-----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, SeUzMYdTIkPEtOyRgJi9tr1NlqqLocFENfrXnjKO4874ir+qcwoGAnWF6NX6wcYJ ZpKRtLJjtiJBXi/krjLxdw== 0000950152-96-006676.txt : 19961220 0000950152-96-006676.hdr.sgml : 19961220 ACCESSION NUMBER: 0000950152-96-006676 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19961219 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLE NATIONAL GROUP INC CENTRAL INDEX KEY: 0000909492 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 341744334 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18207 FILM NUMBER: 96682981 BUSINESS ADDRESS: STREET 1: 5915 LANDERBROOK DR CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 BUSINESS PHONE: 2164494100 MAIL ADDRESS: STREET 1: 5915 LANDERBROOK DR STREET 2: SUITE 300 CITY: CLEVELAND STATE: OH ZIP: 44124 S-1 1 COLE NATIONAL GROUP, INC. S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 1996 REGISTRATION STATEMENT NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ COLE NATIONAL GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 5995 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 34-1744334 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) ------------------ 5915 Landerbrook Drive Mayfield Heights, Ohio 44124 (216) 449-4100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------ WAYNE L. MOSLEY Vice President and Controller Cole National Corporation 5915 Landerbrook Drive Mayfield Heights, Ohio 44124 (216) 449-4100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------ COPIES TO: DAVID P. PORTER, Esq. Jones, Day, Reavis & Pogue 901 Lakeside Avenue Cleveland, Ohio 44114 (216) 586-3939 ------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------ CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OFFERING AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE - -------------------------------------------------------------------------------------------------------------------- 9 7/8% Senior Subordinated Notes due 2006.................................. $150,000,000 100% $150,000,000 $45,454.55 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457.
------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 19, 1996 PROSPECTUS [Cole LOGO] Cole National Group, Inc. OFFER TO EXCHANGE ITS 9 7/8% SENIOR SUBORDINATED NOTES DUE 2006, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND ALL OF ITS OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2006 ISSUED ON NOVEMBER 15, 1996 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997 UNLESS EXTENDED. -------------------- Cole National Group, Inc., a Delaware corporation (the "Company"), hereby offers to exchange (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal"), up to $150,000,000 in aggregate principal amount of the Company's new 9 7/8% Senior Subordinated Notes due 2006 (the "Exchange Notes"), for $150,000,000 in aggregate principal amount of the Company's outstanding 9 7/8% Senior Subordinated Notes due 2006 (the "Original Notes") originally issued on November 15, 1996. The Original Notes and the Exchange Notes are sometimes referred to herein collectively as the "Notes." The terms of the Exchange Notes are substantially identical in all respects (including principal amount, interest rate and maturity) to the terms of the Original Notes for which they may be exchanged pursuant to this Exchange Offer, except that (i) the Exchange Notes will be freely transferable by holders thereof (other than as provided herein) and issued free of any covenant restricting transfer absent registration and (ii) holders of the Exchange Notes will not be entitled to certain rights of holders of the Original Notes under the Registration Rights Agreement (as defined herein), which rights will terminate upon the consummation of the Exchange Offer. The Exchange Notes will evidence the same debt as the Original Notes (which they replace) and will be entitled to the benefits of an Indenture dated as of November 15, 1996 governing the Original Notes and the Exchange Notes (the "Indenture"). For a complete description of the terms of the Exchange Notes, see "Description of the Notes." There will be no cash proceeds to the Company from the Exchange Offer. The Original Notes were sold on November 15, 1996, by the Company, a wholly owned subsidiary of Cole National Corporation (the "Parent"), in connection with the consummation of the following transactions (collectively, the "Transactions"): (i) the acquisition by the Parent (the "Parent's Acquisition of Pearle") of the outstanding shares of Pearle, Inc. ("Pearle"), which has 347 company-owned and 339 franchised retail optical locations in North America and the Caribbean; (ii) the sale of assets and/or outstanding shares of Pearle Holdings B.V. ("Pearle Holdings"), which owns Pearle's European operations, in transactions pursuant to which the Parent (and not the Company) retained a minority interest in Pearle Holdings' business (the "Pearle Holdings Disposition"); (iii) the sale of the outstanding shares of Pearle (excluding the Parent's retained interest in the European operations) to the Company, as a result of which Pearle became a wholly owned subsidiary of the Company (the "Pearle Acquisition"); (iv) the repurchase from the Parent of $15.1 million of Senior Notes (as defined herein); and (v) the financing of the Pearle Acquisition through the proceeds of the offering of the Original Notes (the "Offering"). Interest on the Notes will be payable in cash semi-annually on each December 31 and June 30, commencing June 30, 1997. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after December 31, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, the Company, at its option, may redeem in the aggregate up to 35% of the original principal amount of the Notes at any time and from time to time prior to December 31, 1999 at 109.875% of the aggregate principal amount so redeemed plus accrued interest to the redemption date, with the Net Proceeds (as defined herein) of one or more Qualified Equity Offerings of the Company or the Parent to the extent such proceeds were contributed to the Company as common equity, provided that at least $97.5 million of the principal amount of the Notes originally issued remain outstanding immediately after the occurrence of any such redemption and that any such redemption occurs within 90 days following the closing of any such Qualified Equity Offering. See "Description of the Notes -- Optional Redemption." Upon a Change of Control (as defined herein), each holder of the Notes will be entitled to require the Company to purchase such holder's Notes at 101% of the principal amount thereof plus accrued interest to the purchase date. See "Description of the Notes -- Change of Control Offer." In addition, the Company is obligated in certain instances to make an offer to repurchase the Notes at a purchase price in cash equal to 100% of the principal amount thereof plus accrued interest to the date of repurchase with the net cash proceeds of certain asset sales. See "Description of the Notes -- Certain Covenants -- Limitation on Certain Asset Sales." The Notes will be general unsecured obligations of the Company subordinate in right of payment to all existing and future Senior Indebtedness (as defined herein) of the Company and senior in right of payment to any subordinated indebtedness of the Company. As of November 2, 1996, on a pro forma basis, after giving effect to the Transactions, the Company and its subsidiaries would have had $166.9 million aggregate principal amount of Senior Indebtedness outstanding. Substantially all of the Company's assets are held through subsidiaries and the Notes will be effectively subordinated to the obligations of such subsidiaries. As of November 2, 1996, on a pro forma basis, after giving effect to the Transactions, subsidiaries of the Company had $142.5 million of liabilities outstanding consisting primarily of trade payables and accrued expenses. The Indenture governing the Notes will prohibit the incurrence of additional indebtedness by any subsidiaries other than a limited amount of purchase money indebtedness, capitalized lease obligations and other limited indebtedness under a New Credit Facility (as defined herein). See "Description of Notes -- Certain Covenants." SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF THE NOTES. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is December , 1996. 3 The Original Notes were sold on November 15, 1996, in a transaction not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon an exemption provided in the Securities Act. Accordingly, the Original Notes may not be offered, resold or otherwise pledged, hypothecated or transferred in the United States unless registered under the Securities Act or unless an exemption from the registration requirements of the Securities Act is available. The Exchange Notes are being offered to satisfy the obligations of the Company under the Registration Rights Agreement (as defined herein) relating to the Original Notes. See "The Exchange Offer -- Purposes and Effects of the Exchange Offer." Each holder receiving Exchange Notes, other than a broker-dealer, will represent that the holder is not engaging in or intending to engage in a distribution of such Exchange Notes. Exchange Notes issued pursuant to the Exchange Offer in exchange for the Original Notes may be offered for resale, resold or otherwise transferred by the holder thereof (other than any holder that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. See "The Exchange Offer - -- Purposes and Effects of the Exchange Offer" and "Plan of Distribution." Broker-dealers may use this Prospectus, as amended or supplemented, in connection with resales of the Exchange Notes received in exchange for the Original Notes where such Original Notes were acquired by such broker-dealer as a result of market making activities or other such trading. The Exchange Offer is not conditioned on any minimum aggregate principal amount of Original Notes being tendered for exchange. The Company will accept for exchange any and all validly tendered Original Notes not withdrawn prior to 5:00 P.M., New York City time, on , 1997 unless extended by the Company, in its sole discretion (the "Expiration Date"). Tenders of Original Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is subject to certain customary conditions. See "The Exchange Offer - -- Certain Conditions to the Exchange Offer." Original Notes may be tendered only in integral multiples of $1,000. The Company will pay all expenses incident to the Exchange Offer. The Notes constitute securities for which there is no established trading market. Any Original Notes not tendered and accepted in the Exchange Offer will remain outstanding. The Company does not currently intend to list the Exchange Notes on any securities exchange. To the extent that any Original Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Original Notes would be adversely affected. No assurances can be given as to the liquidity of the trading market for either the Original Notes or the Exchange Notes. i 4 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the Exchange Notes offered by this Prospectus. For the purposes hereof, the term Registration Statement means the original Registration Statement and any and all amendments thereto, including the schedules and exhibits to such Registration Statement or any such amendment. This Prospectus, which forms a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, to which reference is hereby made. Each statement made in this Prospectus concerning a document filed as an exhibit to the Registration Statement is qualified in its entirety by reference to such exhibit for a complete statement of its provisions. Pursuant to the terms of the Senior Note Indenture (as defined herein), the Company files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained at prescribed rates by writing the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site, located at http://www.sec.gov., that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. Pursuant to the Indenture, the Company has agreed to furnish to the Trustee and to registered holders of the Notes, without cost to the Trustee or such registered holder, copies of all reports and other information that would be required to be filed by the Company with the Commission under the Securities Exchange Act of 1934 (the "Exchange Act"), whether or not the Company is then required to file reports with the Commission. As a result of the Exchange Offer, the Company will become subject to the periodic reporting and other informational requirements of the Exchange Act. The Company has agreed that, whether or not the Company is subject to filing requirements under Section 10 or 15(d) of the Exchange Act, and so long as any Notes remain outstanding, it will file with the Commission (but only if the Commission at such time is accepting such voluntary filings) and will send the Trustee copies of the financial information, documents and reports that would have been required to be filed with the Commission pursuant to the Exchange Act. The principal address of the Company is 5915 Landerbrook Drive, Suite 300, Mayfield Heights, Ohio 44124, telephone number (216) 449-4100. ii 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. The consummation of the offering of the Original Notes occurred concurrently with the consummation of (i) the Parent's Acquisition of Pearle; (ii) the Pearle Holdings Disposition; and (iii) the Pearle Acquisition. See "The Transactions." As used herein, unless the context otherwise indicates, references in this Prospectus to "Pearle" refer to Pearle after the completion of the Pearle Holdings Disposition. Unless the context otherwise indicates, references to the "Company" refer to Cole National Group, Inc. and its wholly owned subsidiaries, including, for periods following the consummation of the Transactions, Pearle, and references to the "Parent" refer to Cole National Corporation. The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are identified according to the calendar year in which they begin. For example, the fiscal year ended February 3, 1996 is referred to as "fiscal 1995." Unless otherwise indicated, references herein to the number of stores for the Company or Pearle are as of November 2, 1996. This Prospectus contains certain forward-looking statements (including, without limitation, statements that reflect beliefs or anticipations of future operations, results or events) with respect to the business of the Company and the industry in which it operates. These forward-looking statements are subject to certain risks and uncertainties which may cause actual results to differ materially from those stated in or suggested by such forward-looking statements. See "Risk Factors." THE COMPANY The Company, a leading provider of eyewear products, optometric services and personalized gifts, acquired Pearle on November 15, 1996. The combination of the Company and Pearle creates the second largest optical retail company in the United States, with over 1,800 locations in the United States, Canada and the Caribbean. Pearle enjoys one of the most highly recognized brand names in the optical retail industry. Pro forma for the Pearle Acquisition, the Company's fiscal 1995 net sales and EBITDA were $873.7 million and $84.0 million, respectively, with approximately 70% of the Company's net sales derived from its optical business and the remaining 30% derived from its gift business. The Company conducts its business through two principal operating units: (i) Cole Optical, consisting of Cole Vision Corporation ("Cole Vision") and Pearle; and (ii) Cole Gift, consisting of Things Remembered, Inc. ("Things Remembered") and Cole Gift Centers, Inc. ("CGC"). Cole Vision operates 980 leased locations within Sears, Montgomery Ward and other host stores and 75 freestanding "Sears Optical" stores, providing eyewear products and optometric services throughout the United States. Cole Vision's product line includes a broad selection of private label and brand name prescription eyeglasses as well as contact lenses and eyewear accessories. Each of Cole Vision's optical stores is linked by computer to Cole Vision's five centralized manufacturing laboratories, which grind, cut and fit lenses to order. Cole Vision provides next day delivery on most of the eyewear it offers when requested by its customers. Cole Vision's managed vision care program is its fastest growing component. Currently, managed vision care represents approximately 30% of Cole Vision's sales and is expected to be an increasing part of the Company's business in the future. As a leading provider of managed vision care programs, Cole Vision is the exclusive contract provider to over 20 million participants and their dependents. Pearle's operations consist of 347 company-owned and 339 franchised stores located in freestanding, strip center and mall locations in the United States, Canada and the Caribbean. In 1961, Pearle's first store was opened in Savannah, Georgia by Dr. Stanley Pearle, an optometrist who sought to bring high-quality eyecare products and services to his patients at a good value. Pearle's highly recognized brand name and slogan, Nobody Cares For Eyes More Than Pearle, have been used for over 15 years. Management believes that Pearle has historically targeted a different customer base than Cole Vision. While Pearle's stores sell a broad range of optical products, Pearle features well-recognized designer brand names such as Armani, Calvin Klein, Laura Ashley and Polo, which appeal to the more affluent and fashion-conscious consumer. Unlike Cole Vision, which utilizes centralized laboratories for all of its manufacturing, Pearle produces most of its spectacles at its in-store laboratories. Pearle also has been at the forefront of changing consumer preferences and has pioneered many innovative marketing practices including Buy One Get One Free and one-hour express service. 1 6 Cole Gift is the only national chain of personalized gift stores in the United States. Total store locations of 1,302 include 797 Things Remembered locations in enclosed shopping malls and 505 CGC leased locations operated in Sears and other host stores. Cole Gift provides its customers value-added personalization services including gift engraving, glass etching and monogramming and custom embroidering of soft goods, as well as key duplicating. Cole Gift's product offerings include distinctive private label merchandise and branded gift items such as Cross and Parker writing instruments and clocks by Bulova and Seiko. The selection of quality gifts offered in a broad price range satisfy the Cole Gift customer's needs for all important gift-giving occasions. The Company has operated each of its specialty service businesses for over 30 years. Over this period, the Company has refined its store formats to produce a strong record of consistent growth in sales and EBITDA. Since 1983, combined sales of Cole Vision and Cole Gift have grown at a compound annual rate of 8.8%, reaching $577.1 million in fiscal 1995. During the same period, EBITDA has grown at a compound annual rate of 10.7% to $61.6 million. During the first nine months ended November 2, 1996, sales grew by 10.2%, including comparable store sales increases of 6.3%, and EBITDA increased 16.0% over prior year levels. See "Selected Historical Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." THE PEARLE ACQUISITION On September 24, 1996, the Parent and The Pillsbury Company signed a definitive purchase agreement for the Parent's Acquisition of Pearle. Pearle historically has maintained separate European operations. On November 15, 1996, (i) assets and/or outstanding shares of Pearle Holdings, which owned Pearle's European operations, were sold in transactions pursuant to which the Parent (and not the Company) retained an indirect equity interest of approximately 20% in Pearle Holdings, and (ii) the Parent sold the stock of Pearle to the Company for approximately $154 million. Accordingly, Pearle became a wholly owned subsidiary of the Company. In connection with the Pearle Acquisition, the Company also repurchased (the "Senior Note Repurchase") from the Parent $15.1 million principal amount of the Company's 11.25% Senior Notes due 2001 (the "Senior Notes"), which the Parent purchased in the open market during fiscal 1996. The Company financed the Pearle Acquisition and the Senior Note Repurchase through (i) the proceeds from the offering of the Original Notes, (ii) cash on hand, and (iii) intercompany borrowings from the Parent. The Senior Notes acquired through the Senior Note Repurchase were retired upon receipt by the Company. See "The Transactions." The Company believes the Pearle Acquisition better positions it to meet the increasing vision care needs of an aging population and to become a major provider in the growing managed vision care industry. The Pearle Acquisition complements and expands the Company's optical business by providing a highly recognized brand name, enhancing its customer base and product lines, increasing the number and types of store locations, and adding new growth opportunities. The major benefits of the Pearle Acquisition are summarized as follows: - - INCREASED PRESENCE IN GROWING OPTICAL RETAILING INDUSTRY. Pro forma for the Pearle Acquisition, approximately 70% of the Company's sales will be derived from its optical business. According to industry sources, the United States optical industry grew from $11.4 billion to $13.8 billion between 1990 and 1995 and is expected to increase to $18 billion by the year 2000. The optical retailing industry is expected to continue to benefit from the aging of the United States population since approximately 95% of persons over age 45 require some form of corrective eyewear. - - ENHANCED NAME RECOGNITION. Pearle provides the Company with an established brand name well-known to optical customers, independent from the names of Cole Vision's host stores. Pearle's slogan, Nobody Cares for Eyes More than Pearle, has been used for over 15 years and commands strong consumer recognition. Pearle's brand positioning of high quality eyecare products and services at reasonable prices has been reinforced through an extensive advertising and promotion program featuring Pearle's founder, Dr. Stanley Pearle. - - EXPANDED CUSTOMER BASE AND BROADER PRODUCT LINES. The Company believes there exists little overlap between the Pearle and Cole Vision customer base since each appeals to a different type of consumer. Cole 2 7 Vision's typical customers are value-oriented consumers who often shop at its host stores, whereas Pearle's customers are often more affluent and fashion-conscious shoppers who are attracted by Pearle's name and reputation. Pearle offers higher price point, brand name merchandise from well-recognized designers such as Armani, Calvin Klein, Laura Ashley and Polo, which is currently unavailable at Cole Vision's stores. - - INCREASED GEOGRAPHICAL PRESENCE AND NEW GROWTH OPPORTUNITIES. The Pearle Acquisition increased the Company's optical locations to over 1,800 in 49 states, Canada and the Caribbean. Management believes that the Company's increased geographical presence and number of locations will make its managed vision care program more attractive to managed care providers and corporations by significantly expanding its network and coverage base. Furthermore, the Pearle network of company-owned and franchised stores offers the Company a new outlet for growth independent of the expansion plans of the Company's host stores. Management believes that the Parent's on-going relationship with Pearle Holdings, which operates the Pearle Vision business in Europe, may provide opportunities for future international expansion of the Pearle business, as well as enhance the Pearle name worldwide. BUSINESS STRATEGY The Pearle Acquisition is the most significant strategic development for the Company in the last ten years. The Company believes that the Pearle Acquisition will create economies of scale and synergies that, in conjunction with the utilization of the best historical practices of each of the Company and Pearle, will result in increased revenue and improved operating results and enable the Company to better serve its customers. The Company's strategy to achieve these goals includes the following key components: - - LEADERSHIP BY COLE VISION MANAGEMENT TEAM. The Company operates Pearle and Cole Vision as two separate businesses under the general leadership of Cole Vision's management team. The Company believes that its highly experienced management team is an important asset for the successful integration of Pearle. The Company believes that its success in the optical retailing industry is attributable to Cole Vision's experienced group of senior managers, who have an average tenure of more than ten years with the Company. In contrast, the Company believes Pearle's performance has been hampered by frequent changes in operating strategy and senior management. The Cole Vision management team will help Pearle identify and execute more focused operational and growth strategies. - - FOCUS ON OPERATIONAL EFFICIENCIES TO IMPROVE OPERATING RESULTS. Cole Vision historically has had higher operating margins than Pearle. The Company intends to continuously evaluate the operations of Pearle and Cole Vision for opportunities to effect operational efficiencies and reduce costs through the integration of Pearle. The Company is evaluating several opportunities to improve Pearle's operating results through revenue expansion, cost reductions and consolidation of duplicative facilities and functions. For example, management intends to introduce selling systems at Pearle that emphasize the sale of higher margin products such as anti-reflective coatings and polycarbonate lenses. Management believes that it can also improve Pearle's operating results by introducing direct foreign sourcing of eyeglass frames, which account for approximately 55% of Cole Vision's supply and provide significant cost savings over purchases from domestic distributors. Another potential strategy may be the removal of in-store laboratories in Pearle locations where sales volume is insufficient to support the higher overhead. Furthermore, management believes that economies of scale and other cost saving opportunities exist, particularly in purchasing, advertising efficiency and distribution. - - EXPANSION OF FRANCHISE OPERATIONS; BUSINESS RATIONALIZATION. The Company intends to expand Pearle's franchising operations. The Company has identified strategies that it believes will improve the sales and operating results of Pearle's franchisees, encourage expansion by current franchisees, and enable the Company to attract new franchisees. The Company's management is closely examining the geographic and demographic areas which favor Pearle's franchised stores versus areas which favor company-owned stores. The Company expects that future new store growth will facilitate a rationalization of geographic coverage between company-owned and franchised stores in order to permit more focused local promotional and advertising programs and to streamline field organizations. - - EMPHASIS ON MANAGED VISION CARE. The Pearle Acquisition enhances the Company's ability to compete effectively in the rapidly expanding managed vision care component of the optical industry. The Company 3 8 believes this component, which accounts for approximately 30% of Cole Vision's sales, may increase to as much as 50% of its business over the next five years. The acquisition of Pearle's store base increases the Company's number of distribution points and geographical presence, thereby enhancing the Company's appeal to large national corporations as well as regional corporations and organizations. In addition, the Company expects that the more fashion-oriented mix and broader selection of eyewear frames offered by Pearle will increase managed vision care utilization. Currently, the Company believes that Pearle's managed vision care program accounts for approximately 10% of its sales. - - DEVELOPMENT OF NEW MERCHANDISING CONCEPTS. The Company continually seeks to expand on its base business through innovative merchandising concepts. Management's disciplined approach to new merchandising concepts is predicated on initially test marketing each new concept with a small number of prototype stores, thereby limiting capital outlays until operating results warrant additional store roll-out. Cole Vision seeks to increase customer satisfaction by offering a wide selection of innovative products and services, most recently introducing a mail order contact lens service as well as advanced anti-reflective coatings for eyeglasses. CGC is currently test marketing seven "Personally Yours" stores in a major metropolitan area. These stores are extensions of the Gift Centers at Sears and provide personalization on hard and soft goods sold in other Sears departments as well as on CGC's own merchandise. During 1995, CGC added a variety of soft goods to its product lines including towels, bathrobes, pillows and blankets for embroidering or monogramming, and also expanded its seasonal presentation to include items such as gourmet food baskets. - - CONTINUED NEW STORE OPENINGS. The Company is committed to the continued growth of Cole Optical and Cole Gift through the development of new store concepts and the opening of additional locations as well as selected store acquisitions. The Company's new store concepts are almost exclusively extensions of existing businesses. For example, Cole Vision has increased its commitment to freestanding Sears Optical locations in strip shopping centers, opening 63 new stores since the end of fiscal 1993. Cole Vision acquired 73 Sears Optical locations and two freestanding Vision Club stores in Canada in November 1996. Cole Vision has also expanded through the development of new host store relationships, including BJ's Wholesale Club and Target Supercenter, adding 80 new locations since 1995. The Company's current plans include the opening of both company-owned and franchised Pearle locations throughout North America. Since fiscal 1993, Cole Gift has opened 80 Things Remembered personalization superstores, which provide an attractive growth vehicle for personalization sales. 4 9 THE EXCHANGE OFFER Purpose of the Exchange Offer.... The Original Notes were sold in a transaction exempt from the registration requirements of the Securities Act by the Company on November 15, 1996 to CIBC Wood Gundy Securities Corp., CS First Boston Corporation, NationsBanc Capital Markets, Inc. and Smith Barney Inc. (the "Initial Purchasers"). In connection therewith, the Company executed and delivered, for the benefit of the holders of the Original Notes, the Registration Rights Agreement dated November 15, 1996 (the "Registration Rights Agreement"), which is incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part, providing for, among other things, the Exchange Offer so that the Exchange Notes will be freely transferable by the holders thereof without registration or any prospectus delivery requirements under the Securities Act, except that a "dealer" or any of its "affiliates" as such terms are defined under the Securities Act, who exchanges Original Notes held for its own account will be required to deliver copies of this Prospectus in connection with any resale of the Exchange Notes issued in exchange for such Original Notes. See "The Exchange Offer -- Purposes and Effects of the Exchange Offer" and "Plan of Distribution." The Exchange Offer............... The Company is offering to exchange $1,000 principal amount of Exchange Notes for each $1,000 principal amount of Original Notes that are properly tendered and accepted. The Company will issue Exchange Notes on or promptly after the Expiration Date. There is $150,000,000 aggregate principal amount of Original Notes outstanding. The Original Notes and the Exchange Notes are collectively referred to herein as the "Notes." The terms of the Exchange Notes are substantially identical in all respects (including principal amount, interest rate and maturity) to the terms of the Original Notes for which they may be exchanged pursuant to the Exchange Offer, except that (i) the Exchange Notes are freely transferable by holders thereof (other than as provided herein), and are not subject to any covenant restricting transfer absent registration under the Securities Act and (ii) holders of the Exchange Notes will not be entitled to certain rights of holders of the Original Notes under the Registration Rights Agreement, which rights will terminate upon the consummation of the Exchange Offer. See "The Exchange Offer." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Original Notes being tendered for exchange. Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that the Exchange Notes issued pursuant to the Exchange Offer in exchange for Original Notes may be offered for resale, resold and otherwise transferred by a 5 10 holder thereof (other than (i) a broker-dealer who purchases such Exchange Notes directly from the Company to resell pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate (as defined in Rule 405 under the Securities Act) of the Company), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the Exchange Notes in the ordinary course of its business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the Exchange Notes. Each broker-dealer that receives the Exchange Notes for its own account in exchange for the Original Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. Registration Rights Agreement.... The Original Notes were sold by the Company on November 15, 1996 to the Initial Purchasers pursuant to a Securities Purchase Agreement dated as of November 13, 1996 by and between the Company and the Initial Purchasers (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Company and the Initial Purchasers entered into the Registration Rights Agreement which grants the holders of the Original Notes certain exchange and registration rights. See "The Exchange Offer -- Termination of Certain Rights." This Exchange Offer is intended to satisfy such rights, which terminate upon the consummation of the Exchange Offer. The holders of the Exchange Notes are not entitled to any exchange of registration rights with respect to the Exchange Notes. Expiration Date.................. The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1997, unless the Exchange Offer is extended by the Company in its reasonable discretion, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. Accrued Interest on the Exchange Notes and Original Notes...... Interest on the Exchange Notes will accrue from (A) the last interest payment date on which interest was paid on the Notes surrendered in exchange therefor, or (B) if no interest has been paid on the Notes, from November 15, 1996. Holders whose Original Notes are accepted for exchange will be deemed to have waived the right to receive any interest accrued on the Original Notes. Conditions to the Exchange Offer................. The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. See "The Exchange Offer -- Certain Conditions to the Exchange Offer." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Original Notes being tendered for exchange. The Company reserves the right to 6 11 terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such conditions. Procedures for Tendering Original Notes................. Each holder of Original Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Original Notes and any other required documentation to the exchange agent (the "Exchange Agent") at the address set forth herein. Original Notes may be physically delivered, but physical delivery is not required if a confirmation of a book-entry of such Original Notes to the Exchange Agent's account at The Depository Trust Company ("DTC" or the "Depository") is delivered in a timely fashion. By executing the Letter of Transmittal, each holder will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the holder, that neither the holder nor any such other person is engaged in, or intends to engage in, or has an arrangement or understanding with any person to participate in, the distribution of such Exchange Notes and that neither the holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. Each broker or dealer that receives Exchange Notes for its own account in exchange for Original Notes, where such Original Notes were acquired by such broker or dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "The Exchange Offer -- Procedures for Tendering" and "Plan of Distribution." Special Procedures for Beneficial Owners.............. Any beneficial owner whose Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering his Original Notes, either make appropriate arrangements to register ownership of the Original Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. See "The Exchange Offer -- Procedures for Tendering." Guaranteed Delivery Procedures... Holders of Original Notes who wish to tender their Original Notes and whose Original Notes are not immediately 7 12 available or who cannot deliver their Original Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date, must tender their Original Notes according to the guaranteed delivery procedures set forth in the "Exchange Offer -- Guaranteed Delivery Procedures." Acceptance of the Original Notes and Delivery of the Exchange Notes.......................... Subject to the satisfaction or waiver of the conditions to the Exchange Offer, the Company will accept for exchange any and all Original Notes which are properly tendered in the Exchange Offer prior to the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered on the earliest practicable date following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Withdrawal Rights................ Tenders of Original Notes may be withdrawn at any time prior to the Expiration Date. See "The Exchange Offer -- Withdrawal of Tenders." Exchange Agent................... Norwest Bank Minnesota, National Association is serving as the Exchange Agent in connection with the Exchange Offer. See "The Exchange Offer -- Exchange Agent." Effect on Holders of the Original Notes............. As a result of the making of, and upon acceptance for exchange of all validly tendered Original Notes pursuant to the terms of this Exchange Offer, the Company will have fulfilled one of the covenants contained in the Registration Rights Agreement and, accordingly, there will be no increase in the interest rate on the Original Notes pursuant to the applicable terms of the Registration Rights Agreement due to the Exchange Offer. Holders of the Original Notes who do not tender their Original Notes will be entitled to all the rights and limitations applicable thereto under the Indenture between the Company and Norwest Bank Minnesota, National Association, as trustee (the "Trustee"), relating to the Original Notes and the Exchange Notes, except for any rights under the Indenture or the Registration Rights Agreement, which by their terms terminate or cease to have further effectiveness as a result of the making of, and the acceptance for exchange of all validly tendered Original Notes pursuant to, the Exchange Offer. All untendered Original Notes will continue to be subject to the restrictions on transfer provided for in the Original Notes and in the Indenture. To the extent that Original Notes are tendered and accepted in the Exchange Offer, the trading market for untendered Original Notes could be adversely affected. Use of Proceeds.................. There will be no cash proceeds to the Company from the exchange pursuant to the Exchange Offer. THE NOTES The Exchange Notes............... The Exchange Offer applies to $150,000,000 aggregate principal amount of the Original Notes. The form and terms of 8 13 the Exchange Notes are the same as the form and terms of the Original Notes except that (i) the exchange will have been registered under the Securities Act and, therefore, the Exchange Notes will not bear legends restricting their transfer pursuant to the Securities Act, and (ii) holders of the Exchange Notes will not be entitled to certain rights of holders of the Original Notes under the Registration Rights Agreement, which rights will terminate upon consummation of the Exchange Offer. The Exchange Notes will evidence the same debt as the Notes (which they replace) and will be issued under, and be entitled to the benefits of, the Indenture. See "Description of the Notes" for further information and for definitions of certain capitalized terms used below. Issuer........................... Cole National Group, Inc. Maturity Date.................... December 31, 2006. Interest Rate.................... The Notes will bear interest at a rate of 9 7/8% per annum. Interest Payment Dates........... Interest will be payable semi-annually on each December 31 and June 30, commencing June 30, 1997. Interest on the Notes will be paid on the basis of a 360 day year and twelve 30 day months. Ranking.......................... The Notes will be general unsecured obligations of the Company subordinate in right of payment to all existing and future Senior Indebtedness of the Company and senior in right of payment to all subordinated indebtedness of the Company. As of November 2, 1996, on a pro forma basis, after giving effect to the Pearle Acquisition, the Company and its subsidiaries would have had $166.9 million aggregate principal amount of Senior Indebtedness outstanding. Because the Company's operations are conducted through subsidiaries, the Notes will effectively rank junior to all liabilities of the Company's subsidiaries (which were $142.5 million as of November 2, 1996, on a pro forma basis, after giving effect to the Pearle Acquisition) consisting primarily of trade payables and accrued expenses. The Indenture pursuant to which the Original Notes were issued will prohibit the incurrence of additional indebtedness by any subsidiaries other than up to $15 million in the aggregate of purchase money indebtedness and capital leases, up to $3 million in the aggregate of guarantees of franchisee obligations, and limited indebtedness under the New Credit Facility (as defined). The New Credit Facility will initially be limited to $75 million. Mandatory Redemption............. There will be no mandatory redemption requirements with respect to the Notes. Optional Redemption.............. The Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after December 31, 2001, at the redemption prices set forth herein plus accrued interest to the date of redemption. In addition, the Company, at its option, may redeem in the aggregate up to 35% of the original principal amount of the Notes at any time and from 9 14 time to time prior to December 31, 1999 at a redemption price equal to 109.875% of the principal amount thereof plus accrued interest to the redemption date with the Net Proceeds of one or more Qualified Equity Offerings, provided that at least $97.5 million principal amount of Notes issued remain outstanding immediately after the occurrence of any such redemption and that any such redemption occurs within 90 days following the closing of any such Qualified Equity Offering. Change of Control................ In the event of a Change of Control, the Company will be required to make an offer to purchase all outstanding Notes at a price equal to 101% of the principal amount thereof plus accrued interest to the date of repurchase. See "Description of the Notes -- Change of Control Offer." There can be no assurance that the Company will have sufficient funds or will be contractually permitted by outstanding Senior Indebtedness to pay the required purchase price for all Notes tendered by holders upon a Change of Control. Asset Sale Proceeds.............. The Company will be obligated in certain instances to make offers to repurchase the Notes at a purchase price in cash equal to 100% of the principal amount thereof plus accrued interest to the date of repurchase with the net cash proceeds of certain asset sales. See "Description of the Notes -- Certain Covenants -- Limitation on Certain Asset Sales." Certain Covenants................ The Indenture contains covenants for the benefit of the holders of the Notes that, among other things, restrict the ability of the Company and any Subsidiaries (as defined herein) to: (i) incur additional Indebtedness; (ii) pay dividends and make distributions; (iii) issue stock of subsidiaries; (iv) repurchase stock; (v) create liens; (vi) enter into transactions with affiliates; (vii) enter into sale and leaseback transactions; (viii) merge or consolidate the Company or any subsidiaries; and (ix) transfer and sell assets. These covenants are subject to a number of important exceptions. See "Description of the Notes -- Certain Covenants." RISK FACTORS Prospective purchasers of the Notes should consider carefully the information set forth under the caption "Risk Factors" and all other information set forth in this Memorandum in evaluating an investment in the Notes. 10 15 SUMMARY HISTORICAL FINANCIAL AND OTHER DATA COMPANY The following table sets forth summary historical financial and other data of the Company for (i) the fiscal years 1993 through 1995, which have been derived from the Company's audited consolidated financial statements for those years and (ii) the 39 weeks ended October 28, 1995 and November 2, 1996 which have been derived from the Company's unaudited consolidated condensed financial statements for those periods, which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the 39 weeks ended November 2, 1996 are not necessarily indicative of results that may be expected for the entire year. Prior to the Initial Capitalization (see "The Company"), all operations of the Company were conducted by subsidiaries of the Parent. The summary historical financial and other data set forth below for fiscal year 1993 are based on historical cost as if the Initial Capitalization had occurred at the beginning of fiscal 1993 and the Company had been in existence for that year. Accordingly, transactions of the Parent prior to the Initial Capitalization on September 30, 1993, except for those relating to the debt not assumed by the Company and the interest expense thereon, have been included in the summary historical financial and other data below. The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are identified according to the calendar year in which they begin. For example, the fiscal year ended February 3, 1996 is referred to as "fiscal 1995." Fiscal 1995 consisted of a 53-week period; all other fiscal years presented consisted of 52-week periods. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical Financial and Other Data" and the consolidated financial statements and notes included elsewhere herein.
FISCAL YEAR ENDED 39 WEEKS ENDED -------------------------------- -------------------- JAN. 29, JAN. 28, FEB. 3, OCT. 28, NOV. 2, 1994 1995 1996 1995 1996 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) OPERATING RESULTS: Net sales................................................ $472,888 $528,049 $577,091 $401,999 $443,057 Gross profit............................................. 331,936 363,326 394,157 276,753 306,384 Operating expenses....................................... 281,149 305,470 332,540 242,269 266,385 Depreciation and amortization............................ 13,516 14,892 15,686 11,552 12,780 -------- -------- -------- -------- -------- Income from operations................................... 37,271 42,964 45,931 22,932 27,219 Interest expense......................................... 18,029 22,266 22,143 16,403 15,943 Interest income.......................................... (378) (443) (761) (531) (1,161) Income tax provision (benefit)........................... 2,361 (3,703) 10,799 3,107 5,473 -------- -------- -------- -------- -------- Income from continuing operations........................ $ 17,259 $ 24,844 $ 13,750 $ 3,953 $ 6,964 ======== ======== ======== ======== ======== OTHER DATA: Gross margin............................................. 70.2% 68.8% 68.3% 68.8% 69.2% EBITDA (a)............................................... $ 50,787 $ 57,856 $ 61,617 $ 34,484 $ 39,999 EBITDA margin (a)........................................ 10.7% 11.0% 10.7% 8.6% 9.0% Capital expenditures..................................... $ 13,074 $ 18,527 $ 19,675 $ 14,042 $ 15,553 NUMBER OF UNITS (AT END OF PERIOD): Cole Vision.............................................. 774 938 1,013 998 1,055 Things Remembered........................................ 737 760 778 775 797 Cole Gift Centers........................................ 586 589 587 588 505 -------- -------- -------- -------- -------- Total.................................................. 2,097 2,287 2,378 2,361 2,357 ======== ======== ======== ======== ======== COMPARABLE STORE SALES GROWTH (B): Cole Vision.............................................. 10.7% 9.8% 5.6% 7.4% 8.7% Things Remembered........................................ 1.8% 0.1% 3.1% 4.3% 3.8% Cole Gift Centers........................................ 31.6% 5.8% (4.8)% (4.8)% 0.7% Total.................................................. 9.4% 5.5% 3.4% 5.0% 6.3% BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................................. $298,990 $327,118 Long-term debt........................................... 180,218 180,033 Stockholder's equity..................................... 2,497 9,461 - --------------- (a) EBITDA is defined as income from operations before depreciation and amortization and nonrecurring charges, if any. The Company has included information concerning EBITDA here as it is relevant for covenant analysis under the Indenture for the Notes and the Senior Notes and because it is used by certain investors as a measure of a company's ability to service its debt. EBITDA is not a performance measure under generally accepted accounting principles and should not be considered more meaningful than operating income or cash flows as an indicator of operating performance. (b) Comparable store sales growth is calculated using sales for all stores open at least twelve months, for the weeks that the stores were open in both the previous and current periods. For the year ended January 29, 1994, the growth in comparable store sales for Cole Gift Centers includes the addition of greeting card merchandise to 171 locations in February 1993.
11 16 SUMMARY HISTORICAL FINANCIAL AND OTHER DATA (CONTINUED) PEARLE The following table sets forth summary historical financial and other data of Pearle for the fiscal years 1993 through 1996, which have been derived from Pearle's audited consolidated financial statements for those years. The summary historical financial and other data of Pearle set forth below includes the operating results and other data of Pearle Holdings presented in note (a) below. Pearle Holdings was disposed of by the Parent prior to the Pearle Acquisition although the Parent retains a minority interest in Pearle Holdings' business. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Selected Historical Financial and Other Data" and the consolidated financial statements and notes of Pearle included elsewhere herein.
FISCAL YEARS ENDED SEPTEMBER 30, ------------------------------------------------ 1993 1994 1995 1996 --------- --------- --------- --------- (DOLLARS IN THOUSANDS) OPERATING RESULTS (a): Revenues........................................................ $ 364,938 $ 336,018 $ 354,252 $ 366,024 Gross profit (b)................................................ 170,153 154,678 167,067 181,538 Selling, general and administrative expenses (c)................ 202,810 160,820 155,256 164,129 Restructuring and store closure costs (d)....................... 33,854 1,876 7,265 (2,083) Royalty payments and other affiliate charges (e)................ 5,842 5,916 6,039 6,406 Amortization of intangible assets............................... 19,567 14,289 14,260 15,604 Provision for impairment of intangible assets and related costs (f)........................................................... 22,146 -- -- 94,673 -------- -------- -------- -------- Operating loss.................................................. (114,066) (28,223) (15,753) (97,191) Interest expense to Pearle's parent (g)......................... 15,670 17,309 15,769 15,461 Other interest income, net...................................... (3,545) (4,080) (4,829) (4,258) Gain on sale of subsidiary (f).................................. -- -- (14,811) -- Income tax benefit.............................................. (34,716) (10,480) (12,845) (6,011) -------- -------- -------- -------- Income (loss) before cumulative effect of accounting change..... $ (91,475) $ (30,972) $ 963 $(102,383) ======== ======== ======== ======== OTHER DATA (a): Gross margin (b)................................................ 46.6% 46.0% 47.2% 49.6% EBITDA (h)...................................................... $ 32,166 $ 28,621 $ 35,278 $ 37,696 EBITDA margin (h)............................................... 8.8% 8.5% 10.0% 10.3% Capital expenditures............................................ $ 4,945 $ 6,083 $ 7,321 $ 13,558 NUMBER OF UNITS IN NORTH AMERICA (AT END OF PERIOD): Company-owned stores............................................ 412 368 336 345 Franchised stores............................................... 433 387 361 340 -------- -------- -------- -------- Total........................................................... 845 755 697 685 ======== ======== ======== ======== COMPARABLE STORE SALES GROWTH (U.S. LOCATIONS) (i): Company-owned stores............................................ (6.6)% 4.4% 4.2% (1.2)% Franchised stores............................................... (2.0)% 3.0% 2.1% 2.0% - --------------- (a) Includes the following summary financial data of Pearle's European operations owned and operated by Pearle Holdings:
FISCAL YEARS ENDED SEPTEMBER 30, ------------------------------------------------ 1993 1994 1995 1996 --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues.................................................... $ 52,890 $ 48,704 $ 59,841 $ 63,817 Gross profit................................................ 24,933 21,899 26,469 27,968 Selling, general and administrative expenses................ 18,051 17,974 19,583 20,177 Amortization and impairment of intangible assets............ 217 209 236 238 -------- -------- -------- -------- Income from operations...................................... 6,665 3,716 6,650 7,553 Other interest (income) expense, net........................ 582 (99) (429) (488) Income tax provision........................................ 1,986 1,216 2,135 2,510 -------- -------- -------- -------- Net income.................................................. $ 4,097 $ 2,599 $ 4,944 $ 5,531 ======== ======== ======== ======== EBITDA...................................................... $ 10,183 $ 6,858 $ 10,184 $ 11,487 Capital expenditures........................................ 1,084 2,272 3,279 3,193 (b) Gross profit and gross margin for Pearle are determined on a basis not consistent with that of the Company. Pearle includes certain store occupancy costs and depreciation in cost of goods sold, whereas the Company reports such costs as operating expenses or depreciation and amortization. In addition, Pearle includes payroll, supplies and other costs related to the making of eyeglasses at its in-store labs in selling, general and administrative expenses; the Company and Pearle both classify similar costs of making eyeglasses at their central laboratories in cost of goods sold. Information to reclassify Pearle's historical costs and expenses on a basis consistent with the Company is not readily available. As a result of the Pearle Acquisition, the Company's consolidated gross
12 17 margin will likely decline from its historical levels because Pearle is expected to have a lower gross margin than the Company due to the higher cost of in-store labs and lower margin wholesale sales to franchised stores partially offset by franchise royalties, fees and interest income on franchise notes receivable which have no corresponding cost of goods sold. (c) During the year ended September 30, 1993 Pearle recorded a charge to operations (included in selling, general and administrative expenses) of approximately $19.5 million related to the disposal of obsolete retail and laboratory equipment, the abandonment of certain leasehold improvements, the elimination of unrecoverable capitalized software costs and costs associated with the elimination of operations in Germany. (d) During the year ended September 30, 1993 Pearle recorded a provision related to restructuring its retail operations, including the costs of closing certain unprofitable United States and all German retail locations. During the years ended September 30, 1994 and 1995 Pearle recorded net provisions for estimated costs, consisting primarily of future commitments under operating leases, of closing unprofitable United States and international retail locations. During the year ended September 30, 1996, $2.1 million of the restructuring and store closure reserves was reversed. (e) Represents amounts paid to an affiliated company pursuant to a licensing agreement in connection with a 1989 acquisition for use of the predecessor's trademark and for management fees. As a result of the Pearle Acquisition, all future payment obligations will be cancelled. (f) On October 27, 1994, Pearle entered into an agreement to sell all of the capital stock of Ophthalmic Research Group International Company ("ORGIC") to a third party for cash consideration of $14.8 million. During the year ended September 30, 1993, the remaining book value of ORGIC of approximately $22.1 million was written off since, in the opinion of Pearle's management, the value of such assets was not recoverable. As a result, the gain on sale in 1995 was equal to the cash consideration. As a result of the sale of Pearle, a provision for impairment of the assets of Pearle was determined to exist at September 30, 1996. Accordingly, a provision for impairment of approximately $88.0 million was recorded to reflect the assets of Pearle at their estimated fair value. The impairment was recorded as a write-off of excess cost over fair value of net tangible assets acquired. A charge of approximately $6.7 million was also recorded for amounts which were paid or will be paid by a Pearle affiliate on behalf of Pearle as a result of the sale. (g) Interest expense related to intercompany balances which will be cancelled and contributed to Pearle's capital at the closing of the Transactions. (h) EBITDA is defined as income from operations before depreciation and amortization and nonrecurring charges (including the items described in notes (c), (d), (e) and (f) above) and includes interest income on franchise notes receivable. The Company has included information concerning EBITDA here as it is relevant for covenant analysis under the Indentures for the Notes and the Senior Notes and because it is used by certain investors as a measure of a company's ability to service its debt. EBITDA is not a performance measure under generally accepted accounting principles and should not be considered more meaningful than operating income or cash flows as an indicator of operating performance. (i) Comparable store sales growth is calculated using sales for all stores open at least twelve months, for the weeks that the stores were open in both the previous and current periods. 13 18 SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION The following sets forth summary unaudited pro forma condensed financial information derived from the Unaudited Pro Forma Condensed Consolidated Financial Data contained elsewhere herein. The summary unaudited pro forma condensed financial information for the fiscal year ended February 3, 1996 and the 39 weeks ended November 2, 1996, includes the results of Pearle's operations and gives effect to the Transactions as if each had occurred at the beginning of the respective periods. The summary pro forma balance sheet data presented below presents the financial condition of the Company as if the Transactions had occurred as of November 2, 1996. All data presented below excludes Pearle Holdings, which will not be acquired by the Company. The summary unaudited pro forma condensed financial information does not purport to be indicative of the actual financial position or results of the Company that would have actually been attained had the Transactions in fact occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. Furthermore, the summary unaudited pro forma condensed financial information presented below does not consider any future events which may occur after the Transactions have been consummated. The Company believes revenue and operating expense synergies and purchasing and other cost reductions of the combined operations of the Company and Pearle will be realized after the Company has completed the Pearle Acquisition and has installed its management controls, systems and merchandising and marketing programs. However, for purposes of the Unaudited Pro Forma Condensed Consolidated Statements of Income, these and other potential synergies in overhead expenses have not been reflected because their realization cannot be assured. Nor do the pro forma statements consider the incremental expenses, capital or conversion costs which may be incurred as a result of the Pearle Acquisition. Following the closing of the Transactions, integration and consolidation charges may be incurred which could result in the Company reporting a negative stockholder's equity. The Summary Unaudited Pro Forma Condensed Financial Information is based on certain assumptions and adjustments described in the notes to the Unaudited Pro Forma Condensed Consolidated Financial Data and should be read in conjunction therewith.
