the Participant's benefit together with any adjustment for income, gain or loss and any payments from the Account. The Plan Administrator may cause the Trustee to maintain and invest separate asset accounts corresponding to each Participant's Account. As of the last business day of each calendar quarter, the Plan Administrator shall provide the Participant with a statement of his or her Account reflecting the income, gains and losses (realized and unrealized), amounts of deferrals, and distributions of such Account since the prior statement. 5.2 INVESTMENTS The assets of the Trust shall be invested in such investments as the Trustee shall determine. The Trustee may (but is not required to) consider the Employer's or a Participant's investment preferences when investing the assets attributable to a Participant's Account. 9 ARTICLE 6 -- VESTING 6.1 VESTING SERVICE For purposes of applying the vesting schedule set forth in Section 6.2, a Participant's years of vesting service shall equal such Participant's years of vesting service calculated under any one of the Cole National Corporation 401(k) Plan, the Cole National Corporation 401(k) Plan for Former NuVision Locations or the Cole National Corporation 401(k) Plan for Employees of Pearle Vision Centers. 6.2 GENERAL A Participant shall be immediately vested in, i.e., shall have a nonforfeitable right to, all Elective Deferrals, and all income and gain attributable thereto, credited to his or her Account. Unless the Employer elects, in its sole discretion, to accelerate the vesting of the portion of a Participant's Account attributable to Mandatory Matching Contributions and Discretionary Matching Contributions and income and gain attributable thereto, a Participant shall become vested in the portion of his or her Account attributable to Mandatory Matching Contributions and Discretionary Matching Contributions and income and gain attributable thereto in accordance with the following schedule subject to earlier vesting in accordance with Sections 6.3, 6.4 and 6.5:
years of vesting service percentage vested 1 25 2 50 3 75 4 100
6.3 CHANGE OF CONTROL A Participant shall become fully vested in his or her Account immediately prior to a Change of Control of the Employer. 6.4 DEATH OR DISABILITY A Participant shall become fully vested in his or her Account immediately prior to termination of the Participant's employment by reason of the Participant's death or Total and Permanent Disability. Whether a Participant's termination of employment is by reason of the Participant's Total and Permanent Disability shall be determined by the Plan Administrator in its sole discretion. 10 6.5 INSOLVENCY A Participant shall become fully vested in his or her Account immediately prior to the Employer becoming Insolvent, in which case the Participant will have the same rights as a general creditor of the Employer with respect to his or her Account balance. ARTICLE 7 -- PAYMENTS 7.1 RETIREMENT A Participant shall elect (on a form approved by the Plan Administrator) the date, which shall be coincident with or following his attainment of age 65, or such earlier age which coincides with such Participant's early retirement under the Cole National Group, Inc. Retirement Plan as shall be permitted by the Employer in its sole discretion, at which the Elective Deferrals and vested Mandatory Matching Contributions and Discretionary Matching Contributions (including any earnings attributable thereto) will commence to be paid to the Participant by CNG. The election described in the preceding sentence must be made at least one year prior to the date elected by the Participant at which the Elective Deferrals and vested Mandatory Matching Contributions and Discretionary Matching Contributions (including any earnings attributable thereto) will commence to be paid by CNG to such Participant. The Participant shall also elect for payments to be paid by CNG in either: A. a single lump-sum payment; or B. annual installments over a period elected by the Participant, the amount of each installment to equal the balance of his or her Account immediately prior to the installment divided by the number of installments remaining to be paid. If a Participant terminates employment on or after his attainment of age 65 and fails to make an election as set forth in this Section 7.1, his Account shall be payable to him by CNG in a single lump sum payment. 7.2 CHANGE OF CONTROL As soon as possible following a Change of Control, CNG shall pay each Participant his or her entire Account balance (including any amount vested pursuant to Section 6.3) in a single lump sum. 7.3 TERMINATION OF EMPLOYMENT Upon termination of a Participant's employment for any reason other than death and prior to the attainment of age 65, the vested portion of the Participant's Account (including any portion vested pursuant to Section 6.4, as a consequence of the Participant's Total and Permanent Disability) shall be paid by CNG to the Participant in a single lump sum, as soon as practicable following the date of such termination, unless the Participant elects to 11 defer payment for up to a period of twelve months following the date of such termination; provided, however, that the Plan Administrator in its sole discretion may cause CNG to pay out a Participant's Account balance in annual installments if the Participant's employment terminates by reason of the Participant's Total and Permanent Disability. 