PRO FORMA COMBINED ------------------------- FISCAL YEAR 39 WEEKS FEB. 3, NOV. 2, 1996 1996 ----------- -------- (DOLLARS IN THOUSANDS) OPERATING RESULTS: Net revenues.............................................................. $ 873,732 $683,544 Cost of goods sold and operating expenses (a)............................. 789,718 620,520 Restructuring charges, net (b)............................................ 8,775 (3,486) Depreciation and amortization............................................. 32,181 23,642 -------- -------- Income from operations.................................................... 43,058 42,868 Interest expense.......................................................... 36,830 27,131 Interest income........................................................... (150) (579) Income tax provision...................................................... 4,377 7,659 -------- -------- Net income................................................................ $ 2,001 $ 8,657 ======== ======== OTHER DATA: EBITDA (c)................................................................ $ 84,014 $ 63,024 Ratio of EBITDA to interest expense (c)................................... 2.3x 2.4x NUMBER OF UNITS (AT END OF PERIOD): Cole Vision............................................................... 1,055 Pearle owned stores....................................................... 347 Pearle franchised stores.................................................. 339 Things Remembered......................................................... 797 Cole Gift Centers......................................................... 505 -------- Total............................................................. 3,043 ======== BALANCE SHEET DATA (AT END OF PERIOD): Total assets.............................................................. $531,531 Long-term debt............................................................ 313,984 Stockholder's equity...................................................... 9,202
14 19 (a) Gross profit and gross margin for Pearle are determined on a basis not consistent with that of the Company. Pearle includes certain store occupancy costs and depreciation in cost of goods sold, whereas the Company reports such costs as operating expenses or depreciation and amortization. In addition, Pearle includes payroll, supplies and other costs related to the making of eyeglasses at its in-store labs in selling, general and administrative expenses; the Company and Pearle both classify similar costs of making eyeglasses at their central laboratories in cost of goods sold. Information to reclassify Pearle's historical costs and expenses on a basis consistent with the Company is not readily available. For the purposes of the pro forma operating results presented above, depreciation normally included in Pearle's cost of goods sold and operating expenses has been reclassified to depreciation and amortization. As a result of the Pearle Acquisition, the Company's consolidated gross margin will likely decline from its historical levels because Pearle is expected to have a lower gross margin than the Company due to the higher cost of in-store labs and lower margin wholesale sales to franchised stores partially offset by franchise royalties, fees and interest income on franchise notes receivable which have no corresponding cost of goods sold. (b) For the twelve months ended December 31, 1995, Pearle recorded a net provision of approximately $8.8 million for estimated costs, consisting primarily of future commitments under operating leases, of closing unprofitable North American retail locations. During the nine months ended September 30, 1996, Pearle recorded net adjustments of $3.5 million to the restructuring reserves previously established. (c) EBITDA is defined as income from operations before depreciation and amortization and nonrecurring charges, including restructuring charges, net shown above. The Company has included information concerning EBITDA here as it is relevant for covenant analysis under the Indentures for the Notes and the Senior Notes and because it is used by certain investors as a measure of a company's ability to service its debt. EBITDA is not a performance measure under generally accepted accounting principles and should not be considered more meaningful than operating income or cash flows as an indicator of operating performance. For the purposes of computing the ratio of EBITDA to interest expense, interest expense excludes the amortization of deferred financing costs. Amortization of deferred financing costs used to compute the pro forma ratios of EBITDA to interest expense were $0.9 million and $0.7 million for the fiscal year ended February 3, 1996 and the 39 weeks ended November 2, 1996, respectively. 15 20 RISK FACTORS Prospective purchasers of the Notes should consider carefully the following factors, as well as other information set forth in this Prospectus, before making an investment in the Notes. LEVERAGE The Company is highly leveraged. Pro forma for the completion of the Transactions, the Company's total indebtedness on November 2, 1996, would have been $314.3 million. The consequences of such leverage include, but are not limited to, the following: (i) the ability of the Company to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be on terms favorable to the Company; (ii) the Company will have significantly increased cash requirements for debt service; (iii) financial and other covenants and operating restrictions imposed by the terms of the indenture (the "Indenture") entered into in connection with the Offering, along with the terms of the existing indenture (the "Senior Note Indenture") relating to the Senior Notes will limit, among other things, its ability to borrow additional funds or to dispose of assets; (iv) the Company may be at a competitive disadvantage because the Company will be more highly leveraged than some of its competitors; (v) a downturn in the Company's business will have a more significant impact on its results of operations and (vi) the Company had approximately $166.9 million principal amount of indebtedness senior to the Notes immediately following the issuance of the Notes. The Company currently expects it will be able to service the principal obligations on its indebtedness out of cash flow from operations. The Company's indebtedness immediately following the consummation of the Transactions includes $0.3 million of indebtedness outstanding under Industrial Revenue Bonds, $165.8 million principal amount of the Senior Notes, $0.8 million of capitalized leases, and the $150.0 million principal amount of the Notes included in the Offering. The ability of the Company to satisfy its obligations will be primarily dependent upon the future financial and operating performance of the Company's subsidiaries and upon the Company's ability to renew or refinance borrowings or to raise additional equity capital. Each of these alternatives is dependent upon financial, business and other general economic factors affecting the Company's subsidiaries and the retailing business in particular, many of which are beyond the control of the Company and its subsidiaries. If the Company and its subsidiaries are unable to generate sufficient cash flow to meet their debt service obligations, they will have to pursue one or more alternatives, such as reducing or delaying capital expenditures, refinancing debt, or selling assets. There can be no assurance that any such alternatives could be accomplished on satisfactory terms or that such actions would yield sufficient funds to retire the Notes and the indebtedness senior to the Notes. While the Company believes that cash flow from operations will provide an adequate source of long-term liquidity, a significant drop in operating cash flows resulting from economic conditions, competition or other uncertainties beyond the Company's control would increase the need for alternative sources of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". SUBORDINATION OF THE NOTES The Notes are subordinated in right of payment to all existing and future Senior Indebtedness (as defined in the Indenture) of the Company, including the Senior Notes. The Notes are also structurally subordinated to all existing and future liabilities of the Company's subsidiaries. In addition, under the Indenture, provided certain incurrence tests are met, the Company is able to borrow additional Senior Indebtedness. In the event of a bankruptcy, liquidation or reorganization of the Company or in the event that any default in payment of, or the acceleration of, any indebtedness occurs, holders of Senior Indebtedness will be entitled to payment in full from the proceeds of all assets of the Company prior to any payment of such proceeds to the holders of the Notes. In addition, the Company may not make any principal or interest payments in respect of the Notes if any payment default exists with respect to Senior Indebtedness and the maturity of such indebtedness is accelerated, or in certain circumstances prior to such acceleration for a specified period of time, unless, in any case, such default has been cured or waived, any such acceleration has been rescinded or such indebtedness has been repaid in full. Consequently, there can be no assurance that the Company will have sufficient funds remaining after such payments to make payments to the holders of the Notes. Because the assets of the Company are and will be held by operating subsidiaries, the claims of holders of the Notes (which are not 16 21 guaranteed by the operating subsidiaries) are and will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money), including trade payables, accrued expenses, litigation costs and borrowings under a New Credit Facility (as defined herein) of such subsidiaries. See "Description of the Notes -- Subordination" and "Description of the Notes -- Certain Covenants -- Limitation on Additional Indebtedness." ABSENCE OF GUARANTEE The Original Notes were and the Exchange Notes are being issued solely by the Company and none of the Company's subsidiaries or the Parent are or will be a guarantor under the Exchange Notes or the Original Notes, and the Indenture expressly provides that no person or entity other than the Company will have any liability for any obligations of the Company under the Notes or such Indenture or any claim based on, in respect of or by reason of such obligations, and that by accepting the Notes, each holder of the Notes waives and releases such liability, which waiver and release are part of the consideration for the Notes. The operations of the Company are and will be conducted through its subsidiaries and, therefore, the Company is and will be dependent on the cash flow of its subsidiaries to meet its obligations. Pro forma for the Pearle Acquisition, as of November 2, 1996, the subsidiaries of the Company had $142.5 million of liabilities outstanding, consisting primarily of trade payables and accrued expenses. The Indenture pursuant to which the Notes have been issued prohibits the incurrence of additional indebtedness by the Company's subsidiaries other than a limited amount of purchase money indebtedness, capital leases and guarantees of franchisee obligations, as well as limited indebtedness under a revolving credit facility. The Company has also entered into the New Credit Facility (as defined herein), which includes restrictions on the activities of the Company's subsidiaries, including restrictions on payments to the Company. Such restrictions do not include restrictions on distributions to the Company for the purpose of paying the interest and principal on the Notes or payments to the Company for certain administrative and operating expenses. In the event of a default under the New Credit Facility, the Company's subsidiaries may not be allowed to make new cash borrowings under such facilities. Management believes such restrictions will not have an adverse affect on the Company's or its subsidiaries' operations. See "Description of Other Indebtedness -- New Credit Facility." FRAUDULENT TRANSFER CONSIDERATIONS The Company incurred the indebtedness represented by the Original Notes in a transaction involving the purchase of assets from the Parent. Under fraudulent transfer law, if a court were to find, in a lawsuit by an unpaid creditor or representative of creditors of the Company, that the Company received less than fair consideration or reasonable equivalent value for incurring the indebtedness represented by the Notes, and, at the time of such incurrence, the Company (i) was insolvent or was rendered insolvent by reason of such incurrence, (ii) was engaged or about to engage in a business or transaction for which its remaining property constituted unreasonably small capital or (iii) intended to incur, or believed or reasonably should have believed that it would incur, debts beyond its ability to pay as such debts mature, such court could, among other things, (a) void all or a portion of the Company's obligations to the holders of the Notes and/or (b) subordinate the Company's obligations to the holders of the Notes to other existing and future indebtedness of the Company, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Notes. The measure of insolvency for purposes of determining whether a transfer is avoidable as a fraudulent transfer varies depending upon the law of the jurisdiction which is being applied. Generally, however, a debtor would be considered insolvent if the sum of all of its liabilities were greater than the value of all of its property at a fair valuation, or if the present fair salable value of the debtor's assets was less than the amount required to repay its probable liability on its debts as they become absolute and mature. There can be no assurance as to what standard a court would apply in order to determine solvency. To the extent that proceeds from the sale of the Notes were used to pay for the Pearle Acquisition or the Senior Note Repurchase, a court may find that the Company did not receive fair consideration or reasonably equivalent value for the incurrence of such indebtedness if the value of Pearle or of the Senior Notes at the time of transfer to the Company were found to be less than the aggregate consideration paid by the Company. 17 22 On the basis of its historical financial information, its recent operating history as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other factors, the Company believes that, at the time of the consummation of the Pearle Acquisition, the Senior Note Repurchase, the Offering and the incurrence of indebtedness under the New Credit Facility, the Company was and will be solvent, had and will have sufficient capital for the business in which it is engaged and did not and will not have incurred debts beyond its ability to pay such debts as they mature. Further, as the purchase price paid for Pearle was originally negotiated on an arms-length basis with a third party, and the Senior Notes were transferred at a price below the market value of such notes, the Company believes that it received fair consideration and reasonably equivalent value. There can be no assurance, however, that a court would necessarily agree with these conclusions. POTENTIAL NEGATIVE NET WORTH Pro forma for the Transactions, the Company had stockholder's equity of $9.2 million as of November 2, 1996. As a result of the Pearle Acquisition, the Company intends to closely evaluate the various operations of Pearle and Cole Vision for opportunities to effect operational efficiencies. If, as a result of such review, it is decided to eliminate any assets or operations of Pearle or of Cole Vision, such decision could result in a charge for business integration and consolidation costs that has the effect of reducing assets and the Company's net worth, perhaps creating negative net worth for accounting purposes. In addition, the Indenture and the Senior Note Indenture permit dividend payments to the Parent of one-half of the Company's consolidated net income, provided that no default or event of default has occurred under such Indenture and the Company has satisfied a debt incurrence test under the applicable restrictive covenant. Such payments, including $15.4 million available for restricted payments as of November 2, 1996, if made, could reduce the Company's stockholder's equity, perhaps creating negative net worth for accounting purposes. CHANGE OF CONTROL In the event of a "Change of Control" of the Company or of the Parent (as defined in the Indenture and Senior Note Indenture), the Company will be required to offer to repurchase all of the outstanding Senior Notes and Notes at 101% of the principal amount thereof plus any accrued and unpaid interest thereon to the date of the purchase. A Change of Control under the Indenture or Senior Note Indenture will result in a default under the New Credit Facility. The exercise by the holders of the Senior Notes and the Notes of their right to require the Company to repurchase the Senior Notes and the Notes upon a Change of Control could also cause a default under other indebtedness of the Company (including the New Credit Facility), even if the Change of Control itself does not, because of the financial effect of such repurchase on the Company. The Company's ability to pay cash to the holders of the Senior Notes and the Notes upon a repurchase may be limited by the Company's then existing financial resources. There can be no assurance that in the event of a Change of Control, the Company will have, or will have access to, sufficient funds or will be contractually permitted under the terms of outstanding indebtedness to pay the required purchase price for all Senior Notes and Notes tendered by holders upon a Change of Control. The obligations of the Company to offer to repurchase the Notes are subject to its obligations to offer to repurchase the Senior Notes and redeem amounts outstanding under the New Credit Facility. Even if the Company can satisfy its obligations to the holders of the Senior Notes and under the New Credit Facility, there can be no assurance that it would be able to fund the repurchase of any Notes. See "Description of the Notes -- Change of Control Offer" and "Description of Other Indebtedness -- New Credit Facility." RESTRICTIVE DEBT COVENANTS The New Credit Facility contains a number of covenants that, among other things, limit the Company's ability to incur additional indebtedness, pay dividends, prepay subordinated indebtedness, dispose of certain assets, create liens, make capital expenditures, make certain investments or acquisitions and otherwise restrict corporate activities. The New Credit Facility also requires the Company to comply with certain financial ratios and tests, under which the Company is required to achieve certain financial and operating results. The ability of the Company to comply with such provisions may be affected by events beyond its control. A breach of any of these covenants would result in a default under the New Credit Facility. In the event of any such default, depending on the actions taken by the lenders under the New Credit Facility, the Company could be 18 23 prohibited from making any payments on the Notes. In addition, such lenders could elect to declare all amounts borrowed under the New Credit Facility, together with accrued interest, to be due and payable. As a result of the priority and security afforded the New Credit Facility, there can be no assurance that the Company would have sufficient assets to pay indebtedness then outstanding under the New Credit Facility and the Notes. Any refinancing of the New Credit Facility is likely to contain similar restrictive covenants. See "Description of Other Indebtedness--New Credit Facility." INTEGRATION OF PEARLE The Pearle Acquisition is the largest acquisition made by the Company or the Parent. Acquisitions of the magnitude of the Pearle Acquisition are inherently subject to significant risk. There can be no assurance that the Company will be able to integrate the acquired Pearle operations successfully. The full benefits of the integration of the acquired Pearle operations will require some consolidation of Cole Vision's and Pearle's management, control and administrative systems. These steps will require substantial attention from and place substantial demands upon the senior management of Cole Vision and/or the Company, as well as the cooperation of Pearle's management, employees and franchisees. The demands on the Company's existing management caused by the acquisition of Pearle may divert attention from and adversely impact their ability to manage the Company's existing businesses. As a result of the Pearle Acquisition, the Company's consolidated gross margin will likely decline from its historical levels. This will likely result because even after conforming Pearle's accounting methods to those of the Company, Pearle is expected to have a lower gross margin than the Company due to the higher costs of in-store laboratories and lower margin wholesale sales to franchised stores partially offset by franchise royalties, fees and interest income on franchise notes receivable which have no corresponding cost of goods sold. In addition, the Company has never operated as a franchisor and will be required to operate such business in accordance with applicable franchise laws and regulations. The Company's plans for Pearle depend, in part, on the Company's ability to continue Pearle's franchised operations, to improve Pearle's relationships with its franchisees, and to attract new franchisees. The Company's flexibility in making changes to Pearle's franchisee operation is limited by the terms of the agreements entered into with the franchisees, laws and regulations governing the relationship with the franchisees and other obligations. As a result, the ability of the Company to realize the benefits from the Pearle Acquisition may be limited with respect to the Pearle franchise operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General," and "Business -- Government Regulations." NATURE OF STOCK PURCHASE AGREEMENT; LIMITED RECOURSE TO SELLER The representations and warranties made by The Pillsbury Company and Pearle in the Stock Purchase Agreement relating to Pearle and the business to be acquired and the associated indemnities are limited and qualified. Although the Company was not obligated to consummate the Pearle Acquisition if there are changes in the business or assets of Pearle which would result in a "Material Adverse Effect" (as defined and excluding matters arising in the ordinary course of business), the Company's recourse to The Pillsbury Company after the acquisition is limited. In addition, the Pearle Acquisition was consummated on a rapid schedule, and the Company's ability to conduct due diligence was limited by time constraints and other factors. Accordingly, unanticipated events or liabilities related to Pearle's business could materially and adversely affect the Company and the success of the Pearle Acquisition. RELATIONSHIPS WITH HOST STORES All of the CGC and the vast majority of Cole Vision locations are operated under the names of their respective host stores under leases or licenses from such host stores that are terminable upon 60-90 days notice. In addition, Cole Vision operates its freestanding stores under the name "Sears Optical" pursuant to a license agreement with Sears that is cancelable on 90 days notice. The Company has enjoyed stable relationships with its major host stores for over 40 years and has never had a lease or license terminated, other than in connection with a store closing, relocation or major remodeling. Although the Company currently has stable relationships with its major host stores, there can be no assurance that a major host store will not in the future terminate its relationship with the Company, including the use of the host store's name, in accordance 19 24 with the terms and conditions of the lease or license between such host store and the Company. There would be a material adverse effect on the Company's financial position and results of operations if a major host store were to terminate its relationship with the Company. See "Business -- Host Relationships." SEASONALITY The Company's business historically has been seasonal with approximately 30% of the Company's sales and approximately 50% of its operating earnings occurring in the fourth fiscal quarter. Although the acquisition of Pearle will moderate the seasonality of the Company's business due to relatively lower levels of optical product sales during the Christmas holiday season, the Company's business will remain seasonal. See "Business -- Seasonality." COMPETITION AND OTHER BUSINESS FACTORS The Company operates in highly competitive businesses. Cole Vision and Pearle each compete with other optical companies, private ophthalmologists, optometrists, opticians and a growing number of health maintenance organizations ("HMOs"). Cole Gift competes generally with other retailers that sell gift items. Some of the Company's competitors have greater financial resources than the Company. See "Business -- Competition." The Company's future performance may be subject to a number of factors beyond its control, including economic downturns and cyclical variations in the retail areas it serves, the Company's ability to select and stock merchandise attractive to customers, weather factors affecting retail operations, its quality controls in optical manufacturing and engraving, operating factors affecting customer satisfaction, the mix of goods sold, pricing and other competitive factors, and the seasonality of the Company's businesses. Moreover, the implementation of the Company's growth strategies is subject to a number of factors, including general economic and competitive conditions as well as on-going evaluation by the Company of its opportunities for investment in its businesses. In addition, the optical retail industry may be subject to new technological advances, such as alternative surgical techniques. If such new advances were to provide a practical alternative to vision correction, the demand for contact lenses and eyeglasses may decrease. ABSENCE OF PUBLIC MARKET There is no existing trading market for the Notes, and the Company does not intend to list any Notes on any securities exchange. Although the Company has been advised that the Initial Purchasers currently intend to make a market in the Notes, the Initial Purchasers are not obligated to do so and may discontinue any such market making at any time without notice. In addition, any market making activities in the Original Notes may be limited during the pendency of the Exchange Offer. There can be no assurance that an active trading market for the Notes will develop, or, if it develops, that it will continue. Future trading prices for the Notes will depend on many factors, including, among other things, the Company's operating results, the market for similar securities and changes in prevailing interest rates. CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES Holders of Original Notes who do not exchange their Original Notes for Exchange Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Original Notes as set forth in the legend thereon as a consequence of the offer or sale of the Original Notes pursuant to an exemption from or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Original Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act or applicable state securities laws. The Company does not currently expect that it will register the Original Notes under the Securities Act. Based on interpretations by the staff of the Commission issued in no-action letters to third parties, the Company believes that the Exchange Notes issued pursuant to the Exchange Offer in exchange for Original Notes may be offered for resale, resold or otherwise transferred by the Holder thereof (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), provided that such Exchange Notes are acquired in the ordinary course of such Holder's business and such Holder has no arrangement with any person to participate in the distribution of such Exchange Notes. Such no-action letters are not binding interpretations of the law. Any Holder of Original Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange 20 25 Notes would not be acting consistently with such interpretation by the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Thus, any Exchange Notes acquired by such Holder will not be freely transferable except in compliance with the Securities Act. Each Restricted Holder that receives Exchange Notes for its own account in exchange for the Original Notes, where such Original Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." 21 26 THE EXCHANGE OFFER PURPOSES AND EFFECTS OF THE EXCHANGE OFFER The Original Notes were sold by the Company on November 15, 1996 (the "Issue Date") to the Initial Purchasers pursuant to a Purchase Agreement dated as of November 13, 1996. As a condition to the sale of the Original Notes, the Company and the Initial Purchasers entered into the Registration Rights Agreement on the Issue Date. Pursuant to the Registration Rights Agreement, the Company agreed that, unless the Exchange Offer is not permitted by applicable law or Commission policy, it would (i) file with the Commission a Registration Statement under the Securities Act with respect to the Exchange Notes within 45 days after the Issue Date, (ii) use its best efforts to cause such Registration Statement to become effective under the Securities Act within 120 days after the Issue Date and (iii) upon effectiveness of the Registration Statement, commence the Exchange Offer, keep the Exchange Offer open for at least 30 days (or a longer period if required by law) and deliver to the Exchange Agent Exchange Notes in the same aggregate principal amount at maturity as the Original Notes that were tendered by holders thereof pursuant to the Exchange Offer. Under existing Commission interpretations, the Exchange Notes would in general be freely transferable after the Exchange Offer without further registration under the Securities Act; provided, that in the case of broker-dealers, a prospectus meeting the requirements of the Securities Act be delivered as required. The Company has agreed to make available a prospectus meeting the requirements of the Securities Act to any broker-dealer for use in connection with any resale of any such Exchange Notes acquired as described below for such period of 180 days after the Expiration Date. A broker-dealer that delivers such a prospectus to purchasers in connection with such resales will be subject to certain of the civil liability provisions under the Securities Act, and will be bound by the Registration Rights Agreement (including certain indemnification rights and obligations). A copy of the Registration Rights Agreements has been incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part. The Registration Statement of which this Prospectus is a part is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement and the Purchase Agreement. The Company is generally not required to file any registration statement to register any outstanding Original Notes. Holders of Original Notes who do not tender their Original Notes or whose Original Notes are tendered but not accepted will have to rely on exemptions to registration requirements under the securities laws, including the Securities Act, if they wish to sell their Original Notes. With respect to the Exchange Notes, based upon an interpretation by the staff of the Commission set forth in certain no-action letters issued to third parties, the Company believes that a holder (other than (i) a broker-dealer who purchases such Exchange Notes directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) who exchanges Original Notes for Exchange Notes in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement with any person to participate, in the distribution of the Exchange Notes, will be allowed to resell the Exchange Notes to the public without further registration under the Securities Act and without delivering to the purchasers of the Exchange Notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. However, if any holder acquires the Exchange Notes in the Exchange Offer for the purpose of distributing or participating in the distribution of the Exchange Notes or is a broker-dealer, such holder cannot rely on the position of the staff of the Commission enumerated in certain no-action letters issued to third parties and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives Exchange Notes for its own account in exchange for Original Notes, where such Original Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with the resales of Exchange Notes received in exchange for Original Notes where 22 27 such Original Notes were acquired by such broker-dealer as a result of market-making or other trading activities. Pursuant to the Registration Rights Agreement, the Company has agreed to make this Prospectus, as it may be amended or supplemented from time to time, available to broker-dealers for used in connection with any resale for a period of 180 days after the Expiration Date. See "Plan of Distribution." REGISTRATION RIGHTS; ADDITIONAL INTEREST In the event that applicable interpretations of the staff of the Commission do not permit the Company to effect such an Exchange Offer, or if for any other reason the Exchange Offer is not consummated within 180 days of the date of the Registration Rights Agreement, the Company will, at its own expense, (a) as promptly as practicable, file a shelf registration statement covering resales of the Notes (the "Shelf Registration Statement"), (b) use its best efforts to cause the Shelf Registration Statement to be declared effective under the Act, and (c) use its best efforts to keep effective the Shelf Registration Statement until three years after its effective date. The Company will, in the event of the Shelf Registration Statement, provide to each holder of the Notes copies of the prospectus which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement for the Notes has become effective and take certain other actions as are required to permit unrestricted resales of the Notes. A holder of the Notes that sells such Notes pursuant to the Shelf Registration Statement generally would be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Act in connection with such sales, and will be bound by the provisions of the Registration Rights Agreement which are applicable to such a holder (including certain indemnification rights and obligations). Although the Company intends to file one of the registration statements described above, there can be no assurance that such registration statement will be filed or, if filed, that it will become effective. If the Company fails to comply with the above provisions or if such registration statement fails to become effective, then, as liquidated damages, additional interest shall become payable in respect of the Notes as follows: If (i) the Exchange Offer Registration Statement or Shelf Registration Statement is not filed within 45 days after the Issue Date; (ii) an Exchange Offer Registration Statement or Shelf Registration Statement is not declared effective within 120 days after the Issue Date; or (iii) either (A) the Company has not exchanged the Exchange Notes for all Notes validly tendered in accordance with the terms of the Exchange Offer on or prior to 60 days after the date on which the Exchange Offer Registration Statement was declared effective or (B) the Exchange Offer Registration Statement ceases to be effective at any time prior to the time that the Exchange Offer is consummated or (C) if applicable, the Shelf Registration Statement has been declared effective and such Shelf Registration Statement ceases to be effective at any time prior to the third anniversary of its effective date; (each such event referred to in clauses (i) through (iii) above is a "Registration Default"), then the sole remedy available to holders of the Notes will be the immediate assessment of additional interest ("Additional Interest") as follows: the per annum interest rate on the Notes will increase by 50 basis points; and the per annum interest rate will increase by an additional 25 basis points for each subsequent 90-day period during which the Registration Default remains uncured, up to a maximum additional interest rate of 200 basis points per annum in excess of the interest rate on the cover of this Prospectus. All Additional Interest will be payable to holders of the Notes in cash on each December 31 and June 30, commencing with the first such date occurring after any such Additional Interest commences to accrue, until such Registration Default is cured. After the date on which such Registration Default is cured, the interest rate on the Notes will revert to the interest rate originally borne by the Notes (as shown on the cover of this Prospectus). The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration 23 28 Rights Agreement, which has been incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part, a copy of which will be available upon request to the Company. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal, the Company will accept any and all Original Notes validly tendered and not withdrawn prior to the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of outstanding Original Notes surrendered pursuant to the Exchange Offer. Holders may tender some or all of their Original Notes pursuant to the Exchange Offer; provided, however, that Original Notes may be tendered only in integral multiples of $1,000. The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Original Notes being tendered for exchange. The form and terms of the Exchange Notes are the same as the form and terms of the Original Notes except that (i) the Exchange Notes will be registered under the Securities Act and, therefore, will not bear legends restricting their transfer and (ii) holders of the Exchange Notes will not be entitled to the certain rights of holders of Original Notes under the Registration Rights Agreement, which rights will terminate upon the consummation of the Exchange Offer. The Exchange Notes will evidence the same debt as the Original Notes (which they replace) and will be issued under, and be entitled to the benefits of, the Indenture, which also authorized the issuance of the Original Notes, such that all outstanding Notes will be treated as a single class of debt securities under the Indenture. Interest on the Exchange Notes will accrue from the last interest payment date on which interest was paid on the Original Notes surrendered in exchange therefor or, if no interest has been paid, from November 15, 1996. Accordingly, registered holders of Exchange Notes on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the last interest payment date on which interest was paid or, if no interest has been paid on the Notes, from November 15, 1996. Original Notes accepted for exchange will cease to accrue interest from and after the date of the consummation of the Exchange Offer. Holders whose Original Notes are accepted for exchange will not receive any payment in respect of interest on such Original Notes otherwise payable on any interest payment date, the record date for which occurs on or after consummation of the Exchange Offer. As of the date of this Prospectus, $150,000,000 aggregate principal amount of the Original Notes are outstanding and registered in the name of Cede & Co., as nominee for the Depository Trust Company (the "Depository" or "DTC"). Only a registered holder of the Original Notes (or such holder's legal representative or attorney-in-fact) as reflected on the records of the Trustee under the Indenture may participate in the Exchange Offer. There will be no fixed record date for determining registered holders of the Original Notes entitled to participate in the Exchange Offer. Holders of the Original Notes do not have any appraisal or dissenters' rights under the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the provisions of the Registration Rights Agreement and the applicable requirements of the Securities Act, the Exchange Act and the rules and regulations of the Commission thereunder. The Company shall be deemed to have accepted validly tendered Original Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Original Notes for the purposes of receiving the Exchange Notes from the Company. If any tendered Original Notes are not accepted for exchange because of an invalid tender, or due to the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Original Notes will be returned without expense to the tendering holders thereof (or in the case of Original Notes tendered by book-entry transfer, such Original Notes will be credited to the account of such holder maintained at the Depository), as promptly as practicable after the expiration or termination of the Exchange Offer. Holders who tender Original Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to 24 29 the exchange of Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes described below, in connection with the Exchange Offer. See "The Exchange Offer -- Fees and Expenses." EXPIRATION DATE; EXTENSIONS; TERMINATION The term "Expiration Date" shall mean 5:00 p.m., New York City time on , 1997 unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer the Company will notify the Exchange Agent of any extension by oral (promptly confirmed in writing) or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date of the Exchange Offer. Without limiting the manner in which the Company may choose to make a public announcement of any delay, extension, amendment or termination of the Exchange Offer, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. The Company reserves the right, in its sole discretion, (i) to delay accepting any Original Notes, (ii) to extend the Exchange Offer, (iii) if any conditions set forth below under "-- Certain Conditions to the Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (iv) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered holders of Original Notes, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to such registered holders, if the Exchange Offer would otherwise expire during such five to ten business day period. The rights reserved by the Company in this paragraph are in addition to the Company's rights set forth below under the caption "-- Certain Conditions to the Exchange Offer." If the Company extends the period of time during which the Exchange Offer is open, or if it is delayed in accepting for exchange of, or in issuing and exchanging the Exchange Notes for, any Original Notes, or is unable to accept for exchange of, or issue Exchange Notes for, any Original Notes pursuant to the Exchange Offer for any reason, then, without prejudice to the Company's rights under the Exchange Offer, the Exchange Agent may, on behalf of the Company, retain all Original Notes tendered, and such Original Notes may not be withdrawn except as otherwise provided below in "-- Withdrawal of Tenders." The adoption by the Company of the right to delay acceptance for exchange of, or the issuance and the exchange of the Exchange Notes, for any Original Notes is subject to applicable law, including Rule 14e-1(c) under the Exchange Act, which requires that the Company pay the consideration offered or return the Original Notes deposited by or on behalf of the holders thereof promptly after the termination or withdrawal of the Exchange Offer. PROCEDURES FOR TENDERING Only a registered holder of Original Notes may tender such Original Notes in the Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal, or facsimile thereof, have the signature thereon guaranteed if required by the Letter of Transmittal and mail or otherwise deliver such Letter of Transmittal or such facsimile to the Exchange Agent at the address set forth below under "-- Exchange Agent" for receipt prior to the Expiration Date. In addition, either (i) certificates for such Notes must be received by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer of such Notes, if such procedure is available, into the Exchange Agent's account at DTC pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or (iii) the holder must comply with the guaranteed delivery procedures described below. 25 30 Any financial institution that is a participant in the Depository's Book-Entry Transfer Facility system may make book-entry delivery of the Original Notes by causing the Depository to transfer such Original Notes into the Exchange Agent's account in accordance with the Depository's procedure for such transfer. Although delivery of Original Notes may be effected through book-entry transfer into the Exchange Agent's account at the Depository, the Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received or confirmed by the Exchange Agent at its addresses set forth under "-- Exchange Agent" below prior to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The tender by a holder which is not withdrawn prior to the Expiration Date will constitute a binding agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner of the Original Notes whose Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on such beneficial owners's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering such owner's Original Notes, either make appropriate arrangements to register ownership of the Notes in such owner's name (to the extent permitted by the Indenture) or obtain a properly completed assignment from the registered holder. The transfer of registered ownership may take considerable time. If the Letter of Transmittal is signed by a person other than the registered holder of any Original Notes (which term includes any participants in DTC whose name appears on a security position listing as the owner of the Original Notes) or if delivery of the Exchange Notes is to be made to a person other than the registered holder, such Original Notes must be endorsed or accompanied by a properly completed bond power, in either case signed by such registered holder as such registered holder's name appears on such Original Notes with the signature on the Original Notes or the bond power guaranteed by an Eligible Institution (as defined below). Signatures on a Letter of Transmittal or a notice of withdrawal described below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed by an Eligible Institution unless the Original Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be made by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or another "Eligible Guarantor Institution" within the meaning of Rule 17Ad-15 under the Exchange Act (any of the foregoing, an "Eligible Institution"). If the Letter of Transmittal or any Original Notes or assignments are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, 26 31 evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. The Exchange Agent and the Depository have confirmed that any financial institution that is a participant in the Depository's system may utilize the Depository's Automated Tender Offer Program to tender Original Notes. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Original Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Original Notes not properly tendered or any Original Notes, the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Original Notes must be cured within such time as the Company shall determine. Although the Company intends to request the Exchange Agent to notify holders of defects or irregularities with respect to tenders of Original Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Original Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. While the Company has no present plan to acquire any Original Notes which are not tendered in the Exchange Offer or to file a registration statement to permit resales of any Original Notes which are not tendered pursuant to the Exchange Offer, the Company reserves the right in its sole discretion to purchase or make offers for any Original Notes that remain outstanding subsequent to the Expiration Date or, as set forth below under "-- Certain Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Original Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. By tendering, each holder will represent to the Company that, among other things, (i) the Exchange Notes to be acquired by the holder of the Original Notes in connection with the Exchange Offer are being acquired by the holder in the ordinary course of business of the holder, (ii) the holder has no arrangement or understanding with any person to participate in the distribution of Exchange Notes, (iii) the holder acknowledges and agrees that any person who is a broker-dealer registered under the Exchange Act or is participating in the Exchange Offer for the purpose of distributing the Exchange Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the Exchange Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in certain no-action letters, (iv) the holder understands that a secondary resale transaction described in clause (iii) above and any resales of Exchange Notes obtained by such holder in exchange for Original Notes acquired by such holder directly from the Company should be covered by an effective registration statement containing the selling securityholder information required by Item 507 or Item 508, as applicable, of Regulation S-K of the Commission, and (v) the holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company. If the holder is a broker-dealer that will receive Exchange Notes for its own account in exchange for Original Notes that were acquired as a result of market-making activities or other trading activities, the holder is required to acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the holder will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. RETURN OF NOTES If any tendered Original Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Original Notes are withdrawn or are submitted for a greater principal amount than the holders desire to exchange, such unaccepted, withdrawn or non-exchanged Original Notes will be returned 27 32 without expense to the tendering holder thereof (or, in the case of Original Notes tendered by book-entry transfer into the Exchange Agent's account at the Depository pursuant to the book-entry transfer procedures described below, such Original Notes will be credited to an account maintained with the Depository) as promptly as practicable. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Original Notes at the Depository for purposes of the Exchange Offer within two business days after the date of this Prospectus, and any financial institution that is a participant in the Depository's system may make book-entry delivery of Original Notes by causing the Depository to transfer such Original Notes into the Exchange Agent's account at the Depository in accordance with the Depository's procedures for transfer. However, although delivery of Original Notes may be effected through book-entry transfer at the Depository, the Letter of Transmittal or facsimile thereof, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at the address set forth below under "-- Exchange Agent" on or prior to the Expiration Date or pursuant to the guaranteed delivery procedures described below. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Original Notes and (i) whose Original Notes are not immediately available or (ii) who cannot deliver their Original Notes (or complete the procedures for book-entry transfer), the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Expiration Date, may effect a tender if: (a) the tender is made through an Eligible Institution; (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by the Company (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder, the certificate number(s) of such Original Notes (if available) and the principal amount of Original Notes tendered, stating that the tender is being made thereby guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or a facsimile thereof) together with the certificate(s) representing the Original Notes in proper form for transfer (or a confirmation of a book-entry transfer into the Exchange Agent's account at the Depository of Original Notes delivered electronically), and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly executed Letter of Transmittal (or facsimile thereof), as well as the certificate(s) representing all tendered Original Notes in proper form for transfer (or a confirmation of a book-entry transfer into the Exchange Agent's account at the Depository of Original Notes delivered electronically), and all other documents required by the Letter of Transmittal are received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. Upon request to the exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Original Notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Original Notes may be withdrawn at any time prior to the Expiration Date. To withdraw a tender of Original Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Original Notes to be withdrawn (the "Depositor"), (ii) identify the Original Notes to be withdrawn (including the certificate number or numbers (if applicable) and principal amount of such Original Notes), and (iii) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such 28 33 Original Notes were tendered (including any required signature guarantees). All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company in its sole discretion, whose determination shall be final and binding on all parties. Any Original Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Original Notes so withdrawn are validly retendered. Properly withdrawn Notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the Expiration Date. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or exchange the Exchange Notes for, any Original Notes not theretofore accepted for exchange, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Original Notes, if any of the following conditions exist: (a) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the reasonable judgment of the Company, might impair the ability of the Company to proceed with the Exchange Offer or have a material adverse effect on the contemplated benefits of the Exchange Offer to the Company or there shall have occurred any material adverse development in any existing action or proceeding with respect to the Company or any of its subsidiaries; or (b) there shall have been any material change, or development involving a prospective change, in the business or financial affairs of the Company or any of its subsidiaries which, in the reasonable judgment of the Company, could reasonably be expected to materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (c) there shall have been proposed, adopted or enacted any law, statute, rule or regulation which, in the judgment of the Company, could reasonably be expected to materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (d) any governmental approval which the Company shall, in its reasonable discretion, deem necessary for the consummation of the Exchange Offer as contemplated hereby shall not have been obtained. If the Company determines in its reasonable discretion that any of these conditions are not satisfied, the Company may (i) refuse to accept any Original Notes and return all tendered Original Notes to the tendering holders, (ii) extend the Exchange Offer and retain all Original Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of holders to withdraw such Original Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Original Notes which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered holders of the Original Notes, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered holders, if the Exchange Offer would otherwise expire during such five to ten business day period. Holders may have certain rights and remedies against the Company under the Registration Rights Agreement should the Company fail to consummate the Exchange Offer, notwithstanding a failure of the conditions stated above. Such conditions are not intended to modify those rights or remedies in any respect. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to such condition or may be waived by the Company in whole or in part at any time and from time to time in the Company's reasonable discretion. The failure by the Company at any time to exercise the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. 29 34 TERMINATION OF CERTAIN RIGHTS All rights under the Registration Rights Agreement (including registration rights) of holders of the Original Notes eligible to participate in this Exchange Offer will terminate upon consummation of the Exchange Offer except with respect to the Company's continuing obligations (i) to indemnify the holders (including any broker-dealers) and certain parties related to the holders against certain liabilities (including liabilities under the Securities Act), (ii) to provide, upon the request of any holder of a transfer-restricted Original Note, the information required by Rule 144A(d)(4) under the Securities Act in order to permit resales of such Original Notes pursuant to Rule 144A, (iii) to use its best efforts to keep the Registration Statement effective to the extent necessary to ensure that it is available for resales of transfer restricted Notes by broker-dealers for a period of 180 days from the date on which the Registration Statement is declared effective and (iv) to provide copies of the latest version of the Prospectus to broker-dealers upon their request for a period of 180 days from the date on which the Registration Statement is declared effective. Insofar as indemnification for liabilities arising under the Securities Act may be permitted pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. EXCHANGE AGENT Norwest Bank Minnesota, National Association has been appointed as Exchange Agent for the Exchange Offer. All questions and requests for assistance as well as all correspondence in connection with the Exchange Offer and the Letter of Transmittal should be addressed to the Exchange Agent, as follows: By Registered or Certified Mail: Norwest Bank Minnesota, National Association Corporate Trust Operations P.O. Box 1517 Minneapolis, MN 55480-1517 By Hand: Norwest Bank Minnesota, National Association Corporate Trust Operations Northstar East, 12th Floor 608 2nd Avenue Minneapolis, MN 55479-0113 By Overnight Courier: Norwest Bank Minnesota, National Association Corporate Trust Operations Norwest Center Sixth and Marquette Minneapolis, MN 55479-0113 By Facsimile: Norwest Bank Minnesota, National Association Corporate Trust Operations (612) 667-4927 Confirm by telephone: (612) 667-9764 Requests for additional copies of this Prospectus, the Letter of Transmittal or the Notice of Guaranteed Delivery should be directed to the Exchange Agent. 30 35 FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager or other soliciting agent in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptance of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company and are estimated in the aggregate to be approximately $200,000. Such expenses include fees and expenses of the Exchange Agent and Trustee, accounting and legal fees and printing costs, among others. The Company will pay all transfer taxes, if any, applicable to the exchange of Original Notes pursuant to the Exchange Offer. If, however, certificates representing Exchange Notes, or Original Notes for principal amounts not tendered or acceptable for exchange, are to be delivered to, or are to be issued in the name of, any person other than the registered holders of the Original Notes tendered, or if tendered Original Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Original Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder of Original Notes. ACCOUNTING TREATMENT The Exchange Notes will be recorded at the same carrying value as the Original Notes as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized. The expenses of the Exchange Offer will be amortized over the term of the Exchange Notes. CONSEQUENCE OF FAILURE TO EXCHANGE Participation in the Exchange Offer is voluntary. Holders of the Original Notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. The Original Notes which are not exchanged for the Exchange Notes pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Original Notes may be resold only (i) to a person whom the seller reasonably believes is a qualified institutional buyer (as defined in Rule 144A under the Securities Act) in a transaction meeting the requirements of Rule 144A, (ii) in a transaction meeting the requirements of Rule 144 under the Securities Act, (iii) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act, (iv) in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company so requests), (v) to the Company or (vi) pursuant to an effective registration statement and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction. 31 36 THE COMPANY The Company, a leading provider of eyewear products, optometric services and personalized gifts, acquired Pearle on November 15, 1996. The combination of the Company and Pearle creates the second largest optical retail company in the United States with over 1,800 locations in the United States, Canada and the Caribbean. Pearle enjoys one of the most highly recognized brand names in the optical retail industry. Pro forma for the Pearle Acquisition, the Company's fiscal 1995 net sales and EBITDA were $873.7 million and $84.0 million, respectively, with approximately 70% of the Company's net sales derived from its optical business and the remaining 30% derived from its gift business. The Company conducts its business through two principal operating units: (i) Cole Optical, consisting of Cole Vision and Pearle; and (ii) Cole Gift, consisting of Things Remembered and CGC. The Company, a wholly owned subsidiary of the Parent, is an intermediate holding company that operates its businesses through subsidiaries. The Company has no operations of its own. The Parent, a public company with common stock trading on the New York Stock Exchange (symbol: CNJ), currently has no debt obligations, other than $4.1 million of capitalized leases, and has minimal operations besides those conducted through the Company. The Company was incorporated in July 1993. Immediately prior to the Company's issuance and sale of its Senior Notes on September 30, 1993, all of the Parent's assets, except for the stock of the Company, were contributed to the Company and the Company assumed all of the Parent's liabilities (the "Initial Capitalization") other than $50.0 million of the Parent's obligations under the Parent's 13% Senior Subordinated Notes, which were later retired. Prior to the Initial Capitalization, all operations were conducted by subsidiaries of the Parent. 32 37 THE TRANSACTIONS THE PARENT'S ACQUISITION OF PEARLE On September 24, 1996, the Parent and The Pillsbury Company, a subsidiary of Grand Metropolitan PLC ("GrandMet"), signed a purchase agreement (the "Pearle Purchase Agreement") under which the Parent agreed to purchase from The Pillsbury Company for an aggregate purchase price of approximately $220 million (i) all of the issued and outstanding shares of Pearle Service Corporation ("PSC") capital stock, a subsidiary of Pearle, Inc. that holds certain assets related to Pearle's Dallas headquarters, and (ii) following the distribution to The Pillsbury Company of the proceeds from the purchase of the PSC capital stock, all of the issued and outstanding shares of Pearle's capital stock. These transactions were consummated on November 15, 1996. As a result, the Parent owned all of the business operations and assets of Pearle, including its European operations which were resold pursuant to the Pearle Holdings Disposition. THE PEARLE HOLDINGS DISPOSITION On September 24, 1996, the Parent and HAL Investments B.V. ("HAL") signed a definitive purchase agreement (the "BV Purchase Agreement"), pursuant to which a new company to be formed by HAL and in which the Parent would purchase an equity interest of approximately 20% ("Newco"), would purchase all of the issued and outstanding shares of Pearle Holdings together with certain related assets for an aggregate purchase price of approximately $62 million. Pearle's European operations historically were conducted by Pearle Holdings. This transaction was consummated on November 15, 1996. Under the BV Purchase Agreement, the Parent and Newco agreed not to compete against each other in the optical services business in the other party's territory for a period of five years following the closing of the BV Purchase Agreement. Newco's territory is defined to include generally all territories currently customarily referred to as Europe and the Parent's territory is defined as the rest of the world. THE PEARLE ACQUISITION Pursuant to a transfer agreement (the "Transfer Agreement") between the Parent and the Company, immediately following the Parent's Acquisition of Pearle, the Company purchased from the Parent all of the issued and outstanding shares of both PSC and Pearle for an aggregate purchase price of approximately $154 million, net of transaction adjustments. Both PSC and Pearle became wholly owned subsidiaries of the Company. Under the Transfer Agreement, the Parent assigned all of its rights and obligations under the Pearle Purchase Agreement except for those rights and obligations which are necessary for the Parent to fulfill its obligations under the BV Purchase Agreement. THE SENIOR NOTE REPURCHASE During fiscal 1996, the Parent used a portion of the net proceeds from a public offering of the Parent's Class A common stock, par value $.001 per share (the "Common Stock") to purchase approximately $15.1 million of the Company's outstanding Senior Notes in the open market. In connection with the Pearle Acquisition, the Parent sold such Senior Notes to the Company for an aggregate purchase price of $14.9 million which represents face value of $15.1 million after deduction of unamortized discount. Such Senior Notes were retired upon receipt by the Company. An aggregate of $165.8 million principal amount of the Company's Senior Notes remain outstanding following the consummation of the Transactions. The Senior Note Repurchase will reduce the Company's interest expense by $1.7 million per year. THE FINANCING The Company financed the Pearle Acquisition, the Senior Note Repurchase and estimated fees and expenses through (i) the proceeds from the Offering, (ii) cash on hand, and (iii) intercompany borrowings from the Parent. Concurrently with the consummation of the offering of the Original Notes, the Company entered into a senior secured revolving line of credit in an aggregate principal amount of $75.0 million (the "New Credit Facility") and all amounts outstanding under the Company's existing $50.0 million revolving credit facility (the "Revolving Credit Facility") were replaced by equivalent amounts under the New Credit Facility. As of December 1, 1996, approximately $9.7 million of letters of credit were outstanding under the Company's New Credit Facility. 33 38 USE OF PROCEEDS The Company will not receive any cash proceeds from the issuance of the Exchange Notes offered hereby. In consideration for issuing the Exchange Notes as contemplated in this Prospectus, the Company will receive in exchange Original Notes in like principal amount, the terms of which are substantially identical to the Exchange Notes. The Original Notes surrendered in exchange for Exchange Notes will be retired and cancelled and cannot be reissued. Accordingly, issuance of the Exchange Notes will not result in any increase in the indebtedness of the Company. The net proceeds to the Company from the sale of the Original Notes, together with cash on hand and intercompany borrowings from the Parent, was used to finance the Pearle Acquisition, the Senior Note Repurchase and estimated fees and expenses. The sources and uses of funds are set forth below (dollars in thousands). Sources of funds: Proceeds of Original Notes.......................................... $148,875 Cash on hand........................................................ 15,013 Borrowings from the Parent.......................................... 14,917 -------- Total sources of funds......................................... $178,805 ======== Uses of funds: The Pearle Acquisition.............................................. $154,000 The Senior Note Repurchase.......................................... 14,917 Estimated fees and expenses......................................... 9,888 -------- Total uses of funds............................................ $178,805 ========
34 39 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at November 2, 1996 and as adjusted to reflect the Transactions. This table should be read in conjunction with the information contained in "Use of Proceeds," "Unaudited Pro Forma Condensed Consolidated Financial Data" and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as the Company's and Pearle's consolidated financial statements and notes thereto included elsewhere herein.
NOVEMBER 2, 1996 ------------------------- ACTUAL PRO FORMA --------- --------- (DOLLARS IN THOUSANDS) Long-term debt: Revolving credit facilities.................................... $ -- $ -- Senior Notes, net of discount.................................. 179,248 164,324(a) Other secured indebtedness..................................... 1,085(b) 1,085(b) Notes, net of discount......................................... -- 148,875(c) --------- --------- Total long-term debt........................................ 180,333(b) 314,284(b) Stockholder's equity: Common stock................................................... -- -- Paid-in capital................................................ 118,065 118,065 Accumulated deficit............................................ (108,604) (108,863)(d) --------- --------- Total stockholder's equity.................................. 9,461 9,202 --------- --------- Total capitalization........................................ $ 189,794 $ 323,486 ========= ========= - --------------- (a) Reflects purchase and cancellation by the Company of $15.1 million principal amount of Senior Notes held by Parent, net of unamortized discount. (b) Includes $300 of current maturities of long-term debt. (c) Reflects the issuance of the Original Notes. (d) Reflects the write-off of unamortized deferred financing costs from the Revolving Credit Facility, net of the related income tax benefit.
35 40 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The following Unaudited Pro Forma Condensed Consolidated Statements of Income for the fiscal year ended February 3, 1996 and the 39 weeks ended November 2, 1996 include the results of Pearle's operations and give effect to the Transactions as if they had occurred at the beginning of the periods presented. Pearle's results of operations exclude Pearle Holdings, which was not acquired by the Company. The following Unaudited Pro Forma Condensed Consolidated Balance Sheet presents the pro forma financial condition of the Company as if the Transactions had occurred as of November 2, 1996 and includes the financial position of Pearle's operations as of September 30, 1996, the end of Pearle's most recent fiscal year. Pearle's financial position excludes Pearle Holdings and certain assets and liabilities that were not purchased or assumed in the Pearle Acquisition. The purchase price of Pearle was determined based on arms-length negotiations between the parties to the Pearle Purchase Agreement. The excess of the purchase price of Pearle over the net identifiable assets and liabilities of Pearle is reported as goodwill. The carrying values of Pearle's net assets are assumed to equal their fair values for purposes of these pro forma financial statements, unless indicated otherwise in the Notes to Unaudited Pro Forma Condensed Consolidated Financial Data. These values are subject to revision following the results of any appraisals. However, management does not believe that the results of any such appraisals will yield materially different values from the carrying values. The Unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements of Income were prepared reflecting: (i) the Pearle Acquisition, which will be accounted for under the purchase method of accounting; (ii) the Senior Note Repurchase; (iii) the Offering of the Notes; and (iv) the New Credit Facility. The pro forma information presented does not consider any future events which may occur after the consummation of the Transactions. The Company believes revenue and operating expense synergies and purchasing and other cost reductions of the combined operations of the Company and Pearle will be realized after the Company has installed its management controls, systems and merchandising and marketing programs. However, for purposes of the Unaudited Pro Forma Condensed Consolidated Statements of Income, these and other synergies in overhead expenses have not been reflected because their realization cannot be assured. Nor do the pro forma statements consider the incremental expenses, capital or conversion costs which may be incurred as a result of the Pearle Acquisition. Following the closing of the Transactions, integration and consolidation charges may be incurred which could result in the Company reporting a negative stockholder's equity. The financial information is presented for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred had the Transactions been consummated at the dates indicated, nor is it necessarily indicative of future operating results or financial position. The unaudited pro forma condensed consolidated financial data should be read in conjunction with the financial statements of the Company and Pearle and the related notes thereto included elsewhere herein. 36 41 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 2, 1996 (DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA -------------------------- -------------------------- COMPANY PEARLE (a) ADJUSTMENTS COMBINED --------- ----------- ----------- --------- ASSETS Current assets: Cash and temporary cash investments....................... $ 31,489 $ -- $ (15,013)(b) $ 16,476 Accounts and notes receivable, prepaid expenses and other........ 25,870 24,162 -- 50,032 Inventories.......................... 103,778 28,955 -- 132,733 Deferred income tax benefits......... 10,616 9,118 1,750(c) 21,484 --------- --------- --------- --------- Total current assets......... 171,753 62,235 (13,263) 220,725 Property and equipment, net............ 67,586 43,152 (5,000)(c) 105,738 Franchise notes receivable, excluding current portion...................... -- 25,250 -- 25,250 Other assets........................... 8,294 809 6,689(d) 15,792 Cost in excess of net assets of purchased businesses and other intangible assets, net............... 79,485 117,281 (32,740)(e) 164,026 --------- --------- --------- --------- Total assets........................... $ 327,118 $ 248,727 $ (44,314) $ 531,531 ========= ========= ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt.... $ 300 $ -- $ -- $ 300 Accounts payable..................... 39,896 18,723 -- 58,619 Payable to affiliates................ 25,394 -- 14,924(f) 40,318 Accrued liabilities.................. 66,644 33,107 (140)(g) 99,611 --------- --------- --------- --------- Total current liabilities.... 132,234 51,830 14,784 198,848 Long-term debt, net of discount........ 180,033 -- 133,951(h) 313,984 Deferred income taxes and other........ 5,390 4,107 -- 9,497 Stockholder's equity: Common stock and paid-in capital..... 118,065 642,449 (642,449)(i) 118,065 Accumulated deficit.................. (108,604) (452,163) 451,904(i) (108,863) Foreign currency translation adjustment........................ -- 2,504 (2,504)(i) -- --------- --------- --------- --------- Total stockholder's equity... 9,461 192,790 (193,049) 9,202 --------- --------- --------- --------- Total liabilities and stockholder's equity............................... $ 327,118 $ 248,727 $ (44,314) $ 531,531 ========= ========= ========= =========
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet. 37 42 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (a) For purposes of the Unaudited Pro Forma Condensed Consolidated Balance Sheet, the financial position of Pearle is as of September 30, 1996, the end of Pearle's most recent fiscal year. Pearle's financial position excludes the financial position of Pearle Holdings and reflects the elimination of certain assets and liabilities that were not purchased or assumed in the Pearle Acquisition, primarily cash on hand, income taxes payable and payables to parent and affiliated companies. (b) Records the estimated portion of the purchase price and the fees and expenses funded from cash on hand. (c) Records estimated writedown of property and equipment and the related deferred income taxes to reflect the adoption by Pearle of SFAS No. 121-Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of. (d) Records the estimated professional fees and expenses associated with the financing requirements of the Pearle Acquisition and the write-off of the unamortized deferred financing costs related to the Company's Revolving Credit Facility. A breakdown of the estimated costs and write-off follows (in thousands): Financing fees and debt issuance costs............................... $4,900 Legal and professional fees and other costs.......................... 2,188 Write-off of unamortized deferred financing costs.................... (399) ------ $6,689 ======
(e) Records the purchase price allocation to goodwill and other intangible assets using the purchase method of accounting. The preliminary allocation of the purchase price and related transaction costs is as follows (in thousands): Purchase price.................................................... $ 154,000 Transaction costs................................................. 2,800 Less equity acquired (adjusted for the estimated impact of SFAS No. 121)........................................................ (189,540) ------ Purchase price allocation adjustments to goodwill and other intangible assets............................................ (32,740) Historical goodwill and other intangible assets................... 117,281 ------ Pearle's pro forma goodwill and other intangible assets......... $ 84,541 ======
(f) Records increase in the payable to Parent in connection with financing the Transactions. (g) Records the benefit to accrued income taxes resulting from the write-off of unamortized deferred financing costs related to the Company's Revolving Credit Facility. (h) Records the issuance of the Notes, net of discount, and the purchase and cancellation by the Company of $15.1 million of Senior Notes held by the Parent, net of unamortized discount. (i) Eliminates the stockholder's equity of Pearle and records the write-off of unamortized deferred financing costs, net of the related income tax benefit. 38 43 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996 (DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA ------------------------ ------------------------- COMPANY PEARLE (a) ADJUSTMENTS COMBINED -------- ----------- ----------- --------- Net revenue................................... $577,091 $ 296,641 $ -- $ 873,732 Costs and expenses: Cost of goods sold & operating expenses (b)...................................... 515,474 274,244 -- 789,718 Restructuring charges, net (c).............. -- 8,775 -- 8,775 Royalty payments & other affiliate charges.................................. -- 5,167 (5,167)(d) -- Depreciation and amortization............... 15,686 28,509 (12,014)(e) 32,181 -------- -------- -------- -------- Total costs and expenses............ 531,160 316,695 (17,181) 830,674 -------- -------- -------- -------- Income (loss) from operations................. 45,931 (20,054) 17,181 43,058 Gain on sale of subsidiary.................... -- (14,811) 14,811(g) -- Interest expense.............................. 22,143 16,354 (1,667)(h) 36,830 Interest income............................... (761) -- 611(i) (150) -------- -------- -------- -------- Income (loss) before income taxes............. 24,549 (21,597) 3,426 6,378 Income tax provision (benefit)................ 10,799 (12,001) 5,579(j) 4,377 -------- -------- -------- -------- Net income (loss)............................. $ 13,750 $ (9,596) $ (2,153) $ 2,001 ======== ======== ======== ======== Ratio of earnings to fixed charges (k)........ 1.8x 1.1x EBITDA data (l): Income (loss) from operations............... $ 45,931 $ (20,054) $ 17,181 $ 43,058 Restructuring charges, net.................. -- 8,775 -- 8,775 Royalty payments & other affiliate charges.................................. -- 5,167 (5,167) -- Depreciation and amortization............... 15,686 28,509 (12,014) 32,181 -------- -------- -------- -------- EBITDA...................................... $ 61,617 $ 22,397 $ -- $ 84,014 Ratio of EBITDA to interest expense......... 2.8x 2.3x
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income. 39 44 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE 39 WEEKS ENDED NOVEMBER 2, 1996 (DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA ------------------------- ------------------------- COMPANY PEARLE (a) ADJUSTMENTS COMBINED --------- ----------- ----------- --------- Net revenue................................ $ 443,057 $ 240,487 $ -- $ 683,544 Costs and expenses: Cost of goods sold & operating expenses (b)................................... 403,058 217,462 -- 620,520 Restructuring charges, net (c)........... -- (3,486) -- (3,486) Royalty payments & other affiliate charges............................... -- 5,842 (5,842)(d) -- Depreciation and amortization............ 12,780 21,055 (10,193)(e) 23,642 Provision for impairment of intangible assets and related costs.............. -- 94,673 (94,673)(f) -- --------- --------- --------- --------- Total costs and expenses......... 415,838 335,546 (110,708) 640,676 --------- --------- --------- --------- Income (loss) from operations.............. 27,219 (95,059) 110,708 42,868 Interest expense........................... 15,943 12,258 (1,070)(h) 27,131 Interest income............................ (1,161) -- 582(i) (579) --------- --------- --------- --------- Income (loss) before income taxes.......... 12,437 (107,317) 111,196 16,316 Income tax provision (benefit)............. 5,473 (6,996) 9,182(j) 7,659 --------- --------- --------- --------- Net income (loss).......................... $ 6,964 $ (100,321) $ 102,014 $ 8,657 ========= ========= ========= ========= Ratio of earnings to fixed charges (k)..... 1.5x 1.4x EBITDA data (l): Income (loss) from operations............ $ 27,219 $ (95,059) $ 110,708 $ 42,868 Provision for impairment of intangible assets and related costs.............. -- 94,673 (94,673) -- Restructuring charges, net............... -- (3,486) -- (3,486) Royalty payments & other affiliate charges............................... -- 5,842 (5,842) -- Depreciation and amortization............ 12,780 21,055 (10,193) 23,642 --------- --------- --------- --------- EBITDA................................... $ 39,999 $ 23,025 $ -- $ 63,024 Ratio of EBITDA to interest expense...... 2.5x 2.4x
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income. 40 45 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (a) Pearle's most recent audited fiscal year ended on September 30, 1996. For purposes of the Unaudited Pro Forma Condensed Consolidated Statement of Income for the Company's fiscal year ended February 3, 1996, results of operations for Pearle are for its four quarters ended December 31, 1995, and exclude Pearle Holdings. For purposes of preparing the Unaudited Pro Forma Condensed Consolidated Statement of Income for the Company's 39 weeks ended November 2, 1996, the information for Pearle is the nine month period ended September 30, 1996, Pearle's second, third and fourth fiscal quarters, and excludes Pearle Holdings. The results of operations of Pearle included in the Unaudited Pro Forma Condensed Consolidated Statements of Income contain certain reclassification entries in order to present financial information on a basis consistent with the presentation used by the Company. These are (i) the inclusion in net revenue of interest income on franchise notes receivable ($4.7 million for the 12 months ending December 31, 1995 and $3.0 million for the nine months ending September 30, 1996) and (ii) the presentation of depreciation and amortization separately from cost of goods sold and operating expenses. (b) Cost of goods sold and operating expenses have been combined in the accompanying Unaudited Pro Forma Condensed Consolidated Statements of Income because information is not readily available to classify Pearle's cost of goods sold and selling, general and administrative expenses in a manner consistent with the Company's presentation. Pearle includes certain store occupancy costs and depreciation in cost of goods sold, whereas the Company reports such costs as operating expenses or depreciation and amortization. In addition, Pearle includes payroll, supplies and other costs related to the making of eyeglasses at its in-store labs in selling, general and administrative expenses; the Company and Pearle both classify similar costs of making eyeglasses at their respective central laboratories in cost of goods sold. As a result of the Pearle Acquisition, the Company's consolidated gross margin will likely decline from its historical levels because Pearle is expected to have a lower gross margin than the Company due to the higher cost of in-store labs and lower margin wholesale sales to franchised stores partially offset by franchise royalties, fees and interest income on franchise notes receivable which have no corresponding cost of goods sold. (c) For the twelve months ended December 31, 1995, Pearle recorded a net provision of approximately $8.8 million for estimated costs, consisting primarily of future commitments under operating leases, of closing unprofitable North American retail locations. During the nine months ended September 30, 1996, Pearle recorded net adjustments of $3.5 million to the restructuring reserves previously established. (d) Reflects the elimination of amounts paid to an affiliated company pursuant to a licensing agreement in connection with a 1989 acquisition for use of the predecessor's trademark and for management fees. As a result of the Pearle Acquisition, all future payment obligations were cancelled. (e) The Pearle Acquisition will be accounted for by the purchase method of accounting. Under purchase accounting, the total purchase price will be allocated to the tangible and intangible assets and liabilities of Pearle based upon their respective fair values as of the closing of the Pearle Acquisition based on valuations and other studies which are not yet available. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities in the accompanying Unaudited Pro Forma Condensed Consolidated Financial Data based on available information and certain assumptions that management believes to be reasonable. The actual allocation of purchase price and the resulting effect on income from operations may differ significantly from the pro forma amounts included herein. Consequently, the amounts reflected in the Unaudited Pro Forma Condensed Consolidated Financial Data are subject to change, and the final amounts may differ substantially. 41 46 The following reflects the effect of purchase adjustments on depreciation and amortization expense based upon management's assumptions (in thousands):
39 WEEKS FISCAL YEAR ENDED ENDED NOV. 2, 1996 FEB. 3, 1996 ------------ ------------ Amortization of new goodwill and intangible assets over 40 years.................................................... $ 1,585 $ 2,114 Elimination of amortization of Pearle's historical goodwill and intangible assets.................................... (11,778) (14,128) ------- -------- $(10,193) $(12,014) ======= ========
(f) Reflects the elimination of the provision for impairment of intangible assets and related costs that were nonrecurring incremental costs directly attributable to the Pearle Acquisition. The impairment of approximately $88.0 million was recorded as a write-off of excess cost over fair value of net tangible assets acquired. The remaining charge of approximately $6.7 million reflected amounts paid or to be paid by a Pearle affiliate on behalf of Pearle. (g) On October 27, 1994, Pearle entered into an agreement to sell all of the capital stock of Ophthalmic Research Group International Company ("ORGIC") to a third party for cash consideration of $14.8 million. During the year ended September 30, 1993, the remaining book value of ORGIC of approximately $22.1 million was written off (included in amortization and impairment of intangible assets) since, in the opinion of Pearle's management, the value of such assets was not recoverable. As a result, the gain on sale in 1995 was equal to the cash consideration. (h) Reflects the effect on interest expense resulting from the adjustments below (in thousands):
39 WEEKS FISCAL YEAR ENDED ENDED NOV. 2, 1996 FEB. 3, 1996 ------------ ------------ Interest on the Notes, including amortization of discount................................................. $ 11,156 $ 14,874 Interest expense from pro forma borrowing under the New Credit Facility.......................................... 20 324 Elimination of interest expense on the $15.1 million of Senior Notes held by Parent to be purchased from and cancelled by the Company................................. (1,286) (1,746) Elimination of interest expense charged by Pearle's parent................................................... (11,528) (15,872) Amortization of financing costs of the New Credit Facility and the Notes over their respective terms, less the elimination of amortization of financing costs related to the Company's Revolving Credit Facility.................. 568 753 ------- -------- $ (1,070) $ (1,667) ======= ========
(i) Reflects elimination of interest income on temporary cash investments used to fund the Pearle Acquisition. (j) Reflects the increase in income tax expense resulting from the combined pro forma results of the Company and Pearle. Income tax expense includes the provision for state, local and federal income taxes. The pro forma effective tax rate differs from the federal statutory rate of 35% principally because of state and local taxes and permanent differences arising from amortization of the Company's existing goodwill and goodwill associated with the Pearle Acquisition. (k) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes and fixed charges. Fixed charges consist of interest expense, including amortization of deferred debt issuance costs, and one-third of minimum rental expense less sublease rental income (the portion deemed representative of the interest factor). 42 47 (l) EBITDA is defined as income from operations before depreciation and amortization and nonrecurring charges including restructuring and store closure costs. The Company has included information concerning EBITDA here as it is relevant for covenant analysis under the Indentures for the Notes and the Senior Notes and because it is used by certain investors as a measure of a company's ability to service its debt. EBITDA is not a performance measure under generally accepted accounting principles and should not be considered more meaningful than operating income or cash flows as an indicator of operating performance. For purposes of computing the ratio of EBITDA to interest expense, interest expense excludes the amortization of deferred financing costs. Amortization of deferred financing costs used to compute the pro forma ratios of EBITDA to interest expense were $0.9 million and $0.7 million for the fiscal year ended February 3, 1996 and the 39 weeks ended November 2, 1996, respectively. 43 48 SELECTED HISTORICAL FINANCIAL AND OTHER DATA COMPANY The following table sets forth selected historical financial and other data of the Company for (i) the fiscal years 1991 through 1995, which have been derived from the Company's audited consolidated financial statements for those years and (ii) the 39 weeks ended October 28, 1995 and November 2, 1996 which have been derived from the Company's unaudited consolidated condensed financial statements for those periods, which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the 39 weeks ended November 2, 1996 are not necessarily indicative of results that may be expected for the entire year. Prior to the Initial Capitalization (see "The Company"), all operations of the Company were conducted by subsidiaries of the Parent. The selected historical financial and other data set forth below for fiscal years 1991 through 1993 are based on historical cost as if the Initial Capitalization had occurred at the beginning of fiscal 1991 and the Company had been in existence for those periods. Accordingly, transactions of the Parent prior to the Initial Capitalization on September 30, 1993, except for those relating to the debt not assumed by the Company and the interest expense thereon, have been included in the selected historical financial and other data below. The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are identified according to the calendar year in which they begin. For example, the fiscal year ended February 3, 1996 is referred to as "fiscal 1995." Fiscal 1995 consisted of a 53-week period; all other fiscal years presented consisted of 52-week periods. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes included elsewhere herein.
FISCAL YEAR ENDED 39 WEEKS ENDED -------------------------------------------------------- -------------------- FEB. 1, JAN. 30, JAN. 29, JAN. 28, FEB. 3, OCT. 28, NOV. 2, 1992 1993 1994 1995 1996 1995 1996 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) OPERATING RESULTS: Net sales............................ $426,453 $428,066 $472,888 $528,049 $577,091 $401,999 $443,057 Gross profit......................... 305,582 304,012 331,936 363,326 394,157 276,753 306,384 Operating expenses................... 247,562 258,534 281,149 305,470 332,540 242,269 266,385 Depreciation and amortization........ 13,701 13,581 13,516 14,892 15,686 11,552 12,780 -------- -------- -------- -------- -------- -------- -------- Income from operations............... 44,319 31,897 37,271 42,964 45,931 22,932 27,219 Interest expense..................... 45,064 18,897 18,029 22,266 22,143 16,403 15,943 Interest income...................... (1,029) (127) (378) (443) (761) (531) (1,161) Income tax provision (benefit)....... 3,073 6,161 2,361 (3,703) 10,799 3,107 5,473 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations (a)..................... $ (2,789) $ 6,966 $ 17,259 $ 24,844 $ 13,750 $ 3,953 $ 6,964 ======== ======== ======== ======== ======== ======== ======== OTHER DATA: Gross margin......................... 71.7% 71.0% 70.2% 68.8% 68.3% 68.8% 69.2% EBITDA (c)........................... $ 58,020 $ 45,478 $ 50,787 $ 57,856 $ 61,617 $ 34,484 $ 39,999 EBITDA margin (c).................... 13.6% 10.6% 10.7% 11.0% 10.7% 8.6% 9.0% Capital expenditures................. $ 9,816 $ 9,580 $ 13,074 $ 18,527 $ 19,675 $ 14,042 $ 15,553 Ratio of earnings to fixed charges (b)................................ 1.0x 1.5x 1.7x 1.7x 1.8x 1.3x 1.5x NUMBER OF UNITS (AT END OF PERIOD): Cole Vision.......................... 751 769 774 938 1,013 998 1,055 Things Remembered.................... 697 717 737 760 778 775 797 Cole Gift Centers.................... 598 594 586 589 587 588 505 -------- -------- -------- -------- -------- -------- -------- Total......................... 2,046 2,080 2,097 2,287 2,378 2,361 2,357 ======== ======== ======== ======== ======== ======== ======== COMPARABLE STORE SALES GROWTH (d): Cole Vision.......................... (2.5)% (1.4)% 10.7% 9.8% 5.6% 7.4% 8.7% Things Remembered.................... (1.4)% (0.7)% 1.8% 0.1% 3.1% 4.3% 3.8% Cole Gift Centers.................... (1.4)% 1.8% 31.6% 5.8% (4.8)% (4.8)% 0.7% Total......................... (1.9)% (0.7)% 9.4% 5.5% 3.4% 5.0% 6.3% BALANCE SHEET DATA (AT END OF PERIOD) (e): Total assets......................... $237,302 $225,861 $257,945 $283,303 $298,990 $295,633 $327,118 Long-term debt....................... 513,388 190,556 188,299 184,388 180,218 184,722 180,033 Stockholder's equity (deficit)....... (420,150) (58,902) (29,793) 1,139 2,497 5,092 9,461
44 49 (a) Earnings per share and weighted average number of common shares outstanding data for all periods have been omitted as the Company is a wholly owned subsidiary of the Parent. (b) Earnings used in computing the ratio of earnings to fixed charges consist of income (loss) before income taxes plus fixed charges. Fixed charges consist of interest on indebtedness, amortization of deferred financing fees and the portion minimum rent expense less sublease rental income that represents interest. (c) EBITDA is defined as income from operations before depreciation and amortization and nonrecurring charges, if any. The Company has included information concerning EBITDA here as it is relevant for covenant analysis under the Indentures for the Notes and the Senior Notes and because it is used, by certain investors as a measure of a company's ability to service its debt. EBITDA is not a performance measure under generally accepted accounting principles and should not be considered more meaningful than operating income or cash flows as an indicator of operating performance. (d) Comparable store sales growth is calculated using sales for all stores open at least twelve months, for the weeks that the stores were open in both the previous and current periods. For the year ended January 29, 1994, the growth in comparable store sales for Cole Gift Centers includes the addition of greeting card merchandise to 171 locations in February 1993. (e) The balance sheet data for the fiscal year ended February 1, 1992 reflect historical amounts for the Parent and not the Company. In fiscal 1992, the Parent exchanged a significant portion of long-term debt (including redeemable preferred stock) for equity resulting in a reduction of the Parent's long-term debt and stockholders' deficit. 45 50 SELECTED HISTORICAL FINANCIAL AND OTHER DATA (CONTINUED) PEARLE The following table sets forth selected historical financial and other data of Pearle for the fiscal years 1993 through 1996, which have been derived from Pearle's audited consolidated financial statements for those years. The selected historical financial and other data of Pearle below includes the operating results and other data of Pearle Holdings presented in note (a) set forth below. Pearle Holdings was disposed of by the Parent prior to the Pearle Acquisition although the Parent retains a minority interest in Pearle Holdings' business. The information presented below is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements and notes of Pearle included elsewhere herein.
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------------------ 1993 1994 1995 1996 --------- --------- --------- --------- OPERATING RESULTS (a): Revenues............................................. $ 364,938 $ 336,018 $ 354,252 $ 366,024 Gross profit (b)..................................... 170,153 154,678 167,067 181,538 Selling, general and administrative expenses (c)..... 202,810 160,820 155,256 164,129 Restructuring and store closure costs (d)............ 33,854 1,876 7,265 (2,083) Royalty payments and other affiliate charges (e)..... 5,842 5,916 6,039 6,406 Amortization of intangible assets.................... 19,567 14,289 14,260 15,604 Provision for impairment of intangible assets and related costs (f).................................. 22,146 -- -- 94,673 -------- -------- -------- -------- Income (loss) from operations........................ (114,066) (28,223) (15,753) (97,191) Interest expense to Pearle's parent (g).............. 15,670 17,309 15,769 15,461 Other interest income, net........................... (3,545) (4,080) (4,829) (4,258) Gain on sale of subsidiary (f)....................... -- -- (14,811) -- Income tax benefit................................... (34,716) (10,480) (12,845) (6,011) -------- -------- -------- -------- Income (loss) before cumulative effect of accounting change.................................. $ (91,475) $ (30,972) $ 963 $(102,383) ======== ======== ======== ======== OTHER DATA (a): Gross margin (b)..................................... 46.6% 46.0% 47.2% 49.6% EBITDA (h)........................................... $ 32,166 $ 28,621 $ 35,278 37,696 EBITDA margin (h).................................... 8.8% 8.5% 10.0% 10.3% Capital expenditures................................. $ 4,945 $ 6,083 $ 7,321 $ 13,558 NUMBER OF UNITS IN NORTH AMERICA (AT END OF PERIOD): Company-owned stores................................. 412 368 336 345 Franchised stores.................................... 433 387 361 340 -------- -------- -------- -------- Total............................................ 845 755 697 685 ======== ======== ======== ======== COMPARABLE STORE SALES GROWTH (U.S. LOCATIONS) (i): Company-owned stores................................. (6.6)% 4.4% 4.2% (1.2)% Franchised stores.................................... (2.0)% 3.0% 2.1% 2.0% - --------------- (a) Includes the following selected financial data of Pearle's European operations owned and operated by Pearle Holdings:
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------------------ 1993 1994 1995 1996 --------- --------- --------- --------- Revenues............................................... $ 52,890 $ 48,704 $ 59,841 $ 63,817 Gross profit........................................... 24,933 21,899 26,469 27,968 Selling, general and administrative expenses........... 18,051 17,974 19,583 20,177 Amortization and impairment of intangible assets....... 217 209 236 238 -------- -------- -------- -------- Income from operations................................. 6,665 3,716 6,650 7,553 Interest expense (income), net......................... 582 (99) (429) (488) Income tax provision................................... 1,986 1,216 2,135 2,510 -------- -------- -------- -------- Net income............................................. $ 4,097 $ 2,599 $ 4,944 5,531 ======== ======== ======== ======== EBITDA................................................. $ 10,183 $ 6,858 $ 10,184 $ 11,487 Capital expenditures................................... 1,084 2,272 3,279 3,193
46 51 (b) Gross profit and gross margin for Pearle are determined on a basis not consistent with that of the Company. Pearle includes certain store occupancy costs and depreciation in cost of goods sold, whereas the Company reports such costs as operating expenses or depreciation and amortization. In addition, Pearle includes payroll, supplies and other costs related to the making of eyeglasses at its in-store labs in selling, general and administrative expenses; the Company and Pearle both classify similar costs of making eyeglasses at their central laboratories in cost of goods sold. Information to reclassify Pearle's historical costs and expenses on a basis consistent with the Company is not readily available. As a result of the Pearle Acquisition, the Company's consolidated gross margin will likely decline from its historical levels because Pearle is expected to have a lower gross margin than the Company due to the higher cost of in-store labs and lower margin wholesale sales to franchised stores partially offset by franchise royalties, fees and interest income on franchise notes receivable which have no corresponding cost of goods sold. (c) During the year ended September 30, 1993 Pearle recorded a charge to operations (included in selling, general and administrative expenses) of approximately $19.5 million related to the disposal of obsolete retail and laboratory equipment, the abandonment of certain leasehold improvements, the elimination of unrecoverable capitalized software costs and costs associated with the elimination of operations in Germany. (d) During the year ended September 30, 1993 Pearle recorded a provision related to restructuring its retail operations, including the costs of closing certain unprofitable United States and all German retail locations. During the years ended September 30, 1994 and 1995 Pearle recorded net provisions for estimated costs, consisting primarily of future commitments under operating leases, of closing unprofitable United States and international retail locations. During the year ended September 30, 1996 $2.1 million of the restructuring and store closure reserves was reversed. (e) Represents amounts paid to an affiliated company pursuant to a licensing agreement in connection with a 1989 acquisition for use of the predecessor's trademark and for management fees. As a result of the Pearle Acquisition, all future payment obligations will be cancelled. (f) On October 27, 1994, Pearle entered into an agreement to sell all of the capital stock of Ophthalmic Research Group International Company ("ORGIC") to a third party for cash consideration of $14.8 million. During the year ended September 30, 1993, the remaining book value of ORGIC of approximately $22.1 million was written off (included in amortization and impairment of intangible assets) since, in the opinion of Pearle's management, the value of such assets was not recoverable. As a result, the gain on sale in 1995 was equal to the cash consideration. As a result of the sale of Pearle, an impairment of the assets of Pearle was determined to exist at September 30, 1996. Accordingly, an impairment of approximately $88.0 million was recorded to reflect the assets of Pearle at their estimated fair value. The impairment was recorded as a write-off of excess cost over fair value of net tangible assets acquired. A charge of approximately $6.7 million was also recorded for amounts which were paid or will be paid by a Pearle affiliate on behalf of Pearle as a result of the sale. (g) Interest expense related to intercompany balances which will be cancelled and contributed to Pearle's capital at the closing of the Transactions. (h) EBITDA is defined as income from operations before depreciation and amortization and nonrecurring charges (including the items described in notes (c), (d), (e) and (f) above) and includes interest income on franchise notes receivable. The Company has included information concerning EBITDA here as it is relevant for covenant analysis under the Indentures for the Notes and the Senior Notes and because it is used by certain investors as a measure of a company's ability to service its debt. EBITDA is not a performance measure under generally accepted accounting principles and should not be considered more meaningful than operating income or cash flows as an indicator of operating performance. (i) Comparable store sales growth is calculated using sales for all stores open at least twelve months, for the weeks that the stores were open in both the previous and current periods. 47 52 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a direct wholly owned subsidiary of the Parent. The following discussion should be read in conjunction with the Selected Historical Financial and Other Data and the Unaudited Pro Forma Condensed Consolidated Financial Data and the notes thereto. Except as otherwise indicated, the following discussion relates to the Company on a historical basis without giving effect to the Pearle Acquisition. Any discussion of Pearle's historical operating results is inclusive of the operations of Pearle Holdings except where indicated. GENERAL The Company is a leading provider of eyewear products, optometric services and personalized gifts. The Pearle Acquisition creates the second largest vision care company in the United States, and with Cole Gift, results in the Company, on a pro forma basis for fiscal 1995, reaching $873.7 million in annual net revenues and $84.0 million in EBITDA. See "Unaudited Pro Forma Condensed Consolidated Financial Data." The Company has produced a record of consistent growth in sales and EBITDA. During the three-year period ended February 3, 1996, the Company's net revenues increased from $472.9 million to $577.1 million, representing a compound annual growth rate of 10.5%. Over the same time period, EBITDA has increased from $50.8 million to $61.6 million, representing a compound annual growth rate of 10.1%. The Company's growth has been driven by its increased managed vision care business, the introduction of new merchandising concepts, new store openings and selected acquisitions. Cole Vision acquired 73 Sears Optical locations and two freestanding Vision Club stores in Canada in November 1996 for a purchase price of approximately $2.5 million. These locations had sales of approximately $15 million during 1995. The Pearle Acquisition Dr. Stanley Pearle opened Pearle's first store in Savannah, Georgia in 1961. Through a period of broad expansion over the next 20 years, Pearle became the first nationwide retail eyecare chain. From 1988 to 1990, Pearle expanded by adding 170 stores through six acquisitions and by opening approximately 123 company-owned and franchised stores. Pearle has maintained a franchise program since 1980. As of November 2, 1996, 49% of Pearle's North American and Caribbean stores were franchised. In 1985, Pearle was acquired by GrandMet, under whose ownership Pearle experienced frequent changes in both operating strategy and senior management. Beginning in fiscal 1993, Pearle embarked on a major restructuring program. Since 1994, Pearle closed 129 stores worldwide, of which 119 were in the United States. In addition, Pearle wrote off obsolete retail and laboratory equipment, unrecoverable capitalized software and the purchase of Ophthalmic Research Group International Company, a lens equipment manufacturer whose assets were deemed unrecoverable by Pearle. Pearle's restructuring program has resulted in the closure of unprofitable locations, staff reductions in administration and manufacturing and the reduction of inventory. A new management team, which was put in place during 1994 and 1995, has worked to improve Pearle's franchisee and professional relationships, reemphasized managed care, refocused Pearle's advertising budget to assist the franchisees with additional local advertising and reintroduced Dr. Stanley Pearle through television advertising in order to enhance the Pearle Vision brand awareness. Pearle's new management has also begun opening new locations, including 13 company-owned and eleven franchised locations in the year ended September 30, 1996. During Pearle's fiscal 1995, consolidated net sales grew by 5.4% to $354.3 million, which included comparable store sales increases of 4.2% for company-owned stores. Pearle's fiscal 1995 consolidated EBITDA, excluding nonrecurring items, was $35.3 million, a 23.3% increase over 1994 levels, driven primarily by lower costs resulting from store closures, comparable store sales growth and other cost containment efforts. In Pearle's fiscal 1996, consolidated net sales increased 3.3% to $366.0 million, which included a comparable store sales decrease of 1.2% for company-owned stores. Consolidated EBITDA for fiscal 1996, excluding nonrecurring items, increased 6.9% to $37.7 million. 48 53 Certain Effects of the Pearle Acquisition The Pearle Acquisition is the most significant strategic development for the Company in the last ten years. The Company believes that the Pearle Acquisition will create economies of scale and synergies that, in conjunction with the utilization of the best historical practices of each of the Company and Pearle, will result in increased revenue and improved operating results and enable the Company to better serve its customers. Cole Vision historically has had higher operating margins than Pearle. The Company will evaluate several opportunities to improve Pearle's operating results through revenue expansion, cost reductions and consolidation of duplicative facilities and functions. Although the acquisition of Pearle will moderate the seasonality of the Company's business due to relatively lower levels of optical product sales during the Christmas holiday season, the Company's business will remain seasonal. Potential Revenue Enhancements. The Company believes that there are opportunities for revenue enhancement in its combined operations. The Pearle Acquisition positions the Company for growth through the expansion of Pearle's network of company-owned and franchised stores. The Company expects that future new store growth will facilitate a rationalization of geographic coverage between company-owned and franchised stores in order to permit more focused local promotional and advertising programs and to streamline field organizations. The Pearle Acquisition enhances the Company's ability to compete effectively in the rapidly expanding managed vision care component of the optical industry by increasing the Company's number of distribution points and geographical presence and broadening its merchandise selection. Furthermore, management intends to introduce selling systems at Pearle that emphasize the sale of higher margin products such as anti-reflective coatings, polycarbonate lenses, and eyeglass warranties. Certain Cost Savings. The Company intends to continuously evaluate the operations of Pearle and Cole Vision for opportunities to effect operational efficiencies and reduce costs through the integration of Pearle. For example, management believes that it can improve Pearle's operating results by introducing direct foreign sourcing of eyeglass frames, which account for approximately 55% of Cole Vision's supply and provide significant cost savings over purchases from domestic distributors. Another potential strategy may be the removal of in-store laboratories in Pearle locations where sales volume is insufficient to support the higher overhead. Furthermore, management believes that economies of scale and other cost saving opportunities exist, particularly in purchasing, advertising efficiency and distribution. Certain Costs Associated with the Pearle Acquisition. The Company expects that the Pearle Acquisition will increase its need for letters of credit drawn on working capital facilities. Accordingly, the Company replaced its former $50 million Revolving Credit Facility with the New Credit Facility, which provides a maximum available line of $75 million. See "Description of Other Indebtedness -- New Credit Facility." In addition, the Company intends to closely evaluate the various operations of Pearle and Cole Vision for opportunities to effect operational efficiencies. If, as a result of such review, it is decided to eliminate any assets or operations of Pearle or of Cole Vision, such decision could result in a charge for business integration and consolidation costs that has the effect of reducing assets and the Company's net worth, perhaps creating negative net worth for accounting purposes. See "Risk Factors -- Potential Negative Net Worth." Following the Pearle Acquisition, the Company's consolidated gross margin will likely decline from its historical levels. This will likely result because even after conforming Pearle's accounting methods to those of the Company, Pearle is expected to have a lower gross margin than the Company due to the higher costs of in-store laboratories and lower margin wholesale sales to franchised stores partially offset by franchise royalties, fees and interest income on franchise notes receivable which have no corresponding cost of goods sold. RESULTS OF OPERATIONS NINE MONTHS ENDED NOVEMBER 2, 1996 COMPARED TO NINE MONTHS ENDED OCTOBER 28, 1995 Net sales for the first nine months of fiscal 1996 increased 10.2% to $443.1 million from $402.0 million for the same period a year ago. The increase in consolidated sales for the first nine months of fiscal 1996 was due to a comparable store sales increase of 6.3% and to the opening of additional Cole Gift and Cole Vision units, partially offset by the closing of 95 low-volume Cole Gift departments. Comparable store sales increased 49 54 primarily as a result of successful eyewear promotions and growth in the managed vision care program at Cole Vision, along with the roll-out of monogrammed softgoods and introduction of new merchandise at Cole Gift. At November 2, 1996, the Company operated 2,357 specialty service retail units compared to 2,361 at October 28, 1995. The decline in stores operated was a result of the closing of low-volume locations (whose aggregate sales in fiscal 1995 represented less than one percent of Cole Gift's sales) in Sears, Venture and Montgomery Ward stores as part of an expense reduction program. For the first nine months, gross profit increased to $306.4 million in fiscal 1996 from $276.8 million for the same period a year ago. Gross margins for the first nine months in fiscal 1996 and fiscal 1995 were 69.2% and 68.8%, respectively. The increase in the gross margin percentage was the result of lower product costs, improved optical lab productivity and a higher level of personalization in the sales mix at Things Remembered. For the first nine months of fiscal 1996, operating expenses increased 10.0% to $266.4 million from $242.3 million for the same period in fiscal 1995. As a percentage of sales, operating expenses decreased to 60.1% for the first nine months of fiscal 1996 from 60.3% for the same period in fiscal 1995. The operating expense increase compared to last year was primarily due to higher advertising expenditures, payroll costs and store occupancy expenses. Advertising expenditures at Cole Vision were increased for optical promotions to encourage continued sales growth above the prior year's promotions. Payroll costs increased because of more higher-volume retail units open in 1996, including an increased number of Things Remembered personalization superstores, and additional payroll to support increased sales. Store occupancy expenses increased primarily as a result of the increased number of Things Remembered personalization superstores and higher percentage rents caused by increased comparable store sales. Fiscal 1996 depreciation and amortization expense of $12.8 million in the first nine months was $1.2 million more than the same period in fiscal 1995 reflecting an increase in capital expenditures beginning in the latter part of fiscal 1993. Income from operations increased 18.7% to $27.2 million in the first nine months primarily because of increased sales at Cole Vision and Things Remembered. Net interest expense decreased $1.1 million to $14.8 million in the first nine months. The decrease for the nine months was primarily due to the retirement of $5.0 million of Senior Notes in November 1995, the elimination of working capital borrowings and increased interest income from an increase in temporary cash investments. Income tax provisions were recorded in the first nine months of fiscal 1996 and fiscal 1995 using the Company's estimated annual effective tax rate of 44%. For the first nine months of fiscal 1996, net income increased to $7.0 million from $4.0 million for that same period last year, due to the improvement in income from operations and the decrease in net interest expense. The Company's business historically has been seasonal with approximately 30% of its sales and approximately 50% of its income from operations occurring in the fourth fiscal quarter because of the importance of gift sales during the Christmas retailing season. Therefore, results of operations for interim periods are not necessarily indicative of full year results. FISCAL 1995 COMPARED TO FISCAL 1994 Net sales increased 9.3% to $577.1 million in fiscal 1995 from $528.0 million in fiscal 1994. The increase in consolidated sales was due to a comparable store sales increase of 3.4%, sales for the 53rd week of approximately $9.3 million and additional Things Remembered and Cole Vision units open in fiscal 1995. Comparable store sales increased primarily as a result of successful eyewear promotions and growth in the managed vision care program at Cole Vision and expanded gift and softgoods merchandise at Things Remembered locations. Fourth quarter comparable store sales were even with last year as the retail industry in general experienced a very difficult Christmas season and severe weather conditions in many major geographic areas. At February 3, 1996, the Company operated 2,378 specialty service retail locations versus 2,287 at the end of the prior year. The net increase in retail units includes the acquisition by Cole Vision on May 21, 1995, 50 55 of 59 optical departments located in BJ's Wholesale Club stores and the sale of the Company's 39 Sunspot fashion sunglass kiosks as of April 29, 1995. Gross profit increased to $394.2 million in fiscal 1995 from $363.3 million in fiscal 1994. Gross margins for fiscal 1995 and fiscal 1994 were 68.3% and 68.8%, respectively. The decrease in gross margin percentage was primarily due to an increase in the sales of lower margin optical products, including disposable contact lenses, and a lower mix of higher margin merchandise, primarily keys, at CGC. Gross margin in the fourth quarter of fiscal 1995, however, improved to 67.1% from 66.9% in fiscal 1994, benefitting from fiscal 1994 and 1995 investments aimed at increasing optical laboratory capacity and production efficiency and from reduced material costs for spectacles. Operating expenses increased 8.9% to $332.5 million in fiscal 1995 from $305.5 million for the prior year. As a percentage of sales, operating expenses decreased to 57.6% in fiscal 1995 from 57.8% in fiscal 1994. Operating expenses increased primarily because of higher payroll costs, store occupancy expenses and advertising expense due, in part, to the 53rd week. The higher payroll costs were also the result of more retail units in fiscal 1995 and additional payroll to support the higher level of sales. Partially offsetting the payroll increases were savings from outsourcing the Company's data processing operations in fiscal 1995. Store occupancy expense increased because of the increased number of retail units and higher percentage rents due to increased comparable store sales. Advertising costs increased primarily as a result of additional efforts to support eyewear promotions. Also included in operating expenses in fiscal 1995 was a $0.2 million provision for the closing of approximately 90 low volume leased key and gift departments in the first quarter of fiscal 1996. Fiscal 1995 depreciation and amortization expense of $15.7 million was $0.8 million more than fiscal 1994 reflecting an increase in capital expenditures that began in the latter part of fiscal 1993. Income from operations increased 6.9% to $45.9 million in fiscal 1995 from $43.0 million the prior year. The increase was primarily attributable to the increased sales. The lower gross margin percentage was partially offset by improved leveraging of operating expenses. Net interest expense for fiscal 1995 of $21.4 million was $0.4 million less than that of the prior year. This decrease was primarily due to an increase in interest income and lower borrowings on the Senior Notes. The income tax provision of $10.8 million for fiscal 1995 represents an effective tax rate of 44.0%. This rate reflects the significant impact of non-deductible amortization of goodwill. The income tax benefit of $3.7 million in fiscal 1994 included the effects of utilizing all of the Company's net operating loss carryforwards and the reversal of a valuation allowance on net deferred tax assets in the fourth quarter. Net income in fiscal 1994 of $24.7 million included a loss on early extinguishment of debt of $0.1 million to reflect the payment of premiums, the write-off of unamortized debt discount and other costs associated with retiring the debt in connection with the Parent's initial public offering ("IPO"). FISCAL 1994 COMPARED TO FISCAL 1993 Net sales increased 11.7% to $528.0 million in fiscal 1994 from $472.9 million in fiscal 1993. The increase in consolidated sales was due to a comparable store sales increase of 5.5% and additional Things Remembered and Cole Vision units opened in fiscal 1994. Comparable store sales increased primarily as a result of successful eyeglass promotions and growth in managed vision care sales at Cole Vision, which continued to take advantage of the general improvement within the optical industry. Comparable store sales gains from increased gift and greeting card sales at Cole Gift Center locations were offset for the most part by soft fourth quarter sales at Things Remembered which experienced the general sales weakness that affected many enclosed mall retailers during the Christmas selling season. At January 28, 1995, the Company operated 2,287 specialty service retail locations versus 2,097 at the end of the prior year. The net increase in retail units includes the acquisition by Cole Vision of 107 optical departments located in Montgomery Ward stores as of January 30, 1994. Gross profit increased to $363.3 million in fiscal 1994 from $331.9 million in fiscal 1993. Gross margins for fiscal 1994 and fiscal 1993 were 68.8% and 70.2%, respectively. The decrease in gross margin percentage 51 56 was primarily attributable to Cole Vision as the optical promotions delivered lower average retails and encouraged the sale of higher cost products, combined with an increased mix of lower margin contact lenses. Operating expenses increased 8.7% to $305.5 million in fiscal 1994 from $281.1 million the prior year. As a percentage of sales, operating expenses decreased to 57.8% in fiscal 1994 from 59.5% in fiscal 1993. Operating expenses increased primarily due to higher payroll costs and store occupancy expenses partially offset by a reduction in advertising expense. The higher payroll costs were due to more retail units in fiscal 1994 and additional payroll to support the higher level of sales, offset in part by lower benefits and incentive compensation costs. Store occupancy expense increased because of the increased number of retail units and higher percentage rents caused by increased comparable store sales. Advertising expenditures were reduced this year primarily because of a television advertising test at Things Remembered during the prior year's Christmas retail season and advertising efficiencies at Cole Vision. Fiscal 1994 depreciation and amortization expense of $14.9 million was $1.4 million more than fiscal 1993 reflecting an increase in capital expenditures beginning in the latter part of fiscal 1993 and the acquisition of the Montgomery Ward optical departments. Income from operations increased 15.3% to $43.0 million in fiscal 1994 from $37.3 million the prior year. The increase was primarily attributable to the increased comparable store sales. The lower gross margin percentage was more than offset by improved leveraging of operating expenses which resulted from the lower payroll costs and advertising expenditures as a percentage of sales. Net interest expense for fiscal 1994 of $21.8 million was $4.2 million more than that of the prior year. This increase was primarily a result of the higher effective interest rates on outstanding debt following completion of the offering of the Senior Notes on September 30, 1993. Partially offsetting this was a reduction in interest expense resulting from the early extinguishment of debt in connection with the IPO. The income tax benefit of $3.7 million in fiscal 1994 includes the effects of utilizing all of the Company's net operating loss carryforwards and the reversal of a valuation allowance on net deferred tax assets in the fourth quarter of fiscal 1994. Based on the complete utilization of the net operating loss carryforwards, the Company's historic levels of income from operations and expected levels of future taxable income, the Company believes that it is more likely than not that net deferred tax assets can be realized and, thus, no valuation allowance is needed. The income tax provision of $2.4 million for fiscal 1993 consisted of only state income taxes. Net income in fiscal 1994 of $24.7 million included a loss on early extinguishment of debt of $0.1 million to reflect the payment of premiums, the write-off of unamortized debt discount and other costs associated with retiring the debt in connection with the IPO. Net income in fiscal 1993 of $36.1 million included a gain on extinguishment of debt of $18.8 million related to the issuance of the Senior Notes. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity is funds provided from operations of its operating subsidiaries. In addition, the Company's principal operating subsidiaries have available to them working capital commitments of $75.0 million under the New Credit Facility, reduced by commitments under letters of credit. The New Credit Facility replaced, contemporaneous with the consummation of the Pearle Acquisition, the existing $50.0 million Revolving Credit Facility. There were no working capital borrowings outstanding under the Revolving Credit Facility as of November 2, 1996 and the maximum amounts outstanding during fiscal 1995 and fiscal 1994 were $3.5 million and $13.0 million, respectively. There were no working capital borrowings during the first nine months of fiscal 1996. The maximum amount outstanding during the first nine months of fiscal 1995 was $3.5 million. The New Credit Facility contains covenants restricting the ability of the Company's operating subsidiaries to, among other things, pay dividends or make other restricted payments to the Company. The New Credit Facility permits the Company's subsidiaries to pay dividends to the Company to the extent necessary to permit it to pay all interest and principal on the Senior Notes and the Notes when due. At November 2, 1996, the Company had outstanding $180.9 million of Senior Notes. The Senior Notes bear interest at a rate of 11.25% per annum, payable semi-annually on each April 1 and October 1. During the 52 57 second quarter of fiscal 1996, the Parent completed a public offering of 1,437,500 shares of Common Stock at an offering price of $19.25 per share. The net proceeds from the offering were $26.2 million. A portion of the net proceeds was used to purchase in the open market $15.1 million principal amount of the Company's Senior Notes plus accrued interest thereon. The $15.1 million aggregate principal amount of the Senior Notes were retired through the Senior Note Repurchase. The Senior Note Repurchase will result in a reduction of interest expense of $1.7 million annually. After the Transactions, $165.8 million in principal amount of the Senior Notes is outstanding. The Company has no significant principal payment obligations under any of its outstanding indebtedness until the Senior Notes mature in 2001. The ability of the Company and its subsidiaries to satisfy that obligation and its obligations under the Notes will be primarily dependent upon future financial and operating performance of the subsidiaries and upon the Company's ability to renew or refinance borrowings or to raise additional equity capital. Pro forma for the Offering, as of November 2, 1996, the Company had an intercompany payable to affiliates of $40.3 million. Such payable arose primarily from the Parent's loan to the Company of proceeds from the Parent's 1996 public offering of common stock and cash that had earlier been received as dividends from the Company and subsequently borrowed by the Company. Operations for the first nine months provided cash of $9.8 million in fiscal 1996 compared to $5.2 million provided in 1995. The increase in cash provided by operations resulted from an increase in net income and favorable changes in accounts receivable, prepaid expenses, accounts payable and accrued liabilities. These favorable changes were partially offset by unfavorable changes in inventory in fiscal 1996 as compared to fiscal 1995. Operations generated net cash of $36.2 million in fiscal 1995, $19.1 million in fiscal 1994 and $33.3 million in fiscal 1993. The $17.1 million increase in cash provided by operations in fiscal 1995 compared to fiscal 1994 was primarily due to a $2.5 million reduction in inventory, despite a 9.3% increase in sales, compared to an $8.7 million increase in inventory the prior year. Also, income from operations in fiscal 1995 was higher by $3.0 million and interest expense was lower by $0.4 million than in fiscal 1994. The $14.3 million decrease in cash provided from operations in fiscal 1994 compared to fiscal 1993 was primarily the result of the following: a $5.7 million increase in fiscal 1994 income from operations offset by a $2.9 million decrease in noncash interest expense and a decrease in accrued liabilities in fiscal 1994 compared to the substantial increase in accrued liabilities that occurred in fiscal 1993 (primarily accrued interest and incentive compensation). Net capital additions were $15.5 million and $14.0 million for the first nine months of fiscal 1996 and fiscal 1995, respectively, and were $19.7 million, $18.5 million and $13.1 million in fiscal 1995, 1994 and 1993, respectively. In addition, the Company used $0.8 million for the purchase of the BJ's Wholesale Club optical departments in fiscal 1995, $4.7 million for the purchase of the Montgomery Ward optical departments in fiscal 1994 and $3.2 million for the acquisition of a mail order contact lens business in fiscal 1993. The majority of the capital additions were for store fixtures, equipment and leasehold improvements for new stores and the remodeling of existing stores. For the balance of fiscal 1996, the Company expects to continue to expand the number of stores as well as remodel and relocate stores. The Company currently estimates capital expenditures in fiscal 1996 will exceed $20.0 million and that for 1997 including Pearle will exceed $30.0 million. The Company has acquired land to construct a new warehouse and distribution facility for Cole Gift that is expected to improve distribution efficiencies. The facility, which the Company expects will be completed in fiscal 1997, will most likely be financed through a sale and lease-back transaction or through conventional secured real estate financing. The Company estimates the cost for this facility to be approximately $10 million. The Company believes that funds provided from operations along with funds available under the New Credit Facility will provide adequate sources of long-term liquidity to allow the Company's operating subsidiaries, including Pearle, to continue to expand the number of stores. The Pearle Acquisition and consummation of the Offering involve a wide variety of risk factors that may adversely affect the Company. 53 58 See "Risk Factors -- Leverage;" "-- Integration of Pearle;" and "-- Competition and Other Business Factors." This Prospectus contains and incorporates by reference certain statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Those statements include, among other things, the discussions of the Company's business strategy and expectations concerning the Company's position in the industry, future operations, margins, profitability, liquidity and capital resources, as well as statements concerning the integration of the Pearle Acquisition and achievement of cost savings and other efficiencies in connection therewith. Investors in the Notes offered hereby are cautioned that reliance on any forward-looking statement involves risks and uncertainties, and that although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be materially incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's plans and objectives will be achieved. 54 59 BUSINESS GENERAL The Company, a leading provider of eyewear products, optometric services and personalized gifts, acquired Pearle on November 15, 1996. The combination of the Company and Pearle creates the second largest optical retail company in the United States, with over 1,800 locations in the United States, Canada and the Caribbean. Pearle enjoys one of the most highly recognized brand names in the optical retail industry. Pro forma for the Pearle Acquisition, the Company's fiscal 1995 net sales and EBITDA were $873.7 million and $84.0 million, respectively, with approximately 70% of the Company's net sales derived from its optical business and the remaining 30% derived from its gift business. As a result of the Pearle Acquisition, the Company conducts its business through two principal operating units: (i) Cole Optical, consisting of Cole Vision and Pearle; and (ii) Cole Gift, consisting of Things Remembered and CGC. Cole Vision operates 980 leased locations within Sears, Montgomery Ward and other host stores and 75 freestanding "Sears Optical" stores, providing eyewear products and optometric services throughout the United States. Cole Vision's product line includes a broad selection of private label and brand name prescription eyeglasses as well as contact lenses and eyewear accessories. Each of Cole Vision's optical stores is linked by computer to Cole Vision's five centralized manufacturing laboratories, which grind, cut and fit lenses to order. Cole Vision provides next day delivery on most of the eyewear it offers when requested by its customers. Cole Vision's managed vision care program is its fastest growing component. Currently, managed vision care represents approximately 30% of Cole Vision's sales and is expected to be an increasing part of the Company's business in the future. As a leading provider of managed vision care programs, Cole Vision is the exclusive contract provider to over 20 million participants and their dependents. Pearle's operations consist of 347 company-owned and 339 franchised stores located in freestanding, strip center and mall locations in the United States, Canada and the Caribbean. In 1961, Pearle's first store was opened in Savannah, Georgia by Dr. Stanley Pearle, an optometrist who sought to bring high-quality eyecare products and services to his patients at a good value. Pearle's highly recognized brand name and slogan, Nobody Cares For Eyes More Than Pearle, have been used for over 15 years. Management believes that Pearle has historically targeted a different customer base than Cole Vision. While Pearle's stores sell a broad range of optical products, Pearle features well-recognized designer brand names such as Armani, Calvin Klein, Laura Ashley and Polo, which appeal to the more affluent and fashion-conscious consumer. Unlike Cole Vision, which utilizes centralized laboratories for all of its manufacturing, Pearle produces most of its spectacles at its in-store laboratories. Pearle also has been at the forefront of changing consumer preferences and has pioneered many innovative marketing practices including Buy One Get One Free and one-hour express service. Cole Gift is the only national chain of personalized gift stores in the United States. Total store locations of 1,302 include 797 Things Remembered locations in enclosed shopping malls and 505 CGC leased locations operated in Sears and other host stores. Cole Gift provides its customers value-added personalization services including gift engraving, glass etching and monogramming and custom embroidering of soft goods, as well as key duplicating. Cole Gift's product offerings include distinctive private label merchandise and branded gift items such as Cross and Parker writing instruments and clocks by Bulova and Seiko. The selection of quality gifts offered in a broad price range satisfy the Cole Gift customer's needs for all important gift-giving occasions. The Company has operated each of its specialty service businesses for over 30 years. Over this period, the Company has refined its store formats to produce a strong record of consistent growth in sales and EBITDA. Since 1983, combined sales of Cole Vision and Cole Gift have grown at a compound annual rate of 8.8%, reaching $577.1 million in fiscal 1995. During the same period, EBITDA has grown at a compound annual rate of 10.7% to $61.6 million. During the first nine months ended November 2, 1996, sales grew by 10.2%, including comparable store sales increases of 6.3%, and EBITDA increased 16.0% over prior year levels. See "Selected Historical Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." 55 60 THE PEARLE ACQUISITION On September 24, 1996, the Parent and The Pillsbury Company signed a definitive purchase agreement for the Parent's Acquisition of Pearle. Pearle historically has maintained separate European operations. On November 15, 1996, (i) assets and/or outstanding shares of Pearle Holdings, which owned Pearle's European operations, were sold in transactions pursuant to which the Parent (and not the Company) retained an indirect equity interest of approximately 20% in Pearle Holdings, and (ii) the Parent sold the stock of Pearle to the Company for approximately $154 million. Accordingly, Pearle became a wholly owned subsidiary of the Company. In connection with the Pearle Acquisition, the Company also repurchased from the Parent $15.1 million principal amount of the Senior Notes, which the Parent purchased in the open market during fiscal 1996. The Company financed the Pearle Acquisition and the Senior Note Repurchase through (i) the proceeds from the offering of the Original Notes, (ii) cash on hand, and (iii) intercompany borrowings from the Parent. The Senior Notes acquired through the Senior Note Repurchase were retired upon receipt by the Company. See "The Transactions." The Company believes the Pearle Acquisition better positions it to meet the increasing vision care needs of an aging population and to become a major provider in the growing managed vision care industry. The Pearle Acquisition complements and expands the Company's optical business by providing a highly recognized brand name, enhancing its customer base and product lines, increasing the number and types of store locations, and adding new growth opportunities. The major benefits of the Pearle Acquisition are summarized as follows: - - INCREASED PRESENCE IN GROWING OPTICAL RETAILING INDUSTRY. Pro forma for the Pearle Acquisition, approximately 70% of the Company's sales are derived from its optical business. According to industry sources, the United States optical industry grew from $11.4 billion to $13.8 billion between 1990 and 1995 and is expected to increase to $18 billion by the year 2000. The optical retailing industry is expected to continue to benefit from the aging of the United States population since approximately 95% of persons over age 45 require some form of corrective eyewear. - - ENHANCED NAME RECOGNITION. Pearle provides the Company with an established brand name well-known to optical customers, independent from the names of Cole Vision's host stores. Pearle's slogan, Nobody Cares for Eyes More than Pearle, has been used for over 15 years and commands strong consumer recognition. Pearle's brand positioning of high quality eyecare products and services at reasonable prices has been reinforced through an extensive advertising and promotion program featuring Pearle's founder, Dr. Stanley Pearle. - - EXPANDED CUSTOMER BASE AND BROADER PRODUCT LINES. The Company believes there exists little overlap between the Pearle and Cole Vision customer base since each appeals to a different type of consumer. Cole Vision's typical customers are value-oriented consumers who often shop at its host stores, whereas Pearle's customers are often more affluent and fashion-conscious shoppers who are attracted by Pearle's name and reputation. Pearle offers higher price point, brand name merchandise from well-recognized designers such as Armani, Calvin Klein, Laura Ashley and Polo, which is currently unavailable at Cole Vision's stores. - - INCREASED GEOGRAPHICAL PRESENCE AND NEW GROWTH OPPORTUNITIES. The Pearle Acquisition increased the Company's optical locations to over 1,800 in 49 states, Canada and the Caribbean. Management believes that the Company's increased geographical presence and number of locations will make its managed vision care program more attractive to managed care providers and corporations by significantly expanding its network and coverage base. Furthermore, the Pearle network of company-owned and franchised stores offers the Company a new outlet for growth independent of the expansion plans of the Company's host stores. Management believes that the Parent's on-going relationship with Pearle Holdings, which operates the Pearle Vision business in Europe, may provide opportunities for future international expansion of the Pearle business, as well as enhance the Pearle name worldwide. 56 61 BUSINESS STRATEGY The Pearle Acquisition is the most significant strategic development for the Company in the last ten years. The Company believes that the Pearle Acquisition will create economies of scale and synergies that, in conjunction with the utilization of the best historical practices of each of the Company and Pearle, will result in increased revenue and improved operating results and enable the Company to better serve its customers. The Company's strategy to achieve these goals includes the following key components: - - LEADERSHIP BY COLE VISION MANAGEMENT TEAM. The Company operates Pearle and Cole Vision as two separate businesses under the general leadership of Cole Vision's management team. The Company believes that its highly experienced management team is an important asset for the successful integration of Pearle. The Company believes that its success in the optical retailing industry is attributable to Cole Vision's experienced group of senior managers, who have an average tenure of more than ten years with the Company. In contrast, the Company believes Pearle's performance has been hampered by frequent changes in operating strategy and senior management. The Cole Vision management team will help Pearle identify and execute more focused operational and growth strategies. - - FOCUS ON OPERATIONAL EFFICIENCIES TO IMPROVE OPERATING RESULTS. Cole Vision historically has had higher operating margins than Pearle. The Company intends to continuously evaluate the operations of Pearle and Cole Vision for opportunities to effect operational efficiencies and reduce costs through the integration of Pearle. The Company is evaluating several opportunities to improve Pearle's operating results through revenue expansion, cost reductions and consolidation of duplicative facilities and functions. For example, management intends to introduce selling systems at Pearle that emphasize the sale of higher margin products such as anti-reflective coatings and polycarbonate lenses. Management believes that it can also improve Pearle's operating results by introducing direct foreign sourcing of eyeglass frames, which account for approximately 55% of Cole Vision's supply and provide significant cost savings over purchases from domestic distributors. Another potential strategy may be the removal of in-store laboratories in Pearle locations where sales volume is insufficient to support the higher overhead. Furthermore, management believes that economies of scale and other cost saving opportunities exist, particularly in purchasing, advertising efficiency and distribution. - - EXPANSION OF FRANCHISE OPERATIONS; BUSINESS RATIONALIZATION. The Company intends to expand Pearle's franchising operations. The Company has identified strategies that it believes will improve the sales and operating results of Pearle's franchisees, encourage expansion by current franchisees, and enable the Company to attract new franchisees. The Company's management is closely examining the geographic and demographic areas which favor Pearle's franchised stores versus areas which favor company-owned stores. The Company expects that future new store growth will facilitate a rationalization of geographic coverage between company-owned and franchised stores in order to permit more focused local promotional and advertising programs and to streamline field organizations. - - EMPHASIS ON MANAGED VISION CARE. The Pearle Acquisition enhances the Company's ability to compete effectively in the rapidly expanding managed vision care component of the optical industry. The Company believes this component, which accounts for approximately 30% of Cole Vision's sales, may increase to as much as 50% of its business over the next five years. The acquisition of Pearle's store base increases the Company's number of distribution points and geographical presence, thereby enhancing the Company's appeal to large national corporations as well as regional corporations and organizations. In addition, the Company expects that the more fashion-oriented mix and broader selection of eyewear frames offered by Pearle will increase managed vision care utilization. Currently, the Company believes that Pearle's managed vision care program accounts for approximately 10% of its sales. - - DEVELOPMENT OF NEW MERCHANDISING CONCEPTS. The Company continually seeks to expand on its base business through innovative merchandising concepts. Management's disciplined approach to new merchandising concepts is predicated on initially test marketing each new concept with a small number of prototype stores, thereby limiting capital outlays until operating results warrant additional store roll-out. Cole Vision seeks to increase customer satisfaction by offering a wide selection of innovative products and 57 62 services, most recently introducing a mail order contact lens service as well as advanced anti-reflective coatings for eyeglasses. CGC is currently test marketing seven "Personally Yours" stores in a major metropolitan area. These stores are extensions of the Gift Centers at Sears and provide personalization on hard and soft goods sold in other Sears departments as well as on CGC's own merchandise. During 1995, CGC added a variety of soft goods to its product lines including towels, bathrobes, pillows and blankets for embroidering or monogramming, and also expanded its seasonal presentation to include items such as gourmet food baskets. - - CONTINUED NEW STORE OPENINGS. The Company is committed to the continued growth of Cole Optical and Cole Gift through the development of new store concepts and the opening of additional locations as well as selected store acquisitions. The Company's new store concepts are almost exclusively extensions of existing businesses. For example, Cole Vision has increased its commitment to freestanding Sears Optical locations in strip shopping centers, opening 63 new stores since the end of fiscal 1993. Cole Vision acquired 73 Sears Optical locations and two freestanding Vision Club stores in Canada in November 1996. Cole Vision has also expanded through the development of new host store relationships, including BJ's Wholesale Club and Target Supercenter, adding 80 new locations since 1995. The Company's current plans include the opening of both company-owned and franchised Pearle locations throughout North America. Since fiscal 1993, Cole Gift has opened 80 Things Remembered personalization superstores, which provide an attractive growth vehicle for personalization sales. 58 63 COLE OPTICAL GENERAL Pro forma for the Pearle Acquisition, Cole Optical contributed 70% of the Company's sales for the year ended February 3, 1996. With the addition of Pearle, the Company became the second largest retailer (by revenues) of eyewear products and optometric services in the United States, with over 1,800 locations in the United States, Canada and the Caribbean. The Company operates Cole Vision and Pearle as two principal operating units under the general leadership of Cole Vision's management team. The following table sets forth the number of Cole Vision and Pearle stores by state:
NO. OF STORES -------------------------------------- PEARLE COLE ------------------- STATE VISION OWNED FRANCHISED TOTAL - ------------------- ------ ----- ---------- ----- UNITED STATES: Alabama 10 1 10 21 Alaska 2 0 0 2 Arizona 19 2 2 23 Arkansas 1 2 2 5 California 110 25 0 135 Colorado 22 4 8 34 Connecticut 5 2 6 13 Delaware 4 3 1 8 Florida 70 14 19 103 Georgia 26 15 12 53 Idaho 4 1 0 5 Illinois 65 12 39 116 Indiana 30 5 1 36 Iowa 14 12 1 27 Kansas 13 1 0 14 Kentucky 4 4 0 8 Louisiana 12 0 0 12 Maine 2 0 1 3 Maryland 42 6 23 71 Massachusetts 33 6 22 61 Michigan 41 1 0 42 Minnesota 21 3 20 44 Mississippi 5 0 0 5 Missouri 22 9 5 36 Montana 0 1 4 5 Nebraska 3 2 8 13 Nevada 3 0 0 3 NO. OF STORES -------------------------------------- PEARLE COLE ------------------- STATE VISION OWNED FRANCHISED TOTAL - ------------------- ------ ----- ---------- ----- New Hampshire 8 3 2 13 New Jersey 30 12 21 63 New Mexico 4 2 2 8 New York 63 18 28 109 North Carolina 17 3 3 23 North Dakota 0 0 4 4 Ohio 63 20 4 87 Oklahoma 0 1 0 1 Oregon 14 0 0 14 Pennsylvania 67 46 19 132 Rhode Island 3 0 0 3 South Carolina 9 3 0 12 South Dakota 2 1 2 5 Tennessee 13 4 18 35 Texas 87 23 25 135 Utah 8 4 1 13 Vermont 1 0 1 2 Virginia 33 18 12 63 Washington 27 9 0 36 West Virginia 11 1 2 14 Wisconsin 12 5 2 19 Wyoming 0 1 0 1 CANADA 75 * 18 0 93 * CARIBBEAN: Puerto Rico 0 24 5 29 Virgin Islands 0 0 4 4 ------ ----- --- ----- Total 1,130 347 339 1,816 - --------------- * Cole Vision acquired 73 Sears Optical locations and two freestanding Vision Club stores in Canada in November 1996.