7.4 DEATH If a Participant dies prior to the complete distribution of his or her Account, the balance of the Account shall be paid by CNG as soon practicable to the Participant's Beneficiary. Any designation of Beneficiary and form of payment to such Beneficiary shall be made by the Participant on an Election Form filed with the Plan Administrator and may be changed by the Participant at any time by filing another Election Form containing the revised instructions. If no Beneficiary is designated or no designated Beneficiary survives the Participant, payment shall be made to the Participant's surviving spouse, or, if none, to the Participant's issue per stirpes, in a single payment. If no spouse or issue survives the Participant, payment shall be made in a single lump sum to the Participant's estate. 7.5 UNFORESEEN EMERGENCY If a Participant suffers an unforeseen emergency, as defined herein, the Plan Administrator, in its sole discretion, may cause CNG to pay to the Participant only that portion, if any, of the vested portion of his or her Account that the Plan Administrator determines is necessary to satisfy the emergency need, including any amounts necessary to pay any federal, state or local income taxes reasonably anticipated to result from the distribution. A Participant requesting an emergency payment shall apply for the payment in writing in a form approved by the Plan Administrator and shall provide such additional information as the Plan Administrator may require. For purposes of this paragraph, "unforeseen emergency" means an immediate and heavy financial need resulting from any of the following: a. expenses that are not covered by insurance and which the Participant or his or her spouse or dependent has incurred as a result of, or is required to incur in order to receive, medical care; b. the need to prevent eviction of a Participant from his or her principal residence or foreclosure on the mortgage of the Participant's principal residence; c. expenses associated with the purchase (excluding mortgage payments) of a principal residence of the Participant; d. payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant, his or her Spouse, children or dependents; or 12 e. any other circumstance that is determined by the Plan Administrator in its sole discretion to constitute an unforeseen emergency that is not covered by insurance. 7.6 IN-SERVICE DISTRIBUTIONS A Participant may elect to receive a lump sum distribution from CNG of all or any portion of his vested Account, provided that, the amount elected by the Participant shall be reduced by ten percent of such amount and such ten percent shall be forfeited and shall be used to satisfy the Employer's obligation to make contributions to the Trust under the Plan. The remaining ninety percent shall be distributed to the Participant. 7.7 FORFEITURE OF NON-VESTED AMOUNTS To the extent that any amounts credited to a Participant's Account are not vested at the time such amounts are otherwise payable under Sections 7.1 or 7.3, such amount shall be forfeited and shall be used to satisfy the Employer's obligation to make contributions to the Trust under the Plan. 7.8 TAXES All federal, state or local taxes that the Plan Administrator determines are required to be withheld from any payments made pursuant to this Article 7 shall be withheld. 7.9 GUARANTEE BY EMPLOYERS The Company and each Employer, other than CNG, jointly and severally guaranty the performance by CNG of its obligations under the Plan. ARTICLE 8 -- PLAN ADMINISTRATOR 8.1 PLAN ADMINISTRATION AND INTERPRETATION The Plan Administrator shall oversee the administration of the Plan. The Plan Administrator shall have the sole and absolute discretion to (a) interpret the provisions of the Plan (including without limitation, by supplying omissions from, correcting deficiencies in, or resolving inconsistencies or ambiguities in, the language of the Plan), (b) to make factual findings with respect to any issue arising under the Plan, (c) to determine the rights and status under the Plan of Participants and other persons, (d) to decide disputes arising under the Plan and to make determinations and findings (including factual findings) with respect to the benefits payable thereunder and the persons entitled thereto as may be required for the purposes of the Plan. In furtherance thereof, but without limiting the foregoing, the Plan Administrator is granted the following specific authorities, which it shall discharge in its sole and absolute discretion in accordance with the terms of the Plan (as interpreted to the extent necessary by the Plan Administrator): (a) to resolve all questions (including factual questions) arising 13 under the Plan as to any individual's entitlement to become a Participant and (b) to determine the amount of benefits, if any, payable with respect to any person under the Plan (including to the extent necessary, making any factual findings with respect thereto). All decisions of the Plan Administrator as to the facts of any case and the application thereof to any case, as to the interpretation of any provision of the Plan or its application to any case, and as to any other interpretive matter or other determination or questions related to the Plan shall be final and binding on all parties affected thereby. Any individual serving as Plan Administrator who is a Participant will not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Plan Administrator shall be entitled to rely on information furnished by a Participant, a Beneficiary, the Employer or the Trustee. The Plan Administrator shall have the responsibility for complying with any reporting and disclosure requirements of ERISA. 8.2 POWERS, DUTIES, PROCEDURES, ETC. The Plan Administrator shall have such powers and duties, may adopt such rules and tables, may act in accordance with such procedures, may appoint such officers or agents, may delegate such powers and duties, may receive such reimbursements and compensation, and shall follow such claims and appeal procedures with respect to the Plan as it may establish. 