Operating principally under the names "Sears Optical," "Montgomery Ward Vision Center," "BJ's Optical Department" and "Target Optical," Cole Vision operated 1,055 locations in 45 states, including 672 departments on the premises of Sears department stores, 214 departments in Montgomery Ward stores, 75 departments in BJ's Wholesale Clubs, five departments in Target Supercenters, 14 departments located in three other retailers and 75 freestanding "Sears Optical" stores. Cole Vision's optical departments within host stores 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 as rent and remits the remainder to Cole Vision on a weekly basis. Pearle operated 686 stores under the "Pearle Vision Center" name, 347 of which were company-owned and 339 of which were franchised. Pearle has maintained a franchise program since 1980 and the Company expects Pearle's franchise network to be an attractive vehicle for future growth. Both Cole Vision's and Pearle's stores 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. 59 64 OPTICAL INDUSTRY OVERVIEW Based on industry sources, United States optical retail sales, encompassing prescription glasses and contact lenses, grew to $13.8 billion in 1995, a 7% increase over the prior year. This growth is expected to continue over the next several years as the "baby-boomer generation" continues to age, since approximately 95% of people over the age of forty-five require some form of corrective eyewear. According to industry estimates, by the year 2000 the total United States optical industry will grow to $18 billion with more than 168 million eyewear users. AGE BREAKDOWNS OF U.S. EYEWEAR CONSUMERS IN 1995
NUMBER OF PERCENT OF AGE GROUP POPULATION USERS POPULATION - --------------------- ---------- ---------- ---------- (IN MILLIONS) (IN MILLIONS) 14 and under......... 57.5 8.9 15% 15-24................ 35.9 15.0 42% 25-44................ 83.4 52.4 63% 45-64................ 52.2 49.6 95% 65 and over.......... 33.6 31.2 93% ----- ----- -- 262.8 157.2 60% ===== ===== ==
Despite rapid growth by retail chains such as Cole Vision and Pearle in the late 1980's, the United States eyecare industry remains highly fragmented with retail chains accounting for only 37% of United States eyecare sales nationwide in 1995. According to industry estimates, there are nine optical retailers in the United States with sales above $100 million. Some operate or franchise freestanding stores, while the others lease space in existing stores, such as Sears, JC Penney and Wal-Mart. In addition, many regional and local chains with as few as three stores exist throughout the United States. In 1995, the top ten chains were estimated to have a combined share of 17.8% of the United States retail eyecare products sales. With the introduction of eyewear by many leading designers, including Giorgio Armani, Calvin Klein, Ralph Lauren and Donna Karan, eyeglasses have evolved from a corrective device into a fashion accessory. MANAGED VISION CARE One of the fastest growing areas of the United States optical industry is the managed vision care segment. The expansion of managed health care in general, which has been driven by efforts to control rising medical costs, has been the strongest influence behind this growth. According to industry surveys done in early 1995, 63% of employees receive health care benefits through some form of managed care, up from 52% in the previous year. Managed vision care encompasses a wide variety of delivery systems including HMOs, preferred provider organizations ("PPOs"), employer-sponsored plans, "private" third party plans and physician-owned networks. Vision benefits have traditionally been provided through a basic indemnity insurance plan but are now routinely provided through a managed vision care plan. Vision care benefits have also seen increasing coverage within Medicare and Medicaid programs, as these programs move closer to a managed care delivery system. Vision care's popularity within managed care is due to several factors. It is a relatively low-cost, "well" benefit that people can utilize while in good health. In addition, regular vision exams may reveal the early onset of systemic diseases such as diabetes and glaucoma and fit well with managed care's emphasis on prevention and early, low-cost treatment. Cole Vision believes that escalating health care costs are leading benefit plan sponsors to seek relatively low-cost benefits such as vision care in order to partially compensate for reductions or limitations placed on traditional health and hospitalization coverage. In the last several years, Cole Vision has introduced and expanded its managed vision care program that provides low-cost, comprehensive benefits marketed directly to employers, other employee benefit plan sponsors and insurance companies, primarily under the name "Vision One." Cole Vision's managed vision care program gives participants access to a network of both company-owned and third-party optical locations. 60 65 The Vision One basic program gives employers the opportunity to offer their employees a group discount at the managed vision care network with minimal direct cost to the employer. An enhanced Vision One program allows employers to provide employees with prepaid eye examinations as well as pricing discounts or reimbursements on purchases of eyeglasses or contact lenses. Cole Vision's managed vision care program is currently the contract provider of vision care benefits to over 20 million members and their dependents. Direct employer accounts include more than 350 companies, approximately 120 of which have in excess of 10,000 employees. Managed vision care contracts often require a minimum number of locations in a given region based upon the number of lives covered. The acquisition of Pearle's store base increases the Company's number of distribution points and geographical presence, thereby enhancing the Company's appeal to large national corporations as well as regional corporations and organizations. In addition, the more fashion-oriented mix of eyewear frames offered by Pearle significantly broadens the merchandise selection that the Company is able to offer the managed care recipient, increasing the likelihood of network utilization. Historically, Pearle's managed vision care strategy has been to offer eye exams to plan participants at the optical professional's office space adjacent to the Pearle Vision store in order to increase sales volume. Although Pearle participates in most forms of managed vision care offerings, Pearle has focused on contracts in which the member must buy products and services from a Pearle Vision store and its associated eyecare professional to be entitled to full benefit coverage. Currently, the Company believes that Pearle's managed vision care program accounts for approximately 10% of its sales. In order to continue the growth of its managed vision care business, Cole Vision is focusing on expanding the size of its network, increasing plan participant utilization rates and adding new contracts. During 1996, Cole Vision began testing a program whereby independent eyecare professionals are able to join Cole Vision's managed care network. Cole Vision anticipates that this program, if successful, could significantly enlarge its managed vision care network over the next two years. Furthermore, the Pearle Acquisition will add 305 United States based company-owned stores to Cole Vision's managed vision care network, and the Company believes that Pearle's franchisees will react favorably to the opportunity to join Cole Vision's managed vision care program. In order to increase plan participant utilization rates, and thereby increase the Company's optical sales, Cole Vision has focused on selling enhanced Vision One programs, which include free eye examinations to encourage plan utilization. STORE OPERATIONS COLE VISION. Most Cole Vision optical departments operate with a doctor of optometry, a department manager, and from one to seven opticians depending on store sales volume. Cole Vision also operates approximately 84 optical departments that carry a full line of products but that operate in states that do not permit doctors of optometry to be located in retail stores. Approximately 80% of the doctors of optometry are independent, as is often required by state law, with the remainder being employed by Cole Vision. The independent doctors sublease space and equipment from Cole Vision where permitted by law, or from the host, and retain their examination fees. Cole Vision has established an optometric advisory council of doctors of optometry that assists Cole Vision's management in providing quality service and product selection to its customers and believes that its relations with its independent doctors of optometry are good. Cole Vision strives to provide its customers with exceptional patient care and value by combining the personal service typically associated with a private doctor of optometry with the broad product selection and cost benefits of a large optical retailer. Each optical department utilizes a proprietary retail information system that captures sales and customer information such as prescription data. This system allows Cole Vision to better monitor sales and merchandise trends and provides an automated customer file that allows for subsequent follow-up with patients. In contrast to most Pearle Vision locations, as well as those of many other optical retailers, Cole Vision stores do not maintain in-store laboratories. All eyeglasses are produced at Cole Vision's five centralized laboratories and are sent to the store for delivery to the customer. Cole Vision provides next day delivery on most of the eyewear it offers when requested by its customers. 61 66 PEARLE. All Pearle Vision stores operate in either an "Express" or "Mainline" store format. The Express stores contain a full surfacing lab that can manufacture most glasses in approximately one hour. The Mainline stores can manufacture over 50% of prescriptions on-site in approximately one hour. Other prescriptions have to be sent to a nearby Express location or to the main laboratory located at Pearle's Dallas Support Center. The main laboratory generally is able to complete orders for next day delivery if requested. As of November 2, 1996, 267 of the company-owned stores and 121 of the franchised stores were Express, with the balance being Mainline. The Express stores typically are located in high traffic freestanding, strip center, and mall locations with most stores averaging 3,000 square feet. The Express stores are usually staffed with two managers and a support staff of four to eight people. Mainline stores have an average size of 1,730 square feet and also are 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 Vision 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 has 18 company-owned Pearle Vision stores in British Columbia and Alberta, including eight Express stores. Pearle currently has doctors in only four Canadian locations as it has traditionally been difficult to lease doctor services in British Columbia and Alberta because of province regulation. Pearle has 33 stores in the Caribbean, with 24 company-owned and five franchised locations in Puerto Rico, and two franchised locations in each of St. Thomas and St. Croix. Pearle recently entered into a franchise agreement for a location in Tortola (British Virgin Islands). Pearle's locations in the Caribbean operate generally on a stand-alone basis using the in-store laboratories of 18 Express stores, with limited support from Pearle's Dallas Support Center. FRANCHISE OPERATIONS Pearle has maintained a franchise program since 1980. As of November 2, 1996, 330 or approximately 52% of the Pearle Vision stores in the United States were franchised. A majority of franchisees have been franchisees for at least eight years. Franchises are concentrated in the upper Midwest, Northeast and Southeastern United States. Many of the franchised stores are single franchise operations, with no franchisee operating more than five stores. The majority of Pearle's franchised stores are either former company-owned Pearle stores that were purchased by a franchisee, or franchisee-developed new stores. The investment needed to purchase an existing franchise operation ranges from $130,000 to $2.5 million, depending on the location and the size of the existing customer base. A typical new Express store, fully-equipped, costs approximately $350,000. Depending on the type of franchise, the down payment will range from 10% to 15% of the total purchase price. With the proper financial approvals, a franchise purchase can be financed through Pearle. Currently, Pearle offers financing over seven to ten years at a rate of prime plus three points adjusted quarterly. Each franchisee is required to enter into a Franchise Agreement. The initial franchise fee Pearle charges can range from $15,000 to $30,000. 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. If necessary, the fee is prorated accordingly. Royalty and advertising contributions typically are based on a percentage of the franchisee's gross revenues and/or professional fee revenues. Gross revenues are those revenues generated or received by the retail operation of the franchised business. Professional fee revenues consist of non-surgical professional fee revenues generated or received by the optometry or ophthalmologic office adjacent to the Pearle location. In most cases, the current monthly royalty rate is 7.5% of the franchisee's monthly gross revenues and, unless prohibited by law, 4.0% of the franchisee's monthly professional fee revenues. In most cases, the current monthly advertising contribution is equal to 9.0% of the franchisee's gross revenues and professional fee revenues. The total monthly advertising contribution is distributed between Pearle's system-wide advertising fund (up to 7.0%) and the local co-op market advertising fund (no less than 2.0%). The Company expects to pursue an aggressive growth strategy for Pearle's franchise operations. The Company anticipates that it will engage in discussions with Pearle's franchisees in an effort to improve the 62 67 sales and operating results of the franchisees, to encourage expansion by current franchisees, and to rebuild the Pearle franchise system, which once had more than 650 locations. The Company's efforts to accomplish these goals will be subject to a variety of contractual and regulatory restrictions, as well as potential individual franchisee issues. See "Risk Factors -- Integration of Pearle." MERCHANDISING COLE VISION. Cole Vision offers a broad assortment of eyeglass frames consisting of name brands such as Gant, Van Heusen, Bugle Boy, Stetson, Cheryl Tiegs and Linda Evans as well as private label lines such as Headhugger, which features spring hinges to ensure a comfortable fit. Cole Vision purchases all of the frames and lenses used in its eyeglasses from outside suppliers, and imports approximately 55% of its frames. Cole Vision carries a full selection of men's, women's and children's frames, a complete line of contact lenses supplied by all of the major contact lens manufacturers and ancillary products for eyeglasses and contact lenses. Eyeglasses accounted for nearly 80% of Cole Vision's sales in fiscal 1995. As one of the largest retailers of eyewear in the United States, Cole Vision purchases significant quantities of frames, lenses and contact lenses from its suppliers. Cole Vision's relationships with its vendors have frequently enabled it to be the first to offer new products. The selection of frames offered by Cole Vision is generally broader than that carried by private optometrists, but is not as broad as that carried by optical superstores. Cole Vision's opticians receive extensive training in educating patients about eyecare and the benefits and value of available products and services. For example, lightweight, virtually unbreakable polycarbonate lenses offer better comfort and safety. Scratch resistant coatings provide longer lasting lenses. Anti-reflective coatings on eyeglass lenses reduce glare and eyestrain, improve visual clarity and are cosmetically more appealing. Disposable contact lenses virtually eliminate the daily or weekly care and supplies required for most contact lenses. PEARLE. Pearle offers a broad array of merchandise, which includes frames, sunglasses, lenses and contacts. In the early 1990's, Pearle's management focused its merchandising efforts on brand names that strengthened the Pearle Vision name. As a result, a large component of Pearle's frame merchandise is comprised of well-recognized designer brand names such as Armani, Calvin Klein, Laura Ashley and Polo, many of which are not available at Cole Vision stores. Pearle is also the exclusive licensee for Wrangler ophthalmic frames in the United States and has recently begun selling Harley Davidson and Nautica frames. In addition, Pearle offers value-priced brands, including Mainstreet and Boulevard. Brands of sunglasses include Ellen Tracy, Polo, Ray-Ban and Serengeti. Pearle currently buys virtually all of its optical products from producers or distributors in the United States, even for foreign-sourced goods. The Company intends to increase Pearle's direct foreign sourcing of products. Unlike the frame segment, there exists little consumer awareness with respect to differences in lens brands because of the lack of advertising to consumers. The absence of a strong brand in the lens marketplace has provided Pearle with the opportunity to develop its own polycarbonate lens brands: Microthin and Kidsafe. Microthin and Kidsafe are polycarbonate lenses that offer added value features to the consumer at a competitive price relative to traditional plastic lenses. Such features include ultra violet ray protection, shatter resistance and lightweight material. As technology progresses and new lenses are developed, Pearle seeks to aggressively associate these new brands with Pearle in the consumer's mind. The Transitions Lens, a light-sensitive plastic lens that changes from clear to dark depending on variance in sunlight, is an example of one such lens. MANUFACTURING AND DISTRIBUTION COLE VISION. Cole Vision operates five centralized optical laboratories, in Memphis, Tennessee; Richmond, Virginia; Salt Lake City, Utah and two in Knoxville, Tennessee, that manufacture all of Cole Vision's prescription eyeglasses. The Memphis laboratory produces all of Cole Vision's next-day delivery prescriptions, serves as a distribution center for the other laboratories and stores and is the site of Cole Vision's central contact lens warehouse. Cole Vision selected the Memphis location due to its proximity to an air express hub that affords significant transportation efficiencies and cost savings. Orders are electronically transmitted from 63 68 each retail location to Cole Vision's central computer system and then assigned by computer to the appropriate laboratory designated for that product or service. Many standard prescriptions can be manufactured by cutting and edging a prefinished lens to fit the frames selected. More complex prescriptions require a highly technical process that grinds the lenses to fit the prescription. Cole Vision uses a state-of-the-art computer system that not only reduces the production time but also enhances the accuracy of the manufacturing process and reduces production waste. Cole Vision provides next day delivery on most of the eyewear it offers when requested by its customers. Management believes that its centralized processing laboratories provide Cole Vision with several operational, product quality and cost advantages relative to competitors that process lenses at each retail location. First, Cole Vision is able to utilize its labor more efficiently, resulting in significantly lower costs per prescription than its competitors who utilize in-store laboratories. Second, because all processing is centralized at a limited number of locations, Cole Vision believes that it is better able to monitor and control the quality of the products being produced. Third, the centralized laboratory format allows Cole Vision to carry significantly lower inventory at each of its retail locations, since only display and sample items are needed at the store level. In addition, Cole Vision is able to add new retail units at a relatively low cost, as new stores do not have to be equipped with expensive and duplicative manufacturing equipment or high levels of inventory. Finally, Cole Vision believes that the centralized laboratory format provides it with greater flexibility in developing and adapting to new product technologies. PEARLE. Unlike Cole Vision, Pearle currently relies primarily on its in-store laboratories, for production of most complete sets of eyeglasses, with support from a single central laboratory located at Pearle's Dallas headquarters. An anti-reflective coating laboratory recently has been added to Pearle's Dallas headquarters, with the anticipation that sales of such coatings may increase. The Company anticipates that, following the Pearle Acquisition, it will evaluate the potential benefits of reducing the number of in-store laboratories in lower volume stores, in favor of greater centralized production. A freestanding warehouse unit at Pearle's headquarters inventories and distributes a comprehensive product line including frames, eyeglass lenses, contact lenses, optical supplies, and eyewear accessories to company-owned and franchised locations. During the last three years, Pearle has developed its warehouse management system that incorporates a state-of-the-art real time bar code driven system, using handheld radio frequency devices to manage the flow of products into and out of the distribution center. Pearle believes that it now has one of the most advanced distribution and warehouse management systems in the optical industry. MARKETING COLE VISION. Cole Vision conducts a variety of marketing and promotional efforts to build and maintain its customer base. Cole Vision's advertising is targeted at the consumer who is seeking a positive price-to-value relationship. Cole Vision primarily uses host store advertising, newspaper, direct mail and yellow pages. Host advertising includes the placement of promotional material within sales circulars or credit card billings sent out by the host store to its customers. Cole Vision also promotes its next day service as "Eyewear Express." Cole Vision utilizes a wide variety of other promotional techniques, including paid-for examinations and free frames with an eyeglass order. One such program includes an offer to pay for a patient's eye examination if the patient makes a purchase at a Cole Vision location. This program is designed to increase awareness of the availability of doctors of optometry at Cole Vision locations and to create strong customer loyalty. This type of promotion has been run in conjunction with National Eye Exam Month, a successful Cole Vision sponsored "event." 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 in fiscal 1995. 64 69 Pearle's brand positioning of high quality eyecare products and services has been reinforced by an aggressive advertising and promotions program. Pearle's advertising tag line, Nobody Cares For Eyes More Than Pearle, has been used for over fifteen years and has positioned Pearle as a highly recognized, quality leader in the optical retail industry. Pearle's name recognition was further enhanced in January 1995, when Pearle introduced its founder, Dr. Stanley Pearle, to the general public in a series of TV commercials that emphasize his compassion and trustworthiness. Pearle has developed extensive "Partnership Programs" which offer sales promotion incentives and group discounts through Pearle's Seniors Choice program with the AARP and alliances with major organizations nationwide, including AT&T, AAA, Visa, Discover, Citibank and A&P. Sales under these Partnership Programs approximated $26 million in fiscal 1995. STORE OPENINGS COLE VISION. Cole Vision has grown from 751 to 1,055 locations over the past five years. Cole Vision made two significant acquisitions during this period, including 107 locations in Montgomery Ward stores acquired January 30, 1994, and 59 locations in BJ's Wholesale Club stores acquired May 21, 1995. In addition, Cole Vision acquired 73 Sears Optical locations and two freestanding Vision Club stores in Canada prior to the consummation of the Transactions. Cole Vision reviews new store opportunities based primarily on the sales volume and traffic of the proposed host store location. Sears has historically offered Cole Vision the opportunity to open an optical department in virtually all new Sears stores opened. The cost of opening new Cole Vision leased departments is relatively low, with initial capital expenditures and working capital investment approximating $50,000 per location. Since fiscal 1990, Cole Vision has opened 75 freestanding Sears Optical stores, which are a variation of its traditional in-store optical department. These optical stores, which require a capital and working capital investment of approximately $100,000, typically are located near major shopping areas or in strip shopping centers that do not have a Sears store but have a high Sears credit card penetration. Sears Optical stores are typically opened in geographic areas where Cole Vision has other in-store Sears Optical departments, allowing Cole Vision to attract new customers while taking advantage of advertising leverage and existing field organizations. The Company expects to open approximately 20 freestanding stores in fiscal 1996. The following table sets forth the historical openings and closings of Cole Vision's stores during the last five fiscal years and for the 39 weeks ended November 2, 1996:
FISCAL YEAR 39 WEEKS ENDED ----------------------------------------- NOVEMBER 2, 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ----- --------------- Beginning of Period... 734 751 769 774 938 1,013 Opened.............. 28 25 24 184* 115** 55 Closed.............. (11) (7) (19) (20) (40)*** (13) --- --- --- --- ----- ----- End of Period......... 751 769 774 938 1,013 1,055 === === === === ===== ===== - --------------- * Includes 107 locations within Montgomery Ward stores acquired effective January 30, 1994. ** Includes 59 locations within BJ's Wholesale Club stores acquired effective May 21, 1995. *** Includes 39 "Sunspot" fashion sunglass kiosks sold on April 29, 1995.
The Company anticipates that Cole Vision will open approximately 68 locations and close approximately 15 locations in fiscal 1996. PEARLE. Pearle locations, including franchises, have been reduced from 845 to 686 over the past three years as Pearle has implemented its restructuring program. See "Management's Discussion and Analysis of Financial Condition" and "Results of Operations -- General -- The Pearle Acquisition." Of the locations closed, 67 company-owned stores were closed in fiscal 1994, 46 company-owned locations were closed during fiscal 1995, and 18 company-owned locations were closed during fiscal 1996. Pearle historically has reviewed new store opportunities based primarily on the sales volume and traffic potential of a new location. In fiscal 1996, Pearle opened 25 new locations, including company-owned and franchised locations. Pearle's cost of 65 70 opening new company-owned Express stores, including initial capital expenditures and working capital investment, approximated $390,000 per store in 1996. As part of the Company's evaluation of Pearle's operations, the Company will investigate opportunities to reduce the capital investment necessary to open new Pearle stores. The following table sets forth the historical openings and closings of Pearle's stores during the last four fiscal years and the interim period ended November 2, 1996:
INTERIM PERIOD ENDED FISCAL YEARS -------------- ---------------------------------- NOVEMBER 2, 1993 1994 1995 1996 1996 ---- ---- ---- ---- -------------- FRANCHISED STORES: Beginning of Period.......... 471 433 387 361 340 Opened..................... 6 14 10 11 0 Existing Stores Franchised.............. 24 5 7 3 0 Franchise Takebacks*....... (35) (27) (16) (17) (1) Stores Closed.............. (33) (38) (27) (18) 0 --- --- --- --- End of Period................ 433 387 361 340 339 === === === === COMPANY-OWNED STORES: Beginning of Period.......... 429 412 368 336 345 Opened..................... 0 1 5 13 1 Existing Stores Franchised.............. (24) (5) (7) (3) 0 Franchise Takebacks*....... 35 27 16 17 1 Stores Closed.............. (28) (67) (46) (18) 0 --- --- --- --- End of Period................ 412 368 336 345 347 === === === === TOTAL PEARLE STORES........ 845 755 697 685 686 === === === === - --------------- * Franchise takebacks are the conversion of franchised locations into company-owned stores.
COLE GIFT GENERAL Cole Gift, which pro forma for the Pearle Acquisition generated 30% of the Company's net sales in fiscal 1995, is comprised of personalization gift stores operated by Things Remembered and CGC. Cole Gift provides its customers value-added personalization services including gift engraving, glass etching and monogramming and custom embroidering of soft goods, as well as key duplicating. As of November 2, 1996, Things Remembered operated 797 retail locations in enclosed shopping malls, while CGC operated 505 locations in Sears and other host stores. Cole Gift offers a successful combination of retail and service formats that no other company is employing on a national scale. Things Remembered and CGC each offers a wide assortment of engravable gift items, including Cross and Parker writing instruments and clocks by Bulova and Seiko. Cole Gift achieves operational efficiencies and reduces costs through a computerized carousel system at its central distribution facility and computer engravers at many of its stores. Although the Pearle Acquisition has reduced the size of Cole Gift in relation to the consolidated Company, Cole Gift remains an important part of the Company's operations and growth strategies. THINGS REMEMBERED. Things Remembered contributed approximately 75% of Cole Gift's sales in fiscal 1995. Things Remembered operated 797 stores and kiosks generally located in large, enclosed shopping malls in 44 states. Each location carries a wide assortment of engravable items and provides "while you shop" personalization and engraving services for any occasion including holiday, business and special occasion gift events. Things Remembered offers engraving for items purchased at the store as well as for items purchased elsewhere. Things Remembered benefits from all gift giving occasions including Christmas, Valentine's Day, Mother's Day, Father's Day, graduations, weddings, birthdays and anniversaries. 66 71 Merchandise sold at Things Remembered stores consists of a broad assortment of gift categories and items that can be personalized at prices generally ranging from $10 to $75. Things Remembered sells high quality merchandise, often made of pewter, silver or brass. Things Remembered's broad 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 such as Cross and Parker writing instruments, Bulova and Seiko clocks, Speidel and 1928 jewelry, Disney music boxes and Mikasa crystal, as well as higher margin private label merchandise. In 1993, Things Remembered began a new retail concept by opening "personalization superstores" that combine engraved gifts with personalized soft goods in a large store format. The Company had tested the personalized soft goods concept on a stand-alone basis over the previous four years in two mall stores under the name "Monograms Etc." The Company utilizes sophisticated computer-controlled embroidery equipment for the personalization of merchandise such as throws, sweaters, bathrobes, jackets, baseball caps, towels and baby blankets. The personalization superstores concept has added the color and brightness of soft goods to the traditional display of a Things Remembered store. Although they retain the gift merchandise concept, the soft goods have attracted new types of customers shopping for different gift giving occasions. The personalization superstores operating in malls that previously contained Things Remembered locations have averaged more than a 50% sales increase in their first year after conversion. The Company plans to open or convert approximately 25 personalization superstores in fiscal 1996. In addition, the Company recently added soft goods to most of Things Remembered's other locations with monogramming services for these stores occurring at a central facility. Things Remembered operated 362 stores and 355 kiosks. The typical store consists of about 1,000 square feet, while kiosks, which are units located in the center of the common mall area, are typically 200 square feet in size. In addition, Things Remembered operates 80 personalization superstores which average 2,200 square feet. The three store formats give Things Remembered flexibility to locate its retailing outlets in the most advantageous space in a variety of retailing environments and to exploit various leasing opportunities. COLE GIFT CENTERS. CGC, the Company's original business, contributed approximately 25% of Cole Gift's sales in fiscal 1995. CGC operated 505 leased locations in 44 states including 455, 36 and 13 locations in Sears, Venture and Montgomery Ward stores, respectively. CGC stores are generally operated under a lease or license arrangement under which the host store collects the sales receipts, retains an agreed upon percentage of sales, which is reported as rent expense by the Company, and remits the remainder to CGC on a weekly basis. CGC locations sell gifts and gift engraving and other services similar to those offered by Things Remembered, in addition to key duplicating and watch repair services. As of November 2, 1996, 104 of the CGC locations in operation were standard format shops occupying approximately 150 square feet. Since 1989, CGC has also operated greeting card locations in Sears stores and combined them with the CGC operations in such stores. Locations in this enhanced format, which numbered 70 as of November 2, 1996, average approximately 1,000 square feet in size. CGC also operates 50 key shops, of approximately 80 square feet in size, that provide key duplicating and key related products only, and 281 gift centers. The gift centers, which occupy approximately 1,200 square feet of space, typically carry a substantially expanded line of engravable and non-engravable gifts along with greeting cards. In 1995, CGC opened the first "Personally Yours" department within Sears. Personally Yours is a concept designed to generate additional customer traffic and increase sales by offering personalization for hard and soft line products for both CGC and Sears merchandise. In the first half of 1996, CGC expanded this test by opening seven stores located in one metropolitan area. If the test is successful, a large number of Gift Centers could be converted to this format over the next several years. 67 72 MERCHANDISING Both Things Remembered and CGC carry a broad assortment of gift categories and items, with approximately 400 to 600 SKU counts at most locations. Cole Gift's centralized merchandising department selects products that are designed to complement Cole Gift's specialty engraving, monogramming and embroidery services. Cole Gift seeks to expand the range of product categories it sells by working with vendors to create new engravable and non-engravable products. Cole Gift has developed its own proprietary brands to complement brand name merchandise, particularly in the writing instrument and clock lines. These private label brands, such as "Reflections" pens and "Danbury" clocks, consist of high quality merchandise that have lower price points but higher gross margins than the comparable branded merchandise. Since most of Cole Gift's merchandise is not seasonal in character, Cole Gift generally does not need to mark down its prices to sell out-of-season merchandise. No single category of merchandise accounted for more than 10% of Cole Gift's sales in fiscal 1995. During 1995, CGC added a variety of soft goods to its product lines including towels, bathrobes, pillows and blankets for embroidering or monogramming, and also expanded its seasonal presentation to include items such as gourmet food baskets. Cole Gift designs store layout, merchandise presentation and signage at its headquarters and utilizes plan-o-grams to ensure standardized implementation by field personnel on a national scale. Most engravable products are sold with a limited amount of engraving included in the purchase price. Most customers purchase a personally tailored message that typically requires additional engraving at additional cost. Sample messages, grouped by gift giving occasion, are located at the sales counter of Cole Gift stores in order to suggest engraving ideas to customers. STORE OPERATIONS Cole Gift's customer service strategy is implemented by its field personnel. The staffing at each store varies based on store size and shopping seasons. Cole Gift locations are typically operated by one or two employees during non-peak periods and up to 15 employees during the peak Christmas season. Locations typically employ a store manager on a full-time basis and a full- or part-time assistant manager, while the balance of the employees are part-time sales associates. Store managers report through an existing district and regional management structure which Cole Gift believes can accommodate continued growth. Training programs are utilized in order to promote the Company's philosophy of customer satisfaction and to encourage repeat business. Sales associates undertake a comprehensive training program which covers familiarization with product lines, selling skills and operation of the gift engraving, key duplicating and other equipment. Sales associates are trained to suggest engraved messages and aid customers in their gift and message selection process. Sales associates are also trained to inquire about each customer's next gift giving occasion in order to encourage repeat shopping. The training programs are supported by ongoing employee incentive programs. For sales associates these generally take the form of recognition awards or cash payments based on sales contests occurring at various times during the year. Store managers receive bonus compensation based on meeting sales and other performance goals. Nearly all Cole Gift locations are equipped with gift engravers and key duplicating machines. Many Things Remembered stores also have equipment for etching glassware items. Personalization superstores are also equipped with computerized embroidery machines. Cole Gift has introduced computerized engraving equipment in most of its Things Remembered stores and kiosks that has reduced engraving time, staffing levels and engraving mistakes. Cole Gift anticipates that this equipment will be included in all new Things Remembered locations opened in the future and will be added to higher volume existing stores where cost-effective. INVENTORY MANAGEMENT AND DISTRIBUTION Cole Gift's centralized distribution system ships most of the store merchandise other than greeting cards through its two warehouses located in the Cleveland, Ohio area. The main warehouse in Highland Heights, Ohio utilizes a modern computerized carousel system to automate the process of locating merchandise needed to fill a store order. The carousel system locates approximately 70% of all SKUs and has permitted the 68 73 Company to reduce the number of warehouse employees while increasing accuracy and efficiency in filling shipments to stores. The Company is currently negotiating the purchase and financing of a new warehouse and distribution facility for Cole Gift that is expected to provide improved distribution efficiencies. The facility, which would commence operation in 1997 and may cost approximately $10 million, will most likely be financed through a sale and lease-back transaction or through conventional secured real estate financing. Most Cole Gift locations are equipped with point of sale terminals. Store orders are generated utilizing information collected by point of sale equipment at each store and transmitted electronically to the Company's central computers. Using proprietary software, Cole Gift tracks inventory levels and product trends and provides automated inventory replenishment to its stores. Cole Gift ships to each of its stores via UPS or similar carrier once every week or two weeks, depending on store volume. STORE OPENINGS Cole Gift seeks to open new locations where opportunities arise to lease space in high traffic areas. In the case of Things Remembered, factors considered by management include the size, location, anchor tenants and demographics of the mall. CGC considers primarily the sales volume of and location within the host store. The Company believes that Things Remembered stores are attractive shopping mall tenants because of their low level of cannibalization of sales from other mall stores and, in the case of kiosks, their ability to make effective use of common area space. As a result, Things Remembered stores and kiosks are frequently located in high traffic areas within malls. In general, initial capital expenditures and working capital investments required to open a new Things Remembered superstore, in-line store, and kiosk are $280,000, $170,000, and $50,000, respectively. The following table sets forth information concerning openings and closings of Cole Gift locations during the last five fiscal years and for the 39 weeks ended November 2, 1996:
FISCAL YEAR ---------------------------------------- 39 WEEKS ENDED 1991 1992 1993 1994 1995 NOVEMBER 2, 1996 ---- ---- ---- ---- ---- ---------------- Things Remembered Beginning of period.......... 669 697 717 737 760 778 Opened.......... 43 34 32 35 31 31 Closed.......... (15) (14) (12) (12) (13) (12) --- --- --- --- --- --- End of period...... 697 717 737 760 778 797 === === === === === === CGC Beginning of period.......... 598 598 594 586 589 587 Opened.......... 21 10 23 16 26 13 Closed.......... (21) (14) (31) (13) (28) (95) --- --- --- --- --- --- End of period...... 598 594 586 589 587 505 === === === === === ===
Closings of CGC locations have resulted from a number of factors, including the closing or relocating of the host store and low store sales volume. In early fiscal 1996, CGC closed 86 low-volume locations (whose aggregate sales in fiscal 1995 represented less than one percent of Cole Gift's sales) in Sears, Venture and Montgomery Ward stores as part of an expense reduction program. Closings of CGC departments involve minimal cost as fixtures and inventory are typically moved to other locations and there are no ongoing lease costs to absorb. HOST RELATIONSHIPS The Company has developed excellent relationships with the host stores in which Cole Vision and CGC operate. Set forth below is a table indicating the number of locations Cole Vision and CGC had within each of their major store hosts as of November 2, 1996: 69 74
COLE VISION CGC HOST LOCATIONS LOCATIONS ------------------------ ----------- --------- Sears................... 745* 455 Montgomery Ward......... 214 13 Venture................. 0 36 BJ's Wholesale Club..... 75 0 Other................... 19 1 ----- --- Totals........ 1,053 505 ===== === - --------------- * Includes 73 locations in Canada which Cole Vision acquired in November 1996. Does not include 75 free-standing Sears Optical stores.
The Company has maintained its relationships with Sears and Montgomery Ward for over 40 years in the gift and key business and over 35 years in the optical business. Of the Sears and Montgomery Ward stores that offer optometric services, virtually all are operated by Cole Vision. Sears routinely consults with the Company about the size and placement of Cole Vision and CGC departments within newly opened or remodeled Sears stores and includes plans for such departments in its prototype new store. By operating Cole Vision and CGC as leased departments, management believes that the Company obtains several marketing advantages at a relatively low cost. Sears and Montgomery Ward provide Cole Vision and CGC with access to their customer database for marketing purposes, and from time to time include promotional materials relating to CGC and the optical departments in their mailings to customers. Through Sears, Cole Vision and CGC customers are able to utilize their Sears credit cards which the Company believes provides it with a competitive advantage. Furthermore, all of the host stores' other marketing efforts to increase customer traffic operate to the Company's benefit. The Company believes its hosts' reputations of quality, trust and value enhance the Company's customer relations. Although Cole Vision's and CGC's leases with their major hosts are terminable by either party upon relatively short notice, neither has ever had a lease terminated other than in connection with a store closing, relocation or major remodelling. See "Risk Factors -- Relationships with Host Stores." SEASONALITY The Company's business historically has been seasonal with approximately 30% of its sales and approximately 50% of its operating earnings occurring in the fourth fiscal quarter because of the importance of gift sales during the Christmas retailing season. Although the acquisition of Pearle will moderate the seasonality of the Company due to relatively lower levels of optical product sales during the Christmas holiday season, the Company's business will remain seasonal. PURCHASING The merchandise, supplies and component parts required for the various products sold by the Company and Pearle are purchased from a large number of suppliers and manufacturers and are generally readily available. In most cases, such purchases are not made under long-term contracts. In fiscal 1995, no single supplier or manufacturer accounted for 10% or more of total purchases. COMPETITION The Company operates in highly competitive businesses. Cole Vision and Pearle compete with other optical companies, private ophthalmologists, optometrists, opticians and a growing number of HMOs in a highly fragmented marketplace. Pearle competes on the basis of its highly recognized brand name, one-hour express service and by offering quality eyecare products. Cole Vision competes primarily on the basis of the service it provides, its price and product quality, and the reputation of its host stores. The Company believes that Pearle and Cole Vision, based on sales, rank second and third, respectively, in United States optical retailing sales. 70 75 Although Cole Gift operates the only two nationwide chains of gift stores offering "while you shop" gift engraving, key duplicating, glass etching and monogramming, as well as related merchandise, it competes with many other retailers that sell gift items. Cole Gift competes with such other retailers primarily on the basis of the value added point of sale services that it provides as well as price and product quality. Some of the Company's competitors have greater financial resources than the Company. See "Risk Factors -- Competition and Other Business Factors." PROPERTIES The Company owns an office and warehouse in Highland Heights, Ohio that is subject to a mortgage and leases its executive offices and another office in Cleveland, Ohio. All of the retail locations of the Company's subsidiaries are leased or operated under a license with the host store, and none of the individual retail locations is material to the Company's operations. Leases for stores operated in Sears stores and freestanding stores operated under the name "Sears Optical" are generally for terms of 90 days and five years, respectively. Leases for Things Remembered stores and kiosks are generally for terms of ten and five years, respectively. The Company believes that its relationships with its lessors are generally good. The Company leases its five optical laboratories, two of which are located in Knoxville, Tennessee; Memphis, Tennessee; Salt Lake City, Utah; and Richmond, Virginia, pursuant to leases expiring (including renewals at the option of the Company) in 1999, 2005, 2002, 2006 and 2002, respectively. Pearle has 635 stores based in forty-three states. Pearle also has eighteen stores in Canada and thirty-three stores in the Caribbean. Stores are located in malls, power centers, local strip centers, freestanding locations and downtown locations. Pearle leases most of its retail stores under noncancellable operating leases with terms generally ranging from five to ten years and which generally contain renewal options for additional periods. Pearle also is the principal lessee on a majority of stores operated by franchisees, who sublease the facilities from Pearle. Pearle owns its Dallas Support Center, which comprises approximately 88,721 square feet of office space and 147,336 square feet of laboratory and distribution facilities. Pearle also owns a small headquarters and laboratory in Puerto Rico. EMPLOYEES As of February 3, 1996, the Company had approximately 6,000 full-time and 3,700 part-time employees. During October, November and December, the Company employs additional full- and part-time employees. In fiscal 1995, approximately 5,000 additional employees were employed in such period. The hourly employees at Cole Gift's distribution center (approximately 80 employees in the aggregate) are represented by a labor union. The Company considers its present labor relations to be satisfactory. As of March 31, 1996, Pearle had 3,644 employees. Approximately 2,915 were full-time and 729 part-time employees. Approximately 171 employees at certain store locations are represented by labor unions. Pearle considers its present labor relations to be satisfactory. PATENTS AND TRADEMARKS The Company has received a license to use the names of its host stores for use in communicating with customers or potential customers. The Company also is licensed to operate its Sears freestanding locations under the name "Sears Optical." Pearle has registered numerous trademarks and service marks worldwide. Pearle Holdings will receive a royalty-free license to the Pearle name in Europe. GOVERNMENT REGULATIONS The offer and sale of franchises is subject to the Federal Trade Commission's (the "FTC") rule entitled Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, which requires, among other things, that the franchisor prepare and update periodically a comprehensive disclosure document in connection with the sale of its franchises. A franchisor also must comply with state franchising 71 76 laws and a wide range of other state rules and regulations governing its ongoing relationship with its franchisees. While Pearle believes that it is in compliance in all material respects with all such applicable laws and regulations, continued compliance with this broad federal and state regulatory network by the Company will be essential and costly, and the failure to comply with such regulations may have an adverse effect on the Company and its operations. Violations of franchising laws and/or state laws and regulations regulating substantive aspects of doing business as a franchisor in a particular state could subject the Company and its affiliates to rescission offers, monetary damages, civil and criminal penalties and/or injunctive proceedings. In addition, absolute vicarious liability has been imposed upon franchisors based upon claims made against franchisees. Further, franchisors are subject to an implied covenant of good faith and fair dealing in their franchise relationships, which implied covenant may restrict the manner in which the Company operates. Even if the Company is able to obtain insurance coverage for such claims, there can be no assurance that such insurance will be sufficient to cover potential claims against the Company. Cole Vision and Pearle are subject to extensive federal, state and local laws, rules and regulations affecting the health care industry and the delivery of health care, including laws and regulations prohibiting the practice of medicine and optometry by persons not licensed to practice medicine or optometry, prohibiting the unlawful rebate or unlawful division of fees and limiting the manner in which prospective patients may be solicited. The regulatory requirements that Cole Vision and Pearle must satisfy to conduct its business will vary from state to state. In particular, some states have enacted laws governing the ability of ophthalmologists and optometrists to enter into contracts to provide professional services with business corporations or lay persons, and some states prohibit Cole Vision and Pearle from computing their fee for management services based upon a percentage of the gross revenues of the ophthalmological practice being managed. The field of optical retailing is regulated by state or provincial governments in those regions in which Cole Vision, Pearle and other retail optical firms do business. The legality of Cole Vision's and Pearle's relationships with optical professionals in the jurisdictions in which it operates has been and may be challenged from time to time, and if challenged, Cole Vision and Pearle may be required to alter the manner in which they conduct their business in the jurisdictions in which they are challenged. Such alterations may adversely affect the Company's business. LEGAL MATTERS The Company and Pearle each are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from such litigation or threat thereof will not have a material adverse effect on the Company. 72 77 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND PARENT The following table sets forth certain information concerning the directors and executive officers of the Company and the Parent. Directors serve for a term of one year and until their successors are elected. Officers hold office until their successors are elected and qualified.
NAME AGE POSITION - --------------------- ------ --------------------------------------------------------------- Chairman, Chief Executive Officer, Chief Financial Officer and Jeffrey A. Cole 55 Director Brian B. Smith 43 President, Chief Operating Officer and Director Joseph Gaglioti 50 Vice President and Treasurer Vice President, Controller, Assistant Secretary and Assistant Wayne L. Mosley 42 Treasurer Timothy F. Finley 53 Director Irwin N. Gold 39 Director Peter V. Handal 54 Director Charles A. Ratner 55 Director
Mr. Cole has been Chairman, Chief Executive Officer, Chief Financial Officer and a Director of the Company since its formation. Mr. Cole has been a Director of the Parent since 1984, and since 1969 had been a director of a predecessor company which operated the business of the Parent prior to 1984 (the "Predecessor"), serving as Chairman of the Predecessor's Executive Committee from 1978 to 1984. He has been Chairman and Chief Executive Officer of the Parent since 1992, Chief Financial Officer of the Parent since 1991 and was President and Chief Executive Officer of the Parent from 1984 to 1992. He was Chief Financial Officer and Treasurer of the Predecessor from 1978 to 1983 and was Vice Chairman of the Board of Directors, President and Chief Operating Officer of the Predecessor from 1983 to 1984. He is also a Director of Hartmarx Corporation. Mr. Smith has been President and Chief Operating Officer of the Company since its formation, and a Director since November 1994. Mr. Smith has been President and Chief Operating Officer of the Parent since 1992, and a Director since November 1994. From January 1992 until September 1992, he was President and Chief Operating Officer of a subsidiary company that merged into the Parent in September 1992 ("CNCD"). He was Executive Vice President and Chief Operating Officer of CNCD until January 1992. Mr. Smith has been Vice Chairman of Cole Vision and CGC, each of which is a wholly owned subsidiary of the Company, since January 1995 and previously was President of Cole Vision and CGC since 1987 and 1990, respectively. He has been President of Things Remembered, a wholly owned subsidiary of the Company, since 1990. Mr. Gaglioti has been Vice President and Treasurer of the Company since its formation. Mr. Gaglioti has been Vice President of the Parent since 1992 and Treasurer of the Parent since 1991. He was Assistant Treasurer of the Parent and CNCD from 1984 to 1991 and has served in various capacities with the Predecessor from 1981 to 1984. Mr. Mosley has been Vice President and Controller of the Company since its formation. Mr. Mosley has been Vice President and Controller (principal accounting officer), Assistant Secretary and Assistant Treasurer of the Parent since 1992. Mr. Mosley served as Vice President, Controller -- Finance of CNCD from 1991 to 1992, was Chief Accounting Officer of CNCD from 1990 to 1991 and Assistant Corporate Controller of CNCD from 1986 to 1990. Mr. Finley has been a Director of the Company since its formation and has been a Director of the Parent since 1992. Since 1990, Mr. Finley has been Chairman and Chief Executive Officer of Jos. A. Bank Clothiers, Inc., a clothing retailer, and Chairman and President of The Finley Group since 1986. He is also a director of Venture Stores, Inc. 73 78 Mr. Gold has been a Director of the Company since its formation and has been a Director of the Parent since 1992. Mr. Gold has been a Managing Director of Houlihan Lokey Howard & Zukin, Inc. ("Houlihan Lokey"), an investment banking firm, since 1988. Mr. Handal has been a Director of the Company since its formation and has been a Director of the Parent since 1992. Currently, Mr. Handal is President of the consulting company COWI International Group, Managing Partner of J4P Associates, a real estate firm, and President of Fillmore Leasing Company. Previously, Mr. Handal served as the President of Victor B. Handal and Bro., Inc., an apparel manufacturer and distributor. He is also a director of Jos. A. Bank Clothiers, Inc., a clothing retailer. Mr. Ratner has been a Director of the Company and the Parent since 1995. Mr. Ratner has served as the President, the Chief Executive Officer and a director of Forest City Enterprises, Inc., a national real estate development and management company, since 1993, prior to which he served as its Executive Vice President. Mr. Ratner is Chairman of Forest City Rental Properties Corporation, a subsidiary of Forest City Enterprises, Inc., a position he has held for at least five years. He is also a director of Forest City Enterprises, Inc. On May 6, 1992, Child World, Inc. ("Child World"), a former 82% subsidiary of the Parent, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Immediately prior to the sale of Child World on June 27, 1991, Jeffrey A. Cole served as a Director and Chairman of the Executive Committee of Child World and Joseph Gaglioti was Assistant Treasurer of Child World. EXECUTIVE COMPENSATION The following table sets forth for the last three fiscal years certain compensation information about the Company's chief executive officer and the other persons who served as executive officers of the Company during fiscal 1995. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL AWARDS COMPENSATION(1) SECURITIES --------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(2) - -------------------------------- ---- -------- -------- ------------ ---------------- Jeffrey A. Cole -- 1995 $617,692 $193,440 25,000 $ 74,649 Chairman, Chief Executive Officer 1994 600,385 295,331 131,815(3) 320,239 and Chief Financial Officer 1993 575,000 296,700 226,000 16,797 Brian B. Smith -- 1995 $400,192 $125,654 17,500 $ 37,617 President and Chief 1994 371,154 183,056 79,322(3) 34,515 Operating Officer 1993 350,000 180,600 136,000 4,576 John F. Downie -- 1995 $207,385 $ 64,896 2,500 $ 26,965 Secretary(4) 1994 203,516 96,882 5,833(3) 169,801 1993 200,850 103,639 10,000 4,015 Joseph Gaglioti -- 1995 $122,231 $ 38,376 3,500 $ 10,885 Vice President and 1994 116,846 61,644 4,666(3) 10,433 Treasurer 1993 110,308 61,187 9,000 784 Wayne L. Mosley -- 1995 $122,231 $ 38,376 3,500 $ 10,721 Vice President and 1994 116,846 61,644 4,666(3) 10,312 Controller 1993 110,308 60,607 9,000 412 - --------------- (1) Other annual compensation did not exceed the lesser of $50,000 or 10% of the salary plus bonus of any of the executive officers for any of the years listed. (2) The amounts listed consist of (i) payments by the Parent pursuant to an agreement between the Parent and an insurance company that provides for reimbursements to Messrs. Cole, Smith and Downie in
74 79 amounts up to $20,000 per year for certain medical expenses for themselves and their families not otherwise covered by the Parent's group medical insurance plan, (ii) contributions to the Parent's 401(k) Plan to match pre-tax elective deferral contributions, (iii) the value of life insurance provided by the Parent for the benefit of the executive officers and (iv) contribution credits in fiscal 1995 and 1994 provided under the Company's Supplemental Retirement Benefit Plan. See "Supplemental Executive Retirement Plans." (3) Reflects options repriced during 1994. (4) Mr. Downie also served as Senior Vice President and General Counsel of the Company and the Parent until February 2, 1996. CERTAIN AGREEMENTS Effective April 1, 1996, Jeffrey A. Cole and Brian B. Smith entered into separate agreements with the Parent and its principal subsidiaries, which replaced earlier employment agreements, pursuant to which Messrs. Cole and Smith are employed by the Parent and each of its principal subsidiaries. The agreements provide for a three-year term that, on the first anniversary of the agreement and each successive anniversary thereafter, automatically extends for an additional year up to and until Messrs. Cole and Smith, respectively, reach age 65, unless notice to the contrary has been furnished in accordance with the provisions of the agreements. The agreements provide for an annual base salary of not less than $640,000 for Mr. Cole and $440,000 for Mr. Smith, along with participation in bonus programs and other customary benefits. Under the agreements, upon their termination of employment (including a self-termination during a period following a change of control of the Parent) except (i) termination by reason of death or disability, (ii) voluntary resignation other than (a) a voluntary resignation involving a substantial adverse change in duties without consent or (b) following a change of control of the Company, (iii) the expiration of the term of the agreement or (iv) termination for cause, Messrs. Smith and Cole are entitled to receive a lump sum payment equal to three times the sum of (x) their respective salaries at the time of such termination and (y) their respective average bonuses for the last five fiscal years. The agreements also contain provisions with respect to compensation, bonus and benefits in the event of their death or disability. The agreements provide that, in the event that any payments received by Messrs. Cole and Smith under the agreements or otherwise are subject to an excise tax, they will be entitled to a gross-up payment. COMPENSATION PURSUANT TO EMPLOYEE BENEFIT PLANS OF THE COMPANY Described below are certain employee benefit plans of the Company pursuant to which cash or non-cash compensation was paid or distributed to its executive officers during the last fiscal year, or is proposed to be paid or distributed to its executive officers in the future. RETIREMENT PLAN The Cole National Group, Inc. Retirement Plan (the "Retirement Plan") provides non-contributory benefits that are integrated with Social Security based upon an employee's years of credited service and highest average annual base salary for any five consecutive years in the last ten years of service. Compensation covered by the Retirement Plan consists of an employee's base salary, not including bonuses or any other form of compensation. Under the Internal Revenue Code of 1986, as amended (the "Code"), the maximum retirement benefit payable under the Retirement Plan and the maximum amount of annual compensation that can be taken into consideration in the calculation of pension benefits under the Retirement Plan are limited. At retirement, based on years of service and current salary levels, it is estimated that the retirement benefits payable to Jeffrey A. Cole, Brian B. Smith and John F. Downie will be reduced because of these limits. Credited service under the Retirement Plan for each of the individuals named in the Summary Compensation Table is as follows: Jeffrey A. Cole -- 17 years; Brian B. Smith -- 12 years; John F. Downie -- 25 years; Joseph Gaglioti -- 14 years; and Wayne L. Mosley -- 9 years. Participants in the Retirement Plan may elect payment of retirement benefits under various alternative formulae. The following table shows the estimated annual retirement benefits which will be payable to 75 80 participating employees under the Retirement Plan's normal retirement formula upon retirement at age 65 after selected periods of service. The benefits as presented below do not take into account any reduction for joint and survivor payments. PENSION PLAN TABLE
YEARS OF SERVICE (1) -------------------------------------------------------- REMUNERATION 10 15 20 25 30 OR MORE ------------------ ------- ------- -------- -------- ---------- $100,000.......... $ 7,901 $11,851 $ 15,802 $ 19,752 $ 23,702 125,000.......... 10,151 15,226 20,302 25,377 30,452 150,000.......... 12,401 18,601 24,802 31,002 37,202 175,000(2)....... 14,651 21,976 29,302 36,627 43,952 200,000(2)....... 16,901 25,351 33,802 42,252 50,702 225,000(2)....... 19,151 28,726 38,302 47,877 57,452 250,000(2)....... 21,401 32,101 42,802 53,502 64,202 300,000(2)....... 25,901 38,851 51,802 64,752 77,702 350,000(2)....... 30,401 45,601 60,802 76,002 91,202 400,000(2)....... 34,901 52,351 69,802 87,252 104,702 500,000(2)....... 43,901 65,851 87,802 109,752 131,702 600,000(2)....... 52,901 79,351 105,802 132,252 158,702 700,000(2)....... 61,901 92,851 123,802 154,752 185,702 - --------------- (1) Based on retirement in 1996. (2) The Code places certain limitations on the amount of compensation that may be taken into account in calculating pension benefits and on the amount of pensions that may be paid under federal income tax qualified plans. For benefits accruing in plan years beginning after December 31, 1993, no more than $150,000 (indexed for inflation) in annual compensation can be taken into account. However, under the Pension Plan SERP (as defined below), participating executives will receive the amounts to which they otherwise would have been entitled under the Retirement Plan, provided they have five years of service with the Company.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS The Company has two supplemental executive retirement plans (the "SERPs") that provide for payment of benefits to the participating executives (who include, among others, the officers named in the Summary Compensation Table) supplementing amounts payable under the Retirement Plan. The Cole National Group, Inc. Supplemental Pension Plan (the "Pension Plan SERP") is an excess benefit plan designed to replace benefits that would otherwise have been payable under the Retirement Plan but that were limited as a result of certain Code limitations. The Cole National Group, Inc. Supplemental Retirement Benefit Plan (the "Benefit Plan SERP") is a defined contribution plan under which participants will receive an annual credit based on a percentage of base salary and an earnings assumption to be determined on an annual basis. Participants in the Pension Plan SERP will vest in the excess benefits after five years of service (with credit for past service). Participants in the Benefit Plan SERP will be fully vested in the defined contribution benefits after ten years of service (with credit given for a year of actual past service for each year of future service). Benefits under the Pension Plan SERP will be payable on the same basis as the Retirement Plan benefits, while benefits under the Benefit Plan SERP will generally be payable upon retirement (at age 55 or older) in ten annual installments or in another form elected by the participant prior to retirement. The following contribution credits were provided in 1995 under the Benefit Plan SERP to the named individuals and are included in "All Other Compensation" in the Summary Compensation Table: Mr. Cole -- $62,000; Mr. Smith -- $33,200; Mr. Downie -- $20,800; Mr. Gaglioti -- $9,840; and Mr. Mosley -- $9,840. 76 81 COMPENSATION PURSUANT TO EMPLOYEE BENEFIT PLANS OF THE PARENT Described below are certain employee benefit plans of the Parent pursuant to which cash or non-cash compensation was paid or distributed to its executive officers during the last fiscal year, or is proposed to be paid or distributed to its executive officers in the future. STOCK OPTION PLANS The Parent's 1992 Plan provides for the granting of stock options for up to 555,556 shares of the Parent's Common Stock to the officers or key employees of the Parent and its subsidiaries, including the Company. The 1993 Plan provides for the granting of stock options for up to 600,000 shares of the Parent's Common Stock to the officers or key employees of the Parent and its subsidiaries, including the Company. The 1992 Plan and the 1993 Plan were approved by the stockholders of the Parent in February 1994 prior to the Parent's initial public offering. The stock options under the 1992 Plan provided for periodic vesting over five years, with early vesting of all or a portion of the unvested options in the case of certain events, such as consummation of a public offering of the Parent's Common Stock, a sale of all or substantially all of the assets of the Parent, certain change in control transactions, certain mergers or the voluntary dissolution of the Parent. In May 1993, the Parent's Board of Directors authorized amendments (the "May Amendments") to the stock option agreements under the 1992 Plan for all of the Parent's executive officers and for certain senior personnel of the Parent's subsidiaries, including the Company. The May Amendments provided for the immediate vesting of the stock options under such option agreements, but provided that any shares acquired upon exercise of the options in excess of the number of shares that would have been vested under the option agreements at the date of exercise had the May Amendments not been adopted would be subject to forfeiture in the event that the employee ceased to be employed by the Parent or any of its subsidiaries, as a result of either voluntary departure or termination for cause, during the period during which the vesting provision applicable to such shares prior to such amendment would not have expired. There were no grants made under the 1992 Plan in fiscal 1995 to the individuals included in the Summary Compensation Table. The stock options under the 1993 Plan provide for periodic vesting over five years, with early vesting of all or a portion of the unvested options in circumstances similar to those that apply to the options under the 1992 Plan. The original option grants under the 1993 Plan were amended in 1994 to reduce their exercise prices, to extend their vesting period from four to five years, and to reduce the number of options granted. The following table contains information concerning options granted under the 1993 Plan during fiscal 1995 to the executive officers of the Parent included in the Summary Compensation Table. 77 82 OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF TOTAL OPTIONS POTENTIAL REALIZABLE GRANTED VALUE AT ASSUMED NUMBER OF TO ANNUAL RATES OF STOCK SECURITIES EMPLOYEES EXERCISE PRICE APPRECIATION UNDERLYING IN OR BASE FOR OPTION TERM(1) OPTIONS FISCAL PRICE EXPIRATION --------------------- NAME GRANTED(#) YEAR(%) ($/SH) DATE 5%($) 10%($) - --------------------------- --------- --------- -------- ---------- -------- -------- Jeffrey A. Cole 10,000 8.2% $ 9.75 3/16/05 $ 61,300 $155,400 15,000 12.3 12.50 8/17/05 117,900 298,800 Brian B. Smith 7,500 6.2 9.75 3/16/05 45,975 116,550 10,000 8.2 12.50 8/17/05 78,600 199,200 John F. Downie 1,500 1.2 9.75 3/16/05 9,195 23,310 1,000 0.8 12.50 8/17/05 7,860 19,920 Joseph Gaglioti 1,500 1.2 9.75 3/16/05 9,195 23,310 2,000 1.6 12.50 8/17/05 15,720 39,840 Wayne L. Mosley 1,500 1.2 9.75 3/16/05 9,195 23,310 2,000 1.6 12.50 8/17/05 15,720 39,840 - --------------- (1) The value, if any, one may realize upon the exercise of a stock option depends on the excess of the then current market value per share over the exercise price per share. There is no assurance that the values to be realized upon exercise of the stock options listed above will be at or near the amounts shown.
The following table contains information concerning options exercised during fiscal 1995 and unexercised stock options held as of February 3, 1996. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FEB. 3, FEB. 3, 1996 SHARES 1996(#) ($)(1) ACQUIRED ON -------------- -------------- EXERCISE EXERCISABLE/ EXERCISABLE/ NAME (#) UNEXERCISABLE UNEXERCISABLE ----------------------- ----------- -------------- -------------- Jeffrey A. Cole -- 87,567/125,748 $21,188/38,188 Brian B. Smith -- 52,695/ 78,127 12,750/20,250 John F. Downie -- 10,595/ 6,958 53,018/ 2,438 Joseph Gaglioti -- 11,913/ 7,253 69,051/ 3,699 Wayne L. Mosley -- 11,913/ 7,253 69,051/ 3,699 - --------------- (1) Based on the closing price of $10.75 per share of the Parent's Common Stock on the New York Stock Exchange on February 2, 1996, the last trading day of fiscal 1995.
The 1992 Plan and the 1993 Plan and the option agreements thereunder permit each optionee to exercise options through borrowing funds from the Parent. The principal on such loans is payable five years following the date of exercise, with interest payable annually at a rate fixed at the date of exercise based on a formula tied to federal borrowing rates. Each loan is made on a recourse basis and is secured by the option shares acquired from the proceeds of such loan. Messrs. Cole, Smith and Downie each elected to exercise options in 1993 by borrowing from the Parent the full amount of the exercise price of such shares granted under the 1992 Plan. As of February 3, 1996, the amount (excluding accrued interest) owed by each individual named in the 78 83 Summary Compensation Table with respect to such loans is as follows (the interest rate per annum payable by such individual is shown in parentheses): Jeffrey A. Cole -- $666,666 (5.47%); Brian B. Smith -- $333,336 (5.47%); and John F. Downie -- $15,840 (5.33%). Mr. Downie's loan was repaid on April 15, 1996. The Parent's 1996 Management Stock Option Plan (the "1996 Plan") was adopted by the Parent's stockholders as of June 6, 1996 and provides for the granting of stock options for up to 884,000 shares of the Parent's Common Stock to the officers or key employees of the Parent and its subsidiaries, including the Company. In February, the following grants were made to the identified executive officers: Jeffrey A. Cole -- 240,000 shares; Brian B. Smith -- 180,000 shares; Joseph Gaglioti -- 16,000 shares; Wayne L. Mosley -- 16,000 shares. The exercise price of the aforementioned options was $10 13/16, which was the market trading price of the shares at the date of grant. The Board of Directors and the Compensation Committee are authorized to determine the time at which options granted under the 1996 Plan will become exercisable and will terminate. Notwithstanding the foregoing, the 1996 Plan provides that an option will immediately become fully exercisable upon the occurrence of a "Sale Transaction" prior to the fifth anniversary of the date on which such option was granted. For purposes of the foregoing, a "Sale Transaction" means (a) the sale, transfer or other disposition of all or substantially all of the assets of the Company, except a sale, transfer or disposition (i) to a subsidiary of the Company or (ii) that results in the holders of the then-outstanding securities of the Company generally eligible to vote in the election of directors of the Parent possessing, in the aggregate, a majority ownership interest in the corporation, partnership, association, firm, entity or individuals (collectively, a "Person") acquiring such assets, (b) any transaction resulting in a majority of the then-outstanding securities of the Company generally eligible to vote in the election of directors of the Parent being held or owned beneficially by one Person or an affiliated group of Persons, (c) a merger or consolidation of the Parent with another Person, except a merger or consolidation of the Parent (i) with a subsidiary of the Parent or (ii) that results in the holders of the then-outstanding securities of the Parent generally eligible to vote in the election of directors of the Parent possessing, in the aggregate, a majority ownership interest in the surviving Person or (d) the voluntary liquidation or dissolution of the Parent. The 1996 Plan further provides that no option may run for more than ten years from the date of grant. EXECUTIVE LIFE INSURANCE PLAN The Parent's Executive Life Insurance Plan permits certain officers and key employees to obtain life insurance benefits in addition to those generally provided to salaried employees. The level of coverage provided to such officers and key employees includes (1) basic term life insurance coverage equal to twice the individual's base salary, (2) an opportunity for the individual to purchase, at group rates based upon age, an additional amount of insurance equal to one or two times such individual's base salary and (3) purchase by the Parent of an additional amount of coverage equal to 50% of the amount purchased by the individual under (2). The maximum level of coverage per individual is $1,500,000. BONUS PLAN The Parent has in effect various plans pursuant to which certain officers and other employees may receive incentive cash bonuses based upon (1) the achievement of specified earnings goals in the preceding fiscal year by a particular operating group or the Parent as a whole and (2) individual performance. The amounts of incentive and discretionary awards, and performance criteria for such awards, are fixed by the Compensation Committee of the Parent's Board of Directors. In March 1996, the Board of Directors approved the adoption by the Parent of the Management Incentive Bonus Program (the "Incentive Program"), which will replace the Parent's existing bonus plans for certain senior managers. Under the Incentive Program, the Compensation Committee establishes performance goals within 90 days of the commencement of a fiscal year. The performance goals for the Parent as a whole or the operating units of the Parent may include earnings, operating income, increases in revenue, return on assets, investment, sales or equity, total stockholder return or any combination thereof. 79 84 The actual level of achievement of the performance goals serves as the basis for establishing the amount of the award payable to a participant for the fiscal year. If operating performance fails to achieve the performance goals established, no awards will be made. The highest award that may be given under the Incentive Program is 100% of base salary. The Incentive Program provides that awards under the Incentive Plan may be made in cash or shares of Common Stock at the discretion of the Compensation Committee. The Compensation Committee approves the list of participants for the fiscal year who include the Parent's executive officers and certain other senior managers. For fiscal 1996, the Compensation Committee designated nine senior managers, including Messrs. Cole, Smith, Gaglioti and Mosley, to participate in the Incentive Program. 401(K) PLAN The Parent provides a defined contribution plan, including features under section 401(k) of the Internal Revenue Code of 1986, which provides retirement benefits to its employees. Eligible employees may contribute up to 15% of their compensation to the plan, although highly compensated employees, including all executive officers of the Parent, were limited to a maximum of 2% of their compensation. There is no mandatory matching of employee contributions by the Parent, but a discretionary match is determined annually by the Board of Directors. The Board of Directors approved the Parent's contribution of $164,000 to be used to partially match employee contributions made in 1995. COMPENSATION OF DIRECTORS The Parent pays each Director who is not an employee of the Parent or its subsidiaries, including the Company, an annual fee of no less than $20,000 plus reasonable out-of-pocket expenses. Members of the Audit Committee and the Compensation Committee receive $500 for each day of attendance at a committee meeting that is not held on the same day as a meeting of the Board of Directors. In addition, the chairpersons of the Audit Committee and the Compensation Committee receive an additional $2,000 and $3,000 per year, respectively. In January 1993, options to purchase 7,500 shares of the Parent's Common Stock were issued to Messrs. Finley, Gold and Handal. The options vest over a five-year period and are exercisable at $3.00 per share. At February 3, 1996, options to purchase 6,000 shares were exercisable for each of those Directors. The Parent's Nonqualified Stock Option Plan for Nonemployee Directors (the "Directors' Plan") provides for the granting of stock options for up to 100,000 shares of the Parent's Common Stock to Directors of the Parent who are not employees of the Parent or any of its subsidiaries, including the Company. The Directors' Plan was approved by the stockholders of the Parent prior to the Parent's initial public offering in April 1994. The Directors' Plan provides for the automatic grant of a nonqualified option to purchase 1,500 shares of Common Stock to each newly elected or appointed nonemployee Director of the Parent on January 1 of the year immediately following the year in which he or she is elected or appointed and on each January 1 thereafter for as long as he or she is elected or appointed and on each January 1 thereafter for as long as he or she continues to serve. Nonemployee Directors serving at the time of the adoption of the Directors' Plan will not receive option grants under such plan until January 1, 1997. Options granted under the Directors' Plan generally vest on the first anniversary of the date of grant of the option, provided that the optionee is still serving as a nonemployee Director at that time. The exercise price per share for options granted under the Directors' Plan is the average of the high and low selling prices of the Parent's Common Stock on the New York Stock Exchange on the date of grant, or, if no such prices are quoted on the date of grant, on the last date on which such prices are quoted prior to the date of grant. Mr. Ratner received an automatic grant of options for 1,500 shares on January 1, 1996 with an exercise price of $13.6875, the average of the high and low selling prices for the Common Stock on December 29, 1995. 80 85 COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND CERTAIN TRANSACTIONS Deliberations concerning compensation for fiscal 1995 generally involved the full Board of Directors of the Parent consisting of Jeffrey A. Cole, Brian B. Smith, Timothy F. Finley, Irwin N. Gold, Peter V. Handal and Charles A. Ratner. Jeffrey A. Cole and Brian B. Smith are employees of the Company. The Company currently leases its headquarters office space in a building which is owned by a partnership in which Jeffrey A. Cole currently has a 46.5% limited partnership interest. The Company believes that the lease terms are equivalent to those that could have been obtained pursuant to an arm's length transaction with unaffiliated parties. Lease payments to the partnership totalled $291,575, $344,637 and $354,194, net of payments made by the Company's subtenant, during fiscal 1993, 1994 and 1995, respectively. Until August 1995, when American Consumer Products, Inc. ("ACP") was acquired by Vista 2000, Stephan W. Cole, the brother of Jeffrey A. Cole, was the controlling shareholder, Chief Executive Officer and a director of ACP, and Jeffrey A. Cole was a beneficial owner of 16.62% of the shares of common stock of ACP and a director of ACP. In fiscal 1993, 1994 and 1995, the Company acquired approximately $1.6 million, $1.3 million and $1.1 million, respectively, of key blanks and other related products from ACP in transactions the Company believes were on terms equivalent to those that could have been obtained pursuant to arm's length transactions with unaffiliated parties. These amounts are not considered material to either the Company or ACP, as they represent less than 5% of the annual gross revenues of each entity. Mr. Ratner is the President, Chief Executive Officer, and a director of Forest City Enterprises, Inc. ("Forest City"). Forest City and its affiliates are developers and managers of commercial real estate, including shopping malls in which the Company's stores may operate. Things Remembered currently operates thirteen stores under leases with Forest City or its affiliates. Under such leases, which expire at different times during the period from 1996 to 2005, Things Remembered paid aggregate rent of $490,843 during 1995. Additional common area charges, insurance charges, taxes and similar charges were paid. The Company believes that the terms of its leases with Forest City or its affiliates, as applicable, are equivalent to those that could have been obtained pursuant to arm's length transactions with unaffiliated parties. Effective as of March 1992, Joseph E. Cole, founder of the Company and the father of Jeffrey A. Cole, who was then serving as Chairman of the Company, relinquished that title and took on the title of Senior Chairman. Joseph E. Cole, who served as Chairman of the Board and as a Director of the Company until March 1992, was compensated prior to his death in January 1995 pursuant to an employment agreement with the Company that provided for an annual salary of $200,000, commencing in fiscal 1993. Under the agreement, Joseph E. Cole received payments of $200,000 in fiscal 1993 and 1994. In fiscal 1995, Jeffrey A. Cole's mother, who is the widow of Joseph E. Cole, received a final $200,000 payment under Joseph E. Cole's employment agreement with the Company. Houlihan Lokey of which Mr. Irwin Gold, a director of the Company, is a managing director, served as a financial advisor to the Company in connection with the Parent's Acquisition of Pearle and was compensated by the Company in the amount of $50,000, as a non-refundable retainer fee. Following the consummation of the Pearle Acquisition, the Company paid Houlihan Lokey an additional payment of $950,000. 81 86 PRINCIPAL STOCKHOLDERS The Company is a wholly owned subsidiary of the Parent, which owns 1,100 shares of the Company's Common Stock, par value $.01 per share, which are the only shares of the Company's capital stock that are outstanding. The following table sets forth certain information as of December 5, 1996 (except as otherwise noted) as to the ownership of the Parent's Common Stock by each of those persons owning of record or known to the Parent to be the beneficial owner of more than five percent of the Parent's Common Stock; each of the Parent's Directors; each of the Parent's executive officers; and all Directors and executive officers of the Parent as a group. The number of shares of the Parent's Common Stock outstanding on December 5, 1996 was 11,947,696. Except as noted, all information with respect to beneficial ownership has been furnished by the respective Director or officer or is based on filings with the Commission. Unless otherwise indicated below, the persons named below have sole voting and investment power with respect to the number of shares set forth opposite their names. Beneficial ownership of the Parent's Common Stock has been determined for this purpose in accordance with Rules 13d-3 and 13d-5 under the Exchange Act, which provide, among other things, that a person is deemed to be the beneficial owner of the Parent's Common Stock if such person, directly or indirectly, has or shares voting power or investment power in respect of such stock or has the right to acquire such ownership within sixty days. Accordingly, the amounts shown in the table do not purport to represent beneficial ownership for any purpose other than compliance with SEC reporting requirements. Further, beneficial ownership as determined in this manner does not necessarily bear on the economic incidence of ownership of the Parent's Common Stock.
NAME OF BENEFICIAL OWNER NO. OF SHARES PERCENT OF CLASS - ------------------------------------------------------------------ ------------- ---------------- Cumberland Associates(1) 527,500 4.42% 1114 Avenue of the Americas New York, New York 10036 FMR Corp.(2) 1,067,100 8.93% 82 Devonshire Street Boston, MA 02109-3614 Harris Associates L.P.(3) 660,000 5.52% Trust Series Designated The Oakmark Fund(6) Two North LaSalle Street Chicago, IL 60602-3790 Palisade Capital Management, L.L.C.(4) 781,000 6.54% One Bridge Plaza Suite 695 Fort Lee, NJ 07024 Pioneering Management Corporation(5) 711,500 5.96% 60 State Street Boston, MA 02109 Robert M. Raiff(6) 793,300 6.64% 152 West 57th Street New York, NY 10019 T. Rowe Price Associates, Inc.(7) 1,060,000 8.87% 100 E. Pratt Street Baltimore, MD 21202 Jeffrey A. Cole (8) 435,971 3.61% Timothy F. Finley (9) 15,500 * Irwin N. Gold (8)(9) 17,355 * Peter V. Handal (8)(9) 19,877 * Charles A. Ratner(10) 2,500 *
82 87
NAME OF BENEFICIAL OWNER NO. OF SHARES PERCENT OF CLASS - ------------------------------------------------------------------ ------------- ---------------- Brian B. Smith (8)(11) 225,847 1.88% Joseph Gaglioti (12) 15,174 * Wayne L. Mosley (12) 15,231 * All Directors and executive officers as a group (8 persons) (8)(9)(10)(11)(12) 747,455 6.11% - --------------- * Less than one percent (1) Stock ownership is based on a Schedule 13D filed on July 3, 1996. Cumberland Associates holds sole dispositive power as to 438,000 shares indicated and shared dispositive power as to 89,500 shares indicated, and holds no voting power with respect to any of the shares. Each of the general partners of Cumberland Associates, who include K. Tucker Andersen, Richard Reiss, Jr., Oscar S. Schafer, Bruce G. Wilcox, Glenn Krevlin, Andrew Wallach and Eleanor Poppe at the principal business address of 1114 Avenue of the Americas, New York, New York 10036, is also deemed a beneficial owner of the shares. (2) Stock ownership is based on a Schedule 13G dated May 10, 1996. Fidelity Management & Research Company, a wholly owned subsidiary of FMR Corp. and an investment adviser registered under the Investment Advisers Act of 1940 ("Fidelity"), is the beneficial owner of the shares indicated as a result of acting as investment adviser to several investment companies registered under the Investment Company Act of 1940 (the "Fidelity Funds"). The ownership of one investment company, Fidelity Low-Priced Stock Fund, amounted to 1,042,200 shares or 8.72% of the Common Stock outstanding. Fidelity Low-Priced Stock Fund has its principal business office at 82 Devonshire Street, Boston, Massachusetts 02109. Edward C. Johnson 3d, FMR Corp. (through its control of Fidelity), and the Fidelity Funds each has sole power to dispose of the 1,067,100 shares owned by the Fidelity Funds. Neither FMR Corp. nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Fidelity Funds' Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Fidelity Funds' Boards of Trustees. Edward C. Johnson 3d and Abigail P. Johnson own respectively 12.0% and 24.5% of the outstanding voting common stock of FMR Corp. Mr. Johnson 3d is Chairman of FMR Corp. Various Johnson family members and trusts for the benefit of Johnson family members own approximately 49% of FMR Corp. voting common stock. These Johnson family members, through their ownership of voting common stock and the execution of a family shareholders' voting agreement, form a controlling group with respect to FMR Corp. (3) Stock ownership is based on a Schedule 13G dated February 6, 1996. Harris Associates L.P. ("Harris") serves as investment adviser to The Oakmark Fund and The Oakmark Small Cap Fund, each of which is a series of the Harris Associates Investment Trust. Various of Harris's officers and directors are also officers and directors of the Harris Associates Investment Trust; Harris has indicated that it does not consider Oakmark Fund to be controlled by such persons. The Oakmark Fund and The Oakmark Small Cap Fund each beneficially own, respectively, 600,000 and 60,000 shares. Harris and Harris's sole general partner, Harris Associates Inc., share voting and dispositive powers as to such shares and thus also are deemed to be beneficial owners of such shares. (4) Stock ownership is based on a Schedule 13G filed on February 14, 1996. (5) Stock ownership is based on a Schedule 13G filed on January 26, 1996. Pioneering Management Corporation has shared dispositive power as to the shares indicated. (6) Stock ownership is based on a Schedule 13D filed on July 31, 1996. (7) Stock ownership is based on a Schedule 13G filed on July 8, 1996. The shares indicated are owned by various individual and institutional investors (including the T. Rowe Price New America Growth Fund whose principal offices are located at 100 E. Pratt Street, Baltimore, MD 21202, which owns 800,000
83 88 shares, representing 6.70% of the shares outstanding), for which T. Rowe Price Associates, Inc. ("Price Associates") serves as investment adviser with sole power to vote the shares. Price Associates disclaims beneficial ownership of the shares indicated. (8) Includes shares of Common Stock that may be acquired pursuant to the exercise of warrants exercisable within 60 days held by the following individuals: Mr. Cole -- 5,861 shares; Mr. Gold -- 1,355 shares; Mr. Handal -- 5,977 shares; and Mr. Smith -- 4,087. Included in Mr. Cole's and Mr. Smith's Common Stock shares are 136,388 and 82,892 shares, respectively, that may be acquired within 60 days pursuant to the exercise of options granted under the Company's 1993 Management Stock Option Plan (the "1993 Plan"). (9) Includes 7,500 shares of Common Stock that may be acquired within 60 days pursuant to the exercise of options granted under stock option agreements. (10) Includes 1,500 shares of Common Stock that may be acquired within 60 days pursuant to the exercise of an option granted under a stock option agreement. (11) Includes 1,140 shares of Common Stock owned indirectly by Mr. Smith and held by Mr. Smith's wife under the Uniform Gifts to Minors Act. Mr. Smith disclaims beneficial ownership of all securities held by his wife. (12) Includes shares of Common Stock that may be acquired within 60 days pursuant to the exercise of options granted under the Company's 1992 Management Stock Option Plan (the "1992 Plan") and the 1993 Plan as follows: Mr. Gaglioti -- 14,700 shares and Mr. Mosley -- 14,700 shares. 84 89 DESCRIPTION OF OTHER INDEBTEDNESS SENIOR NOTES Initially, $190.0 million of Senior Notes were issued pursuant to the Senior Note Indenture between the Company and Norwest Bank Minnesota, N.A., as trustee. Currently, there is $165.8 million aggregate principal amount of Senior Notes outstanding. The Senior Notes are unsecured and mature October 1, 2001 with no earlier scheduled redemption or sinking fund payments. Interest on the Senior Notes accrues at the rate of 11.25% per annum and is payable semiannually on April 1 and October 1 of each year. The Senior Notes are not redeemable at the Company's option prior to October 1, 1998. Thereafter, the Senior Notes will be subject to redemption at the option of the Company, in whole or in part, at redemption prices ranging from 105.625% to 100% of the principal amount, plus accrued and unpaid interest thereon. Upon the occurrence of a change of control of the Company, each holder of Senior Notes will have the right to require the repurchase of all or any part of such holder's Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon. A "change of control" would occur if a single purchaser or purchasers acting together as a "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) acquire more than 50% of the total voting power of the voting stock of the Company and/or warrants or options to acquire such voting stock, calculated on a fully diluted basis, or if there is a change in the Company's Board of Directors not approved by a majority of directors who constitute continuing directors. So long as no single purchaser or purchasers acting together as a "group" acquire 50% or more of the shares outstanding following the offering, the sale of the shares of Common Stock made pursuant to this offering will not constitute a change of control under the Senior Note Indenture. See "Risk Factors -- Leverage." The Senior Note Indenture pursuant to which the Senior Notes were issued contains certain optional and mandatory redemption features and other financial covenants, including restrictions on the ability of the Company to pay dividends or make other restricted payments to the Parent. The Senior Note Indenture permits dividend payments to the Parent of one-half of the Company's consolidated net income, provided that no default or event of default has occurred under the Senior Note Indenture and that the Company has met a specified fixed charge coverage ratio test. The indenture also permits payments to the Parent for certain tax obligations and for administrative expenses of the Parent not to exceed .25% of net sales. In addition, the Senior Note Indenture contains covenants restricting the ability of the Company and its subsidiaries to, among other things, (i) sell or otherwise dispose of assets, (ii) create or incur liens on their assets, (iii) incur or guaranty indebtedness (which is currently more restrictive than is included in the Notes), and (iv) merge or consolidate with or into, or sell or otherwise dispose of all or substantially all of the Company's assets to, another person. Under the Senior Note Indenture each of the following constitutes an Event of Default: (i) default for 30 days in the payment when due of interest on the Senior Notes; (ii) default in the payment when due of principal on the Senior Notes; (iii) failure by the Company for 15 days after notice to comply with certain "Change of Control," "Limitations on Restricted Payments" or "Limitation on Indebtedness and Preferred Stock" provisions, as described in the Indenture; (iv) failure by the Company for 60 days after notice to comply with other agreements or covenants in the Senior Note Indenture or the Senior Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness, as defined in the Senior Note Indenture, for money borrowed by the Company or any of its subsidiaries (or the payment of which is guaranteed by the Company or any of its subsidiaries) (other than the Senior Notes) whether such Indebtedness or guarantee now exists, or is created after the date of the Senior Note Indenture; (vi) failure by the Company or any of its subsidiaries to pay final judgments (other than any judgment as to which a reputable insurance company has accepted full liability) aggregating in excess of $5.0 million which judgments are not stayed within 60 days after their entry; and (vii) certain events of bankruptcy or insolvency with respect to the Company or any of its significant subsidiaries. 85 90 If any Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes may declare all the Senior Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Senior Notes will become due and payable without further action or notice. Holders of the Senior Notes may not enforce the Senior Note Indenture or the Senior Notes except as provided in the Senior Note Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding Senior Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the Senior Notes notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. NEW CREDIT FACILITY The Company's primary source of liquidity is funds provided from operations of its operating subsidiaries. On November 15, 1996, Cole Vision, Things Remembered and CGC, the principal operating subsidiaries of the Company, Pearle and PSC (collectively, the "Borrowers"), entered into the New Credit Facility. The New Credit Facility provides the Borrowers with a four-year revolving line of credit of up to the lesser of a "borrowing base" and $75,000,000. A portion of the New Credit Facility not in excess of $30,000,000 is available for the issuance of letters of credit. Borrowings under the New Credit Facility initially will bear interest at a rate equal to, at the option of the Borrowers, either (a) the Eurodollar Rate plus 1.25% or (b) .25% plus the highest of (i) the rate of interest publicly announced by Canadian Imperial Bank of Commerce as its prime rate in effect at its principal office in New York City, (ii) the secondary market rate for three-month certificates of deposit (adjusted for statutory reserve requirements) plus 1% and (iii) the federal funds effective rate from time to time plus 0.5%. These interest rates are subject to quarterly adjustment after the first anniversary of the closing of the New Credit Facility based on the Company's achievement of certain interest coverage ratio benchmarks. The New Credit Facility replaced, contemporaneously with the consummation of the offering of the Original Notes, the existing Revolving Credit Facility. Proceeds of certain asset sales and proceeds of casualty or condemnation recoveries by the Company or the Borrowers will be required to be reinvested in specified capital assets of the Company or the Borrowers or applied to reduce the commitments under the New Credit Facility. The New Credit Facility requires the Borrowers to comply with various operating covenants that restrict corporate activities, including covenants restricting the Borrowers' ability to incur additional indebtedness, pay dividends, prepay subordinated indebtedness, dispose of certain assets, create liens, make capital expenditures and make certain investments or acquisitions. The New Credit Facility also requires the Borrowers to comply with certain financial covenants, including covenants regarding minimum interest coverage, maximum leverage and consolidated net worth. The New Credit Facility permits the Company's subsidiaries to pay dividends to the Company to the extent necessary to permit it to pay all interest and principal on the Senior Notes and the Notes when due so long as no default or event of default under the New Credit Facility has occurred and is continuing. The New Credit Facility permits the Company to use up to $20,000,000 to repurchase the Senior Notes and/or the Notes so long as no default or event of default under the New Credit Facility has occurred and is continuing. The Company is a limited guarantor under the New Credit Facility, with recourse against the Company limited to certain bank accounts. As of December 1, 1996, approximately $9.7 million of letters of credit were outstanding under the Company's New Credit Facility. 86 91 DESCRIPTION OF THE NOTES The Original Notes were, and the Exchange Notes will be, issued under an Indenture, dated as of November 15, 1996 (the "Indenture") between the Company and the Norwest Bank Minnesota, National Association, as trustee (the "Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and holders of the Notes are referred to the Indenture and the Trust Indenture Act for a statement of such terms. The following is a summary of the material terms and provisions of the Notes. This summary does not purport to be a complete description of the Notes and is subject to the detailed provisions of, and qualified in its entirety by reference to, the Notes and the Indenture (including the definitions contained therein). Definitions relating to certain capitalized terms are set forth under "-- Certain Definitions" and throughout this description. Capitalized terms that are used but not otherwise defined herein have the meanings assigned to them in the Indenture, and such definitions are incorporated herein by reference. The Indenture has been incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part. The form of the Exchange Notes and the Original Notes are identical in all material respects except that the Exchange Notes will have been registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The Exchange Notes will not represent new indebtedness of the Company, will be entitled to the benefits of the same Indenture which governs the Original Notes and will rank pari passu with the Original Notes. Any provisions of the Indenture which require actions by or approval of a specified percentage of Original Notes shall require the approval of the holders of such percentage of principal amount of Original Notes and Exchange Notes, in the aggregate. GENERAL The Notes are limited in aggregate principal amount to $150,000,000. The Notes are general unsecured obligations of the Company, subordinated in right of payment to Senior Indebtedness of the Company, including the Senior Notes, and senior in right of payment to any current or future subordinated indebtedness of the Company. The operations of the Company are conducted through its Subsidiaries and, therefore, the Company is dependent upon the cash flow of its Subsidiaries to meet its obligations, including its obligations under the Notes. The Notes will be effectively subordinated to all indebtedness and other liabilities and commitments (including trade payables and lease obligations) of the Company's Subsidiaries, including borrowings under the New Credit Facility. Any right of the Company to receive assets of any of its Subsidiaries upon the latter's liquidation or reorganization (and the consequent right of the holders of the Notes to participate in those assets) will be effectively subordinated to the claims of that Subsidiary's creditors, except to the extent that the Company is itself recognized as a creditor of such Subsidiary, in which case the claims of the Company would still be subordinate to any security in the assets of such Subsidiary and any indebtedness of such Subsidiary senior to that held by the Company. MATURITY, INTEREST AND PRINCIPAL The Notes will mature on December 31, 2006. The Notes will bear interest at a rate of 9 7/8% per annum from the date of original issuance until maturity. Interest is payable semi-annually in arrears on December 31 and June 30 commencing June 30, 1997, to holders of record of the Notes at the close of business on the immediately preceding December 15 and June 15, respectively. Interest on the Notes will be paid on the basis of a 360 day year and twelve 30 day months. Interest on the Exchange Notes will accrue from (A) the last interest payment date on which interest was paid on the Notes surrendered in exchange therefor, or (B) if no interest has been paid on the Notes, from November 15, 1996. Holders whose Original Notes are accepted for exchange will be deemed to have waived the right to receive any interest on the Original Notes. The interest rate on the Notes is subject to increase, and such Additional Interest will be payable on the payment dates set forth above, in certain circumstances, if the Notes (or other securities substantially similar to the Notes) are 87 92 not registered with the Commission within the prescribed time periods. See "The Exchange Offer -- Registration Rights; Additional Interest." OPTIONAL REDEMPTION The Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after December 31, 2001 at the following redemption prices (expressed as a percentage of principal amount), together, in each case, with accrued interest to the redemption date, if redeemed during the twelve-month period beginning on December 31, of each year listed below:
YEAR PERCENTAGE ----------------------------------------------------- ---------- 2001................................................. 104.9375% 2002................................................. 102.4688% 2003................................................. 101.2343% 2004................................................. 100.6172% 2005 and thereafter.................................. 100.0000%
Notwithstanding the foregoing, the Company may redeem in the aggregate up to 35% of the original principal amount of Notes at any time and from time to time prior to December 31, 1999 at a redemption price equal to 109.875% of the aggregate principal amount so redeemed plus accrued interest to the redemption date out of the Net Proceeds of one or more Qualified Equity Offerings; provided that at least $97.5 million of the principal amount of Notes originally issued remain outstanding immediately after the occurrence of any such redemption and that any such redemption occurs within 90 days following the closing of any such Qualified Equity Offering. In the event of redemption of fewer than all of the Notes, the Trustee shall select by lot or in such other manner as it shall deem fair and equitable the Notes to be redeemed. The Notes will be redeemable in whole or in part upon not less than 30 nor more than 60 days' prior written notice, mailed by first class mail to a holder's last address as it shall appear on the register maintained by the Registrar of the Notes. On and after any redemption date, interest will cease to accrue on the Notes or portions thereof called for redemption unless the Company shall fail to redeem any such Note. SUBORDINATION The indebtedness represented by the Notes is, to the extent and in the manner provided in the Indenture, subordinated in right of payment to the prior indefeasible payment and satisfaction in full in cash of all existing and future Senior Indebtedness of the Company. As of November 2, 1996, after giving pro forma effect to the application of the net proceeds of the Offering, the principal amount of outstanding Senior Indebtedness of the Company, on a consolidated basis, would have been approximately $166.9 million. In addition, the Company would have had $75.0 million of undrawn commitments available under the New Credit Facility, reduced by any outstanding letters of credit. In the event of any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, arrangement, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets, whether voluntary or involuntary, or any liquidation, dissolution or other winding-up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or any general assignment for the benefit of creditors or other marshalling of assets or liabilities of the Company (except in connection with the merger or consolidation of the Company or its liquidation or dissolution following the transfer of substantially all of its assets, upon the terms and conditions permitted under the circumstances described under "--Mergers, Consolidations or Sale of Assets") (all of the foregoing referred to herein individually as a "Bankruptcy Proceeding" and collectively as "Bankruptcy Proceedings"), the holders of Senior Indebtedness of the Company will be entitled to receive payment and satisfaction in full in cash of all amounts due on or in respect of all Senior Indebtedness of the Company before the holders of the Notes are entitled to receive or retain any payment or distribution of any kind on account of the Notes. In the event that, notwithstanding the foregoing, the Trustee or any holder of 88 93 Notes receives any payment or distribution of assets of the Company of any kind, whether in cash, property or securities, including, without limitation, by way of set-off or otherwise, in respect of the Notes before all Senior Indebtedness of the Company is paid and satisfied in full in cash, then such payment or distribution will be held by the recipient in trust for the benefit of holders of Senior Indebtedness and will be immediately paid over or delivered to the holders of Senior Indebtedness or their representative or representatives to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution, or provision therefor, to or for the holders of Senior Indebtedness. By reason of such subordination, in the event of liquidation or insolvency, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than other creditors of the Company, and creditors of the Company who are not holders of Senior Indebtedness or of the Notes may recover more, ratably, than the holders of the Notes. No payment or distribution of any assets or securities of the Company or any Subsidiary of any kind or character (including, without limitation, cash, property and any payment or distribution which may be payable or deliverable by reason of the payment of any other Indebtedness of the Company being subordinated to the payment of the Notes by the Company) may be made by or on behalf of the Company or any Subsidiary, including, without limitation, by way of set-off or otherwise, for or on account of the Notes, or for or on account of the purchase, redemption or other acquisition of the Notes, and neither the Trustee nor any holder or owner of any Notes shall take or receive from the Company or any Subsidiary, directly or indirectly in any manner, payment in respect of all or any portion of Notes following the occurrence of a Payment Default, and in any such event, such prohibition shall continue until such Payment Default is cured, waived in writing or ceases to exist or such acceleration has been rescinded or otherwise cured. At such time as the prohibition set forth in the preceding sentence shall no longer be in effect, subject to the provisions of the following paragraph, the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. Upon the occurrence of a Non-Payment Event of Default on Designated Senior Indebtedness, no payment or distribution of any assets of the Company of any kind may be made by the Company, including, without limitation, by way of set-off or otherwise, on account of the Notes, for or on account of the purchase, redemption, defeasance or other acquisition of Notes, and neither the Trustee nor any holder or owner of Notes shall take or receive from the Company or any Subsidiary, directly or indirectly in any manner, payment in respect of all or any portion of the Notes for a period (a "Payment Blockage Period") commencing on the date of receipt by the Trustee of written notice from an authorized Person on behalf of the holders of Designated Senior Indebtedness (the "Authorized Person") of such Non-Payment Event of Default unless and until (subject to any blockage of payments that may then be in effect under the preceding paragraph) the earliest of (x) more than 179 days shall have elapsed since receipt of such written notice by the Trustee, (y) such Non-Payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Designated Senior Indebtedness shall have been paid in full or (z) such Payment Blockage Period shall have been terminated by written notice to the Company or the Trustee from such Authorized Person, after which, in the case of clause (x), (y) or (z), the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. Notwithstanding any other provision of the Indenture, in no event shall a Payment Blockage Period commenced in accordance with the provisions of the Indenture described in this paragraph extend beyond 179 days from the date of the receipt by the Trustee of the notice referred to above (the "Initial Blockage Period"). Any number of additional Payment Blockage Periods may be commenced during the Initial Blockage Period; provided, however, that no such additional Payment Blockage Period shall extend beyond the Initial Blockage Period. After the expiration of the Initial Blockage Period, no Payment Blockage Period may be commenced until at least 180 consecutive days have elapsed from the last day of the Initial Blockage Period. Notwithstanding any other provision of the Indenture, no event of default with respect to Designated Senior Indebtedness (other than a Payment Default) which existed or was continuing on the date of the commencement of any Payment Blockage Period initiated by an Authorized Person shall be, or be made, the basis for the commencement of a second Payment Blockage Period initiated by an Authorized Person, whether or not within the Initial Blockage Period, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. 89 94 If the Company fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of payment blockage provisions, such failure would constitute an Event of Default under the Indenture and would enable the holders of the Notes to accelerate the maturity thereof. See "Events of Default." A holder of Notes by his acceptance of Notes agrees to be bound by such provisions and authorizes and expressly directs the Trustee, on his behalf, to take such action as may be necessary or appropriate to effectuate the subordination provided for in the Indenture and appoints the Trustee his attorney-in-fact for such purpose. CERTAIN COVENANTS The Indenture will contain, among others, the following covenants. Except as otherwise specified, all of the covenants described below will appear in the Indenture. Limitation on Additional Indebtedness The Company will not, and will not permit any Subsidiary of the Company to, directly or indirectly, incur (as defined) any Indebtedness (including Acquired Indebtedness); provided, that the Company (but not any Subsidiary of the Company) may incur Indebtedness if (i) after giving effect to the incurrence of such Indebtedness and the receipt and application of the proceeds thereof, the Company's Fixed Charge Coverage Ratio (determined on a pro forma basis for the last four fiscal quarters of the Company for which financial statements are available at the date of determination) is at least 2.00 to 1 if the Indebtedness is incurred prior to December 31, 2000 and 2.25 to 1 thereafter, and (ii) no Triggering Default Event shall have occurred and be continuing at the time or as a consequence of the incurrence of such Indebtedness. For purposes of computing the Fixed Charge Coverage Ratio, (A) if the Indebtedness which is the subject of a determination under this provision is Acquired Indebtedness, or Indebtedness incurred in connection with the simultaneous acquisition (by way of merger, consolidation or otherwise) of any Person, business, property or assets (an "Acquisition"), then such ratio shall be determined by giving effect (on a pro forma basis, as if the transaction had occurred at the beginning of the four-quarter period) to both the incurrence or assumption of such Acquired Indebtedness or such other Indebtedness by the Company and the inclusion in the Company's EBITDA of the EBITDA of the acquired Person, business, property or assets, (B) if any Indebtedness outstanding or to be incurred (x) bears a floating rate of interest, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account on a pro forma basis any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term as at the date of determination in excess of 12 months), (y) bears, at the option of the Company or a Subsidiary, a fixed or floating rate of interest, the interest expense on such Indebtedness shall be computed by applying, at the option of the Company or such Subsidiary, either a fixed or floating rate and (z) was incurred under a revolving credit facility, the interest expense on such Indebtedness shall be computed based upon the average daily balance of such Indebtedness during the applicable period, (C) for any quarter prior to the date hereof included in the calculation of such ratio, such calculation shall be made on a pro forma basis, giving effect to the Pearle Acquisition, the issuance of the Notes, the incurrence of Indebtedness under the New Credit Facility and the use of the net proceeds therefrom as if the same had occurred at the beginning of the four-quarter period used to make such calculation and (D) for any quarter included in the calculation of such ratio prior to the date that any Asset Sale was consummated, or that any Indebtedness was incurred, or that any Acquisition was effected, by the Company or any of its Subsidiaries, such calculation shall be made on a pro forma basis, giving effect to each Asset Sale, incurrence of Indebtedness or Acquisition, as the case may be, and the use of any proceeds therefrom, as if the same had occurred at the beginning of the four quarter period used to make such calculation. Notwithstanding the foregoing, the Company and its Subsidiaries may incur Permitted Indebtedness; provided, that the Company will not incur any Permitted Indebtedness, without meeting the Indebtedness incurrence provisions of the preceding paragraph, that ranks pari passu or junior in right of payment to the Notes and that has a maturity or mandatory sinking fund payment prior to the maturity of the Notes. 90 95 Limitation on Restricted Payments The Company will not make, and will not permit any of its Subsidiaries to, directly or indirectly, make, any Restricted Payment, unless: (a) no Triggering Default Event shall have occurred and be continuing at the time of or immediately after giving effect to such Restricted Payment; (b) immediately after giving pro forma effect to such Restricted Payment, the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the covenant set forth under "-- Limitation on Additional Indebtedness"; and (c) immediately after giving effect to such Restricted Payment, the aggregate of all Restricted Payments declared or made after the Issue Date does not exceed the sum of (1) 50% of the cumulative Consolidated Net Income of the Company subsequent to October 31, 1993 (or minus 100% of any cumulative deficit in Consolidated Net Income during such period); (2) 100% of the aggregate Net Proceeds and the fair market value (as determined in good faith by the Board of Directors of the Company) of securities or other property received by the Company from the issue or sale, after the Issue Date, of Capital Stock (other than Disqualified Capital Stock or Capital Stock of the Company issued to any Subsidiary of the Company) of the Company or any Indebtedness or other securities of the Company convertible into or exercisable or exchangeable for Capital Stock (other than Disqualified Capital Stock) of the Company which has been so converted or exercised or exchanged, as the case may be; (3) 100% of the capital contributions made by the Parent to the Company after the Issue Date (other than capital contributions which constitute Indebtedness); and (4) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the date hereof, an amount equal to the lesser of the return of capital with respect to such Investment and the initial amount of such Investment, in either case, less the cost of the disposition of such Investment. For purposes of determining under this clause (c) the amount expended for Restricted Payments, cash distributed shall be valued at the face amount thereof and property other than cash shall be valued at its fair market value (as determined in good faith by the Board of Directors of the Company). The provisions of this covenant will not prohibit (i) the payment of any distribution within 60 days after the date of declaration thereof, if at such date of declaration such payment would comply with the provisions of the Indenture; (ii) the repurchase, redemption or other acquisition or retirement of any shares of Capital Stock of the Company or Indebtedness subordinated to the Notes by conversion into, or by or in exchange for, shares of Capital Stock (other than Disqualified Capital Stock), or out of, the Net Proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of other shares of Capital Stock of the Company (other than Disqualified Capital Stock); (iii) the repurchase, redemption or other acquisition or retirement of Indebtedness of the Company subordinated to the Notes in exchange for, by conversion into, or out of the Net Proceeds of, a substantially concurrent sale or incurrence of Indebtedness (other than any Indebtedness owed to a Subsidiary) of the Company that is contractually subordinated in right of payment to the Notes to at least the same extent as the Indebtedness subordinated to the Notes being redeemed or retired; (iv) the retirement of any shares of Disqualified Capital Stock by conversion into, or by exchange for, shares of Disqualified Capital Stock, or out of the Net Proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of other shares of Disqualified Capital Stock; (v) the repurchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company or the Parent or any current or former Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') current or former employees; provided, that the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock shall not exceed $4 million; (vi) the payment of dividends to the Parent solely for the purpose of enabling Parent to pay the ordinary operating and administrative expenses of the Parent (including all reasonable professional fees and expenses) in connection with its complying with its reporting obligations and obligations to prepare and distribute business records in the ordinary course of business and the Parent's costs and expenses relating to taxes (which taxes are attributable to the operations of the Company and its Subsidiaries or to the Parent's ownership thereof); provided, however, that the aggregate dividend payments paid in each fiscal year pursuant to this clause (vi) will at no time exceed .25% of the Company's Net Sales for 91 96 such fiscal year; (vii) payments to the Parent for income taxes pursuant to the Tax Allocation Agreement; and (viii) the payment of dividends to the Parent solely for the purpose of enabling the Parent to pay taxes other than income taxes, to the extent actually owed and attributable to the operations of the Company and its Subsidiaries or to the Parent's ownership thereof; provided, that, for purposes of determining whether Restricted Payments can be made pursuant to the previous paragraph, all payments made pursuant to clauses (ii), (iv), (v), (vi), (vii) and (viii) of this paragraph will reduce the amount that would otherwise be available for such Restricted Payments and payments made pursuant to the other clauses of this paragraph shall not so reduce the amount available for Restricted Payments. Not later than the date of making any Restricted Payment which may only be made pursuant to subclause (c) above, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "-- Limitation on Restricted Payments" were computed, which calculations may be based upon the Company's latest available financial statements, and that no Triggering Default Event exists and is continuing and no Triggering Default Event will occur immediately after giving effect to any Restricted Payments. At November 2, 1996, the Company had $15.4 million available to make Restricted Payments. Limitation on Other Senior Subordinated Debt The Company will not, directly or indirectly, incur any Indebtedness that is both (i) subordinate in right of payment to any Senior Indebtedness of the Company and (ii) senior in right of payment to the Notes. For purposes of this covenant, Indebtedness is deemed to be senior in right of payment to the Notes if it is not explicitly subordinate in right of payment to Senior Indebtedness at least to the same extent as the Notes are subordinate to Senior Indebtedness. Limitations on Liens The Company will not create, incur or otherwise cause or suffer to exist any Liens of any kind (other than Permitted Liens) upon any property or asset of the Company to secure Indebtedness which is pari passu with or subordinate in right of payment to the Notes, unless (i) if such Lien secures Indebtedness which is pari passu with the Notes, the Notes are secured on an equal and ratable basis with the obligation so secured until such time as such obligation is no longer secured by a Lien and (ii) if such Lien secures Indebtedness which is subordinated to the Notes, such Indebtedness secured by such Lien and such Lien shall be subordinated to the Lien granted to the Holders of the Notes to the same extent as such Indebtedness is subordinated to the Notes. Dividend and Other Payment Restrictions Affecting Subsidiaries The Indenture will provide that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (a)(i) pay dividends or make any other distributions to the Company or any of its Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest or participation in, or measured by, its profits, or (ii) pay any Indebtedness owed to the Company or any of its Subsidiaries or (b) make loans or advances to the Company or any of its Subsidiaries or (c) transfer any of its properties or assets to the Company or any of its Subsidiaries, except for such encumbrances or restrictions existing under or by reasons of (i) Indebtedness outstanding on the date of the Indenture, (ii) the Revolving Credit Facility as in effect as of the date of the Indenture, or as replaced by the New Credit Facility having terms no more restrictive than those contained in the Revolving Credit Facility as in effect on the date of the Indenture, (iii) the Senior Note Indenture, the Senior Notes and the Indenture, (iv) applicable law, (v) customary nonassignment provisions in leases, (vi) permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Refinancing Indebtedness shall not be materially more restrictive than those contained in the agreements governing the Indebtedness being refinanced, (vii) customary restrictions imposed in connection with Purchase Money Indebtedness or Capital Lease Obligations permitted under the covenant entitled "Limitation on Incurrence of Indebtedness" as long as such customary restrictions are not materially more restrictive than those set forth in the Revolving Credit Facility 92 97 on the date of the Indenture and the New Credit Facility (except that they may impose restrictions on the transfer of the asset so financed), or (viii) restrictions in agreements with Persons acquired by the Company or any Subsidiary which do not extend to Property or assets other than the Property or assets of such Persons. Limitation on Transactions with Affiliates The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with any Affiliate (including Parent and entities in which the Company or any of its Subsidiaries own a minority interest) or holder of 10% or more of the Company's Common Stock (an "Affiliate Transaction") or extend, renew, waive or otherwise modify the terms of any Affiliate Transaction entered into prior to the Issue Date unless (i) such Affiliate Transaction is between or among the Company and its Wholly-Owned Subsidiaries; or (ii) the terms of such Affiliate Transaction are fair and reasonable to the Company or such Subsidiary, as the case may be, and the terms of such Affiliate Transaction are at least as favorable as the terms which could be obtained by the Company or such Subsidiary, as the case may be, in a comparable transaction made on an arm's-length basis between unaffiliated parties. In any Affiliate Transaction involving an amount or having a value in excess of $5.0 million which is not permitted under clause (i) above, the Company must obtain a resolution of the Board of Directors certifying that such Affiliate Transaction complies with clause (ii) above. In transactions with a value in excess of $10.0 million which are not permitted under clause (i) above (other than loans from the Parent to the Company at a rate not in excess of the incremental borrowing rate of the Company as determined in good faith by the Board of Directors of the Company, or loans from the Company or any Subsidiary to Parent, in each case at a rate not in excess of the Parent's incremental borrowing rate, as determined in good faith by the Board of Directors of the Company), the Company must obtain a written opinion as to the fairness of such a transaction from an independent investment banking firm. The foregoing provisions will not apply to (i) any Restricted Payment that is not prohibited by the provisions described under "-- Limitations on Restricted Payments" contained herein, (ii) Indebtedness incurred by the Company to the Parent, provided such Indebtedness has terms no more onerous than those contained in the New Credit Facility or (iii) any compensation-related transaction, approved by an independent committee of the Board of Directors of the Company, with an officer or director of the Company or of any Subsidiary in his or her capacity as officer or director entered into in the ordinary course of business. Limitation on Certain Asset Sales The Company will not, and will not permit any of its Subsidiaries to, consummate an Asset Sale unless (i) the Company or its Subsidiaries, as the case may be, receives consideration at the time of such sale or other disposition at least equal to the fair market value thereof (as determined in good faith by the Board of Directors of the Company); (ii) except in the case of the sale, transfer or other disposition of Company-owned stores to franchisees in a business related to the optical business that result in the conversion of such stores to franchised stores, not less than 75% of the consideration received by the Company or its Subsidiaries, as the case may be, is in the form of cash or Temporary Cash Investments; and (iii) the Asset Sale Proceeds received by the Company or such Subsidiary are applied (a) first, to the extent the Company elects, or is required, to prepay, repay or purchase debt under any then existing Senior Indebtedness of the Company or any Subsidiary within 12 months following the receipt of the Asset Sale Proceeds from any Asset Sale, provided that any such repayment shall result in a permanent reduction of the commitments thereunder in an amount equal to the principal amount so repaid; (b) second, to the extent of the balance of Asset Sale Proceeds after application as described above, to the extent the Company elects, to an investment in assets (including Capital Stock or other securities purchased in connection with the acquisition of Capital Stock or property of another person) used or useful in businesses similar or ancillary to the business of the Company or Subsidiary as conducted at the time of such Asset Sale, provided that such investment occurs on or prior to the 365th day following receipt of such Asset Sale Proceeds (the "Reinvestment Date"); and (c) third, if on the Reinvestment Date the Available Asset Sale Proceeds with respect to any Asset Sale exceed $10 million, the Company shall apply an amount equal to such Available Asset Sale Proceeds to an offer to repurchase the 93 98 Notes, at a purchase price in cash equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase (an "Excess Proceeds Offer"). If an Excess Proceeds Offer is not fully subscribed, the Company may retain the portion of the Available Asset Sale Proceeds not required to repurchase Notes. If the Company is required to make an Excess Proceeds Offer, the Company shall mail, within 30 days following the Reinvestment Date, a notice to the Holders stating, among other things: (1) that such Holders have the right to require the Company to apply the Available Asset Sale Proceeds to repurchase such Notes at a purchase price in cash equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase; (2) the purchase date, which shall be no earlier than 30 days and not later than 60 days from the date such notice is mailed; (3) the instructions, determined by the Company, that each Holder must follow in order to have such Notes repurchased; and (4) the calculations used in determining the amount of Available Asset Sale Proceeds to be applied to the repurchase of such Notes. Limitation on Capital Stock of Subsidiaries The Company will not (i) sell, pledge, hypothecate or otherwise convey or dispose of any Capital Stock of a Subsidiary (other than under the New Credit Facility or a successor facility or under the terms of any Designated Senior Indebtedness) or (ii) permit any of its Subsidiaries to issue any Capital Stock, other than to the Company or a Wholly Owned Subsidiary of the Company. The foregoing restrictions shall not apply to an Asset Sale (other than the sale of Preferred Stock of a Subsidiary) made in compliance with "-- Limitation on Certain Asset Sales." Limitation on Sale and Lease-Back Transactions The Company will not, and will not permit any Subsidiary to, enter into any Sale and Lease-Back Transaction unless (i) the consideration received in such Sale and Lease-Back Transaction is at least equal to the fair market value of the property sold, as determined by a board resolution of the Company and (ii) the Company could incur Indebtedness in an amount equal to the Attributable Indebtedness in respect of such Sale and Lease-Back Transaction in compliance with the covenant described under "-- Limitation of Additional Indebtedness." Payments for Consent Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or agreed to be paid to all holders of the Notes which so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. CHANGE OF CONTROL OFFER Within 30 days of the occurrence of a Change of Control, the Company shall notify the Trustee in writing of such occurrence and shall make an offer to purchase (the "Change of Control Offer") the outstanding Notes at a purchase price equal to 101% of the principal amount thereof plus any accrued interest to the Change of Control Payment Date (as hereinafter defined) (such applicable purchase price being hereinafter referred to as the "Change of Control Purchase Price") in accordance with the procedures set forth in this covenant. Within 40 days of the occurrence of a Change of Control, the Company also shall (i) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (ii) send by first-class mail, postage prepaid, to the Trustee and to each holder of the Notes, at the address appearing in the register maintained by the Registrar of the Notes, a notice stating: 94 99 (1) that the Change of Control Offer is being made pursuant to this covenant and that all Notes tendered will be accepted for payment, and otherwise subject to the terms and conditions set forth herein; (2) the Change of Control Purchase Price and the purchase date (which shall be a Business Day no earlier than 30 nor later than 40 days from the date such notice is mailed (the "Change of Control Payment Date")); (3) that any Note not tendered will continue to accrue interest; (4) that, unless the Company defaults in the payment of the Change of Control Purchase Price, any Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (5) that holders accepting the offer to have their Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day preceding the Change of Control Payment Date; (6) that holders will be entitled to withdraw their acceptance if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder, the principal amount of the Notes delivered for purchase, and a statement that such holder is withdrawing his election to have such Notes purchased; (7) that holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, provided that each Note purchased and each such new Note issued shall be in an original principal amount in denominations of $1,000 and integral multiples thereof; (8) any other procedures that a holder must follow to accept a Change of Control Offer or effect withdrawal of such acceptance; and (9) the name and address of the Paying Agent. On the Change of Control Payment Date, the Company shall, to the extent lawful, (i) accept for payment Notes or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee Notes so accepted together with an Officers' Certificate stating the Notes or portions thereof tendered to the Company. The Paying Agent shall promptly mail to each holder of Notes so accepted payment in an amount equal to the purchase price for such Notes, and the Company shall execute and issue, and the Trustee shall promptly authenticate and mail to such holder, a new Note equal in principal amount to any unpurchased portion of the Notes surrendered; provided that each such new Note shall be issued in an original principal amount in denominations of $1,000 and integral multiples thereof. The Indenture requires that if the New Credit Facility is in effect and the Senior Notes are outstanding, or any amounts are owing thereunder or in respect thereof, at the time of the occurrence of a Change of Control, prior to the mailing of the notice to holders described in the preceding paragraph, but in any event within 30 days following any Change of Control, the Company covenants to (i) repay in full all obligations under or in respect of the New Credit Facility and the Senior Notes or offer to repay in full all obligations under or in respect of the New Credit Facility and the Senior Notes and repay the obligations under or in respect of the New Credit Facility and the Senior Notes of each lender and holder, as the case may be, who has accepted such offer or (ii) obtain the requisite consent under the New Credit Facility and the Senior Notes to permit the repurchase of the Notes as described above. The Company must first comply with the covenant described in the preceding sentence before it shall be required to purchase Notes in the event of a Change of Control; provided that the Company's failure to comply with the covenant described in the preceding sentence constitutes an Event of Default described in clause (iii) under "-- Events of Default" below if not cured within 60 days after the notice required by such clause. As a result of the foregoing, a holder of the Notes may not be able to compel the Company to purchase the Notes unless the Company is able at the 95 100 time to refinance all of the obligations under or in respect of the New Credit Facility and the Senior Notes or obtain requisite consents under the New Credit Facility and the Senior Notes. Failure by the Company to make a Change of Control Offer when required by the Indenture constitutes a default under the Indenture and, if not cured within 60 days after notice, constitutes an Event of Default. The Indenture provides that, (A) if the Company or any Subsidiary thereof has issued any outstanding (i) Indebtedness that is subordinated in right of payment to the Notes or (ii) Preferred Stock, and the Company or such Subsidiary is required to make a Change of Control Offer or to make a distribution with respect to such subordinated Indebtedness or Preferred Stock in the event of a change of control, the Company shall not consummate any such offer or distribution with respect to such subordinated Indebtedness or Preferred Stock until such time as the Company shall have paid the Change of Control Purchase Price in full to the holders of Notes that have accepted the Company's Change of Control Offer and shall otherwise have consummated the Change of Control Offer made to holders of the Notes and (B) the Company will not issue Indebtedness that is subordinated in right of payment to the Notes or Preferred Stock with change of control provisions requiring the payment of such Indebtedness or Preferred Stock prior to the payment of the Notes in the event of a Change in Control under the Indenture. In the event that a Change of Control occurs and the holders of Notes exercise their right to require the Company to purchase Notes, if such purchase constitutes a "tender offer" for purposes of Rule 14e-1 under the Exchange Act at that time, the Company will comply with the requirements of Rule 14e-1 as then in effect with respect to such repurchase. MERGER, CONSOLIDATION OR SALE OF ASSETS The Company will not and will not permit any Subsidiary to consolidate with, merge with or into, or transfer all or substantially all of its assets (as an entirety or substantially as an entirety in one transaction or a series of related transactions), to any Person unless: (i) the Company or the Subsidiary, as the case may be, shall be the continuing Person, or the Person (if other than the Company or the Subsidiary) formed by such consolidation or into which the Company or the Subsidiary, as the case may be, is merged or to which the properties and assets of the Company or the Subsidiary, as the case may be, are transferred shall be a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all of the obligations of the Company or the Subsidiary, as the case may be, under the Notes and the Indenture, and the obligations under the Indenture shall remain in full force and effect; (ii) immediately before and immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (iii) immediately after giving effect to such transaction on a pro forma basis the Company or such Person could incur at least $1.00 additional Indebtedness (other than Permitted Indebtedness) under the covenant set forth under "Limitation on Additional Indebtedness," provided that a Person that is a Subsidiary on the Issue Date may merge into the Company or another Person that is a Subsidiary on the Issue Date without complying with this clause (iii). In connection with any consolidation, merger or transfer of assets contemplated by this provision, the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and the supplemental indenture in respect thereto comply with this provision and that all conditions precedent herein provided for relating to such transaction or transactions have been complied with. EVENTS OF DEFAULT The following events are defined in the Indenture as "Events of Default": (i) default in payment of any principal of, or premium, if any, on the Notes; (ii) default for 30 days in payment of any interest on the Notes; 96 101 (iii) default by the Company or any Subsidiary in the observance or performance of any other covenant in the Notes or the Indenture for 60 days after written notice from the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding; (iv) failure to pay when due (within the grace period provided in such Indebtedness) principal, interest or premium in an aggregate amount of $5,000,000 or more with respect to any Indebtedness of the Company or any Subsidiary thereof, or the acceleration of any such Indebtedness aggregating $5,000,000 or more, which default or acceleration shall not be cured, waived or postponed pursuant to an agreement with the holders of such Indebtedness within 60 days after written notice, or such acceleration shall not be rescinded or annulled within 20 days after written notice; (v) any final judgment or judgments which can no longer be appealed for the payment of money in excess of $5,000,000 shall be rendered against the Company or any Subsidiary thereof (other than a judgment or portion thereof as to which an insurance company of national reputation has accepted full liability), and shall not be discharged or fully bonded for any period of 60 consecutive days during which a stay of enforcement shall not be in effect; and (vi) certain events involving bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary thereof. The Indenture provides that the Trustee may withhold notice to the holders of the Notes of any default (except in payment of principal or premium, if any, or interest on the Notes) if the Trustee considers it to be in the best interest of the holders of the Notes to do so. The Indenture will provide that if an Event of Default (other than an Event of Default resulting from certain events of bankruptcy, insolvency or reorganization) shall have occurred and be continuing, then the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare to be immediately due and payable the entire principal amount of all the Notes then outstanding plus accrued interest to the date of acceleration and (i) such amounts shall become immediately due and payable or (ii) if there are any amounts outstanding under or in respect of the New Credit Facility, such amounts shall become due and payable upon the first to occur of an acceleration of amounts outstanding under or in respect of the New Credit Facility or five business days after receipt by the Company and the representative of the holders of Senior Indebtedness under or in respect of the New Credit Facility, of notice of the acceleration of the Notes; provided, however, that after such acceleration but before a judgment or decree based on acceleration is obtained by the Trustee, the holders of a majority in aggregate principal amount of outstanding Notes may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than nonpayment of accelerated principal, premium or interest, have been cured or waived as provided in the Indenture. In case an Event of Default resulting from certain events of bankruptcy, insolvency or reorganization shall occur, the principal, premium and interest amount with respect to all of the Notes shall be due and payable immediately without any declaration or other act on the part of the Trustee or the holders of the Notes. The holders of a majority in principal amount of the Notes then outstanding shall have the right to waive any existing default or compliance with any provision of the Indenture or the Notes and to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, subject to certain limitations specified in the Indenture. No holder of any Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless such holder shall have previously given to the Trustee written notice of a continuing Event of Default and unless also the holders of at least 25% in aggregate principal amount of the outstanding Notes shall have made written request and offered reasonable indemnity to the Trustee to institute such proceeding as a trustee, and unless the Trustee shall not have received from the holders of a majority in aggregate principal amount of the outstanding Notes a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. However, such limitations do not apply to a suit instituted on such Note on or after the respective due dates expressed in such Note. 97 102 DEFEASANCE AND COVENANT DEFEASANCE The Indenture provides the Company may elect either (a) to defease and be discharged from any and all obligations with respect to the Notes (except for the obligations to register the transfer or exchange of such Notes, to replace temporary or mutilated, destroyed, lost or stolen Notes, to maintain an office or agency in respect of the Notes and to hold monies for payment in trust) ("defeasance") or (b) to be released from their obligations with respect to the Notes under certain covenants contained in the Indenture and described above under "-- Certain Covenants" ("covenant defeasance"), upon the deposit with the Trustee (or other qualifying trustee), in trust for such purpose, of money and/or United States Government Obligations which through the payment of principal and interest in accordance with their terms will provide money, in an amount sufficient to pay the principal of, premium, if any, and interest on the Notes, on the scheduled due dates therefor or on a selected date of redemption in accordance with the terms of the Indenture. Such a trust may only be established if, among other things, the Issuers have delivered to the Trustee an Opinion of Counsel (as specified in the Indenture) (i) to the effect that neither the trust nor the Trustee will be required to register as an investment company under the Investment Company Act of 1940, as amended, and (ii) in the case of defeasance describing either a private ruling concerning the Notes or a published ruling of the Internal Revenue Service, to the effect that, and in the case of covenant defeasance, stating that, holders of the Notes or persons in their positions will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred. MODIFICATION OF INDENTURE From time to time, the Company and the Trustee may, without the consent of holders of the Notes, amend the Indenture or the Notes or supplement the Indenture for certain specified purposes, including providing for uncertificated Notes in addition to certificated Notes, and curing any ambiguity, defect or inconsistency, or making any other change that does not materially and adversely affect the rights of any holder. The Indenture contains provisions permitting the Company and the Trustee, with the consent of holders of at least a majority in principal amount of the outstanding Notes, to modify or supplement the Indenture or the Notes, except that no such modification shall, without the consent of each holder affected thereby, (i) reduce the amount of Notes whose holders must consent to an amendment, supplement, or waiver to the Indenture or the Notes, (ii) reduce the rate of or change the time for payment of interest on any Note, (iii) reduce the principal of or premium on or change the stated maturity of any Note, (iv) make any Note payable in money other than that stated in the Note or change the place of payment from New York, New York, (v) change the amount or time of any payment required by the Notes or reduce the premium payable upon any redemption of Notes, or change the time before which no such redemption may be made, (vi) waive a default on the payment of the principal of, interest on, or redemption payment with respect to any Note, or (vii) take any other action otherwise prohibited by the Indenture to be taken without the consent of each holder affected thereby. REPORTS TO HOLDERS So long as the Company is subject to the periodic reporting requirements of the Exchange Act, it will continue to furnish the information required thereby to the Commission and to the holders of the Notes. The Indenture provides that even if the Company is entitled under the Exchange Act not to furnish such information to the Commission or to the holders of the Notes, they will nonetheless continue to furnish such information to the Commission and holders of the Notes. COMPLIANCE CERTIFICATE The Company will deliver to the Trustee on or before 120 days after the end of the Company's fiscal year and on or before 60 days after the end of each the first, second and third fiscal quarters in each year an Officers' Certificate stating whether or not the signers know of any Default or Event of Default that has occurred. If they do, the certificate will describe the Default or Event of Default and its status. 98 103 THE TRUSTEE The Trustee under the Indenture will be the Registrar and Paying Agent with regard to the Notes. The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. TRANSFER AND EXCHANGE Holders of the Notes may transfer or exchange Notes in accordance with the Indenture. The Registrar under such Indenture may require a holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar is not required to transfer or exchange any Note selected for redemption. Also, the Registrar is not required to transfer or exchange any Note for a period of 15 days before selection of the Notes to be redeemed. The Original Notes were issued in a transaction exempt from registration under the Act and are subject to the restrictions on transfer. The registered holder of a Note may be treated as the owner of it for all purposes. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the covenants contained in the Indenture. Reference is made to the Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Subsidiary or assumed in connection with the acquisition of assets from such Person. "Affiliate" of any specified Person means any other Person which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by," and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Asset Sale" means the sale, transfer or other disposition (other than to the Company or any of its Subsidiaries) in any single transaction or series of related transactions having a fair market value in excess of $2.5 million of (a) any Capital Stock of or other equity interest in any Subsidiary of the Company, (b) all or substantially all of the assets of the Company or of any Subsidiary, (c) real property or (d) all or substantially all of the assets of a division, line of business or comparable business segment or part thereof of the Company or any Subsidiary thereof; provided that Asset Sales shall not include sales, transfers or other dispositions to the Company or to a Subsidiary or to any other Person if after giving effect to such sale, lease, conveyance, transfer or other disposition such other Person becomes a Subsidiary. "Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash received by the Company or any Subsidiary from such Asset Sale (including cash received as consideration for the assumption of liabilities incurred in connection with or in anticipation of such Asset Sale), after (a) provision for all income or other taxes measured by or resulting from such Asset Sale, (b) payment of all brokerage commissions, underwriting and other fees and expenses related to such Asset Sale, (c) provision for minority interest holders in any Subsidiary as a result of such Asset Sale and (d) deduction of appropriate amounts to be provided by the Company or a Subsidiary as a reserve, in accordance with GAAP, against any liabilities associated with the assets sold or disposed of in such Asset Sale and retained by the Company or a Subsidiary after such Asset Sale, including, without limitation, pension and other post employment benefit liabilities and liabilities related to environmental matters or against any indemnification obligations associated with the assets sold or disposed 99 104 of in such Asset Sale, and (ii) promissory notes and other noncash consideration received by the Company or any Subsidiary from such Asset Sale or other disposition upon the liquidation or conversion of such notes or noncash consideration into cash. "Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction means, as at the time of determination, the greater of (i) the fair value of the property subject to such arrangement (as determined by the Board of Directors of the Company) and (ii) the present value (discounted at a rate of 10%, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale and Lease-Back Transaction (including any period for which such lease has been extended). "Available Asset Sale Proceeds" means, with respect to any Asset Sale, the aggregate Asset Sale Proceeds from such Asset Sale that have not been applied in accordance with clauses (iii)(a) or (iii)(b), and which have not yet been the basis for an Excess Proceeds Offer in accordance with clause (iii)(c) of the first paragraph of "Description of the Notes -- Certain Covenants -- Limitation on Certain Asset Sales." "Capital Stock" means, with respect to any Person, any and all shares or other equivalents (however designated) of capital stock, partnership interests or any other participation, right or other interest in the nature of an equity interest in such Person or any option, warrant or other security convertible into any of the foregoing. "Capitalized Lease Obligations" means Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP. A "Change of Control" of the Company will be deemed to have occurred at such time as (i) any Person (including a Person's Affiliates and associates), other than a Permitted Holder, becomes the beneficial owner (as defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of 50% or more of the total voting or economic power of the Common Stock of the Company or the Parent and/or warrants or options to acquire such Common Stock on a fully diluted basis, (ii) either the Company or Parent consolidates with, or merges with or into, another Person or conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, either the Company or Parent, in any such event pursuant to a transaction in which the outstanding Common Stock of either the Company or Parent is converted into or exchanged for cash, securities or other property, other than any such transaction where (a) (1) the outstanding Common Stock of the Company or Parent, as the case may be, is not converted or exchanged at all (except to the extent necessary to reflect a change in the jurisdiction of incorporation) or is converted into or exchanged for Common Stock (other than Disqualified Capital Stock) of the surviving or transferee corporation (the "Surviving Entity") and (2) immediately after such transaction, no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) other than a Permitted Holder is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than a majority of the total outstanding Common Stock of the Surviving Entity, or (b) the holders of the Common Stock of the Company outstanding immediately prior to the consolidation or merger hold, directly or indirectly, at least a majority of the Common Stock of the surviving corporation immediately after such consolidation or merger, or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company or the Parent (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company or the Parent has been approved by 66 2/3% of the directors then still in office who either were directors at the beginning of such period or whose election or recommendation for election was previously so approved) cease to constitute a majority of the Board of Directors of the Company or the Parent. "Common Stock" of any Person means all Capital Stock of such Person that is generally entitled to (i) vote in the election of directors of such Person or (ii) if such Person is not a corporation, vote or otherwise 100 105 participate in the selection of the governing body, partners, managers or others that will control the management and policies of such Person. "Consolidated Fixed Charges" means, with respect to any Person and with respect to any determination date, the sum of a Person's (i) Consolidated Interest Expense, plus (ii) the product of (x) the aggregate amount of all dividends paid on Disqualified Capital Stock of the Company or on each series of preferred stock of each Subsidiary of such Person (other than dividends paid or payable in additional shares of preferred stock or to the Company or any of its Wholly Owned Subsidiaries) times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective combined federal, state and local tax rate of such Person (expressed as a decimal), in each case, for the prior four full fiscal quarter period for which financial results are available. "Consolidated Interest Expense" means, with respect to any Person, for any period and without duplication, the aggregate amount of interest which, in conformity with GAAP, would be set forth opposite the caption "interest expense" or any like caption on an income statement for such Person and its Subsidiaries on a consolidated basis (including, but not limited to, (i) imputed interest included in Capitalized Lease Obligations, (ii) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (iii) net payments made in connection with Interest Rate Agreements, (iv) the interest portion of any deferred payment obligation, (v) amortization of discount or premium, if any, and (vi) all other non-cash interest expense (other than interest amortized to cost of sales)) plus all net capitalized interest for such period and all interest paid under any guarantee of Indebtedness (including a guarantee of principal, interest or any combination thereof) of any Person, and minus (a) net payments received in connection with Interest Rate Agreements and (b) amortization of deferred financing costs and expenses. "Consolidated Net Income" means, with respect to any Person, for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, however, that (a) the Net Income of any Person (the "other Person") in which the Person in question or any of its Subsidiaries has less than a 100% interest (which interest does not cause the net income of such other Person to be consolidated into the net income of the Person in question in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions paid to the Person in question or the Subsidiary, (b) the Net Income of any Subsidiary of the Person in question that is subject to any restriction or limitation on the payment of dividends or the making of other distributions (other than pursuant to the Notes or the Indenture) shall be excluded to the extent of such restriction or limitation, (c)(i) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition and (ii) any net gain (but not loss) resulting from an Asset Sale by the Person in question or any of its Subsidiaries other than in the ordinary course of business shall be excluded, (d) extraordinary, unusual and non-recurring gains and losses shall be excluded. "Designated Senior Indebtedness," as to the Company, means any Senior Indebtedness (a) under the New Credit Facility or (b) which at the time of determination exceeds $25 million in aggregate principal amount (or accreted value in the case of Indebtedness issued at a discount) outstanding or available under a committed facility. "Disqualified Capital Stock" means any Capital Stock of the Company or a Subsidiary thereof which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the maturity date of the Notes, for cash or securities constituting Indebtedness. Without limiting the foregoing, Disqualified Capital Stock shall be deemed to include (i) any Preferred Stock of a Subsidiary of the Company and (ii) any Preferred Stock of the Company, with respect to either of which, under the terms of such Preferred Stock, by agreement or otherwise, such Subsidiary or the Company is obligated to pay current dividends or distributions in cash during the period prior to the maturity date of the Notes; provided, however, that Preferred Stock of the Company or any Subsidiary thereof that is issued with the benefit of provisions requiring a change of control offer to be made for such Preferred Stock in the event of a change of 101 106 control of the Company or Subsidiary, which provisions have substantially the same effect as the provisions of the Indenture described under "Description of the Notes -- Change of Control Offer," shall not be deemed to be Disqualified Capital Stock solely by virtue of such provisions. "EBITDA" means, for any Person, for any period, an amount equal to (a) the sum of (i) Consolidated Net Income for such period, plus (ii) the provision for taxes for such period based on income or profits to the extent such income or profits were included in computing Consolidated Net Income and any provision for taxes utilized in computing net loss under clause (i) hereof, plus (iii) Consolidated Interest Expense for such period (but only including Redeemable Dividends in the calculation of such Consolidated Interest Expense to the extent that such Redeemable Dividends have not been excluded in the calculation of Consolidated Net Income), plus (iv) depreciation for such period on a consolidated basis, plus (v) amortization of intangibles for such period on a consolidated basis, plus (vi) any other non-cash items reducing Consolidated Net Income for such period including the write-off of franchise receivables acquired in the Pearle Acquisition which have not been restructured or refinanced since the consummation of the Pearle Acquisition but excluding the write-off of all other franchise receivables, minus (b) all non-cash items increasing Consolidated Net Income for such period, all for such Person and its Subsidiaries determined in accordance with GAAP, except that with respect to the Company each of the foregoing items shall be determined on a consolidated basis with respect to the Company and its Subsidiaries only. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fixed Charge Coverage Ratio" of any Person means, with respect to any determination date, the ratio of (i) EBITDA for such Person's prior four full fiscal quarters for which financial results have been reported prior to the determination date, to (ii) Consolidated Fixed Charges of such Person. "GAAP" means generally accepted accounting principles consistently applied as in effect in the United States from time to time. "incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such person (and "incurrence," "incurred," "incurrable," and "incurring" shall have meanings correlative to the foregoing); provided that a change in GAAP that results in an obligation of such Person that exists at such time becoming Indebtedness shall not be deemed an incurrence of such Indebtedness. "Indebtedness" means (without duplication), with respect to any Person, any indebtedness at any time outstanding, secured or unsecured, contingent or otherwise, which is for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), or evidenced by bonds, notes, debentures or similar instruments or representing the balance deferred and unpaid of the purchase price of any property (excluding, without limitation, any balances that constitute accounts payable or trade payables, and other accrued liabilities arising in the ordinary course of business) if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, and shall also include, to the extent not otherwise included (i) any Capitalized Lease Obligations, (ii) obligations secured by a lien to which the property or assets owned or held by such Person is subject, whether or not the obligation or obligations secured thereby shall have been assumed (provided, however, that if such obligation or obligations shall not have been assumed, the amount of such indebtedness shall be deemed to be the lesser of the principal amount of the obligation or the fair market value of the pledged property or assets), (iii) guarantees of items of other Persons which would be included within this definition for such other Persons (whether or not such items would appear upon the balance sheet of the guarantor), (iv) all obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (provided that in the case of any such letters of credit, the items for which such letters of credit provide credit support are those of other Persons which would be included within this definition for such other Persons), (v) Disqualified Capital Stock of the Company or any Subsidiary thereof, and (vi) obligations of any such Person under any Interest Rate Agreement applicable to any of the foregoing (if and to the extent such Interest Rate Agreement obligations would appear as a liability upon a 102 107 balance sheet of such Person prepared in accordance with GAAP). The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided (i) that the amount outstanding at any time of any Indebtedness issued with original issue discount is the principal amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP and (ii) that Indebtedness shall not include any liability for federal, state, local or other taxes. Notwithstanding any other provision of the foregoing definition, any trade payable arising from the purchase of goods or materials or for services obtained in the ordinary course of business shall not be deemed to be "Indebtedness" of the Company or any Subsidiaries for purposes of this definition. Furthermore, guarantees of (or obligations with respect to letters of credit supporting) Indebtedness otherwise included in the determination of such amount shall not also be included. "Interest Rate Agreement" means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect the party indicated therein against fluctuations in interest rates. "Investments" means, directly or indirectly, any advance, account receivable (other than an account receivable arising in the ordinary course of business or acquired as part of the assets acquired by the Company in connection with an acquisition of assets which is otherwise permitted by the terms of the Indenture), loan or capital contribution to (by means of transfers of property to others, payments for property or services for the account or use of others or otherwise), the purchase of any stock, bonds, notes, debentures, partnership or joint venture interests or other securities of, the acquisition, by purchase or otherwise, of all or substantially all of the business or assets or stock or other evidence of beneficial ownership of, any Person or the making of any investment in any Person. Investments shall exclude (i) extensions of trade credit on commercially reasonable terms in accordance with normal trade practices and (ii) the repurchase of securities of any Person by such Person. "Issue Date" means the date the Notes are first issued by the Company and authenticated by the Trustee under the Indenture. "Lien" means with respect to any property or assets of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement, encumbrance, preference, priority, or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such property or assets (including without limitation, any Capitalized Lease Obligation, conditional sales, or other title retention agreement having substantially the same economic effect as any of the foregoing). "Net Income" means, with respect to any Person for any period, the net income (loss) of such Person determined in accordance with GAAP. "Net Proceeds" means (a) in the case of any sale of Capital Stock by the Company, the aggregate net proceeds received by the Company, after payment of expenses, commissions and the like incurred in connection therewith, whether such proceeds are in cash or in property (valued at the fair market value thereof, as determined in good faith by the board of directors, at the time of receipt) and (b) in the case of any exchange, exercise, conversion or surrender of outstanding securities of any kind for or into shares of Capital Stock of the Company which is not Disqualified Stock, the net book value of such outstanding securities on the date of such exchange, exercise, conversion or surrender (plus any additional amount required to be paid by the holder to the Company upon such exchange, exercise, conversion or surrender, less any and all payments made to the holders, e.g., on account of fractional shares and less all expenses incurred by the Company in connection therewith). "Net Sales" means Net Sales as shown on the Company's audited consolidated statements of income for the applicable fiscal year. "New Credit Facility" means the term and revolving credit agreement, dated November 15, 1996, by and among Canadian Imperial Bank of Commerce, as agent, the lenders named therein, one or more lenders 103 108 parties thereto, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified from time to time. "Non-Payment Event of Default" means any event (other than a Payment Default) the occurrence of which entitles one or more Persons to accelerate the maturity of any Designated Senior Indebtedness. "Officer" means the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, Controller, Secretary or any Vice-President of the Company or any Subsidiary, as the case may be. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the principal executive officer, principal financial officer, treasurer or principal accounting officer of the Company. "Parent" means Cole National Corporation, a Delaware corporation and the Company's sole stockholder. "Payment Default" means any default, whether or not any requirement for the giving of notice, the lapse of time or both, or any other condition to such default becoming an event of default has occurred, in the payment of principal of (or premium, if any) or interest on or any other amount payable in connection with Designated Senior Indebtedness. "Pearle Acquisition" means the acquisition of the capital stock of Pearle, Inc. and Pearle Service Corporation by the Parent from The Pillsbury Company pursuant to a stock purchase agreement dated as of September 24, 1996 and various documents related thereto. "Permitted Holders" means (i) Jeffrey A. Cole, (ii) any employee stock ownership plan or any "group" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) in which employees of Parent or its Subsidiaries beneficially own at least 25% of the Common Stock of the Company or Parent owned by such group, (iii) Parent and (iv) any Person that is controlled by any one or more of the Persons set forth in (i)-(iii) above. "Permitted Indebtedness" means: (i) Indebtedness of the Company or any Subsidiary arising under or in connection with the New Credit Facility in an amount not to exceed the greater of (a) $75,000,000 less any mandatory prepayments actually made thereunder (to the extent, in the case of payments of revolving credit indebtedness, that the corresponding commitments have been permanently reduced) or scheduled payments actually made thereunder or (b) the sum of (x) 80% of consolidated accounts receivable of the Company and its Subsidiaries and (y) 50% of consolidated inventory of the Company and its Subsidiaries; (ii) Indebtedness under the Notes; (iii) Indebtedness not covered by any other clause of this definition which is outstanding on the date of the Indenture; (iv) Indebtedness of the Company to any Subsidiary and Indebtedness of any Subsidiary to the Company or another Subsidiary; (v) Purchase Money Indebtedness and Capitalized Lease Obligations incurred by the Company or its Subsidiaries to acquire property in the ordinary course of business which Indebtedness and Capitalized Lease Obligations do not in the aggregate exceed $15,000,000 at any time outstanding; (vi) Interest Rate Agreements; (vii) Indebtedness of the Company or its Subsidiaries which do not in the aggregate exceed $3,000,000 in principal amount at anytime outstanding with respect to guarantees of obligations of franchisees in a business related to the optical business of the Company or any Subsidiary as conducted on the Issue Date; 104 109 (viii) Indebtedness incurred in connection with the financing of a new warehouse facility relating to Cole Gift's business in an amount not to exceed $7,500,000 in the aggregate; (ix) additional Indebtedness of the Company not to exceed $15,000,000 in principal amount outstanding at any time; and (x) Refinancing Indebtedness. "Permitted Investments" means, for any Person, Investments made on or after the date of the Indenture consisting of (i) Investments by the Company, or by a Subsidiary thereof, in the Company or a Subsidiary; (ii) Temporary Cash Investments; (iii) Investments by the Company, or by a Subsidiary thereof, in a Person, if as a result of such Investment (a) such Person becomes a Subsidiary of the Company or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Subsidiary thereof; (iv) reasonable and customary loans made to employees in connection with their relocation; (v) an Investment that is made by the Company or a Subsidiary thereof in the form of any stock, bonds, notes, debentures, partnership or joint venture interests or other securities that are issued by a third party to the Company or Subsidiary solely as partial consideration for the consummation of an Asset Sale that is otherwise permitted under the covenant described under "Description of the Notes -- Certain Covenants -- Limitation on Sale of Assets"; (vi) Investments made by the Company or any Subsidiary in franchises in a business related to the optical business of the Company as conducted on the Issue Date; provided, that immediately after giving pro forma effect to such Investment, the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the covenant set forth under "Description of the Notes -- Certain Covenants -- Limitation on Additional Indebtedness"; provided, however, that if the Company may not incur $1.00 of additional Indebtedness, but otherwise satisfies the requirements of this clause (vi), the Company may make Investments in such franchises in an amount not to exceed $7,500,000 in any fiscal year, which unused portion of any such annual amount, if any, may not be applied to any Investment in a subsequent fiscal year; and (vii) other Investments that do not exceed $10,000,000 at any time outstanding. "Permitted Liens" means (i) Liens on property or assets of, or any shares of stock of or secured debt of, any corporation existing at the time such corporation becomes a Subsidiary of the Company or at the time such corporation is merged into the Company or any of its Subsidiaries; provided that such Liens are not incurred in connection with, or in contemplation of, such corporation becoming a Subsidiary of the Company or merging into the Company or any of its Subsidiaries, (ii) Liens securing Refinancing Indebtedness; provided that any such Lien on subordinated Indebtedness does not extend to or cover any Property, shares or debt other than the Property, shares or debt securing the Indebtedness so refunded, refinanced or extended, (iii) Liens in favor of the Company or any of its Subsidiaries, (iv) Liens securing industrial revenue bonds, (v) Liens to secure Purchase Money Indebtedness that is otherwise permitted under the Indenture, provided that (a) any such Lien is created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including sales and excise taxes, installation and delivery charges and other direct costs of, and other direct expenses paid or charged in connection with, such purchase or construction) of such Property and (b) such Lien does not extend to or cover any Property other than such item of Property and any improvements on such item, (vi) statutory liens or landlords', carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which do not secure any Indebtedness and with respect to amounts not yet delinquent or being contested in good faith by appropriate proceedings, if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor, (vii) other Liens securing obligations 105 110 incurred in the ordinary course of business which obligations do not exceed $3,000,000 in the aggregate at any one time outstanding, (viii) Liens securing Interest Rate Agreements, (ix) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other Property relating to such letters of credit and the products and proceeds thereof, (x) any extensions, substitutions, replacements or renewals of the foregoing, (xi) Liens for taxes, assessments or governmental charges that are being contested in good faith by appropriate proceedings, and (xii) Liens securing Capital Lease Obligations permitted to be incurred under clause (v) of the definition of "Permitted Indebtedness," provided that such Lien does not extend to any property other than that subject to the underlying lease. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government (including any agency or political subdivision thereof). "Preferred Stock" means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to dividends, distributions or liquidation proceeds of such Person over the holders of other Capital Stock issued by such Person. "Property" of any Person means all types of real, personal, tangible, intangible or mixed property owned by such Person whether or not included in the most recent consolidated balance sheet of such Person and its Subsidiaries under GAAP. "Purchase Money Indebtedness" means any Indebtedness incurred by a Person to finance the cost (including the cost of construction) of an item of Property, the principal amount of which Indebtedness does not exceed the sum of (i) 100% of such cost and (ii) reasonable fees and expenses of such Person incurred in connection therewith. "Qualified Equity Offering" means an offering by the Company or the Parent of shares of its common stock (however designated and whether voting or non-voting) and any and all rights, warrants or options to acquire such common stock, whether registered or exempt from registration under the Securities Act; provided, however, that in connection with a Qualified Equity Offering of the Parent the net proceeds of such Qualified Equity Offering are contributed to the Company as common equity. "Refinancing Indebtedness" means Indebtedness that refunds, refinances or extends any Indebtedness of the Company outstanding on the Issue Date or other Indebtedness permitted to be incurred by the Company or its Subsidiaries pursuant to the terms of the Indenture, but only to the extent that (i) the Refinancing Indebtedness is subordinated to the Notes to at least the same extent as the Indebtedness being refunded, refinanced or extended, if at all, (ii) the Refinancing Indebtedness is scheduled to mature either (a) no earlier than the Indebtedness being refunded, refinanced or extended, or (b) after the maturity date of the Notes, (iii) the portion, if any, of the Refinancing Indebtedness that is scheduled to mature on or prior to the maturity date of the Notes has a weighted average life to maturity at the time such Refinancing Indebtedness is incurred that is equal to or greater than the weighted average life to maturity of the portion of the Indebtedness being refunded, refinanced or extended that is scheduled to mature on or prior to the maturity date of the Notes, (iv) such Refinancing Indebtedness is in an aggregate principal amount that is equal to or less than the sum of (a) the aggregate principal amount then outstanding under the Indebtedness being refunded, refinanced or extended, (b) the amount of accrued and unpaid interest, if any, and premiums owed, if any, not in excess of preexisting prepayment provisions on such Indebtedness being refunded, refinanced or extended, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase and (c) the amount of customary fees, expenses and costs related to the incurrence of such Refinancing Indebtedness, and (v) such Refinancing Indebtedness is incurred by the same Person that initially incurred the Indebtedness being refunded, refinanced or extended, except that the Company may incur Refinancing Indebtedness to refund, refinance or extend Indebtedness of any Wholly Owned Subsidiary of the Company. "Restricted Payment" means any of the following: (i) the declaration or payment of any dividend or any other distribution or payment on Capital Stock of the Company or any Subsidiary of the Company or any 106 111 payment made to the direct or indirect holders (in their capacities as such) of Capital Stock of the Company or any Subsidiary of the Company (other than (x) dividends or distributions payable solely in Capital Stock (other than Disqualified Capital Stock), and (y) in the case of Subsidiaries of the Company, dividends or distributions payable to the Company or to a Wholly Owned Subsidiary of the Company), (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company or any of its Subsidiaries (other than Capital Stock owned by the Company or a Wholly Owned Subsidiary of the Company), (iii) the making of any principal payment on, or the purchase, defeasance, repurchase, redemption or other acquisition or retirement for value, prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, of any Indebtedness which is subordinated in right of payment to the Notes other than subordinated Indebtedness acquired in anticipation of satisfying a scheduled sinking fund obligation, principal installment or final maturity (in each case due within one year of the date of acquisition), (iv) the making of any Investment in any Person other than a Permitted Investment, and (v) forgiveness of any Indebtedness of an Affiliate of the Company to the Company or a Subsidiary. For purposes of determining the amount expended for Restricted Payments, cash distributed or invested shall be valued at the face amount thereof and property other than cash shall be valued at its fair market value. "Sale and Lease-Back Transaction" means any arrangement with any Person providing for the leasing by the Company or any Subsidiary of the Company of any real or tangible personal property, which property has been or is to be sold or transferred by the Company or such Subsidiary to such Person in contemplation of such leasing. "Senior Indebtedness" means the principal of and premium, if any, and interest (including, without limitation, interest accruing or that would have accrued but for the filing of a bankruptcy, reorganization or other insolvency proceeding whether or not such interest constitutes an allowable claim in such proceeding) on, and any and all other fees, expense reimbursement obligations and other amounts due pursuant to the terms of all agreements, documents and instruments providing for, creating, securing or evidencing or otherwise entered into in connection with (a) all Indebtedness of the Company owed to lenders under the New Credit Facility, (b) the Senior Notes, (c) all obligations of the Company with respect to any Interest Rate Agreement, (d) all obligations of the Company to reimburse any bank or other person in respect of amounts paid under letters of credit, acceptances or other similar instruments, (e) all other Indebtedness of the Company which does not provide that it is to rank pari passu with or subordinate to the Notes and (f) all deferrals, renewals, extensions and refundings of, and amendments, modifications and supplements to, any of the Senior Indebtedness described above. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness will not include (i) Indebtedness of the Company to any of its Subsidiaries, (ii) Indebtedness represented by the Notes, (iii) any Indebtedness which by the express terms of the agreement or instrument creating, evidencing or governing the same is junior or subordinate in right of payment to any item of Senior Indebtedness, (iv) any trade payable arising from the purchase of goods or materials or for services obtained in the ordinary course of business, or (v) Indebtedness (other than that described in clause (a) above) incurred in violation of the Indenture. "Senior Notes" means the Company's 11 1/4% Senior Notes due 2001. "Senior Note Indenture" means the indenture dated as of October 1, 1993 between the Company and Norwest Bank Minnesota, National Association, as trustee. "Significant Subsidiary" means any Subsidiary which would be a "significant subsidiary" as defined in Article I, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act and the Exchange Act, as in effect on the Issue Date. "Subsidiary" of any specified Person means any corporation, partnership, joint venture, association or other business entity, whether now existing or hereafter organized or acquired, (i) in the case of a corporation, of which more than 50% of the total voting power of the Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, officers or trustees thereof is held by such first-named Person or any of its Subsidiaries; or (ii) in the case of a partnership, joint venture, association or other business entity, with respect to which such first-named Person or any of its Subsidiaries has the power to direct or cause the direction of the management and policies of such entity by contract or otherwise or if in 107 112 accordance with generally accepted accounting principles such entity is consolidated with the first-named Person for financial statement purposes. "Tax Allocation Agreement" means the Tax Allocation Agreement, dated as of August 23, 1985, as amended, between the Parent and its subsidiaries, including the Company, as the same may be amended or extended from time to time provided that no such amendment may create greater additional liability of the Company and its Subsidiaries than existing as of the Issue Date under such agreement. "Temporary Cash Investments" means (i) Investments in marketable, direct obligations issued or guaranteed by the United States of America, or of any governmental agency or political subdivision thereof, maturing within 365 days of the date of purchase, (ii) Investments in United States dollar denominated time deposits and United States dollar denominated certificates of deposit (including Eurodollar time deposits and certificates of deposit) maturing within 365 days of the date of purchase thereof issued by any United States or Canadian national, provincial or state (including the District of Columbia) banking institution having capital, surplus and undivided profits aggregating at least $250,000,000, or by any British, French, German, Japanese or Swiss national banking institution having capital, surplus and undivided profits aggregating at least $1,000,000,000, in each case that is (a) rated at least "A" by Standard & Poor's Corporation or at least "A-2" by Moody's Investors Service Inc., or (b) that is a party to the New Credit Facility, (iii) Investments in commercial paper maturing within 270 days after the issuance thereof that has the highest credit rating of either of such rating agencies, (iv) Investments in readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having the highest rating obtainable from either of such rating agencies, (v) Investments in tax exempted and tax advantaged instruments including, without limitation, municipal bonds, commercial paper, auction rate preferred stock and variable rate demand obligations with the highest short-term ratings by either of such rating agencies or a long-term debt rating of AAA from Standard & Poor's Corporation, (vi) Investments in repurchase agreements and reverse repurchase agreements with institutions described in clause (ii) above that are fully secured by obligations described in clause (i) above and (vii) Investments not exceeding 365 days in duration in money market funds that invest substantially all of such funds' assets in the Investments described in the preceding clauses (i) through (v). "Triggering Default Event" means a Default or Event of Default described in clauses (i), (ii), (iv), (v) or (vi) under the caption "Events of Default" or any breach or violation under the covenants entitled "Limitation on Additional Indebtedness," "Limitation on Restricted Payments," "Limitation on Other Senior Subordinated Debt," "Limitations on Liens," "Limitation on Sale and Lease-Back Transactions," "Dividend and Other Payment Restrictions Affecting Subsidiaries," "Limitation on Transactions with Affiliates," "Limitation on Certain Asset Sales," "Limitation on Capital Stock of Subsidiaries," "Merger, Consolidation or Sale of Assets," "Payments for Consent" or with respect to the making of a Change of Control Offer. "Wholly Owned Subsidiary" means any Subsidiary, all of the outstanding Capital Stock (other than directors' qualifying shares) of which is owned, directly or indirectly, by the Company. BOOK-ENTRY; DELIVERY AND FORM The Original Notes were issued in the form of one Note certificate (the "Original Global Note"). The Original Global Note was deposited on the date of the closing of the sale of the Original Notes offered hereby (the "Closing Date") with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of a nominee of DTC. Except for Exchange Notes issued to Non-Global Purchasers (as defined below), the Exchange Notes will initially be issued in the form of one Global Note (the "Exchange Global Note"). The Exchange Global Note will be deposited on the date of closing of the Exchange Offer, with, or on behalf of DTC and registered in the name of a nominee of DTC. Notes (i) originally purchased by or transferred to "foreign purchasers" or Accredited Investors who are not QIBs, or (ii) held by QIBs which elect to take physical delivery of their certificates instead of holding their interest through the Original Global Note (and which are thus ineligible to trade through DTC) (collectively referred to herein as the "Non-Global Purchasers") will be issued, in registered form, without interest coupons ("Certificated Securities"). Upon the transfer to a QIB of such Certificated Securities 108 113 initially issued to a Non-Global Purchaser, such Certificated Securities will, unless the Global Note has previously been exchanged in whole for such Certificated Securities, be exchanged for an interest in the Global Note. "Global Notes" means the Original Global Notes or the Exchange Global Notes, as the case may be. The Global Note. The Company expects that pursuant to procedures established by DTC (i) upon deposit of the Global Note, DTC will credit the accounts of persons who have accounts with DTC ("participants") or persons who hold interests through participants designated by such person with portions of the Global Note and (ii) ownership of the Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). QIBs may hold their interests in the Global Note directly through DTC if they are participants in such system, or indirectly through organizations that are participants in such system. So long as DTC, or its nominee, is the registered owner or holder of the Notes, DTC or such nominee will be considered the sole owner or holder of the Notes represented by the Global Note for all purposes under the Indenture. No beneficial owner of an interest in the Global Note will be able to transfer such interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture. Payments of the principal of, premium (if any) and interest on the Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of the Company, the Trustee or any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that DTC or its nominee, upon receipt of any payment of the principal of, premium (if any) and interest on the Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note, as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practice, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. If a holder requires physical delivery of a Certificated Security for any reason, including to sell Notes to persons in states which require physical delivery of such securities or to pledge such securities, such holder must transfer its interest in the Global Note in accordance with the normal procedures of DTC and including the procedures set forth in the Indenture. DTC has advised the Company that it will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interest in the Global Note is credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants have given such direction. However, if there is an Event of Default under the Indenture, DTC will exchange the Global Note for Certificated Securities, which it will distribute to its participants. DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others 109 114 such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Note among participants of DTC, it is under no obligation to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Certificated Securities. If DTC is at any time unwilling or unable to continue as a depository for the Global Note and a successor depository is not appointed by the Company within 90 days, the Company will issue Certificated Securities in exchange for the Company's Global Note. PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with any resale of Exchange Notes received in exchange for Original Notes where such Original Notes were acquired as a result of market-making activities of other trading activities. The Company has agreed that for a period of 180 days after the Expiration Date, it will use reasonable efforts to make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale; provided that such broker-dealer indicates in the Letter of Transmittal that it is a broker-dealer. In addition, until , 1997, all broker-dealers effecting transactions in the Exchange Notes may be required to deliver a Prospectus. The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers or any other persons. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act, and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment of supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. By acceptance of this Exchange Offer, each broker-dealer that receives Exchange Notes pursuant to the Exchange Offer agrees that, upon receipt of notice from the Company of the happening of any event which makes any statement in the Prospectus untrue in any material respect or which requires the making of any changes in the Prospectus in order to make the statements therein not misleading (which notice the Company agrees to deliver promptly to such broker-dealer), such broker-dealer will suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented Prospectus to such broker-dealer. If the Company gives any such notice to suspend the use of the Prospectus, it shall extend the 180-day period referred to above by the number of days during the period from and including the date of the giving of such notice up to and including 110 115 when broker-dealers have received copies of the supplement or amended Prospectus necessary to permit resales of Exchange Notes. The Company has agreed to pay all expenses incident to the Company's performance of, or compliance with, the Registration Rights Agreement and will indemnify the holders (including any broker-dealers) and certain parties related to the holders against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters in connection with the issuance of the Exchange Notes will be passed upon for the Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio. INDEPENDENT PUBLIC ACCOUNTANTS The audited financial statements of the Company included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report, which is included herein. The consolidated financial statements of Pearle, Inc. and Subsidiaries as of September 30, 1996 and 1995 and for each of the years in the three-year period ended September 30, 1996 have been included in this Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, as indicated in their report, which is included elsewhere herein and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to a change in the method of accounting for income taxes in 1994. 111 116 INDEX TO FINANCIAL STATEMENTS
PAGE ---- COLE NATIONAL GROUP, INC. AND SUBSIDIARIES: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheet at November 2, 1996.................................... F-2 Consolidated Statements of Income for the 39 weeks ended November 2, 1996 and October 28, 1995........................................................... F-3 Consolidated Statements of Cash Flows for the 39 weeks ended November 2, 1996 and October 28, 1995........................................................... F-4 Notes to Consolidated Financial Statements........................................ F-5 AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Public Accountants.......................................... F-8 Consolidated Balance Sheets at February 3, 1996 and January 28, 1995.............. F-9 Consolidated Statements of Income for the 53 weeks ended February 3, 1996 and 52 weeks ended January 28, 1995 and January 29, 1994.............................. F-10 Consolidated Statements of Stockholder's Equity for the 53 weeks ended February 3, 1996 and 52 weeks ended January 28, 1995 and January 29, 1994.................. F-11 Consolidated Statements of Cash Flows for the 53 weeks ended February 3, 1996 and 52 weeks ended January 28, 1995 and January 29, 1994........................... F-12 Notes to Consolidated Financial Statements........................................ F-13 PEARLE, INC. AND SUBSIDIARIES: AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors' Report...................................................... F-22 Consolidated Balance Sheets at September 30, 1996 and 1995........................ F-23 Consolidated Statements of Operations for the Years Ended September 30, 1996, 1995 and 1994.................................................................. F-24 Consolidated Statements of Stockholder's Equity for the Years Ended September 30, 1996, 1995 and 1994........................................ F-25 Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994.................................................................. F-26 Notes to Consolidated Financial Statements........................................ F-27
F-1 117 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET (UNAUDITED) (DOLLARS IN THOUSANDS)
NOVEMBER 2, 1996 ----------- ASSETS Current assets: Cash and temporary cash investments............................................ $ 31,489 Accounts receivable............................................................ 20,075 Inventories.................................................................... 103,778 Prepaid expenses and other..................................................... 5,795 Deferred income tax benefits................................................... 10,616 --------- Total current assets................................................... 171,753 Property and equipment, at cost.................................................. 162,713 Less -- accumulated depreciation and amortization.............................. (95,127) --------- Total property and equipment, net...................................... 67,586 Other assets..................................................................... 8,294 Cost in excess of net assets of purchased businesses, net........................ 79,485 --------- Total assets........................................................... $ 327,118 ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt.............................................. $ 300 Accounts payable............................................................... 39,896 Payable to affiliates.......................................................... 25,394 Accrued interest............................................................... 1,886 Accrued liabilities............................................................ 59,939 Accrued income taxes........................................................... 4,819 --------- Total current liabilities.............................................. 132,234 Long-term debt, net of discount.................................................. 180,033 Deferred income taxes and other.................................................. 5,390 Stockholder's equity: Common stock................................................................... -- Paid-in capital................................................................ 118,065 Accumulated deficit............................................................ (108,604) --------- Total stockholder's equity............................................. 9,461 --------- Total liabilities and stockholder's equity............................. $ 327,118 =========
The accompanying notes to consolidated financial statements are an integral part of this balance sheet. F-2 118 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS)
39 WEEKS ENDED --------------------------- NOVEMBER 2, OCTOBER 28, 1996 1995 ----------- ----------- Net sales........................................................ $ 443,057 $ 401,999 Costs and expenses: Cost of goods sold............................................. 136,673 125,246 Operating expenses............................................. 266,385 242,269 Depreciation and amortization.................................. 12,780 11,552 ----------- ----------- Total costs and expenses............................... 415,838 379,067 ----------- ----------- Income from operations........................................... 27,219 22,932 Interest expense, net............................................ 14,782 15,872 ----------- ----------- Income before income taxes....................................... 12,437 7,060 Income tax provision............................................. 5,473 3,107 ----------- ----------- Net income....................................................... $ 6,964 $ 3,953 =========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-3 119 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
39 WEEKS ENDED --------------------------- NOVEMBER 2, OCTOBER 28, 1996 1995 ----------- ----------- Cash flows from operating activities: Net income......................................................... $ 6,964 $ 3,953 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization................................... 12,780 11,552 Non-cash interest expense....................................... 322 307 Change in assets and liabilities: Increase in accounts receivable, prepaid expenses and other assets....................................................... (1,705) (5,485) Increase in inventories....................................... (18,984) (12,801) Increase in accounts payable and accrued liabilities.......... 16,722 14,147 Decrease in accrued interest.................................. (5,158) (5,317) Decrease in accrued income taxes.............................. (1,151) (1,116) --------- --------- Net cash provided by operating activities.................. 9,790 5,240 --------- --------- Cash flows from financing activities: Advances from Affiliates, net...................................... 10,639 -- Repayment of long-term debt........................................ (360) (181) --------- --------- Net cash provided (used) by financing activities........... 10,279 (181) --------- --------- Cash flows from investing activities: Purchases of property and equipment, net........................... (15,553) (14,042) Acquisition of business............................................ -- (800) Other, net......................................................... (2,287) (959) --------- --------- Net cash used by investing activities...................... (17,840) (15,801) --------- --------- Cash and temporary cash investments: Net increase (decrease) during the period.......................... 2,229 (10,742) Balance, beginning of the period................................... 29,260 19,730 --------- --------- Balance, end of the period......................................... $ 31,489 $ 8,988 ========= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 120 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES The Consolidated financial statements include the accounts of Cole National Group, Inc. ("CNG") and its wholly owned subsidiaries (collectively, the "Company"). CNG is a wholly owned subsidiary of Cole National Corporation (the "Parent"). All significant intercompany transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared without audit and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes that the disclosures herein are adequate to make the information not misleading. These statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended February 3, 1996. In the opinion of management, the accompanying financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company's financial position as of November 2, 1996 and the results of operations and cash flows for the 39 weeks ended November 2, 1996 and October 28, 1995. Inventories The accompanying interim consolidated financial statements have been prepared without physical inventories. Inventories at November 2, 1996 were valued at the lower of first-in, first-out ("FIFO") cost or market. Cash Flows Net cash flows from operating activities reflect cash payments for income taxes and interest of $6,670,000 and $20,779,000, respectively, for the 39 weeks ended November 2, 1996, and $4,224,000 and $21,413,000, respectively, for the 39 weeks ended October 28, 1995. (2) TRANSACTIONS WITH PARENT During the second quarter of fiscal 1996, the Parent used a portion of the net proceeds from its public stock offering to purchase approximately $15.1 million of the Company's outstanding 11.25% Senior Notes (the "Senior Notes") in the open market. The remaining proceeds of approximately $9.7 million were advanced to the Company. Of the $180.0 million of long-term debt outstanding at November 2, 1996, approximately $15.1 million, plus accrued interest, is payable to the Parent. In connection with the acquisition of Pearle, Inc. (see Note 5), the Company purchased and retired the $15.1 million of Senior Notes held by the Parent at a price equal to net book value. (3) ASSET IMPAIRMENT During the first quarter of fiscal 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of". Adoption of SFAS No. 121 had no material impact on the Company's results of operations, financial position or cash flows. (4) SEASONALITY The Company's business is seasonal with approximately 30% of its sales and approximately 50% of its income from operations generated in the fourth fiscal quarter, which contains the important Christmas F-5 121 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (UNAUDITED) retailing season. Therefore, earnings or losses for a particular interim period are not necessarily indicative of full year results. (5) SUBSEQUENT EVENTS Acquisition of AOCO Limited On November 5, 1996, the Company acquired all of the issued and outstanding common stock of AOCO Limited, which operates 73 Sears Optical Departments and two freestanding Vision Club stores in Canada, for a purchase price of $2.6 million. The acquisition will be accounted for as a purchase. Acquisition of Pearle, Inc. On November 15, 1996, the Parent purchased certain assets and all of the issued and outstanding common stock of Pearle, Inc. ("Pearle"). Subsequent to the acquisition of Pearle, the Parent sold Pearle Holdings B.V., Pearle's European operations, to Pearle Trust B.V. for approximately $62 million. The Parent has a 20% equity interest in Pearle Trust B.V. Immediately following the Parent's acquisition of Pearle, and pursuant to a transfer agreement, CNG purchased from the Parent all of the issued and outstanding common stock of Pearle and Pearle Service Corporation (PSC) for an aggregate purchase price of approximately $154 million. The Company will account for the Pearle acquisition as a purchase. The Company financed the Pearle Acquisition primarily through the proceeds of a private placement (the "Offering") of $150 million of 9 7/8% Senior Subordinated Notes (the "Notes") due in 2006. Interest on the Notes is payable semi-annually in arrears on December 31 and June 30 commencing June 30, 1997. The Notes are general unsecured obligations of the Company, subordinated in right of payment to Senior Indebtedness of the Company, including the Senior Notes, and senior in right of payment to any current or future subordinated indebtedness of the Company. The indenture pursuant to which the Notes were issued restricts dividend payments to the Parent to 50% of the Company's net income after October 31, 1993, plus amounts due to the Parent under a tax sharing agreement and for administrative expenses of the Parent not to exceed 0.25% of the Company's net sales and contains other financial covenants. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after December 31, 2001. In addition, the Company would be required to make an offer to purchase Notes following a Change of Control (as defined in the Indenture) and, under certain circumstances, following a sale of assets. Following the Pearle Acquisition, Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle and PSC, the principal operating subsidiaries of CNG, (collectively, the "Borrowers"), entered into a New Credit Facility. The New Credit Facility replaced, contemporaneously with the consummation of the Offering, the existing Revolving Credit Facility. The New Credit Facility provides the Borrowers with a four-year revolving line of credit of up to the lesser of a "borrowing base" and $75 million. A portion of the New Credit Facility not in excess of $30 million is available for the issuance of letters of credit. Borrowings under the New Credit Facility initially bear interest at a rate equal to, at the option of the Borrowers, either (a) the Eurodollar Rate plus 1.25% or (b) 0.25% plus the highest of (i) the rate of interest publicly announced by Canadian Imperial Bank of Commerce as its prime rate in effect at its principal office in New York City, (ii) the three-week moving average of the secondary market rates for three-month certificates of deposit (adjusted for statutory reserve requirements) plus 1% and (iii) the federal funds effective rate from time to time plus 0.5%. The interest rates are subject to quarterly adjustment after the first anniversary of the closing of the New Credit Facility based on the Company's achievement of certain interest coverage ratio benchmarks. Additionally, the New Credit Facility F-6 122 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (UNAUDITED) requires the Borrowers to comply with various operating covenants that restrict corporate activities, including covenants restricting the Borrowers' ability to incur additional indebtedness, pay dividends, prepay subordinated indebtedness, dispose of certain assets, create liens, make capital expenditures and make certain investments or acquisitions. The New Credit Facility also requires the Borrowers to comply with certain financial covenants, including covenants regarding minimum interest coverage, maximum leverage and consolidated net worth. The New Credit Facility permits the Company's subsidiaries to pay dividends to the Company, to the extent necessary to permit it to pay all interest and principal on the Senior Notes and the Notes, and to use up to $20 million to repurchase the Senior Notes and/or the Notes, so long as no default or event of default under the New Credit Facility has occurred and is continuing. The Company is a limited guarantor under the New Credit Facility, with recourse against the Company limited to certain bank accounts. F-7 123 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- TO THE BOARD OF DIRECTORS OF COLE NATIONAL GROUP, INC.: We have audited the accompanying consolidated balance sheets of Cole National Group, Inc. (a Delaware corporation) and Subsidiaries (the "Company") as of February 3, 1996 and January 28, 1995, and the related consolidated statements of income, stockholder's equity and cash flows for each of the three years in the period ended February 3, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cole National Group, Inc. and Subsidiaries as of February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 19, 1996. F-8 124 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
FEBRUARY 3, JANUARY 28, 1996 1995 ----------- ----------- ASSETS Current assets: Cash and temporary cash investments............................. $ 29,260 $ 19,730 Accounts receivable............................................. 18,544 17,701 Inventories..................................................... 84,794 87,246 Prepaid expenses and other...................................... 5,869 3,574 Deferred income tax benefits.................................... 10,616 13,301 ----------- ----------- Total current assets.................................... 149,083 141,552 Property and equipment, at cost................................... 154,589 140,301 Less -- accumulated depreciation and amortization............... (90,883) (84,284) ----------- ----------- Total property and equipment, net....................... 63,706 56,017 Other assets...................................................... 5,038 2,926 Cost in excess of net assets of purchased businesses, net......... 81,163 82,808 ----------- ----------- Total assets............................................ $ 298,990 $ 283,303 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt............................... $ 292 $ 169 Accounts payable................................................ 29,082 25,141 Payable to affiliates........................................... 1,255 2,184 Accrued interest................................................ 7,044 6,935 Dividend payable................................................ 13,500 -- Accrued liabilities............................................. 53,676 55,035 Accrued income taxes............................................ 5,970 4,643 ----------- ----------- Total current liabilities............................... 110,819 94,107 Long-term debt, net of discount................................... 180,218 184,388 Deferred income taxes and other................................... 5,456 3,669 Stockholder's equity: Common stock.................................................... -- -- Paid-in capital................................................. 118,065 118,065 Notes receivable-stock option exercise.......................... -- (1,108) Accumulated deficit............................................. (115,568) (115,818) ----------- ----------- Total stockholder's equity.............................. 2,497 1,139 ----------- ----------- Total liabilities and stockholder's equity.............. $ 298,990 $ 283,303 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-9 125 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
53 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED FEBRUARY 3, JANUARY 28, JANUARY 29, 1996 1995 1994 ----------- ----------- ----------- Net sales........................................... $ 577,091 $ 528,049 $ 472,888 Costs and expenses: Cost of goods sold................................ 182,934 164,723 140,952 Operating expenses................................ 332,540 305,470 281,149 Depreciation and amortization..................... 15,686 14,892 13,516 ----------- ----------- ----------- Total costs and expenses.................. 531,160 485,085 435,617 ----------- ----------- ----------- Income from operations.............................. 45,931 42,964 37,271 Interest expense, net............................... 21,382 21,823 17,651 ----------- ----------- ----------- Income before income taxes and extraordinary item... 24,549 21,141 19,620 Income tax provision (benefit)...................... 10,799 (3,703) 2,361 ----------- ----------- ----------- Income before extraordinary item.................... 13,750 24,844 17,259 Extraordinary gain (loss) on early extinguishment of debt.............................................. -- (134) 18,828 ----------- ----------- ----------- Net income.......................................... $ 13,750 $ 24,710 $ 36,087 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-10 126 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
NOTES RECEIVABLE TOTAL COMMON PAID-IN STOCK OPTION ACCUMULATED STOCKHOLDER'S STOCK CAPITAL EXERCISE DEFICIT EQUITY -------- -------- ------------ ----------- ------------- Balance, January 30, 1993....... $ -- $110,735 $ -- $(169,637) $ (58,902) -------- -------- ------- --------- -------- Net income.................... -- -- -- 36,087 36,087 Dividends to parent........... -- -- -- (6,978) (6,978) Exercise of stock options..... -- 1,130 (1,130) -- -- -------- -------- ------- --------- -------- Balance, January 29, 1994....... -- 111,865 (1,130) (140,528) (29,793) -------- -------- ------- --------- -------- Net income.................... -- -- -- 24,710 24,710 Capital contribution by parent..................... -- 6,200 -- -- 6,200 Repayment of notes receivable................. -- -- 22 -- 22 -------- -------- ------- --------- -------- Balance, January 28, 1995....... -- 118,065 (1,108) (115,818) 1,139 -------- -------- ------- --------- -------- Net income.................... -- -- -- 13,750 13,750 Transfer of notes receivable to parent.................. -- -- 1,108 -- 1,108 Dividend to parent............ -- -- -- (13,500) (13,500) -------- -------- ------- --------- -------- Balance, February 3, 1996....... $ -- $118,065 $ -- $(115,568) $ 2,497 ======== ======== ======= ========= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-11 127 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
53 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED FEBRUARY 3, JANUARY 28, JANUARY 29, 1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net income........................................ $ 13,750 $ 24,710 $ 36,087 Adjustments to reconcile net income to net cash provided by operations: Extraordinary loss (gain) on early extinguishment of debt....................... -- 134 (18,828) Depreciation and amortization.................. 15,686 14,892 13,516 Non-cash interest expense...................... 454 469 3,373 Deferred income taxes.......................... 4,394 (10,153) -- Change in assets and liabilities: Increase in accounts receivable, prepaid expenses and other assets................. (4,894) (4,596) (2,542) Decrease (increase) in inventories........... 2,452 (8,723) (12,264) Increase in accounts payable, accrued liabilities and payable to affiliates..... 2,812 211 7,492 Increase (decrease) in accrued interest...... 109 (272) 6,125 Increase in accrued income taxes............. 1,419 2,386 355 -------- -------- -------- Net cash provided by operating activities.............................. 36,182 19,058 33,314 -------- -------- -------- Cash flows from financing activities: Repayment of long-term debt....................... (5,200) (5,667) (188,206) Payment of deferred financing fees................ -- (100) (1,214) Proceeds from long-term debt...................... -- -- 187,557 Other............................................. -- 22 (37) -------- -------- -------- Net cash used by financing activities..... (5,200) (5,745) (1,900) -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment, net.......... (19,675) (18,527) (13,074) Acquisition of business........................... (800) (4,675) (3,220) Other, net........................................ (977) (1,285) (560) -------- -------- -------- Net cash used by investing activities..... (21,452) (24,487) (16,854) -------- -------- -------- Cash and temporary cash investments: Net increase (decrease) during the period......... 9,530 (11,174) 14,560 Balance, beginning of the period.................. 19,730 30,904 16,344 -------- -------- -------- Balance, end of the period........................ $ 29,260 $ 19,730 $ 30,904 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-12 128 COLE NATIONAL GROUP, INC. 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 Group, Inc. ("CNG") and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany transactions have been eliminated in consolidation. CNG, a wholly owned subsidiary of Cole National Corporation (the "Parent"), was formed on July 19, 1993. Immediately prior to CNG's issuance and sale of 11.25% Senior Notes on September 30, 1993, as described in Note 2, all of the Parent's assets were contributed to CNG and CNG assumed all of the Parent's liabilities other than $50.0 million of the Parent's obligations under the Parent's 13% Senior Subordinated Notes (the "Initial Capitalization"). The transaction was accounted for as a reorganization of entities under common control, in a manner similar to a pooling of interests. Prior to the Initial Capitalization, all operations of the Company were conducted by subsidiaries of the Parent. The accompanying consolidated financial statements are based on historical cost as if the Initial Capitalization had occurred at the beginning of fiscal 1993 and CNG had been in existence during all periods presented. Accordingly, transactions of the Parent prior to September 30, 1993, except for those relating to the debt not assumed by CNG and the interest expense thereon, have been included in the accompanying financial statements. The Company is a national specialty service retailer operating in both host and non-host environments. The Company's primary lines of business are personalized gifts and eyewear products, both of which are about equal in size based on sales. The Company sells its products nationally through over 2,300 retail locations in 49 states, and differentiates itself from other specialty retailers by providing value-added services at the point of sale at all of its retail locations. The Company considers its operations to be in one business segment. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are identified according to the calendar year in which they begin. The 1995 fiscal year consisted of 53 weeks, and fiscal years 1994 and 1993 each consisted of 52 weeks. Inventories The Company's inventories are valued at the lower of first-in, first-out ("FIFO") cost or market. Property and Depreciation The Company's policy is to provide depreciation using the straight-line method over a period which is sufficient to amortize the cost of the asset during its useful life. 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
F-13 129 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Property and equipment, at cost, consist of the following as of February 3, 1996 and January 28, 1995 (000's omitted):
1996 1995 -------- -------- Land and buildings.............................................. $ 3,615 $ 4,989 Furniture, fixtures and equipment............................... 114,802 104,061 Leasehold improvements.......................................... 36,172 31,251 -------- -------- Total property and equipment.................................. $154,589 $140,301 ======== ========
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. Other Assets Cost in excess of net assets of purchased businesses is being amortized on a straight-line basis over 40 years and is presented net of accumulated amortization of $29,640,000 and $26,880,000, at February 3, 1996 and January 28, 1995, respectively. Management, which regularly evaluates its accounting for goodwill, considering such factors as historical profitability, current operating profits and cash flows, believes that the asset is realizable and the amortization period is appropriate. Financing costs incurred in connection with obtaining long-term debt are capitalized and amortized over the life of the related debt using the effective interest method. Cash Flows For purposes of reporting cash flows, the Company considers all temporary cash investments, which have original maturities of three months or less, to be cash equivalents. The carrying value of cash equivalents approximates fair value because of the short maturity of such instruments. Net cash flows from operating activities reflects cash payments for income taxes and interest as follows (000's omitted):
1995 1994 1993 ------- ------- ------- Income taxes........................................... $ 4,264 $ 2,250 $ 2,685 Interest............................................... $21,580 $22,069 $ 8,530
F-14 130 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The Initial Capitalization was primarily a noncash transaction. The assets contributed to CNG by the Parent and the Parent's liabilities assumed by CNG at September 30, 1993 were as follows (000's omitted): Current assets (including cash of $3,314)............................... $ 108,288 Property and equipment, net............................................. 47,571 Other assets............................................................ 3,339 Cost in excess of net assets of purchased businesses, net............... 81,704 --------- Total assets contributed.............................................. $ 240,902 ========= Current liabilities..................................................... $ 83,263 Long-term debt: Bank loans............................................................ 126,017 13% Senior Subordinated Notes......................................... 59,852 Deferred interest reduction........................................... 20,378 Other................................................................. 2,650 Other deferred liabilities.............................................. 503 --------- Total liabilities assumed.......................................... $ 292,663 =========
During 1994, the Parent contributed $6.2 million of its receivable from the Company to the Company's paid in capital in exchange for 100 additional shares of the Company's common stock. During 1995, non-cash financing activities included incurring $887,000 in capital lease obligations. During 1995, a dividend in the amount of $13.5 million was declared and is payable to the Parent at February 3, 1996. Capital Stock At February 3, 1996, there were 1,100 shares of common stock, par value $.01 per share, authorized, issued, and outstanding. Earnings Per Share Earnings per share and weighted average number of common shares outstanding data for 1995, 1994 and 1993 have been omitted as the presentation of such information, considering the Company is a wholly owned subsidiary of the Parent, is not meaningful. F-15 131 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (2) LONG-TERM DEBT Long-term debt at February 3, 1996 and January 28, 1995 is summarized as follows (000's omitted):
1996 1995 -------- -------- 7.5% obligations in connection with Industrial Revenue Bonds........... $ 506 $ 675 11.25% senior notes: Face value........................................................... 181,000 186,000 Unamortized discount................................................. (1,834) (2,118) -------- -------- Total 11.25% senior notes.................................... 179,166 183,882 Capital lease obligations.............................................. 838 -- -------- -------- 180,510 184,557 Less current portion................................................... (292) (169) -------- -------- Net long-term debt........................................... $180,218 $184,388 ======== ========
On September 30, 1993, CNG completed a public offering of $190 million of 11.25% Senior Notes (the "CNG Notes"). Proceeds of $187.6 million were used to repay $126 million of bank loans, plus accrued interest thereon, and $59.9 million of Senior Subordinated Notes including accrued interest. The Company recorded a net gain of $18.8 million (with no related income tax effect) on extinguishment of this debt in fiscal 1993. The CNG Notes are unsecured and mature October 1, 2001 with no earlier scheduled redemption or sinking fund payments. The CNG Notes bear interest at a rate of 11.25% per annum, payable semi-annually on each April 1 and October 1. The indenture pursuant to which the CNG Notes were issued restricts dividend payments to the Parent to 50% of CNG's net income after October 31, 1993, plus amounts due to the Parent under a tax sharing agreement and for administrative expenses of the Parent not to exceed .25% of the Company's net sales. The indenture also contains certain optional and mandatory redemption features and other financial covenants. During the first quarter of 1994, the Parent completed an initial public offering ("IPO") of the Parent's Class A Common Stock. A portion of the net proceeds from the IPO were advanced to the Company by the Parent and used to retire $4.0 million of the CNG Notes. The Company recorded an extraordinary loss of $134,000 representing the payment of a premium, the write-off of unamortized discount and other costs associated with retiring the debt. The loss is net of an income tax benefit of $72,000. The agreement in connection with the Industrial Revenue Bonds provides for repayment of the obligation in annual installments of $168,750. The Industrial Revenue Bonds are secured by office and distribution facilities with a net book value of $1,781,000 at February 3, 1996. Annual aggregate principal payments due on long-term debt, excluding capital leases, are $168,750 in each of the years 1996 through 1998 with no payments due in 1999 or 2000. At February 3, 1996, the fair value of the Company's long-term debt was approximately $182.4 million compared to a carrying value of $180.5 million. The fair value was estimated primarily by using quoted market prices. (3) REVOLVING CREDIT FACILITY The Company's principal operating subsidiaries entered into a Revolving Credit Facility which provides for working capital borrowings, including letters of credit, of up to $50 million through December 31, 1998. Effective September 1, 1995, the working capital facility was amended such that borrowings bear interest, at F-16 132 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED the borrower's option, at the Prime Rate plus .25% or the Eurodollar Rate plus 2.5% per annum. The Company pays a commitment fee of .375% per annum on the total unused portion of the facility. The maximum amounts of short term borrowings outstanding during 1995 and 1994 were $3.5 million and $13.0 million, respectively. No amounts were outstanding as of February 3, 1996 or January 28, 1995. The Revolving Credit Facility restricts dividend payments to CNG to amounts needed to pay interest and principal on the CNG Notes and certain amounts relating to taxes, along with up to $15.0 million plus .25% of the Company's net sales annually for other direct expenses of CNG or the Parent. The Revolving Credit Facility also contains covenants which, among other things, require CNG to maintain certain financial ratios and specified levels of working capital, net worth and earnings and limit the amount of capital expenditures. (4) NOTES RECEIVABLE -- STOCK OPTION EXERCISE During the second quarter of fiscal 1993, certain officers of the Company exercised stock options to purchase shares of the Parent's Common Stock, par value $.001 per share at $3 per share. Payment was made by executing promissory notes. The remaining promissory notes, which were contributed to CNG by the Parent as part of the Initial Capitalization, were transferred to the Parent during fiscal 1995. (5) INCOME TAXES The Company has been included in the consolidated federal income tax returns of the Parent and has been charged an amount equal to the taxes that would have been payable by it if it were a corporation filing separate tax returns under a tax sharing agreement between the Parent, CNG and its subsidiaries. Income tax expense for fiscal 1995, 1994 and 1993 is detailed below (000's omitted):
1995 1994 1993 -------- -------- -------- Currently payable -- Federal...................................................... $ 4,615 $ 4,434 $ -- State and local.............................................. 1,790 2,016 2,361 -------- -------- -------- 6,405 6,450 2,361 Deferred -- Federal...................................................... 3,260 (1,494) -- Utilization of net operating loss carryforwards.............. 1,134 4,169 -- Change in valuation allowance................................ -- (12,828) -- -------- -------- -------- 4,394 (10,153) -- -------- -------- -------- Income tax provision (benefit)................................. $ 10,799 $ (3,703) $ 2,361 ======== ======== ========
At February 3, 1996, the Company has minimum tax credits in the amount of approximately $2.0 million that can be carried forward indefinitely. F-17 133 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The income tax expense reflected in the accompanying consolidated statements of income differs from the federal statutory rate as follows (000's omitted):
1995 1994 1993 -------- -------- ------- Tax provision at statutory rate................................. $ 8,592 $ 7,399 $ 6,867 Tax effect of -- State income taxes, net of federal tax benefit................ 1,164 1,310 1,534 Amortization of cost in excess of net assets of purchased businesses................................................. 900 901 901 Benefit of net operating loss carryforward.................... -- -- (7,003) Change in valuation allowance................................. -- (12,828) -- Other, net.................................................... 143 (485) 62 -------- -------- ------- Tax provision (benefit)............................... $ 10,799 $ (3,703) $ 2,361 ======== ======== =======
The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and deferred tax liabilities at February 3, 1996 and January 28, 1995 are as follows (000's omitted):
1996 1995 ------- ------- Deferred tax assets: Employee benefit accruals.............................................. $ 3,375 $ 3,883 Other non-deductible accruals.......................................... 3,922 4,315 State and local taxes.................................................. 1,086 981 Tax credit and net operating loss carryforwards........................ 1,990 4,693 Other.................................................................. 1,252 712 ------- ------- Total deferred tax assets...................................... 11,625 14,584 ------- ------- Deferred tax liabilities: Depreciation........................................................... (5,070) (3,763) Other.................................................................. (836) (668) ------- ------- Total deferred tax liabilities................................. (5,906) (4,431) ------- ------- Net deferred taxes....................................................... $ 5,719 $10,153 ======= =======