8.3 INFORMATION To enable the Plan Administrator to perform its functions, the Employer shall supply full and timely information to the Plan Administrator on all matters relating to the compensation of Participants, their employment, retirement, death, termination of employment, and such other pertinent facts as the Plan Administrator may require. 8.4 INDEMNIFICATION OF THE PLAN ADMINISTRATOR The Employer agrees to indemnify and to defend to the fullest extent permitted by law any officer(s) or employee(s) who serve as Plan Administrator (including any such individual who formerly served as Plan Administrator) against all liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by the Employer) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith. This indemnification obligation is supplemental to, and does not reduce, any other indemnity or insurance available to the Plan Administrator, whether under the Employer's charter documents, applicable corporate law, obligations of third parties or otherwise. 14 ARTICLE 9 -- AMENDMENT AND TERMINATION 9.1 AMENDMENTS The Employer shall have the right to amend the Plan from time to time, subject to Section 9.3, by an instrument in writing that has been executed on the Employer's behalf by its duly authorized officer. 9.2 TERMINATION OF PLAN This Plan is strictly a voluntary undertaking on the part of the Employer and shall not be deemed to constitute a contract between the Employer and any Eligible Employee (or any other employee) or a consideration for, or an inducement or condition of employment for, the performance of the services by any Eligible Employee (or other employee). The Employer reserves the right to terminate the Plan at any time, subject to Section 9.3, by an instrument in writing that has been executed on the Employer's behalf by its duly authorized officer. Upon termination, the Employer may (a) elect to continue to maintain the Trust to pay benefits hereunder as they become due as if the Plan had not terminated or (b) direct the Trustee to pay promptly to Participants (or their Beneficiaries) the vested balance of their Accounts. For purposes of the preceding sentence, in the event the Employer chooses to implement clause (b), the Account balances of all Participants who are in the employ of the Employer at the time the Trustee is directed to pay such balances shall become fully vested and nonforfeitable. After Participants and their Beneficiaries are paid all Plan benefits to which they are entitled, all remaining assets of the Trust attributable to Participants who terminated employment with the Employer prior to termination of the Plan and who were not fully vested in their Accounts under Article 6 at that time shall be returned to the Employer. Each other entity that is affiliated with the Employer which adopts the Plan shall have the right to terminate the Plan with regard to such entity's employees. 9.3 EXISTING RIGHTS No amendment or termination of the Plan, except as provided in Section 9.2, shall adversely affect the rights of any Participant with respect to amounts that have been credited to his or her Account prior to the date of such amendment or termination. ARTICLE 10 -- MISCELLANEOUS 10.1 NO FUNDING The Plan constitutes a mere promise by the Employer to make payments in accordance with the terms of the Plan and Participants and Beneficiaries shall have the status of general unsecured creditors of the Employer. Nothing in the Plan will be construed to give any employee or any other person rights to any specific assets of the Employer or of any other person. In all events, it is the intent of the Employer that the Plan be treated as unfunded for tax purposes and for purposes of Title I of ERISA. 15 10.2 NON-ASSIGNABILITY None of the benefits, payments, proceeds or claims of any Participant or Beneficiary shall be subject to any claim of any creditor of any Participant or Beneficiary and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of such Participant or Beneficiary, nor shall any Participant or Beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds that he or she may expect to receive, contingently or otherwise, under the Plan. 10.3 LIMITATION ON PARTICIPANT'S RIGHTS Nothing contained in the Plan shall confer upon any person a right to be employed or to continue in the employ of the Employer, or interfere in any way with the right of the Employer to terminate the employment of a Participant in the Plan at any time, with or without cause. 10.4 PARTICIPANTS BOUND Any action with respect to the Plan taken by the Plan Administrator or the Employer or the Trustee or any action authorized by or taken at the direction of the Plan Administrator, the Employer or the Trustee shall be conclusive upon all Participants and Beneficiaries entitled to benefits under the Plan. 10.5 RECEIPT AND RELEASE Any payment to any Participant or Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Employer, the Plan Administrator and the Trustee under the Plan, and the Plan Administrator may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. If any Participant or Beneficiary is determined by the Plan Administrator to be incompetent by reason of physical or mental disability (including minority) to give a valid receipt and release, the Plan Administrator may cause the payment or payments becoming due to such person to be made to another person for his or her benefit without responsibility on the part of the Plan Administrator, the Employer or the Trustee to follow the application of such funds. 