(6) RETIREMENT PLANS The Company maintains a noncontributory defined benefit pension plan (the "Retirement Plan") that covers employees who have met eligibility service requirements and are not members of certain collective bargaining units. The Retirement Plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and their compensation levels near retirement. The Company's policy is to fund amounts necessary to keep the Retirement Plan in full force and effect, in accordance with the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. Actuarial present values of benefit obligations are determined using the projected unit credit method. F-18 134 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Pension expense for fiscal 1995, 1994 and 1993 includes the following components (000's omitted):
1995 1994 1993 ------- ------- ------- Service cost -- benefits earned during the period............. $ 528 $ 581 $ 620 Interest cost on the projected benefit obligation............. 1,369 1,292 1,275 Less: Return on plan assets -- Actual................................................... (1,138) 178 (452) Deferred................................................. 11 (1,294) (640) ------- ------- ------- (1,127) (1,116) (1,092) Amortization of transition asset over 17.9 years............ (179) (179) (179) ------- ------- ------- Net pension expense................................. $ 591 $ 578 $ 624 ======= ======= =======
The following sets forth the funded status of the Retirement Plan at December 31, 1995 and 1994 based upon the actuarial present values of benefit obligations (000's omitted):
1995 1994 ------- ------- Accumulated benefit obligations: Vested................................................................. $17,147 $14,550 Nonvested.............................................................. 291 218 ------- ------- Total.......................................................... $17,438 $14,768 ======= ======= Projected benefit obligation for service rendered to date................ $19,030 $15,842 Fair value of plan assets, primarily money market and equity mutual funds.................................................................. 13,849 12,052 ------- ------- Plan assets less than projected benefit obligation....................... (5,181) (3,790) Unrecognized prior service cost.......................................... 168 197 Net unrecognized loss.................................................... 2,983 947 Unamortized transition asset............................................. (1,595) (1,774) ------- ------- Pension liability included in accrued liabilities.............. $(3,625) $(4,420) ======= =======
The weighted average discount rate used to measure the projected benefit obligation was 7.75% in 1995 and 8.50% in 1994. 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%. During fiscal 1993, the Company established a defined contribution plan, including features under Section 401(k) of the Internal Revenue Code, which will provide retirement benefits to its employees. Eligible employees may contribute up to 15% of their compensation to the plan. There is no mandatory matching of employee contributions by the Company, but discretionary matches of $163,600, $163,500 and $100,000 were accrued for 1995, 1994 and 1993, respectively. During fiscal 1994, the Company established two Supplemental Executive Retirement Plans which will provide for the payment of retirement benefits to participating executives supplementing amounts payable under the Retirement Plan. The first plan is an excess benefit plan designed to replace benefits that would otherwise have been payable under the Retirement Plan but that were limited as a result of certain tax law changes. The second plan is a defined contribution plan under which participants will receive an annual credit based on a percentage of base salary, subject to vesting requirements. Expense for these plans for fiscal 1995 and 1994 was $447,000 and $413,000, respectively. F-19 135 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (7) COMMITMENTS The Company leases a substantial portion of its facilities including laboratories, office and warehouse space, and retail store locations. These leases have initial terms of up to 10 years and typically do not provide for renewal options. In most leases covering retail store locations, additional rents are payable based on store sales. In addition, the Company operates departments in various host stores paying occupancy costs solely as a percentage of sales under agreements containing short-term cancellation clauses. Generally, the Company is required to pay taxes and normal expenses of operating the premises for laboratory, office, warehouse and retail store leases; the host stores pay these expenses for departments operated on a percentage-of-sales basis. The following amounts represent rental expense for fiscal 1995, 1994 and 1993 (000's omitted):
1995 1994 1993 ------- ------- ------- Occupancy costs based on sales................................ $50,218 $47,198 $41,329 All other rental expense...................................... 32,697 30,003 27,940 Sublease rental income........................................ (1,510) (1,455) (1,197) ------- ------- ------- $81,405 $75,746 $68,072 ======= ======= =======
During 1995, the Company entered into leases for equipment which have been accounted for as capital leases. At February 3, 1996, property under capital leases consisted of $887,000 in equipment with accumulated amortization of $22,000. At February 3, 1996 future minimum lease payments for all leases, and the present value of future minimum lease payments for capital leases, are as follows (000's omitted):
CAPITAL OPERATING LEASES LEASES ------- --------- 1996............................................................. $ 173 $ 30,053 1997............................................................. 188 26,727 1998............................................................. 188 23,537 1999............................................................. 188 19,678 2000............................................................. 308 15,308 2001 and thereafter.............................................. -- 36,621 ------- --------- Total future minimum lease payments.............................. 1,045 $ 151,924 ========= Amount representing interest..................................... (207) ------- Present value of future minimum lease payments................... $ 838 =======
Effective March 25, 1995, CNG entered into an agreement with a third party for the management and operation of the Company's data processing center. The agreement expires in March 2005 and may be F-20 136 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED terminated by the Company upon six months' notice and payment of certain fees for termination. The agreement provides for minimum payments as follows (000's omitted): 1996......................................... $ 6,448 1997......................................... 5,674 1998......................................... 5,020 1999......................................... 6,442 2000......................................... 6,829 Thereafter................................... 21,307 ------- $51,720 =======
(8) ACQUISITIONS AND DISPOSITIONS OF BUSINESS The Company has made several acquisitions, each of which has been accounted for as a purchase. In May 1995, the Company acquired the assets of 59 optical departments located in BJ's Wholesale Clubs for a purchase price of $1.1 million. In January 1994, the Company acquired the assets of 107 leased optical departments within Montgomery Ward Stores for a purchase price of $4.7 million. In September 1993, the Company acquired the operating assets from and assumed certain liabilities of Contact Lens Supply, Inc., a mail order distributor of contact lenses, for a purchase price of $3.2 million. In April 1995, the Company sold its 39 Sunspot fashion sunglass kiosks. No gain or loss was recognized on this transaction. F-21 137 INDEPENDENT AUDITORS' REPORT The Board of Directors Pearle, Inc.: We have audited the accompanying consolidated balance sheets of Pearle, Inc. and subsidiaries as of September 30, 1996 and 1995 and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended September 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 Pearle, Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996, in conformity with generally accepted accounting principles. As discussed in notes 1 and 8, the Company changed its method of accounting for income taxes in fiscal 1994 to adopt the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. KPMG Peat Marwick LLP Dallas, Texas November 22, 1996 F-22 138 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, -------------------- 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents............................................ $ 7,411 $ 17,800 Accounts and notes receivable: Trade, less allowance for doubtful accounts of $2,908 in 1996 and $2,944 in 1995................................................... 21,326 15,657 Current portion of franchise notes................................ 7,310 8,252 Other............................................................. 3,787 3,947 Inventories.......................................................... 36,751 35,432 Prepaid expenses..................................................... 1,741 1,661 Deferred income taxes................................................ 9,118 9,710 -------- -------- Total current assets............................................ 87,444 92,459 Property, plant and equipment, net..................................... 57,860 62,459 Franchise notes receivable, excluding current portion.................. 25,250 32,137 Intangible assets, net................................................. 121,669 216,767 Other assets........................................................... 809 544 -------- -------- $293,032 $404,366 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable..................................................... $ 12,998 $ 8,268 Checks outstanding................................................... 11,196 9,711 Accrued payroll costs................................................ 12,212 14,140 Income taxes payable................................................. -- 18,710 Accrued advertising.................................................. 342 3,707 Accrued store closure costs.......................................... 2,233 6,573 Other accrued expenses and liabilities............................... 21,356 25,168 -------- -------- Total current liabilities....................................... 60,337 86,277 Payables to Parent and affiliated companies............................ -- 201,399 Deferred income taxes.................................................. 1,927 9,059 Other noncurrent liabilities........................................... 5,036 6,501 -------- -------- Total liabilities............................................... 67,300 303,236 -------- -------- Stockholder's equity: Common stock, $1.00 par value, 1,000 shares authorized, 100 shares issued and outstanding............................................ -- -- Additional paid-in capital........................................... 646,243 417,187 Accumulated deficit.................................................. (426,775) (324,392) Foreign currency translation adjustment.............................. 6,264 8,335 -------- -------- Total stockholder's equity...................................... 225,732 101,130 Commitments and contingencies.......................................... -- -- -------- -------- $293,032 $404,366 ======== ========
See accompanying notes to consolidated financial statements. F-23 139 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEARS ENDED SEPTEMBER 30, --------------------------------- 1996 1995 1994 --------- -------- -------- Revenues: Trade sales.............................................. $ 341,141 $331,105 $311,233 Franchise revenues....................................... 24,883 23,147 24,785 -------- -------- --------- Total revenues...................................... 366,024 354,252 336,018 -------- -------- --------- Operating expenses: Cost of sales, including buying and occupancy costs...... 184,486 187,185 181,340 Selling, general and administrative expenses............. 164,129 155,256 160,820 Restructuring and store closure costs.................... (2,083) 7,265 1,876 Royalty payments and other affiliate charges............. 6,406 6,039 5,916 Amortization of intangible assets........................ 15,604 14,260 14,289 Provision for impairment of intangible assets and related costs................................................. 94,673 -- -- -------- -------- --------- Total operating expenses............................ 463,215 370,005 364,241 -------- -------- --------- Operating loss...................................... (97,191) (15,753) (28,223) Other expense (income): Gain on sale of subsidiary............................... -- (14,811) -- Interest expense to Parent............................... 15,461 15,769 17,309 Other interest, net...................................... (4,258) (4,829) (4,080) -------- -------- --------- Loss before income tax benefit and cumulative effect of accounting change............................. (108,394) (11,882) (41,452) Income tax benefit......................................... (6,011) (12,845) (10,480) -------- -------- --------- Income (loss) before cumulative effect of accounting change.............................................. (102,383) 963 (30,972) Cumulative effect of a change in accounting for income taxes.................................................... -- -- 842 -------- -------- --------- Net income (loss)................................... $(102,383) $ 963 $(31,814) ======== ======== =========
See accompanying notes to consolidated financial statements. F-24 140 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 -------------------------------------------------------------------- FOREIGN ADDITIONAL CURRENCY TOTAL COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY -------- ---------- ----------- ---------- ------------- Balances at September 30, 1993...... $ -- $ 405,829 $(293,541) $ 976 $ 113,264 Net loss............................ -- -- (31,814) -- (31,814) Capital contribution from affiliate......................... -- 7,222 -- -- 7,222 Effect of foreign currency translation....................... -- -- -- 3,283 3,283 -------- -------- --------- ------- -------- Balances at September 30, 1994...... -- 413,051 (325,355) 4,259 91,955 Net income.......................... -- -- 963 -- 963 Capital contribution from affiliate......................... -- 4,136 -- -- 4,136 Effect of foreign currency translation....................... -- -- -- 4,076 4,076 -------- -------- --------- ------- -------- Balances at September 30, 1995...... -- 417,187 (324,392) 8,335 101,130 Net loss............................ -- -- (102,383) -- (102,383) Distribution of assets to affiliate......................... -- (19,730) -- -- (19,730) Capital contributions from affiliate......................... -- 248,786 -- -- 248,786 Effect of foreign currency translation....................... -- -- -- (2,071) (2,071) -------- -------- --------- ------- -------- Balances at September 30, 1996...... $ -- $ 646,243 $(426,775) $ 6,264 $ 225,732 ======== ======== ========= ======= ========
See accompanying notes to consolidated financial statements. F-25 141 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED SEPTEMBER 30, --------------------------------- 1996 1995 1994 --------- -------- -------- Cash flows from operating activities: Net income (loss)........................................ $(102,383) $ 963 $(31,814) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization......................... 31,587 33,448 39,953 Provision for bad debts............................... 1,797 (481) 2,162 Provision for inventory shrinkage and reserves........ 2,037 1,361 6,137 Restructuring and store closure costs................. (2,015) 7,164 2,487 Provision for impairment of intangible assets and related costs....................................... 94,673 -- -- Gain on sale of subsidiary............................ -- (14,811) -- Changes in assets and liabilities: Accounts and notes receivable....................... (6,642) 260 3,595 Inventories......................................... (3,004) 1,627 10,564 Prepaid expenses.................................... (80) 5,409 (5,409) Checks outstanding.................................. 1,485 5,185 (10,079) Accrued payroll costs............................... (1,928) 2,755 (2,572) Income taxes payable................................ 3,360 6,573 751 Accrued advertising................................. (3,365) (2,353) 1,795 Accrued store closure costs......................... (2,512) (4,434) (18,878) Accounts payable and accrued and other liabilities...................................... (1,391) (7,695) (19,797) Other assets........................................ (265) 662 3,939 Deferred income taxes............................... (6,540) (4,094) 19,094 Other noncurrent liabilities........................ (912) 625 1,512 --------- -------- -------- Net cash provided by operating activities........ 3,902 32,164 3,440 --------- -------- -------- Cash flows from investing activities: Capital expenditures..................................... (13,558) (7,321) (6,083) Proceeds from sale of property, plant and equipment...... 1,078 400 1,840 Proceeds from sale of subsidiary......................... -- 14,811 -- Other, net............................................... (710) 2,045 (257) --------- -------- -------- Net cash provided by (used in) investing activities..................................... (13,190) 9,935 (4,500) --------- -------- -------- Cash flows from financing activities: Increase (decrease) in payables to Parent and affiliated companies............................................. 18,629 (37,396) (10,355) Capital contribution from affiliate...................... -- 4,146 7,222 Distribution of assets to affiliate...................... (19,730) -- -- --------- -------- -------- Net cash used in financing activities............ (1,101) (33,250) (3,133) --------- -------- -------- Net increase (decrease) in cash and cash equivalents....... (10,389) 8,849 (4,193) Cash and cash equivalents at beginning of year............. 17,800 8,951 13,144 --------- -------- -------- Cash and cash equivalents at end of year................... $ 7,411 $ 17,800 $ 8,951 ========= ======== ======== Supplemental disclosures of cash flow information -- cash paid (received) during the year for: Income taxes.......................................... $ 101 $(16,988) $(29,878) ========= ======== ======== Interest.............................................. $ 11,203 $ 10,759 $ 13,229 ========= ======== ======== Supplemental schedule of noncash financing activities: Capitalization of amounts payable to Parent and affiliated companies............................. $ 220,028 $ -- $ -- ========= ======== ======== Current income taxes payable assumed by affiliate........ $ 22,070 $ -- $ -- ========= ======== ========
See accompanying notes to consolidated financial statements. F-26 142 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General Prior to November 15, 1996, Pearle, Inc. ("Pearle" or the "Company"), was a wholly owned subsidiary of Grand Metropolitan Incorporated ("GrandMet" or the "Parent") (see note 2). GrandMet is an indirect wholly-owned subsidiary of Grand Metropolitan Public Limited Company. Pearle is a retailer of eyecare products and services through company operated and franchised optical stores in the United States, Canada, Puerto Rico, Belgium and the Netherlands. In addition, Pearle operates an optical processing laboratory and distribution center in connection with its retail operations. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. (c) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents were $1,207,000 and $1,174,000 at September 30, 1996 and 1995, respectively. (d) Inventories Inventories consist of frames, lenses and other raw materials and are stated at the lower of weighted average cost or market. (e) Property, Plant and Equipment Property, plant and equipment are stated at cost. Maintenance and repair costs are expensed as incurred. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. Amortization of leasehold improvements is based on the shorter of the lives of the respective leases or the estimated useful lives of the improvements. The following is a summary of depreciation and amortization periods for each classification of property, plant and equipment: Buildings................ 20-33 years Leasehold improvements... 4-20 years Fixtures and equipment... 3-10 years
(f) Intangible Assets The excess of cost over the fair value of net tangible assets acquired upon GrandMet's acquisition of the Company in 1985 and other businesses acquired by Pearle since that time has been reflected as intangible assets in the accompanying consolidated balance sheets. Such intangible assets are being amortized on a straight-line basis over periods up to 40 years (see note 7). As a result of the sale of the stock of the Company on November 15, 1996, it was determined that a portion of the excess of cost over the fair value of net tangible assets acquired was not recoverable. Accordingly, an impairment of $87,985,000 was recorded in the consolidated financial statements at September 30, 1996 (see note 2). Goodwill is recorded on the repurchase of franchise locations based on a discounted cash flow model and is amortized over the expected life of the store location. F-27 143 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (g) Income Taxes Effective October 1, 1993, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes, requiring the asset and liability method of accounting for deferred income taxes. SFAS No. 109 changes the Company's method of accounting for income taxes from the deferred method required under Accounting Principles Board Opinion 11 to the asset and liability method. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has reported the cumulative effect of adopting SFAS No. 109 as a change in method of accounting for income taxes in the fiscal year 1994 consolidated statement of operations. (h) Trade Sales Trade sales represent sales of goods and services to retail customers by Company operated stores and sales of merchandise inventory to franchisees and other outside customers. (i) Franchise Revenues Franchise royalty revenues based on sales by franchisees are accrued as earned. Gains and losses from the sale of existing Company owned stores to franchisees are recognized at the time of the sale. A provision for doubtful notes receivable is included as an offset to gain or loss on sale of franchises, as appropriate. 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 Pearle and when the related store begins operations. Accrued franchise royalty revenues are included in trade accounts receivable. (j) Advertising Expenses The Company expenses advertising production costs and advertising costs as incurred. Gross advertising expense before contributions from franchisees was approximately $47,678,000, $43,903,000 and $43,496,000 during the years ended September 30, 1996, 1995 and 1994, respectively. (k) Foreign Currency Translation The assets and liabilities of the Company's foreign subsidiaries are translated to United States dollars at the rates of exchange on the balance sheet date. Income and expense items of these subsidiaries are translated at average monthly rates of exchange. The resultant translation gains or losses are included in the foreign currency translation adjustment component of stockholder's equity. (l) Postretirement Benefits Other than Pensions The estimated cost of retiree benefit payments, principally health and life insurance benefits, are accrued during the employees' active service periods (see note 13). (m) Use of Estimates The preparation of the consolidated 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 consolidated financial F-28 144 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) SALE OF COMPANY On September 24, 1996, The Pillsbury Company ("Pillsbury"), an intermediate parent of the Company, entered into a Stock Purchase Agreement (the Agreement) with Cole National Corporation, an unrelated third party, to sell Pillsbury's interest in the Company. The final closing of the sale occurred on November 15, 1996 at which time Cole National Corporation exchanged approximately $220 million cash for Pillsbury's interest in the Company. As the net assets of the Company, excluding intercompany and other balances which were assumed by Pillsbury at the time of the sale, exceeded the selling price, an impairment of the assets of the Company was determined to exist at September 30, 1996. Accordingly, an impairment of approximately $87,985,000 has been recorded in the September 30, 1996 consolidated financial statements to reflect the assets of the Company at their estimated fair value. The impairment is recorded as a write-off of excess cost over fair value of net tangible assets acquired. The terms of the Agreement will substantially affect the Company's current affiliate tax, debt and cash sharing arrangements. As a result of the sale, approximately $6,688,000 was or will be paid by an affiliate company on behalf of Pearle. This amount has been included in the consolidated statement of operations and as a corresponding capital contribution in the consolidated statement of stockholder's equity, as this amount will not be repaid by Pearle. (3) RESTRUCTURING AND STORE CLOSURE COSTS During the year ending September 30, 1996, the Company recorded a write-down of the accrued store closure costs in the consolidated statement of operations of approximately $2,083,000 related to a change in estimate of the liability relating to store closure costs. During the years ended September 30, 1995 and 1994 the Company recorded a net provision of approximately $7,265,000 and $1,876,000, respectively, for estimated costs, consisting primarily of future commitments under operating leases, of closing unprofitable U.S. and international retail locations. During the year ended September 30, 1994, the Company also recorded a provision of $4,800,000 (included in cost of sales) for charges related to obsolete inventory which occurred as a result of a change in brand strategy. (4) DISPOSAL OF SUBSIDIARY On October 27, 1994, the Company entered into an agreement to sell all of the capital stock of Ophthalmic Research Group International Company ("ORGIC") to a third party for cash consideration of $14,811,000. Prior to fiscal year 1994, the remaining book value of the intangible assets acquired of approximately $22,146,000 was written off since, in the opinion of management, the value of such assets was not recoverable. As a result, the gain on sale in 1995 was equal to the cash consideration. (5) RELATED PARTY TRANSACTIONS In connection with an acquisition in 1989, Pearle pays to an affiliated company an annual royalty payment equal to the greater of a predetermined minimum amount or 4% of sales from the predecessor's stores as a license fee for use of the predecessor's trademark. The Company paid $6,081,000, $5,714,000, and $5,494,000 for royalties in 1996, 1995 and 1994, respectively, pursuant to the licensing agreement. These amounts are included in the accompanying consolidated statements of operations as royalty payments and other affiliate charges. The Company paid $17,236,000 on November 15, 1996 to settle its obligation under the license agreement. In exchange for the settlement all rights in the trademark were assigned to the Company. F-29 145 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The Company received capital contributions from an affiliate of approximately $4,146,000, and $7,222,000 during the years ended September 30, 1995 and 1994, respectively. These amounts have been recorded as additional paid-in capital in the accompanying consolidated balance sheets. In addition, in connection with the sale of the Company (see note 2), amounts payable to Parent and affiliated companies have been cancelled and current income taxes payable has been assumed by Pillsbury as of September 30, 1996, and accordingly have been recorded as an increase to additional paid-in capital. On September 30, 1996, the Company distributed assets of $19,730,000 relating to a controlled entity to an affiliated company. The distribution resulted in a reduction of additional paid-in capital, and a corresponding reduction in payables to Parent and affiliated companies. On May 28, 1993, an affiliate of the Company purchased approximately $75,280,000 of newly issued preferred stock from a subsidiary of the Company. The cash received from the sale of such stock was then loaned to the affiliate in exchange for a note receivable. All balances related to this transaction have been eliminated in the consolidated financial statements due to the related party nature of the transaction. In fiscal year 1995, the preferred stock was redeemed and the proceeds used to retire the note receivable. The Company maintains an ongoing financing relationship with GrandMet. Excess cash from operations is transferred to GrandMet on a regular basis. Interest expense related to intercompany balances is recorded monthly at the LIBOR rate plus 1%. Royalty payments and other affiliate charges included in the consolidated statements of operations include allocations of management, tax, accounting and other administrative expenses performed by GrandMet. (6) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (in thousands):
SEPTEMBER 30, --------------------- 1996 1995 -------- -------- Land........................................................ $ 6,803 $ 6,951 Buildings................................................... 26,922 26,784 Leasehold improvements...................................... 68,869 67,026 Fixtures and equipment...................................... 111,270 109,247 -------- -------- 213,864 210,008 Less accumulated depreciation and amortization.............. 156,004 147,549 -------- -------- $ 57,860 $ 62,459 ======== ========
Depreciation and amortization expense related to property, plant and equipment was $15,819,000, $18,619,000, and $22,567,000 for 1996, 1995 and 1994, respectively. F-30 146 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (7) INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
SEPTEMBER 30, AMORTIZATION ----------------------------- PERIOD 1996 1995 ------------ ------------ ------------ Goodwill....................................... 7-40 years $ 213,221 $ 205,326 Patient files.................................. 4-8 years 21,297 21,600 Franchise agreements........................... 11-25 years 23,140 24,329 Franchise lease agreements..................... 1-11 years 2,234 2,235 Trademarks..................................... 40 years 55,496 55,496 Noncompetition agreements...................... 2-5 years 17,428 17,428 Other.......................................... 1-23 years 38,487 38,865 ---------- ---------- 371,303 365,279 Less: Accumulated amortization..................... 161,649 148,512 Provision for impairment..................... 87,985 -- ---------- ---------- $ 121,669 $ 216,767 ========== ==========
(8) INCOME TAXES The Company is included in the consolidated Federal income tax return of GrandMet. In 1989 the Company entered into a tax sharing agreement with GrandMet whereby GrandMet agreed to allocate to the Company certain tax benefits resulting from the utilization of the Company's tax deductions by other members of the consolidated GrandMet group. For financial reporting purposes, the Company's Federal income tax provision is calculated as though the Company filed a separate Federal income tax return, except for the effect of the aforementioned 1989 agreement with GrandMet. As discussed in note 1, the Company adopted SFAS No. 109 as of October 1, 1993. The cumulative effect of this change in accounting for income taxes of approximately $842,000 was determined as of October 1, 1993 and is reported separately in the consolidated statement of operations for the year ended September 30, 1994. Federal income tax returns have been examined by the Internal Revenue Service and settled through fiscal 1988. The loss before income tax benefit and cumulative effect of accounting change in the accompanying consolidated statements of operations consists of the following (in thousands):
YEARS ENDED SEPTEMBER 30, ------------------------------------ 1996 1995 1994 --------- -------- --------- Domestic operations........................... $(113,304) $(17,814) $ (30,171) Foreign operations............................ 4,910 5,932 (11,281) --------- -------- --------- Loss before income tax benefit and cumulative effect of accounting changes................................ $(108,394) $(11,882) $ (41,452) ========= ======== =========
F-31 147 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The income tax expense (benefit) attributable to loss before income tax benefit and cumulative effect of accounting change consists of the following (in thousands):
YEARS ENDED SEPTEMBER 30, ---------------------------------- 1996 1995 1994 -------- -------- -------- Current: Federal.................................... $ (7,123) $ (9,380) $(27,535) State...................................... 48 97 103 Foreign.................................... 2,250 532 (1,300) -------- -------- --------- Total current......................... (4,825) (8,751) (28,732) -------- -------- --------- Deferred: Federal.................................... (1,097) (4,037) 17,454 Foreign.................................... (89) (57) 798 -------- -------- --------- Total deferred........................ (1,186) (4,094) 18,252 -------- -------- --------- Income tax benefit.................... $ (6,011) $(12,845) $(10,480) ======== ======== =========
The tax effects of the primary temporary differences giving rise to the deferred income tax assets and liabilities as determined under SFAS No. 109 are as follows (in thousands):
SEPTEMBER 30, -------------------- 1996 1995 -------- ------- Deferred tax assets: Restructuring reserves............................................. $ 627 $ 2,444 Inventories, principally due to additional costs inventoried for tax pursuant to the Tax Reform Act of 1986.................................... 1,264 3,130 Accounts and notes receivable, principally due to allowance for doubtful accounts................................................. 2,834 3,039 Employee related accruals, principally vacation pay and post-retirement medical accruals.................................. 1,407 2,573 Accrued store closure costs........................................ 969 1,921 Warranty reserves.................................................. 86 392 Plant and equipment, principally due to differences in depreciation...................................................... 3,049 -- Self insurance reserves............................................ 1,185 113 Other.............................................................. 1,271 848 -------- ------- Total gross deferred tax assets............................... 12,692 14,460 -------- ------- Deferred tax liabilities: Intangibles, principally due to differences in amortization........ (3,698) (4,830) Deferred income on franchise notes receivable...................... (1,339) (3,482) Plant and equipment, principally due to differences in depreciation...................................................... -- (110) Prepaid advertising................................................ -- (112) Other.............................................................. (464) (5,275) -------- ------- Total gross deferred tax liabilities.......................... 5,501 (13,809) -------- ------- Net deferred income tax asset................................. $ 7,191 $ 651 ======== =======
F-32 148 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED These deferred income tax assets and liabilities are presented as follows in the consolidated balance sheets (in thousands):
SEPTEMBER 30, -------------------- 1996 1995 -------- ------- Current deferred income tax asset....................................... $ 9,118 $ 9,710 Noncurrent deferred income tax liability................................ (1,927) (9,059) -------- ------- Net deferred income tax asset................................. $ 7,191 $ 651 ======== =======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. A reconciliation of the U.S. federal statutory rate to the effective income tax rate applicable to loss before income tax benefit and cumulative effect of accounting change follows:
YEARS ENDED SEPTEMBER 30, --------------------------- 1996 1995 1994 ------ ------ ----- U.S. federal statutory rate....................................... (35.0)% (35.0)% (35.0)% State income taxes, net of Federal benefit........................ 0.3 0.2 0.2 Nondeductible goodwill and trademarks............................. 1.0 8.4 2.1 Provisions for impairment of intangible assets and related costs........................................................... 29.1 -- -- Loss (earnings) of foreign subsidiaries........................... 0.5 (13.1) 8.3 Sale of ORGIC stock............................................... -- (70.8) -- Other............................................................. (1.4) 2.2 (.9) ------ ------ ----- Effective income tax rate............................... (5.5)% (108.1)% (25.3)% ====== ====== =====
The disposition of ORGIC resulted in an income tax deduction of approximately $24,000,000 in 1995. (9) FRANCHISE REVENUES A summary of franchise revenues follows (in thousands):
YEARS ENDED SEPTEMBER 30, ------------------------------- 1996 1995 1994 ------- ------- ------- Franchise royalties........................................... $23,363 $23,978 $23,543 Gain (loss) on sale of franchises, net of reserves............ 1,240 (1,661) 482 Franchise fees................................................ 280 830 760 ------- ------- ------- $24,883 $23,147 $24,785 ======= ======= =======
The Company financed approximately $1,239,000, $1,478,000 and $1,506,000 in 1996, 1995 and 1994, respectively, in notes receivable in connection with the sale of franchises. The Company is reimbursed by franchisees for certain advertising expenditures made on their behalf. The reimbursements amounted to $25,122,000, $25,480,000 and $24,591,000 for 1996, 1995 and 1994, respec- tively, and are netted against advertising expense in the accompanying statement of operations. F-33 149 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The Company's franchise notes receivable are from franchisees throughout the U.S. and are collateralized by inventory, equipment, and leasehold improvements at each location. The notes generally bear interest at the prime rate plus 3% and require monthly payments of principal and interest over ten years. (10) LEASES The Company leases most of its retail stores under noncancellable operating leases with terms ranging from five to twenty years and which may contain renewal options for consecutive five-year terms. Certain of these stores have been sublet to franchisees. In addition, the Company also leases certain of its manufacturing and office facilities and data processing equipment. Net rent expense included in the accompanying consolidated statements of operations is as follows (in thousands):
YEARS ENDED SEPTEMBER 30, -------------------------------- 1996 1995 1994 -------- ------- ------- Base rentals........................................ $ 39,312 $42,135 $43,185 Contingent rentals (based on sales)................. 924 330 35 Sublease rental income.............................. (17,626) (19,620) (20,796) -------- ------- ------- $ 22,610 $22,845 $22,424 ======== ======= =======
Future minimum lease payments and sublease income receipts under noncancellable operating leases as of September 30, 1996 are as follows (in thousands):
PAYMENTS RECEIPTS -------- -------- 1997.......................................................... $ 38,834 $ 15,431 1998.......................................................... 35,245 13,269 1999.......................................................... 30,675 10,841 2000.......................................................... 22,416 8,165 2001.......................................................... 13,288 5,664 Thereafter.................................................... 28,663 7,615 -------- -------- $169,121 $ 60,985 ======== =======
Approximately $1,911,000 and $3,000,000 of these future minimum lease payments are included in accrued store closure costs in the consolidated balance sheet at September 30, 1996 and 1995, respectively. (11) EMPLOYEE BENEFIT PLANS The Company has a contributory profit sharing plan for employees in the U.S. meeting certain service requirements as defined in the plan. The Company's contribution to the plan consists of a minimum matching contribution plus an additional performance contribution. Profit sharing plan expenses, which are included in selling, general and administrative expenses, amounted to $1,224,000, $1,279,000 and $1,010,000 in 1996, 1995 and 1994, respectively. The Company also has retirement plans for employees of foreign subsidiaries. (12) SALE OF FRANCHISE NOTES RECEIVABLE Prior to fiscal year 1994, the Company sold approximately $72,500,000 of franchise notes receivable with limited recourse to a large banking institution for $81,000,000 in cash. The limited recourse provisions require Pearle to reacquire all of the notes under certain circumstances, including failure to maintain properties in good order, failure to deliver a monthly statement, or false or misleading representations. Additionally, under other circumstances, such as default, Pearle is required to repurchase the individual note involved. Such repurchases are limited to 28% of the aggregate purchase price of all notes ($6,460,000 and $8,517,000 F-34 150 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED remaining repurchase exposure at September 30, 1996 and 1995, respectively). The notes are secured by inventory, receivables and fixed assets of the franchised stores. (13) POSTRETIREMENT BENEFIT PLANS Prior to February 1993, the Company and its subsidiaries provided health care and other benefits to substantially all retired employees and covered dependents. Generally, employees who have attained certain age and service requirements were eligible for these benefits. Net postretirement benefit cost, included as a component of selling, general and administration expenses, consisted of the following components:
YEARS ENDED SEPTEMBER 30, -------------------------------- 1996 1995 1994 -------- ------- ------- Interest cost on accumulated postretirement benefit obligation................................................. $ 42,100 $77,400 $76,800 Amortization of unrecognized gain............................ (19,700) -- -- -------- ------- ------- Net postretirement benefit cost.................... $ 22,400 $77,400 $76,800 ======== ======= =======
The actuarial present value of the accumulated postretirement benefit obligation as recognized in the consolidated balance sheets at September 30, 1996 and 1995, respectively, is $589,200 and $978,000, and relates solely to existing retirees. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 7.5% in 1996 and these rates are anticipated to ratably decline to 5% by 2006. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation by approximately $46,600 and net postretirement health care cost by approximately $3,500 as of September 30, 1996. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. (14) COMMITMENTS AND CONTINGENCIES The Company is engaged in various legal proceedings and has certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. Management of the Company, based upon consultation with legal counsel, is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect on the Company's consolidated financial condition, results of operations or liability. The Company has certain commitments to purchase advertising in fiscal year 1997 approximating $11,205,500. (15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, trade and other receivables and payables approximate fair value due to the short maturity of those instruments. Franchise notes receivable and the payable to Parent and affiliated companies bear interest at floating rates based on market rates and are adjusted quarterly; therefore, the carrying value of these instruments approximates fair value. F-35 151 PEARLE, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (16) SELECTED FINANCIAL DATA FOR EUROPEAN OPERATIONS The following summary sets forth selected financial information for the Company's European operations in Netherlands and Belgium included in the Company's consolidated financial statements:
YEARS ENDED SEPTEMBER 30, ------------------------------- 1996 1995 1994 ------- ------- ------- Total revenues................................................ $63,817 $59,841 $48,704 Cost of sales, including buying and occupancy costs........... 35,849 33,372 26,805 Selling, general and administrative expenses.................. 20,177 19,583 17,974 Amortization and impairment of intangible assets.............. 238 236 209 ------- ------- ------- Operating income......................................... 7,553 6,650 3,716 Interest expense (income), net................................ (488) (429) (99) Income tax provision.......................................... 2,510 2,135 1,216 ------- ------- ------- Net income............................................... $ 5,531 $ 4,944 $ 2,599 ======= ======= ======= Total depreciation and amortization........................... $ 3,563 $ 3,373 $ 2,996 Capital expenditures.......................................... 3,193 3,279 2,272 Cash.......................................................... $ 1,380 $ 8,812 $ 4,751 Total current assets.......................................... 19,178 26,048 20,627 Total assets.................................................. 38,274 47,311 40,229 Total current liabilities..................................... 9,107 6,680 6,158 Payable to Company and affiliated companies................... (8,028) (3,985) (1,917) Stockholder's equity.......................................... 34,339 41,049 33,292
F-36 152 =============================================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CON- TAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ----- Available Information................... ii Prospectus Summary...................... 1 Risk Factors............................ 16 The Exchange Offer...................... 22 The Company............................. 32 The Transactions........................ 33 Use of Proceeds......................... 34 Capitalization.......................... 35 Unaudited Pro Forma Condensed Consolidated Financial Data........... 36 Selected Historical Financial and Other Data.................................. 44 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 48 Business................................ 55 Management.............................. 73 Principal Stockholders.................. 82 Description of Other Indebtedness....... 85 Description of the Notes................ 87 Plan of Distribution.................... 110 Legal Matters........................... 111 Independent Public Accountants.......... 111 Index to Financial Statements........... F-1
Until , 1997, (90 days after the date of this Prospectus), all dealers effecting transactions in the Exchange Notes, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when selling Exchange Notes received in exchange for Original Notes held for their own account. See "Plan of Distribution." =============================================================================== =============================================================================== $150,000,000 [ Cole LOGO ] COLE NATIONAL GROUP, INC. OFFER TO EXCHANGE ITS 9 7/8% SENIOR SUBORDINATED NOTES DUE 2006 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2006 ------------------- PROSPECTUS ------------------- DECEMBER , 1996 =============================================================================== 153 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a list of the estimated expenses to be incurred by the Company in connection with the issuance and distribution of the Shares being registered hereby. Securities and Exchange Commission registration fee............................... $ 45,455 Printing costs.................................................................... 50,000 Accounting fees and expenses...................................................... 30,000 Legal fees and expenses (not including Blue Sky).................................. 50,000 Blue Sky fees and expenses........................................................ 10,000 Miscellaneous expenses............................................................ 14,545 -------- Total........................................................................... $200,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article Seventh of the Company's Certificate provides that the Company will indemnify its officers, directors and each person who is or was serving or who had agreed to serve at the request of the Board of Directors or an officer of the Company as an employee or agent of the Company or as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise to the full extent permitted by the General Corporation Law of the State of Delaware (the "DGCL") or any other applicable laws as from time to time may be in effect and that the Company may enter into agreements which provide for indemnification greater or different from that provided in the Certificate. In addition, the Company has provided in Article Sixth of its Certificate that no director will be personally liable to the Company or its stockholders for or with respect to any acts or omissions in the performance of his or her duties as a director, to the full extent permitted by the DGCL or any other applicable laws as from time to time may be in effect. The Certificate further provides that any repeal or modification of Article Seventh or Article Sixth will not adversely affect the right or protection existing under such provision prior to such repeal or modification. Subsection (a) of the Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under standards similar to those set forth in the paragraph above, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. II-1 154 Section 145 further provides that, to the extent that a director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, he will be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) will be made by a corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of Section 145; that expenses incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount unless it is ultimately determined that he is not entitled to be indemnified by the corporation; that indemnification provided for by Section 145 will not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that a corporation is empowered to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him and incurred by him in such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under Section 145. The Parent has entered into indemnity agreements (the "Indemnity Agreements") with the current Directors and executive officers of the Company and expects to enter into similar agreements with any Director or those executive officers designated by the Board of Directors of the Company elected or appointed in the future at the time of their election or appointment. Pursuant to the Indemnity Agreements, the Parent will indemnify a Director or officer of the Company (the "Indemnitee") if the Indemnitee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the Indemnitee is or was a Director or officer of the Company, or is or was serving at the request of the Company in certain capacities with another entity, against any and all costs, charges and expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such proceeding. Indemnity is available to the Indemnitee unless it proved by clear and convincing evidence that the Indemnitee's action or failure to act was not in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. The Indemnity Agreements mandate advancement of expenses to the Indemnitee if the Indemnitee provides the Parent with a written promise that (i) he has reasonably incurred or will reasonably incur actual expenses in defending an actual civil, criminal, administrative, or investigative action, suit, proceeding or claim and (ii) he will repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Parent. In addition, the Indemnity Agreements provide various procedures and presumptions in favor of the Indemnitee's right to receive indemnification under the Indemnity Agreement. Under the Parent's Director and Officer Liability Insurance Policy, each director and certain officers of the Company are insured against certain liabilities which might arise in connection with their respective positions with the Company. II-2 155 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. No securities of the Company which were not registered under the Securities Act have been issued or sold by the Company within the past three years, except as follows: On July 19, 1993, the Parent subscribed for and purchased 1,000 shares of the Company's Common Stock, par value $.01 per share, at a price of $1.00 per share (an aggregate of $1,000), in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act. On March 17, 1995, the Parent purchased 100 shares of the Company's Common Stock, par value $.01 per share, at a price of $62,000 per share (an aggregate of $6,200,000), in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act. On November 13, 1996, the Company sold the Original Notes in an aggregate principal amount of $150,000,000 to CIBC Wood Gundy Securities Corp., CS First Boston Corporation, NationsBanc Capital Markets, Inc. and Smith Barney Inc. The issuance of the Original Notes was exempt from registration under the Securities Act pursuant to Section 4(2). In connection therewith, the Company has agreed to file this registration statement of which this Prospectus is a part. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. The following Exhibits are filed herewith and made a part hereof:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ---------------------------------------------------------------------------------- 2.1 Stock Purchase Agreement, dated as of September 24, 1996, among The Pillsbury Company, Pearle, Inc. and Cole National Corporation, incorporated by reference to Exhibit 2.1 of Cole National Corporation's Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 2.2 Purchase Agreement, dated as of November 15, 1996, among Cole National Corporation and the Company, incorporated by reference to Exhibit 2.3 of Cole National Corporation's Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 3.1(i) Certificate of Incorporation of the Company, incorporated by reference to Exhibit 3.1(i) to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 3.2(ii) By-Laws of the Company, incorporated by reference to Exhibit 3.2(ii) to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 4.1 Indenture dated as of September 30, 1993 between the Company and Norwest Bank Minnesota, N.A., as trustee, relating to the 11 1/4% Senior Notes due 2001 (the form of which Senior Note is included in such Indenture), incorporated by reference to Exhibit 4.1 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 4.2 The Company by this filing agrees, upon request, to file with the Commission the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 4.3 Indenture dated November 15, 1996, between the Company 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 Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814).
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ---------------------------------------------------------------------------------- 4.4 Registration Rights Agreement dated November 15, 1996, by and among the Company and CIBC Wood Gundy Securities Corp., CS First Boston Corporation, NationsBanc Capital Markets, Inc. and Smith Barney Inc., incorporated by reference to Exhibit 4.2 of Cole National Corporation's Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 5.1* Opinion of Jones, Day, Reavis & Pogue as to the validity of the securities being offered. 10.1 Employment Agreement entered into as of April 1, 1996 by and among Cole National Corporation, the Company, Cole Gift Centers, Inc., Cole Vision Corporation, Things Remembered, Inc. and Jeffrey A. Cole, incorporated by reference to Exhibit 10.1 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 10.2 Employment Agreement entered into as of April 1, 1996 by and among Cole National Corporation, the Company, Cole Gift Centers, Inc., Cole Vision Corporation, Things Remembered, Inc. and Brian B. Smith, incorporated by reference to Exhibit 10.2 to Cole National Corporation's Annual Report on Form 10-K for the period 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 the Company'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 the Company'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 the Company'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 the Company'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 Nonqualified Stock Option Plan for Nonemployee Directors, incorporated by reference to Exhibit 10.45 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.9 Form of Nonqualified Stock Option Agreement for Nonemployee Directors, incorporated by reference to Exhibit 10.9 to Cole National Corporation's Annual Report on Form 10-K for the period 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 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 10.11 Management Bonus Programs, incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342).
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ---------------------------------------------------------------------------------- 10.12 Management Bonus Plan, incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1 (Registration No. 33-89996). 10.13 Executive Life Insurance Plan of Cole National Corporation, incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.14 Medical Expense Reimbursement Plan of Cole National Corporation effective as of February 1, 1992, incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.15 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). 10.16 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). 10.17 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 the Company'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 the Company'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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.20 Lease Agreement (Salt Lake) dated as of November 1, 1996 by and between Gibbons Realty and Cole Vision Corporation, incorporated by reference to Exhibit 10.01 to Cole National Corporation's Report on Form 10-Q for the period ended November 2, 1996 (File No. 1-12814). 10.21 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.22 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 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 10.23 Form of Indemnification Agreement for Directors of Cole National Corporation, incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.24 Form of Indemnification Agreement for Officers of Cole National Corporation, incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.25 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342).
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ---------------------------------------------------------------------------------- 10.26 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 the Company's Registration Statement on Form S-1 (Registration No. 33- 66342). 10.27 Form of License Agreement (Optical), incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.28 Form of License/Lease Agreement (Optical), incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.29 License Agreement (Key Shops) dated as of January 15, 1989, between Sears, Roebuck and Co. and Cole Key Corporation, as amended, incorporated by reference to Exhibit 10.46 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.30 License Agreement (Cards and Gifts) dated as of January 1, 1990 between Sears, Roebuck and Co. and Cole Key Corporation, as amended, incorporated by reference to Exhibit 10.47 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.31 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.32 Assignment and Assumption Agreement dated as of September 30, 1993 between Cole National Corporation and the Company, incorporated by reference to Exhibit 10.24 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 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 Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.34 CNG Guarantee and Cash Collateral Agreement, dated as of November 15, 1996, by the Company and Cole National Corporation, incorporated by reference to Exhibit 99.3 of Cole National Corporation's Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.35 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 Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 12.1* Statements regarding computation of ratios. 21.1* List of Subsidiaries. 23.1* Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 5.1). 23.2* Consent of Arthur Andersen LLP. 23.3* Consent of KPMG Peat Marwick LLP. 24.1* Powers of Attorney. 25.1* Statement of Eligibility of Trustee, Norwest Bank Minnesota, National Association, on Form T-1.
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ---------------------------------------------------------------------------------- 99.1* Form of Letter of Transmittal. 99.2* Form of Notice of Guaranteed Delivery.
- --------------- * Filed herewith. (b) Financial Statement Schedules
SCHEDULE NUMBER DESCRIPTION OF DOCUMENT - --------- -------------------------------------------------------------------------------- I Condensed Financial Information of Cole National Group, Inc, incorporated by reference to Schedule I of Cole National Group, Inc.'s Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 33-66342).
All other financial statement schedules are omitted because they are either not applicable or the required information is included in the financial statements or notes thereto appearing elsewhere in this Registration Statement. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in said Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this registration statement in reliance upon Rule 430A and contained in form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) II-7 160 and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-8 161 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on December 19, 1996. COLE NATIONAL GROUP, INC. By: /s/ Wayne L. Mosley ------------------------------- Wayne L. Mosley Vice President and Controller PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ------------------------------ ----------------------------------------- ------------------- /s/ Jeffrey A. Cole Chairman, Chief Executive Officer, December 19, 1996 - ------------------------------ Chief Financial Officer and Director Jeffey A. Cole (Principal Executive Officer and Principal Financial Officer) /s/ Brian B. Smith President, Chief Operating December 19, 1996 - ------------------------------ Officer and Director Brian B. Smith * Vice President, Controller, December 19, 1996 - ------------------------------ Assistant Secretary and Wayne L. Mosley Assistant Treasurer (Principal Accounting Officer) /s/ Timothy F. Finley Director December 19, 1996 - ------------------------------ Timothy F. Finley /s/ Irwin N. Gold Director December 19, 1996 - ------------------------------ Irwin N. Gold /s/ Peter V. Handal Director December 19, 1996 - ------------------------------ Peter V. Handal /s/ Charles A. Ratner Director December 19, 1996 - ------------------------------ Charles A. Ratner - --------------- * The undersigned, pursuant to a Power of Attorney executed by each of the Directors and officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this Registration Statement on behalf of each of the persons noted above, in the capacities indicated.
By: /s/ Wayne L. Mosley December 19, 1996 --------------------------------- Wayne L. Mosley, Attorney-in-Fact
II-9 162 EXHIBIT INDEX
EXHIBITS DESCRIPTION - -------- --------------------------------------------------------------------------------- 2.1 Stock Purchase Agreement, dated as of September 24, 1996, among The Pillsbury Company, Pearle, Inc. and Cole National Corporation, incorporated by reference to Exhibit 2.1 of Cole National Corporation's Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 2.2 Purchase Agreement, dated as of November 15, 1996, among Cole National Corporation and the Company, incorporated by reference to Exhibit 2.3 of Cole National Corporation's Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1- 12814). 3.1(i) Certificate of Incorporation of the Company, incorporated by reference to Exhibit 3.1(i) to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 3.2(ii) By-Laws of the Company, incorporated by reference to Exhibit 3.2(ii) to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 4.1 Indenture dated as of September 30, 1993 between the Company and Norwest Bank Minnesota, N.A., as trustee, relating to the 11 1/4% Senior Notes due 2001 (the form of which Senior Note is included in such Indenture), incorporated by reference to Exhibit 4.1 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 4.2 The Company by this filing agrees, upon request, to file with the Commission the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 4.3 Indenture dated November 15, 1996, between the Company 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 Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 4.4 Registration Rights Agreement dated November 15, 1996, by and among the Company and CIBC Wood Gundy Securities Corp., CS First Boston Corporation, NationsBanc Capital Markets, Inc. and Smith Barney Inc., incorporated by reference to Exhibit 4.2 of Cole National Corporation's Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 5.1* Opinion of Jones, Day, Reavis & Pogue as to the validity of the securities being offered. 10.1 Employment Agreement entered into as of April 1, 1996 by and among Cole National Corporation, the Company, Cole Gift Centers, Inc., Cole Vision Corporation, Things Remembered, Inc. and Jeffrey A. Cole, incorporated by reference to Exhibit 10.1 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 10.2 Employment Agreement entered into as of April 1, 1996 by and among Cole National Corporation, the Company, Cole Gift Centers, Inc., Cole Vision Corporation, Things Remembered, Inc. and Brian B. Smith, incorporated by reference to Exhibit 10.2 to Cole National Corporation's Annual Report on Form 10-K for the period 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342).
163
EXHIBITS DESCRIPTION - -------- --------------------------------------------------------------------------------- 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 the Company'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 the Company'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 the Company'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 Nonqualified Stock Option Plan for Nonemployee Directors, incorporated by reference to Exhibit 10.45 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.9 Form of Nonqualified Stock Option Agreement for Nonemployee Directors, incorporated by reference to Exhibit 10.9 to Cole National Corporation's Annual Report on Form 10-K for the period 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 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 10.11 Management Bonus Programs, incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.12 Management Bonus Plan, incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1 (Registration No. 33-89996). 10.13 Executive Life Insurance Plan of Cole National Corporation, incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.14 Medical Expense Reimbursement Plan of Cole National Corporation effective as of February 1, 1992, incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.15 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). 10.16 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). 10.17 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 the Company'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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342).
164
EXHIBITS DESCRIPTION - -------- --------------------------------------------------------------------------------- 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.20 Lease Agreement (Salt Lake) dated as of November 1, 1996 by and between Gibbons Realty and Cole Vision Corporation, incorporated by reference to Exhibit 10.01 to Cole National Corporation's Report on Form 10-Q for the period ended November 2, 1996 (File No. 1-12814). 10.21 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.22 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 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 1996 (File No. 1-12814). 10.23 Form of Indemnification Agreement for Directors of Cole National Corporation, incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.24 Form of Indemnification Agreement for Officers of Cole National Corporation, incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.25 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.26 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.27 Form of License Agreement (Optical), incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.28 Form of License/Lease Agreement (Optical), incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-66342). 10.29 License Agreement (Key Shops) dated as of January 15, 1989, between Sears, Roebuck and Co. and Cole Key Corporation, as amended, incorporated by reference to Exhibit 10.46 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.30 License Agreement (Cards and Gifts) dated as of January 1, 1990 between Sears, Roebuck and Co. and Cole Key Corporation, as amended, incorporated by reference to Exhibit 10.47 to Cole National Corporation's Registration Statement on Form S-1 (Registration No. 33-74228). 10.31 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 the Company's Registration Statement on Form S-1 (Registration No. 33-66342).
165
EXHIBITS DESCRIPTION - -------- --------------------------------------------------------------------------------- 10.32 Assignment and Assumption Agreement dated as of September 30, 1993 between Cole National Corporation and the Company, incorporated by reference to Exhibit 10.24 to Cole National Corporation's Annual Report on Form 10-K for the period ended February 3, 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 Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.34 CNG Guarantee and Cash Collateral Agreement, dated as of November 15, 1996, by the Company and Cole National Corporation, incorporated by reference to Exhibit 99.3 of Cole National Corporation's Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 10.35 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 Current Report on Form 8-K, filed with the Commission on December 2, 1996 (File No. 1-12814). 12.1* Statements regarding computation of ratios. 21.1* List of Subsidiaries. 23.1* Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 5.1). 23.2* Consent of Arthur Andersen LLP. 23.3* Consent of KPMG Peat Marwick LLP. 24.1* Powers of Attorney. 25.1* Statement of Eligibility of Trustee, Norwest Bank Minnesota, National Association, on Form T-1. 99.1* Form of Letter of Transmittal. 99.2* Form of Notice of Guaranteed Delivery. - --------------- * Filed herewith.
EX-5.1 2 EXHIBIT 5.1 1 [Jones, Day, Reavis & Pogue Letterhead] Exhibit 5.1 December 18, 1996 Cole National Group, Inc. 5915 Landerbrook Drive Mayfield Heights, Ohio 44124 Re: 9 7/8% Senior Subordinated Notes Due 2006 of Cole National Group, Inc. -------------------------------------------- Gentlemen: We are acting as counsel for Cole National Group, Inc., a Delaware corporation (the "Company"), in connection with the proposed issuance of $150,000,000 aggregate amount of the Company's 9 7/8% Senior Subordinated Notes Due 2006 (the "Notes") to be issued pursuant to an Indenture dated as of November 15, 1996 (the "Indenture") between the Company and Norwest Bank Minnesota, National Association, as Trustee (the "Trustee") and a Registration Rights Agreement dated as of November 15, 1996 by and among the Company and CIBC Wood Gundy Securities Corp., CS First Boston Corporation, NationsBanc Capital Markets, Inc. and Smith Barney Inc. (the "Registration Rights Agreement"). We have examined such documents, records and matters of law as we have deemed necessary for purposes of this opinion, and based thereupon, we are of the opinion that the Notes have been duly authorized, and when duly executed by authorized officers of the Company, authenticated by the Trustee, and issued in accordance with the Indenture and the Registration Rights Agreement will be binding obligations of the Company, entitled to the benefits of the Indenture. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement on Form S-1 filed by the Company to effect registration of the Notes under the Securities Act of 1933 and to the reference to us under the caption "Legal Matters" in the Prospectus constituting a part of such Registration Statement. Very truly yours, /s/Jones, Day, Reavis & Pogue EX-12.1 3 EXHIBIT 12.1 1 EXHIBIT 12.1 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands)
Fiscal Year Ended 39 Weeks Ended --------------------------------------------------------------- ---------------------- Feb. 1, Jan. 30, Jan. 29, Jan. 28, Feb. 3, Oct. 28, Nov. 2, 1992 1993 1994 1995 1996 1995 1996 --------------------------------------------------------------- ---------------------- Pre-tax income (loss) from operations $ 284 $13,127 $19,620 $21,141 $24,549 $ 7,060 $12,437 Fixed charges: Interest expenses 45,064 18,897 18,029 22,266 22,143 16,403 15,943 Portion of rents representative of interest factor (a) 8,225 8,668 8,914 9,516 10,396 7,615 8,466 ---------------------------------------------------------- -------------------- Total fixed charges 53,289 27,565 26,943 31,782 32,539 24,018 24,409 ---------------------------------------------------------- -------------------- Earnings before income taxes and fixed charges $53,573 $40,692 $46,563 $52,923 $57,088 $31,078 $36,846 Ratio of earnings to fixed charges 1.01 1.48 1.73 1.67 1.75 1.29 1.51 ========================================================== ==================== (a) One-third of rent included in the calculation is considered an appropriate portion of rentals representative of the interest factor. Rentals include leased premises for laboratories, distribution and retailing operations and certain leased equipment, net of sublease rental income.