10.6 GOVERNING LAW The Plan shall be construed, administered, and governed in all respects under and by internal laws, and not the laws of conflicts, of the State of Ohio. If any provision shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 16 10.7 HEADINGS AND SUBHEADINGS Headings and subheadings in this Plan are inserted for convenience only and are not to be considered in the construction of the provisions hereof. EXECUTED this ____ day of __________________, 1999. COLE NATIONAL GROUP, INC. By:___________________________ Title:________________________ Acknowledged and agreed to for purposes of Section 7.9 of the Plan. COLE NATIONAL CORPORATION By: __________________________ Title: _______________________ EX-10.54 12 EXHIBIT 10.54 1 Exhibit 10.54 AMENDMENT NO. 1 TO THE COLE NATIONAL GROUP, INC. SUPPLEMENTAL PENSION PLAN Cole National Group, Inc. (the "Company") hereby adopts this Amendment No. 1 to the Cole National Group, Inc. Supplemental Pension Plan (the "Plan") effective as of December 17, 1998. Words and phrases used here with initial capital letters that are defined in the Plan are used herein as so defined. I. Section 5.4 of the Plan is hereby amended in its entirety to read as follows: "SECTION 5.4. INSTRUMENTS OF ADOPTION/INSTRUMENTS DESIGNATING PARTICIPANTS. Any member of the Controlled Group may become an Employer hereunder with the written consent of the Company if it executes an "Instrument of Adoption" evidencing its adoption of the Plan and files a copy thereof with the Company. Such Instrument of Adoption may be subject to such terms and conditions as the Company requires or approves and shall include a designation of the Participants in the Plan. In addition, with the consent of the Company, such Instrument of Adoption may contain specific provisions which apply to some or all of the employees of an Employer. The Company shall designate its employees as Participants in an Instrument Designating Participants. The Company's Instrument Designating Participants may contain specific provisions which apply to some or all of the employees of the Company whether or not consistent with the terms of this Plan. An Employer who ceases to exist or who is no longer a member of the Controlled Group shall automatically cease being a Participating Employer hereunder." EXECUTED as of the 17th day of December, 1998. COLE NATIONAL GROUP, INC. By: _______________________ Title: ____________________ EX-21 13 EXHIBIT 21 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF COLE NATIONAL CORPORATION
State of Names Subsidiaries Corporation Name Incorporation Do Business Under - ----------------- ------------- ---------------------- Cole National Group, Inc. Delaware Cole Managed Vision, Inc. Delaware Bay Cities Optical Company California Ward's Optical Cole Lens Supply, Inc. Delaware Contact Lens Supply Contact Lens Supply Co. Cole Vision Corporation Delaware Sears Optical Ward's Optical BJ's Optical Department Target Optical Optical Factory Outlet Cole Vision Canada, Inc. New Brunswick, Canada Sears Optical Vision Club Pearle Vision Center Cole Vision Services, Inc. Delaware Western States Optical, Inc. Washington Sears Optical Things Remembered, Inc. Delaware Things Remembered Things Remembered Engraved Gifts Things Engraved HQ Gifts Gifts Remembered Pearle, Inc. Delaware Pearle VisionCare, Inc. California Pearle Vision (HMO) Pearle Vision Center of Commonwealth of Puerto Rico Pearle Vision Center Puerto Rico, Inc. Pearle Vision Express Pearle Express Pearle Vision, Inc. Delaware Pearle Vision Pearle Vision Center Pearle Vision Express Pearle Eyelab Express Pearle Eye-Tech Express Pearle Express Pearle Vision Managed Care HMO of Texas, Inc. Texas American Vision Centers, Inc. Delaware American Vision Centers Eyes First NuVision, Inc. Michigan Pearle Vision Vision Maintenance Organization, Inc. Michigan
EX-24 14 EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY COLE NATIONAL CORPORATION KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Cole National Corporation, a Delaware corporation, hereby constitutes and appoints Jeffrey A. Cole, Wayne L. Mosley and Joseph Gaglioti, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned an Annual Report on Form 10-K for the fiscal year ended January 30, 1999, pursuant to Section 13 of the Securities Exchange Act of 1934 and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Executed as of the 18th day of March, 1999. /s/ George H. Bernstein, Jr. -------------------------- George H. Bernstein, Jr. Executive Vice President of Strategic Planning and Chief Financial Officer (Principal Financial Officer) /s/ Timothy F. Finley -------------------------- Timothy F. Finley Director /s/ Irwin N. Gold -------------------------- Irwin N. Gold Director /s/ Peter V. Handal -------------------------- Peter V. Handal Director /s/ Brian B. Smith -------------------------- Brian B. Smith President and Director /s/ Charles A. Ratner -------------------------- Charles A. Ratner Director -------------------------- Walter J. Salmon Director /s/ Jeffrey A. Cole -------------------------- Jeffrey A. Cole Chairman and Chief Executive Officer and Director (Principal Executive Officer) EX-27 15 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILED AS PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K. 1,000 12-MOS JAN-30-1999 FEB-01-1998 JAN-30-1999 51,057 0 55,457 7,189 119,881 251,392 261,605 135,731 628,024 182,697 276,013 0 0 15 145,345 628,024 1,068,182 1,068,182 364,090 1,025,836 0 0 18,724 23,622 9,346 14,276 0 0 0 14,276 0.96 0.94
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