2 COLE NATIONAL GROUP, INC. AND SUBSIDIARIES COMPUTATION OF PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands)
39 Weeks Ended November 2, 1996 Fiscal Year Ended February 3, 1996 ------------------------------------------- ------------------------------------------ Historical Historical ------------------------------- ------------------------------ Company Pearle Combined Pro forma Company Pearle Combined Pro forma ------- ------ -------- --------- ------- ------ -------- --------- Pre-tax income (loss) from operations $12,437 ($107,317) ($94,880) $16,316 $24,549 ($21,597) $2,952 $6,378 Fixed charges: Interest expense 15,943 12,258 28,201 27,131 22,143 16,354 38,497 36,830 Portion of rents representative of interest factor (a) 8,466 4,386 12,852 12,852 10,396 6,110 16,506 16,506 ------- --------- -------- ------- ------- -------- ------- ------- Total fixed charges 24,409 16,644 41,053 39,983 32,539 22,464 55,003 53,336 ------- --------- -------- ------- ------- -------- ------- ------- Earnings before income taxes and fixed charges $36,846 ($90,673) ($53,827) $56,299 $57,088 $867 $57,955 $59,714 Ration of earnings to fixed charges 1.51 (b) (b) 1.41 1.75 (b) 1.05 1.12 ======= ========= ======== ======= ======= ======== ======= ======= (a) One-third of rent included in the calculation is considered an appropriate portion of rentals representative of the interest factor. Rentals include leased premises for laboratories, distribution and retailing operations and certain leased equipment, net of sublease rental income. (b) Pearle's earnings before income taxes and fixed charges were insufficient to cover fixed charges by $107.3 and $21.6 million for the periods included in the periods ended November 2, 1996 and February 3, 1996 above, respectively. As a result, combined earnings before income taxes and fixed charges would have been insufficient to cover fixed charges by $94.9 million in the period ended November 2, 1996.
EX-21.1 4 EXHIBIT 21.1 1 Exhibit 21.1 LIST OF SUBSIDIARIES OF COLE NATIONAL GROUP, INC.
State of Names Subsidiaries Corporation Name Incorporation Do Business Under - ---------------- ------------- ------------------ COLE VISION - ----------- Bay Cities Optical Company California Montgomery Ward Vision Center Cole Lens Supply, Inc. Delaware Contact Lens Supply Contact Lens Supply Co. Cole Vision Corporation Delaware Sears Optical Elder-Beerman Optical Montgomery Ward Vision Center BJ's Optical Department Phar-Mor Optical Target Optical Optical Factory Outlet Cole Vision Canada, Inc. New Brunswick, Sears Optical Canada Vision Club Cole Vision Services, Inc. Delaware Western States Optical, Inc. Washington Sears Optical COLE GIFT - --------- Cole Gift Centers, Inc. Delaware Keys N'Engraved Gifts The Keyshop The Keyshop (at Sears, Venture and Montgomery Ward) The Gift Center The Gift Center at Sears Personally Yours Keys N'Things Things Remembered, Inc. Delaware Things Remembered Things Remembered-Engraved Gifts Things Engraved HQ Gifts Gifts Remembered OTHER - ----- Cole Management Services, Inc. Delaware PEARLE - ------ Pearle, Inc. Delaware Pearle Service Corporation Delaware Pearle VisionCare, Inc. California Pearle Vision (HMO) Pearle Vision Center of Commonwealth Pearle Vision Center Puerto Rico, Inc. of Puerto Rico Pearle Vision Express Pearle Express Pearle Vision Center Canada Limited Ontario, Canada Pearle Vision Center Pearle Vision, Inc. Delaware Pearle Vision Pearle Vision Center Pearle Vision Express Pearle Eyelab Express Pearle Eye-Tech Express Pearle Express Pearle Vision Managed Care HMO of Texas, Inc. Texas
EX-23.2 5 EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP Arthur Andersen LLP Cleveland, Ohio, December 17, 1996 EX-23.3 6 EXHIBIT 23.3 1 Exhibit 23.3 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Pearle, Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. The report of KPMG Peat Marwick LLP refers to a change in accounting for income taxes in 1994. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Dallas, Texas December 17, 1996 EX-24.1 7 EXHIBIT 24.1 1 Exhibit 24.1 DIRECTOR AND/OR OFFICER OF COLE NATIONAL GROUP, INC. REGISTRATION STATEMENT ON FORM S-1 POWER OF ATTORNEY The undersigned director and/or officer of Cole National Group, Inc., a Delaware corporation (the "Corporation"), hereby constitutes and appoints Joseph Gaglioti and Wayne L. Mosley, or any of them, with full power of substitution and resubstitution, as attorneys or attorney of the undersigned, for him or her and in his or her name, place and stead, to sign and file under the Securities Act of 1933 one or more Registration Statement(s) on Form S-1 relating to the registration for sale of the Corporation's 9 7/8% Senior Subordinated Notes due 2006, and any and all amendments, supplements and exhibits thereto, including pre-effective and post-effective amendments or supplements, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such registration(s), with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the act of said attorneys and any of them and any such substitute. EXECUTED as of the 5th day of December, 1996. /S/ Jeffrey A. Cole Chairman, Chief Executive Officer, - ---------------------- -------------------------------------- Signature Chief Financial Officer and Director -------------------------------------- Title Jeffrey A. Cole - ---------------------- Name 2 DIRECTOR AND/OR OFFICER OF COLE NATIONAL GROUP, INC. REGISTRATION STATEMENT ON FORM S-1 POWER OF ATTORNEY The undersigned director and/or officer of Cole National Group, Inc., a Delaware corporation (the "Corporation"), hereby constitutes and appoints Jeffrey A. Cole, Joseph Gaglioti and Wayne L. Mosley, or any of them, with full power of substitution and resubstitution, as attorneys or attorney of the undersigned, for him or her and in his or her name, place and stead, to sign and file under the Securities Act of 1933 one or more Registration Statement(s) on Form S-1 relating to the registration for sale of the Corporation's 9 7/8% Senior Subordinated Notes due 2006, and any and all amendments, supplements and exhibits thereto, including pre-effective and post-effective amendments or supplements, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such registration(s), with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the act of said attorneys and any of them and any such substitute. EXECUTED as of the 5th day of December, 1996. /S/ Timothy F. Finley Director - -------------------------------- ------------------------------- Signature Title Timothy F. Finley - ------------------------------- Name 3 DIRECTOR AND/OR OFFICER OF COLE NATIONAL GROUP, INC. REGISTRATION STATEMENT ON FORM S-1 POWER OF ATTORNEY The undersigned director and/or officer of Cole National Group, Inc., a Delaware corporation (the "Corporation"), hereby constitutes and appoints Jeffrey A. Cole, Joseph Gaglioti and Wayne L. Mosley, or any of them, with full power of substitution and resubstitution, as attorneys or attorney of the undersigned, for him or her and in his or her name, place and stead, to sign and file under the Securities Act of 1933 one or more Registration Statement(s) on Form S-1 relating to the registration for sale of the Corporation's 9 7/8% Senior Subordinated Notes due 2006, and any and all amendments, supplements and exhibits thereto, including pre-effective and post-effective amendments or supplements, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such registration(s), with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the act of said attorneys and any of them and any such substitute. EXECUTED as of the 5th day of December, 1996. /S/ Irwin N. Gold Director - -------------------------------- ----------------------------- Signature Title Irwin N. Gold - ------------------------------- Name 4 DIRECTOR AND/OR OFFICER OF COLE NATIONAL GROUP, INC. REGISTRATION STATEMENT ON FORM S-1 POWER OF ATTORNEY The undersigned director and/or officer of Cole National Group, Inc., a Delaware corporation (the "Corporation"), hereby constitutes and appoints Jeffrey A. Cole, Joseph Gaglioti and Wayne L. Mosley, or any of them, with full power of substitution and resubstitution, as attorneys or attorney of the undersigned, for him or her and in his or her name, place and stead, to sign and file under the Securities Act of 1933 one or more Registration Statement(s) on Form S-l relating to the registration for sale of the Corporation's 9 7/8% Senior Subordinated Notes due 2006, and any and all amendments, supplements and exhibits thereto, including pre-effective and post-effective amendments or supplements, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such registration(s), with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the act of said attorneys and any of them and any such substitute. EXECUTED as of the 5th day of December, 1996. /S/ Peter V. Handal Director - ------------------------------ ------------------------- Signature Title Peter V. Handal - ------------------------------ Name 5 DIRECTOR AND/OR OFFICER OF COLE NATIONAL GROUP, INC. REGISTRATION STATEMENT ON FORM S-1 POWER OF ATTORNEY The undersigned director and/or officer of Cole National Group, Inc., a Delaware corporation (the "Corporation"), hereby constitutes and appoints Jeffrey A. Cole, Joseph Gaglioti and Wayne L. Mosley, or any of them, with full power of substitution and resubstitution, as attorneys or attorney of the undersigned, for him or her and in his or her name, place and stead, to sign and file under the Securities Act of 1933 one or more Registration Statement(s) on Form S-1 relating to the registration for sale of the Corporation's 9 7/8% Senior Subordinated Notes due 2006, and any and all amendments, supplements and exhibits thereto, including pre-effective and post-effective amendments or supplements, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such registration(s), with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the act of said attorneys and any of them and any such substitute. EXECUTED as of the 5th day of December, 1996. /S/ Charles A. Ratner Director - ---------------------------------- ------------------------------- Signature Title Charles A. Ratner - ---------------------------------- Name 6 DIRECTOR AND/OR OFFICER OF COLE NATIONAL GROUP, INC. REGISTRATION STATEMENT ON FORM S-1 POWER OF ATTORNEY The undersigned director and/or officer of Cole National Group, Inc., a Delaware corporation (the "Corporation"), hereby constitutes and appoints Jeffrey A. Cole, Joseph Gaglioti and Wayne L. Mosley, or any of them, with full power of substitution and resubstitution, as attorneys or attorney of the undersigned, for him or her and in his or her name, place and stead, to sign and file under the Securities Act of 1933 one or more Registration Statement(s) on Form S-l relating to the registration for sale of the Corporation's 9 7/8% Senior Subordinated Notes due 2006, and any and all amendments, supplements and exhibits thereto, including pre-effective and post-effective amendments or supplements, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such registration(s), with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the act of said attorneys and any of them and any such substitute. EXECUTED as of the 5th day of December, 1996. /S/ Brian B. Smith President, Chief Operating Officer - ---------------------------- ------------------------------------ Signature and Director ------------ Title Brian B. Smith - ---------------------------- Name 7 DIRECTOR AND/OR OFFICER OF COLE NATIONAL GROUP, INC. REGISTRATION STATEMENT ON FORM S-1 POWER OF ATTORNEY The undersigned director and/or officer of Cole National Group, Inc., a Delaware corporation (the "Corporation"), hereby constitutes and appoints Jeffrey A. Cole and Joseph Gaglioti, or any of them, with full power of substitution and resubstitution, as attorneys or attorney of the undersigned, for him or her and in his or her name, place and stead, to sign and file under the Securities Act of 1933 one or more Registration Statement(s) on Form S-l relating to the registration for sale of the Corporation's 9 7/8% Senior Subordinated Notes due 2006, and any and all amendments, supplements and exhibits thereto, including pre-effective and post-effective amendments or supplements, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such registration(s), with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the act of said attorneys and any of them and any such substitute. EXECUTED as of the 5th day of December, 1996. /S/ Wayne L. Mosley Vice President, Controller, Assistant - --------------------------- ----------------------------------------- Signature Secretary and Assistant Treasurer ----------------------------------------- Title Wayne L. Mosley - -------------------------- Name EX-25.1 8 EXHIBIT 25.1 1 Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE -------------- [ ] CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b) (2) NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) A National Banking Association 41-1592157 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national Identification No.) bank) Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479 (Address of principal executive offices) (Zip code) -------------- COLE NATIONAL GROUP, INC. (Exact name of obligor as specified in its charter) Delaware 34-1744334 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5915 Landerbrook Drive Mayfield Heights, Ohio 44124 (Address of principal executive offices) (Zip code) -------------- 9-7/8% Senior Subordinated Notes Due 2006 (Title of the indenture securities) 2 Item 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Treasury Department Washington, D.C. Federal Deposit Insurance Corporation Washington, D.C. The Board of Governors of the Federal Reserve System Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. Item 2. AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the trustee, describe each such affiliation. None with respect to the trustee. No responses are included for Items 3-14 of this Form T-1 because the obligor is not in default as provided under Item 13. Item 15. Not applicable. Item 16. LIST OF EXHIBITS. List below all exhibits filed as a part of this Statement of Eligibility. Norwest Bank incorporates by reference into this Form T-1 the exhibits attached hereto. Exhibit 1. a. A copy of Articles of Association of the trustee now in effect.* b. A copy of the certificate dated May 10, 1983 of name change from Northwestern National Bank Minneapolis to Norwest Bank Minneapolis, National Association.* c. A copy of the certificate dated January 11, 1988, of name change from Norwest Bank Minneapolis, National Association to Norwest Bank Minnesota, National Association.* Exhibit 2. a. A copy of the certificate of authority of the trustee to commence business issued June 28, 1872, by the Comptroller of the Currency to The Northwestern National Bank of Minneapolis.* b. A copy of the certificate of the Comptroller of the Currency dated January 2, 1934, approving the consolidation of the Northwestern National Bank of Minneapolis and the Minnesota Loan and Trust Company of Minneapolis.* 3 c. A copy of the certificate of the Acting Comptroller of the Currency dated January 12, 1943, as to change of corporate title of Northwestern National Bank and Trust Company of Minneapolis to Northwestern National Bank of Minneapolis.* d. A copy of the certificate of the Comptroller of the Currency dated May 1, 1983, authorizing Norwest Bank Minneapolis, National Association, to act as fiduciary.* Exhibit 3. A copy of the authorization of the trustee to exercise corporate trust powers issued January 2, 1934, by the Federal Reserve Board.* Exhibit 4. Copy of By-laws of the trustee as now in effect.* Exhibit 5. Not applicable. Exhibit 6. The consent of the trustee required by Section 321(b) of the Act. Exhibit 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. Exhibit 8. Not applicable. Exhibit 9. Not applicable. * Incorporated by reference to the exhibit of the same number filed with the registration statement number 33-66026. 4 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Norwest Bank Minnesota, National Association, a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Minneapolis and State of Minnesota on the 4th day of December, 1996. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION /s/ Raymond S. Haverstock ------------------------- Raymond S. Haverstock Vice President 5 EXHIBIT 6 December 4, 1996 Securities and Exchange Commission Washington, D.C. 20549 Gentlemen: In accordance with Section 321(b) of the Trust Indenture Act of 1939, as amended, the undersigned hereby consents that reports of examination of the undersigned made by Federal or State authorities authorized to make such examination may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Very truly yours, NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION Raymond S. Haverstock Assistant Vice President 6 1 Board of Governors of the Federal Reserve System OMB Number: 7100-0036 Federal Deposit Insurance Corporation OMB Number: 3064-0052 Office of the Comptroller of the Currency OMB Number: 1557-0081 Federal Financial Expires March 31, 1999 Institutions Examination Council - -------------------------------------------------------------------------------- [logo] Please refer to page i, Table of Contents, for the required disclosure of estimated burden. - -------------------------------------------------------------------------------- CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC AND FOREIGN OFFICES-FFIEC 031 REPORT AT THE CLOSE OF BUSINESS SEPTEMBER 30, 1996 (960930) ---------- (RCRI 9999) This report is required by law: 12 U.S.C. Section 324 (State member banks); 12 U.S.C. Section 1817 (State nonmember banks); and 12 U.S.C. Section 161 (National banks). This report form is to be filed by banks with branches and consolidated subsidiaries in U.S. territories and possessions, Edge or Agreement subsidiaries, foreign branches, consolidated foreign subsidiaries, or International Banking Facilities. - -------------------------------------------------------------------------------- NOTE: The Reports of Condition and Income must be signed by an authorized officer and the Report of Condition must be attested to by not less than two directors (trustees) for State nonmember banks and three directors for State member and National banks. I, Mark P. Wagener, Director of Bank & Service Accounting Name and Title of Officer Authorized to Sign Report of the named bank do hereby declare that these Reports of Condition and Income (including the supporting schedules) have been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and are true to the best of my knowledge and belief. /s/ Mark P. Wagener - ----------------------------------------------- Signature of Officer Authorized to Sign Report 10/29/96 - ----------------------------------------------- Date of Signature For Banks Submitting Hard Copy Report Forms: State Member Banks: Return the original and one copy to the appropriate Federal Reserve District Bank. State Nonmember Banks: Return the original only in the special return address envelope provided. If express mail is used in lieu of the special return address envelope, return the original only to the FDIC, c/o Quality Data Systems, 2127 Espey Court, Suite 204, Crofton, MD 21114. The Reports of Condition and Income are to be prepared in accordance with Federal regulatory authority instructions. NOTE: These instructions may in some cases differ from generally accepted accounting principles. We, the undersigned directors (trustees), attest to the correctness of this Report of Condition (including the supporting schedules) and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with instructions issued by the appropriate Federal regulatory authority and is true and correct. /s/ James R. Campbell - ------------------------------------------------ Director (Trustee) /s/ William H. Queenan - ------------------------------------------------ Director (Trustee) /s/Scott A. Kisting - ------------------------------------------------ Director (Trustee) National Banks: Return the original only in the special return address envelope provided. If express mail is used in lieu of the special return address envelope, return the original only to the FDIC, c/o Quality Data Systems, 2127 Espey Court, Suite 204, Crofton, MD 21114. - -------------------------------------------------------------------------------- FDIC Certificate Number _____________ (RCRI 9050) [Call No. 197 31 09-30-96] STBK: 27-4095 00017 ST CERT: 27-05208 NORWEST BANK MINNESOTA, NATIONAL ASSN. SIXTH STREET AND MARQUETTE AVENUE MINNEAPOLIS, MN 55479-0016 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of tne Currency 7 FFIEC 031 Page i 2 Consolidated Reports of Condition and Income for A Bank With Domestic and Foreign Offices - -------------------------------------------------------------------------------- Table of Contents Signature Page Cover Report of Income Schedule RI-Income Statement .....................RI-1, 2, 3 Schedule RI-A--Changes in Equity Capital ...............RI-4 Schedule RI-B--Charge-offs and Recoveries and Changes in Allowance for Loan and Lease Losses ......................................RI-4, 5 Schedule RI-C--Applicable Income Taxes by Taxing Authority ...............................RI-5 Schedule RI-D--Income from International Operations .......................RI-6 Schedule RI-E--Explanations .........................RI-7, 8
Disclosure of Estimated Burden The estimated average burden associated with this information collection is 32.2 hours per respondent and is estimated to vary from l5 to 230 hours per response, depending on individual circumstances. Burden estimates include the time for reviewing instructions, gathering and maintaining data in the required form, and completing the information collection, but exclude the time for compiling and maintaining business records in the normal course of a respondent's activities. Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, D.C. 20503, and to one of the following: Secretary Board of Governors of the Federal Reserve System Washington, D.C. 20551 Legislative and Regulatory Analysis Division Office of the Comptroller of the Currency Washington, D.C. 20219 Assistant Executive Secretary Federal Deposit Insurance Corporation Washington, D.C. 20429 Report of Condition Schedule RC-Balance Sheet .........................RC-1, 2 Schedule RC-A--Cash and Balances Due From Depository Institutions .................RC-3 Schedule RC-B--Securities ......................RC-3, 4, 5 Schedule RC-C--Loans and Lease Financing Receivables: Part I. Loans and Leases ..................RC-6, 7 Part II. Loans to Small Businesses and Small Farms (included in the forms for June 30 only) ...........................RC-7a, 7b Schedule RC-D--Trading Assets and Liabilities (to be completed only by selected banks) ..............RC-8 Schedule RC-E--Deposit Liabilities ............RC-9, 10, 11 Schedule RC-F--Other Assets .........................RC-1l Schedule RC-G--Cther Liabilities ....................RC-1l Schedule RC-H--Selected Balance Sheet Items for Domestic Cffices ........................RC-12 Schedule RC-I--Selected Assets and Liabilities of IBFs ..................................RC-13 Schedule RC-K--Quarterly Averages ....................RC-13 Schedule RC-L--Off-Balance Sheet Items ..............................RC-14, 15, 16 Schedule RC-M--Memoranda .........................RC-l7, 18 Schedule RC-N--Past Due and Nonaccrual Loans, Leases, and Other Assets ..........RC-19, 20 Schedule RC-O--Other Data for Deposit Insurance Assessments ....................RC-21, 22 Schedule RC-R--Regulatory Capital ................RC-23, 24 Optional Narrative Statement Concerning the Amounts Reported in the Reports of Condition and Income ......................RC-25 Special Report (to be completed by all banks) Schedule RC-J--Repricing Opportunities (sent only to and to be completed only by savings banks)
For information or assistance, National and State nonmember banks should contact the FDIC's Call Reports Analysis Unit, 550 17th Street, NW, Washington, D.C. 20429, toll free on (800) 688-FDIC(3342), Monday through Friday between 8:00 a.m. and 5:00 p.m., Eastern time. State member banks should contact their Federal Reserve District Bank. 8 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RI- 1 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 3 Transit Number: 91000019
Consolidated Report of Income for the period January 1, 1996 - September 30, 1996 All Report of Income schedules are to be reported on a calendar year-to-date basis in thousands of dollars. Schedule RI - Income Statement 1480
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------------------------ 1. Interest income: a. Interest and fee income on loans: (1) In domestic offices: RIAD (a) Loans Secured by real estate OPff 4011. 265,884 1.a.la (b) Loans to depository institutions 4019. 4,390 1.a.lb (c) Loans to finance agricultural production and other loans to farmers 4024. 703 1.a.lc (d) Commercial and industrial loans 4012. 224,945 1.a.1d (e) Acceptances of other banks 4026. 254 1.a.1e (f) Loans to individuals for household, family, and other personaL expenditures: (1) Credit cards and related plans 4054. 17,772 1.a.lfl (2) Other 4055. 44,536 1.a.1f2 (g) Loans to foreign governments and official institutions 4056. 0 1.a.lg (h) obligations (other than securities and leases) of states and political subdivisions in the U.S.: (l) Taxable obligations 4503. 8 1.a.lhl (2) Tax-exempt obligations 4504. 1,242 l.a.1h2 (i) All other loans in domestic offices 4058. 172 1.a.li (2) In foreign offices, Edge and Agreement subsidiaries, and IBFs 4059. 7,498 1.a.2 b. Income from lease financing receivables: (1) Taxable leases 4505. 29,305 1.b.1 (2) Tax-exempt leases 4307. 283 1.b.2 c. Interest income on balances due from depository institutions:(1) (1) In domestic offices 4105. 139 1.c.1 (2) In foreign offices, Edge and Agreement subsidiaries, and IBFs 4106. 45 1.c.2 d. Interest and dividend income on securities: (l) U.S. Treasury securities and U.S. Government agency and corporation obligations 4027. 50,316 1.d.1 (2) Securities issued by states and political subdivisions in the U.S.: (a) Taxable securities 4506. 64 1.d.2a (b) Tax-exempt securities 4507. 4,802 1.d.2b (3) Other domestic debt securities 3657. 710 1.d.3 (4) Foreign debt securities 3658. 0 1.d.4 (5) Equity securities (including investments in mutual funds) 3659. 13,448 1.d.5 e. Interest income from trading assets 4069. 7,980 1.e - ---------- (1) Includes interest income on time certificates of deposit not held for trading.
9 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RI- 2 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 4 Transit Number: 91000019
Schedule RI - Continued
Dollar Anounts in Thousands - --------------------------------------------------------------------------------------------------------------------------- 1. Interest income (continued) f. Interest income on federal funds sold and securities purchased under agreements to resell in domestic offices of the bank RIAD Year-to-date and of its Edge and Agreement subsidiaries, and in IBFs 4020. 173,659 1.f g. Total interest income (sum of items 1.a through 1.f) 4107. 848,155 1.g 2. Interest expense: a. Interest on deposits: (1) Interest on deposits in domestic offices: (a) Transaction accounts (NOW accounts, ATS accounts, and telephone and preauthorized transfer accounts) 4508. 6,799 2.a.1a (b) Nontransaction accounts: (1) Money market deposit accounts (MMDA) 4509. 30,945 2.a.1b1 (2) Other savings deposits 4511. 6,767 2.a.1b2 (3) Time certificates of deposit of $ 100,000 or more 4174. 8,629 2.a.1b3 (4) All other time deposits 4512. 74,939 2.a.1b4 (2) Interest on deposits in foreign offices, Edge and Agreement subsidiaries, and IBFs 4172. 54,785 2.a.2 b. Expense of federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBF 4180. 146,513 2.b c. Interest on demand notes issued to the U.S. Treasury, trading liabilities, and other borrowed money 4185. 97,513 2.c d. Interest on mortgage indebtedness and obligations under capitalized leases 4072. 78 2.d e. Interest on subordinated notes and debentures 4200. 7,288 2.e f. Total interest expense (sum of items 2.a through 2.e) 4073. 434,256 2.f 3. Net interest income (item 1.g minus 2.f) 4074 413,899 3. 4. Provisions: a. Provision for loan and lease losses 4230 17,745 4.a b. Provision for allocated transfer risk 4243 0 4.b 5. Noninterest income: a. Income from fiduciary activities 4070 139,523 5.a b. Service charges on deposit accounts in domestic offices 4080 56,746 5.b c. Trading revenue (must equal Schedule RI, sum of Memorandum items 8.a through 8.d) A220 (9,554) 5.c d. Other foreign transaction gains (losses) 4076 1,616 5.d e. Not applicable f. Other noninterest income: (1) Other fee income 5407 94,159 5.f.1 (2) All other noninterest income* 5408 51,147 5.f.2 g. Total noninterest income (sum of items 5.a through 5.f) 4079 333,637 5.g 6. a. Realized gains (losses) on held-to-maturity securities 3521 0 6.a b. Realized gains (losses) on available-for-sale securities 3196 6,628 6.b 7. Noninterest expense: a. Salaries and employee benefits 4135 229,291 7.a b. Expenses of premises and fixed assets (net of rental income) (excluding salaries and employee benefits and mortgage interest) 4217 61,926 7.b c. Other noninterest expense* 4092 242,858 7.c d. Total noninterest expense (sum of items 7.a through 7.c) 4093 534,075 8. Income (loss) before income taxes and extraordinary items and other adjustments (item 3 plus or minus items 4.a, 4.b, 5.g, 6.a, 6.b, and 7.d) 4301 202,344 8. 9. Applicable income taxes (on item 8) 4302 66,441 9. 10. Income (loss) before extraordinary items and other adjustments (item 8 minus 9) 4300 135,903 10. - ---------------- * Describe on Schedule RI-E -- Explanations.
10 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RI- 3 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 5 Transit Number: 91000019
Schedule RI - Continued
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------------- 11. Extraordinary items and other adjustments: a. Extraordinary items and other adjustments, gross of income RIAD Year-to-date taxes * 4310 0 11.a b. Applicable income taxes (on item 11.a) * 4315 0 11.b c. Extraordinary items and other adjustments, net of income taxes (item 11.a minus 11.b) 4320 0 11.c 12. Net income (loss) (sum of items 10 and 11.c) 4340 135,903 12.
Memoranda 1481
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------------- 1. Interest expense incurred to carry tax-exempt securities, loans, and leases acquired RIAD Year-to-date after August 7, 1986, that is not deductible for federal income tax purposes 4513. 5 M.1 2. Income from the sale and servicing of mutual funds and annuities in domestic offices (included in Schedule RI, item 8) 8431. 1,516 M.2 3. Not applicable 4. Not applicable 5. Number of full-time equivalent employees on payroll at end of current period (round to Number nearest whole number) 4150. 6,088 M.5 6. Not applicable. 7. If the reporting bank has restated its balance sheet as a result of applying push down MM DD YY accounting this calendar year, report the date of the bank's acquisition 9106. N/A M.7 8. Trading revenue (from cash instruments and off-balance sheet derivative instruments) (Sum of Memorandum items 8.a through 8.d must equal Schedule RI, item 5.c): RIAD Year-to-date a. Interest rate exposures 8757. (16,223) M.8.a b. Foreign exchange exposures 8758. 6,669 M.8.b c. Equity security and index exposures 8759. 0 M.8.c d. Commodity and other exposures 8760. 0 M.8.d 9. Impact on income of off-balance sheet derivatives held for purposes other than trading: a. Net increase (decrease) to interest income 8761. (2,648) M.9.a b. Net (increase) decrease to interest expense 8762. 11,157 M.9.b c. Other (noninterest) allocations 8763. (5,624) M.9.c 10. Credit losses on off-balance sheet derivatives (see instructions) A251. 0 M.10 - ------------------ * Describe on Schedule RI-E - Explanations.
11 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RI- 4 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 6 Transit Number: 91000019
Schedule RI-A - Changes in Equity Capital Indicate decreases and losses in parentheses. I483
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------------- 1. Total equity capital originally reported in the December 31, 1995, Reports of RIAD Condition and Income 3215. 1,125,067 1. 2. Equity capital adjustments from amended Reports of Income, net * 3216. 0 2. 3. Amended balance end of previous calendar year (sum of items 1 and 2) 3217. 1,125,067 3. 4. Net income (loss) (must equal Schedule RI, item 12) 4340. 135,903 4. 5. Sale, conversion, acquisition, or retirement of capital stock, net 4346. 0 5. 6. Changes incident to business combinations, net 4356. 15,525 6. 7. LESS: Cash dividends declared on preferred stock 4470. 0 7. 8. LESS: Cash dividends declared on common stock 4460. 65,000 8. 9. Cumulative effect of changes in accounting principles from prior years * (see instructions for this schedule) 4411. 0 9. 10. Corrections of material accounting errors from prior years * (see instructions for this schedule) 4412. 0 10. 11. Change in net unrealized holding gains (losses) on available-for-sale securities 8433. (10,010) 11. 12. Foreign currency translation adjustments 4414. 1 12. 13. Other transactions with parent holding company * (not included in items 5, 7, or 8 above) 4415. 0 13. 14. Total equity capital end of current period (sum of items 3 through 13) (must equal Schedule RC, item 28) 3210. 1,201,486 14. - ------------------------ * Describe on Schedule RI-E - Explanations.
Schedule RI-B - Charge-offs and Recoveries and Changes in Allowance for Loan and Lease Losses Part I. Charge-offs and Recoveries on Loans and Leases Part I excludes charge-offs and recoveries through the allocated transfer risk reserve. I486
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------- calendar year-to-date (Column A) (Column B) Charge-offs Recoveries ----------- ---------- 1. Loans secured by real estate: RIAD RIAD a. To U.S. addressees (domicile) 4651. 2,129 4661. 2,880 1.a b. To non-U.S. addressees (domicile) 4652. 0 4662. 0 1.b 2. Loans to depository institutions and acceptances of other banks: a. To U.S. banks and other U.S. depository institutions 4653. 0 4663. 0 2.a b. To foreign banks 4654. 0 4664. 0 2.b 3. Loans to finance agricultural production and other loans to farmers 4655. 0 4665. 28 3. 4. Commercial and industrial loans: a. To U.S. addressees (domicile) 4645. 8,023 4617. 6,570 4.a b. To non-U.S. addressees (domicile) 4646. 0 4618. 214 4.b 5. Loans to individuals for household, family, and other personal expenditures: a. Credit cards and related plans 4656. 1,187 4666. 137 5.a b. Other (includes single payment, installment, and all student loans) 4657. 5,059 4667. 1,742 5.b 6. Loans to foreign governments and official institutions 4643. 506 4627. 527 6. 7. All other loans 4644. 0 4628. 0 7. 8. Lease financing receivables: a. Of U.S. addressees (domicile) 4658. 3,431 4668. 586. 8.a b. Of non-U.S. addressees (domicile) 4659. 0 4669. 0 8.b 9. Total (sum of items 1 through 8) 4635. 20,335 4605. 12,684 9.
12 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RI- 5 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 7 Transit Number: 91000019
Schedule RI-B - Continued Part I. Continued Memoranda
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------ calendar year-to-date (Column A) (Column B) Charge-offs Recoveries ----------- ---------- 1.-3. Not applicable. 4. Loans to finance commercial real estate, construction, RIAD RIAD and land development activities (not secured by real estate) included in Schedule RI-B, part I, items 4 and 7, above 5409. 0 5410. 0 M.4 5. Loans secured by real estate in domestic offices (included in Schedule RI-B, part I, item 1, above): a. Construction and land development 3582. 0 3583. 658 M.5.a b. Secured by farmland 3584. 0 3585. 0 M.5.b c. Secured by 1-4 family residential properties: (1) Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit 5411. 0 5412. 0 M.5.cl (2) All other loans secured by 1-4 family residential properties 5413. 1,443 5414. 157 M.5.c2 d. Secured by multifamily (5 or more) residentiaL properties 3588. 0 3589. 0 M.5.d e. Secured by nonfarm nonresidential properties 3590. 686 3591. 2,065 M.5.e
Part II. Changes in Allowance for Loan and Lease Losses
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------- RIAD 1. Balance originally reported in the December 31, 1995, Reports of Condition and Income 3124. 187,020 1. 2. Recoveries (must equal part I, item 9, column B above) 4605. 12,684 2. 3. LESS: Charge-offs (must equal part I, item 9, column A above) 4635. 20,335 3. 4. Provision for loan and lease losses (must equal Schedule RI, item 4.a) 4230. 17,745 4. 5. Adjustments * (see instructions for this schedule) 4815. 1,724 5. 6. Balance end of current period (sum of items 1 through 5) (must equal Schedule RC, item 4.b) 3123. 198,838 6. - ----------------- * Describe on Schedule RI-E . Explanations.
Schedule RI-C - Applicable Income Taxes by Taxing Authority I489
Schedule RI-C is to be reported with the December Report of Income. Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------- RIAD 1. Federal 4780. N/A 1. 2. State and local 4790. N/A 2. 3. Foreign 4795. N/A 3. 4. Total (sum of items 1 through 3) (must equal sum of Schedule RI, items 9 and 11.b) 4770. N/A 4. RIAD 5. Deferred portion of item 4 4772. N/A 5.
13 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RI- 6 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 8 Transit Number: 91000019
Schedule RI-D - Income from International Operations For all banks with foreign offices, Edge or Agreement subsidiaries, or IBFs where international operations account for more than 10 percent of total revenues, total assets, or net income. Part I. Estimated Income from International Operations I492
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------- 1. Interest income and expense booked at foreign offices, Edge and Agreement subsidiaries, and IBFs: RIAD Year-to-date a. Interest income booked 4837. N/A 1.a b. Interest expense booked 4838. N/A 1.b c. Net interest income booked at foreign offices, Edge and Agreement subsidiaries, and IBFs (item 1.a minus 1.b) 4839. N/A 1.c 2. Adjustments for booking location of international operations: a. Net interest income attributable to international operations booked at domestic offices 4840. N/A 2.a b. Net interest income attributable to domestic business booked at foreign offices 4841. N/A 2.b c. Net booking location adjustment (item 2.a minus 2.b) 4842. N/A 2.c 3. Noninterest income and expense attributable to international operations: a. Noninterest income attributable to international operations 4097. N/A 3.a b. Provision for loan and lease losses attributable to international operations 4235. N/A 3.b c. Other noninterest expense attributable to international operations 4239. N/A 3.c d. Net noninterest income (expense) attributable to internationaL operations (item 3.a minus 3.b and 3.c) 4843. N/A 3.d 4. Estimated pretax income attributable to international operations before capital allocation adjustment (sum of items 1.c, 2.c, and 3.d) 4844. N/A 4. 5. Adjustment to pretax income for internal allocations to international operations to reflect the effects of equity capital on overall bank funding costs 4845. N/A 5. 6. Estimated pretax income attributable to international operations after capital allocation adjustment (sum of items 4 and 5) 4846. N/A 6. 7. Income taxes attributable to income from international operations as estimated in item 6 4797. N/A 7. 8. Estimated net income attributable to international operations (item 6 minus 7) 4341. N/A 8.
Memoranda
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------- 1. Intracompany interest income included in item 1.a above 4847. N/A M.1 2. Intracompany interest expense included in item 1.b above 4848. N/A M.2
PART II. SUPPLEMENTARY DETAILS ON INCOME FROM INTERNATIONAL OPERATIONS REQUIRED BY THE DEPARTMENTS OF COMMERCE AND TREASURY FOR PURPOSES OF THE U.S. INTERNATIONAL ACCOUNTS AND THE U.S. NATIONAL INCOME AND PRODUCT ACCOUNTS
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------- RIAD Year-to-date 1. Interest income booked at IBFs 4849. N/A 1. 2. Interest expense booked at IBFs 4850. N/A 2. 3. Noninterest income attributable to international operations booked at domestic offices (excluding IBFs): a. Gains (losses) and extraordinary items 5491. N/A 3.a b. Fees and other noninterest income 5492. N/A 3.b 4. Provision for loan and lease losses attributable to international operations booked at domestic offices (excluding IBFs) 4852. N/A 4. 5. Other noninterest expense attributable to international operations booked at domestic offices (excluding IBFs) 4853. N/A 5.
14 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RI- 7 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 9 Transit Number: 91000019
Schedule RI-E - Explanations Schedule RI-E is to be completed each quarter on a calendar year-to-date basis. Detail all adjustments in Schedules RI-A and RI-B, all extraordinary items and other adjustments in Schedule RI, and all significant items of other noninterest income and other noninterest expense in Schedule RI. (See instructions for details.) I495
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------ 1 All other noninterest income (from Schedule RI, item 5.f.(2)) Report amounts that exceed 10% of Schedule RI, item 5.f.(2): RIAD Year-to-date a. Net gains on other real estate owned 5415. N/A 1.a b. Net gains on sales of loans 5416. N/A 1.b c. Net gains on sales of premises and fixed assets 5417. N/A 1.c Itemize and describe the three largest other amounts that exceed 10% of Schedule RI, item 5.f.(2): TEXT RIAD d. 4461: GAIN ON SALE OF LOAN SERVICING RIGHTS 4461. 24,637 1.d e. 4462: PROCESSING FEES 4462. 14,107 i.e f. 4463: RENTAL INCOME 4463. 5,964 1.f 2. Other noninterest expense (from Schedule RI, item 7.c): a. Amortization expense of intangible assets 4531. 6,605 2.a Report amounts that exceed 10% of Schedule RI, item 7.c: b. Net losses on other real estate owned 5418. N/A 2.b c. Net losses on sales of loans 5419. N/A 2.c d. Net losses on sales of premises and fixed assets 5420. N/A 2.d Itemize and describe the three largest other amounts that exceed 10% of Schedule RI, item 7.c: TEXT RIAD e. 4464: PROCESSING FEES 4464. 63,609 2.e f. 4467: 4467. N/A 2.f g. 4468: 4468. N/A 2.g 3. Extraordinary items and other adjustments (from Schedule RI, item 11.a) and applicable income tax effect (from Schedule RI, item 11.b) (itemize and describe all extraordinary items and other adjustments): TEXT RIAD a. (1) 4469: 4469. 0 3.a.1 (2) Applicable income tax effect 4486 0 3.a.2 b. (1) 4487: 4487. 0 3.b.1 (2) Applicable income tax effect 4488 0 3.b.2 c. (1) 4489: 4489. 0 3.c.1 (2) Applicable income tax effect 4491 0 3.c.2 4. Equity capital adjustments from amended Reports of Income (from Schedule RI-A, item 2) (itemize and describe all adjustments): TEXT RIAD a. 4492: 4492. N/A 4.a b. 4493: 4493. N/A 4.b 5. Cumulative effect of changes in accounting principles from prior years (from Schedule RI-A, item 9) (itemize and describe all changes in accounting principles): TEXT RIAD a. 4494: 4494. N/A 5.a b. 4495: 4495. N/A 5.b 6. Corrections of material accounting errors from prior years (from Schedule RI-A, item 10) (itemize and describe all corrections): TEXT RIAD a. 4496: 4496. N/A 6.a b. 4497: 4497. N/A 6.b
15 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RI- 8 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 10 Transit Number: 91000019
Schedule RI-E - Continued
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------- 7. Other transactions with parent holding company (from Schedule RI-A, item 13) (itemize and describe all such transactions): TEXT RIAD Year-to-date a. 4498: 4498. N/A 7.a b. 4499: 4499. N/A 7.b 8. Adjustments to allowance for loan and lease losses (from Schedule RI-B, part II, item 5) (itemize and describe all adjustments): TEXT a. 4521: ACQUISITIONS 4521. 1,732 8.a b. 4522: SALE OF LOANS 4522. (8) 8.b
I498 I499 9. Other explanations (the space below is provided for the bank to briefly describe, at its option, any other significant items affecting the Report of Income): No comment: X (RIAD 4769) Other explanations (please type or print clearly): (TEXT 4769) 16 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 1 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 11 Transit Number: 91000019
Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Banks for September 30, 1996 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC - Balance Sheet C400
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------------------- ASSETS 1. Cash and balances due from depository institutions (from Schedule RC-A): RCFD a. Noninterest-bearing balances and currency and coin (1) 0081. 1,393,267 1.a b. Interest-bearing balances (2) 0071. 1,161 1.b 2. Securities: a. Held-to-maturity securities (from Schedule RC-B, column A) 1754. 0 2.a b. Available-for-sale securities (from Schedule RC-B, column D) 1773. 1,455,489 2.b 3. Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: a. Federal funds sold 0276. 4,238,292 3.a b. Securities purchased under agreements to resell 0277. 476,920 3.b 4. Loans and lease financing receivables: a. Loans and leases, net of unearned income RCFD (from Schedule RC-C) 2122. 8,953,765 4.a b. LESS: Allowance for loan and lease losses 3123. 198,838 4.b c. LESS: Allocated transfer risk reserve 3128. 0 4.c d. Loans and leases, net of unearned income, allowance, and reserve (item 4.a minus 4.b and 4.c) 2125. 8,754,927 4.d 5. Trading assets (from Schedule RC-D) 3545. 15,027 5. 6. Premises and fixed assets (including capitalized leases) 2145. 115,389 6. 7. Other real estate owned (from Schedule RC-M) 2150. 5,543 7. 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 2130. 0 8. 9. Customers' liability to this bank on acceptances outstanding 2155. 41,230 9. 10. Intangible assets (from Schedule RC-M) 2143. 13,816 10. 11. Other assets (from Schedule RC-F) 2160. 547,878 11. 12. Total assets (sum of items 1 through 11) 2170. 17,058,939 12. - ---------------- (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading.
17 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 2 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 12 Transit Number: 91000019
Schedule RC - Continued
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES 13. Deposits: a. In domestic offices (sum of totals of RCON columns A and C from Schedule RC-E, part I) 2200. 8,212,547 13.a RCON (1) Noninterest-bearing (1) 6631. 3,189,790 13.a.1 (2) Interest-bearing 6636. 5,022,757 13.a.2 RCFN b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E, part II) 2200 2,031,917 13.b RCFN (1) Noninterest-bearing 6631. 17,530 13.b.1 (2) Interest-bearing 6636. 2,014,387 13.b.2 14. Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: RCFD a. Federal funds purchased 0278. 2,729,810 14.a b. Securities sold under agreements to repurchase 0279. 400,682 14.b RCON 15. a. Demand notes issued to the U.S. Treasury 2840. 314,011 15.a RCFD b. Trading liabilities (from Schedule RC-D) 3548. 13,619 15.b 16. Other borrowed money: a. With a remaining maturity of one year or less 2332. 8,678 16.a b. With a remaining maturity of more than one year 2333. 1,608,625 16.b 17. Mortgage indebtedness and obligations under capitalized leases 2910. 1,130 17. 18. Bank's liability on acceptances executed and outstanding 2920. 41,230 18. 19. Subordinated notes and debentures 3200. 195 19. 20. Other liabilities (from Schedule RC-G) 2930. 495,009 20. 21. Total liabilities (sum of items 13 through 20) 2948. 15,857,453 21. 22. Limited-life preferred stock and related surplus 3282. 0 22. EQUITY CAPITAL RCFD 23. Perpetual preferred stock and related surplus 3838. 0 23. 24. Common stock 3230. 100,000 24. 25. Surplus (exclude all surplus related to preferred stock) 3839. 606,409 25. 26. a. Undivided profits and capital reserves 3632. 488,915 26.a b. Net unrealized holding gains (losses) on available-for-sale securities 8434. 6,508 26.b 27. Cumulative foreign currency translation adjustments 3284. (346) 27. 28. Total equity capital (sum of items 23 through 27) 3210. 1,201,486 28. 29. Total liabilities, limited-life preferred stock, and equity capital (sum of items 21, 22, and 28) 3300. 17,058,939 29. Memorandum To be reported only with the March Report of Condition. 1. Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the RCFD Number bank by independent external auditors as of any date during 1995 6724. N/A M.1 1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the bank 2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the consolidated holding company (but not on the bank separately) 3 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority) 4 = Directors' examination of the bank performed by other external auditors (may be required by state chartering authority) 5 = Review of the bank's financial statements by external auditors 6 = Compilation of the bank's financial statements by external auditors 7 = Other audit procedures (excluding tax preparation work) 8 = No external audit work - ------------------------------ 1) Includes total demand deposits and noninterest-bearing time and savings deposits.
18 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 3 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 13 Transit Number: 91000019
Schedule RC-A - Cash and Balances Due Prom Depository Institutions Exclude assets held for trading. C405
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------- (Column A) (Column B) Consolidated Bank Domestic Offices ----------------- ---------------- 1. Cash items in process of collection, unposted RCFD RCON debits, and currency and coin 0022 999,661 1. a. Cash items in process of collection and unposted debits 0020. 899,481 1.a b. Currency and coin 0080. 100,159 1.b 2. Balances due from depository institutions in the U.S. 0082. 39,099 2. a. U.S. branches and agencies of foreign banks (including their IBFS) 0083. 0 2.a b. Other commercial banks in the U.S. and other depository institutions in the U.S. (including their IBFS) 0085. 39,429 2.b 3. Balances due from banks in foreign countries and foreign central banks 0070. 10,662 3. a. Foreign branches of other U.S. banks 0073 10,662 3.a b. Other banks in foreign countries and foreign central banks 0074. 302 3.b 4. Balances due from Federal Reserve Banks 0090. 344,374 0090. 343,988 4. 5. Total (sum of items 1 through 4) (total of column A must equal Schedule RC, sum of items 1.a and 1.b) 0010. 1,394,428 0010. 1,393,389 5.
Memorandum
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------- 1. Noninterest-bearing balances due from commercial banks in the U.S. RCON (included in item 2, column B above) 0050. 38,228 M.1
Schedule RC-B - Securities Exclude assets held for trading. C410
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------- Held-to-maturity Available-for-sale (Column A) (Column B) (Column C) (Column D) Amortized Cost Fair Value Amortized Cost Fair Value (1) -------------- ---------- -------------- ---------- --- 1. U.S. Treasury RCFD RCFD RCFD RCFD securities 0211. 0 0213. 0 1286. 462,175 1287. 461,205 1. 2. U.S. Government agency and corporation obligations (exclude mortgage-backed securities): a. Issued by U.S. Government RCFD RCFD RCFD RCFD agencies (2) 1289. 0 1290. 0 1291. 0 1293. 0 2.a b. Issued by U.S. Government- sponsored agencies (3) 1294. 0 1295. 0 1297. 7,620 1298. 7,610 2.b (1) Includes equity securities without readily determinable fair values at historical cost in item 6.c, column D. (2) Includes Small Business Administration "Guaranteed Loan Pool Certificates," U.S. Maritime Administration obligations, and Export-Import Bank participation certificates. (3) Includes obligations (other than mortgage-backed securities) issued by the Farm Credit System, the Federal Home Loan Bank System, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Financing Corporation, Resolution Funding Corporation, the Student Loan Marketing Association, and the Tennessee Valley Authority.
19 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 4 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 14 Transit Number: 91000019
Schedule RC-B - Continued
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------- Held-to-maturity Available-for-sale (Column A) (Column B) (CoLumn C) (Column D) Amortized Cost Fair Value Amortized Cost Fair Value(1) -------------- ---------- -------------- ------------- 3. Securities issued by states and political subdivisions in the U.S.: a. General RCFD RCFD RCFD RCFD obligations 1676. 0 1677. 0 1678. 24,077 1679. 24,926 3.a b. Revenue obligations 1681. 0 1686. 0 1690. 74,801 1691. 79,315 3.b c. Industrial development and similar obligations 1694. 0 1695. 0 1696. 4,508 1697. 5,281 3.c 4. Mortgage-backed securities (MBS): a. Pass-through securities: (1) Guaranteed by GNMA 1698. 0 1699. 0 1701. 111,037 1702. 111,448 4a1 (2) Issued by FNMA and FHLMC 1703. 0 1705. 0 1706. 512,645 1707. 518,347 4a2 (3) Other pass- through securities 1709. 0 1710. 0 1711. 0 1713. 0 4a3 b. Other mortgage- backed securities (include CMOs, REMICs, and stripped MBS): (1) Issued or guaranteed by FNMA, FHLMC, or RCFD RCFD RCFD RCFD GNMA 1714. 0 1715. 0 1716. 27,944 1717. 27,169 4b1 (2) Collateralized by MBS issued or guaranteed by FNMA, FHLMC, RCFD RCFD RCFD RCFD or GNMA 1718. 0 1719. 0 1731. 70 1732. 70 4b2 (3) All other mortgage- backed securities 1733. 0 1734. 0 1735. 3,061 1736. 3,067 4b3 5. Other debt securities: a. Other domestic debt RCFD RCFD RCFD RCFD securities 1737. 0 1738. 0 1739. 2,170 1741. 2,192 5.a b. Foreign debt securities 1742. 0 1743. 0 1744. 0 1746. 0 5.b 6. Equity securities: a. Investments in mutual RCFD RCFD RCFD RCFD funds 1747. 2,909 1748. 2,909 6.a b. Other equity securities with readily determinable fair values 1749. 0 1751. 0 6.b c. All other equity securities(1) 1752. 211,950 1753. 211,950 6.c 7. Total (sum of items 1 through 6)(total of column A must equal Schedule RC, item 2.a)(total of column D must equal Schedule RC, item 2.b) 1754. 0 1771. 0 1772. 1,444,967 1773. 1,455,489 7.
20 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 5 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 15
Transit Number: 91000019 Schedule RC-B - Continued Memoranda C412
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------------------- RCFD 1. Pledged securities (2) 0416. 152,885 M.1 2. Maturity and repricing data for debt securities (2,3,4)(excluding those in nonaccrual status): a. Fixed rate debt securities with a remaining maturity of: (1) Three months or less 0343. 112,673 M.2.a1 (2) Over three months through 12 months 0344. 8,228 M.2.a2 (3) Over one year through five years 0345. 168,235 M.2.a3 (4) Over five years 0346. 768,024 M.2.a4 (5) Total fixed rate debt securities (sum of Memorandum items 2.a.(1) through 2.a.(4)) 0347. 1,057,160 M.2.a5 b. Floating rate debt securities with a repricing frequency of: (1) Quarterly or more frequently 4544. 101,596 M.2.bl (2) Annually or more frequently, but less frequently than quarterly 4545. 81,874 M.2.b2 (3) Every five years or more frequently, but less frequently than annually 4551. 0 M.2.b3 (4) Less frequently than every five years 4552. 0 M.2.b4 (5) Total floating rate debt securities (sum of Memorandum items 2.b.(1) through 2.b.(4)) 4553. 183,470 M.2.b5 c. Total debt securities (sum of Memorandum items 2.a.(5) and 2.b.(5)) (must equal total debt securities from Schedule RC-B, sum of items 1 through 5, columns A and D, minus nonaccrual debt securities included in Schedule RC-N, item 9, column C) 0393. 1,240,630 M.2.c 3. Not applicable 4. Held-to-maturity debt securities restructured and in compliance with modified terms (included in Schedule RC-B, items 3 through 5, column A, above) 5365. 0 M.4 5. Not applicable 6. Floating rate debt securities with a remaining maturity of one year or less (2,4) (included in Memorandum items 2.b.(1) through 2.b.(4) above) 5519. 947 M.6 7. Amortized cost of held-to-maturity securities sold or transferred to available-for-sale or trading securities during the calendar year-to-date (report the amortized cost at date of sale or transfer) 1778. 0 M.7 8. High-risk mortgage securities (included in the held-to-maturity and available-for-sale accounts in Schedule RC-B, item 4.b): a. Amortized cost 8780. 92 M.8.a b. Fair value 8781. 95 M.8.b 9. Structured notes (included in the held-to-maturity and available-for-sale accounts in Schedule RC-B, items 2, 3, and 5): a. Amortized cost 8782. 2,601 M.9.a b. Fair value 8783. 2,600 M.9.b - ----------------- (2) Includes held-to-maturity securities at amortized cost and available-for-sale securities at fair value. (3) Exclude equity securities, e.g., investments in mutual funds, Federal Reserve stock, commen stock; and preferred stock. (4) Memorandum items 2 and 6 are not applicable to savings banks that must complete supplemental Schedule RC-J.
21 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 6 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 16 Transit Number: 91000019
Schedule RC-C - Loans and Lease Financing Receivables Part I. Loans and Leases Do not deduct the allowance for loan and lease losses from amounts reported in this schedule. Report total loans and leases, net of unearned income. Exclude assets held for trading. C415
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------------------- (Column A) (Column B) Consolidated RCFD Bank RCON Domestic Offices ---- ---- ---- ---------------- 1. Loans secured by real estate 1410. 3,323,203 1. a. Construction and land development 1415. 58,017 1.a b. Secured by farmland (including farm residential and other improvements) 1420. 1,122 1.b c. Secured by 1-4 family residential properties: (1) Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit 1797. 114,236 1.cl (2) All other loans secured by 1-4 family residential properties: (a) Secured by first liens 5367. 2,244,850 1.c2a (b) Secured by junior liens 5368. 445,882 1.c2b d. Secured by multifamily (5 or more) residential properties 1460. 56,384 1.d e. Secured by nonfarm nonresidential properties 1480. 402,712 1.e 2. Loans to depository institutions: a. To commercial banks in the U.S. 1505. 48,971 2.a (1) To U.S. branches and agencies of foreign banks 1506. 0 2.a1 (2) To other commercial banks in the U.S. 1507. 58,712 2.a2 b. To other depository institutions in the U.S. 1517. 0 1517. 0 2.b c. To banks in foreign countries 1510. 298 2.c (1) To foreign branches of other U.S. banks 1513. 0 2.c1 (2) To other banks in foreign countries 1516. 59,495 2.c2 3. Loans to finance agricultural production and other Loans to farmers 1590. 4,146 1590. 4,146 3. 4. Commercial and industrial loans: a. To U.S. addressees (domicile) 1763. 3,166,427 1763. 3,161,189 4.a b. To non-U.S. addressees (domicile) 1764. 53,355 1764. 150 4.b 5. Acceptances of other banks: a. Of U.S. banks 1756. 0 1756. 0 5.a b. Of foreign banks 1757. 3,027 1757. 3,027 5.b 6. Loans to individuals for household, family, and other personal expenditures (i.e., consumer loans) (includes purchased paper) 1975. 1,051,711 6. a. Credit cards and related plans (includes check credit and other revolving credit plans) 2008. 218,523 6.a b. Other (includes single payment, installment, and all student loans) 2011. 833,968 6.b 7. Loans to foreign governments and official institutions (including foreign central banks) 2081. 5,000 2081. 5,000 7. 8. Obligations (other than securities and leases) of states and political subdivisions in the U.S. (includes nonrated industrial development obligations) 2107. 22,132 2107. 22,132 8. 9. Other loans 1563. 578,548 9. a. Loans for purchasing or carrying securities (secured and unsecured) 1545. 44,173 9.a b. All other loans (exclude consumer loans) 1564. 534,375 9.b 10. Lease financing receivables (net of unearned income) 2165. 629,992 10. a. Of U.S. addressees (domicile) 2182. 629,992 10.a b. Of non-U.S. addressees (domicile) 2183. 0 10.b 11. LESS: Any unearned income on loans reflected in items 1-9 above 2123. 2,763 2123. 1,875 11. 12. Total loans and leases, net of unearned income (sum of items 1 through 10 minus item 11) (total of column A must equal Schedule RC, item 4.a) 2122. 8,953,765 2122. 8,826,492 12.
22 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 7 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 17 Transit Number: 91000019
Schedule RC-C - Continued Part I. Continued Memoranda
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------------------- (Column A) (Column B) Consolidated Bank Domestic Offices ------------------ ----------------- RCFD RCON ---- ---- 1. Commercial paper included in Schedule RC-C, part I, above 1496. 0 1496. 0 M.1 2. Loans and leases restructured and in compliance with modified terms (included in Schedule RC-C, part I, above, and not reported as past due or nonaccrual in Schedule RC-N, Memorandum item 1): a. Loans secured by real estate: (1) To U.S. addressees (domicile) 1687. 0 M.2.a1 (2) To non-U.S. addressees (domicile) 1689. 0 M.2.a2 b. All other loans and all lease financing receivables (exclude loans to individuals for household, family, and other personal expenditures) 8691. 0 M.2.b c. Commercial and industrial loans to and lease financing receivables of non-U.S. addressees (domicile) included in Memorandum item 2.b above 8692. 0 M.2.c 3. Maturity and repricing data for loans and leases (1) (excluding those in nonaccrual status): a. Fixed rate loans and leases with a remaining maturity of: (1) Three months or less 0348. 3,452,096 M.3.a1 (2) Over three months through 12 months 0349. 653,785 M.3.a2 (3) Over one year through five years 0356. 1,757,203 M.3.a3 (4) Over five years 0357. 825,373 M.3.a4 (5) Total fixed rate Loans and leases (sum of Memorandum items 3.a.(1) through 3.a.(4)) 0358. 6,688,457 M.3.a5 b. Floating rate loans with a repricing frequency of: (1) Quarterly or more frequently 4554. 1,912,494 M.3.b1 (2) Annually or more frequently, but less frequently than quarterly 4555. 277,079 M.3.b2 (3) Every five years or more frequently, but less frequently than annually 4561. 35,110 M.3.b3 (4) Less frequently than every five years 4564. 0 M.3.b4 (5) Total floating rate loans (sum of Memorandum items 3.b.(1) through 3.b.(4)) 4567. 2,224,683 M.3.b5 c. Total loans and leases (sum of Memorandum items 3.a.(5) and 3.b.(5)) (must equal the sum of total loans and leases, net, from Schedule RC-C, part I, item 12, plus unearned income from Schedule RC-C, part I, item 11, minus total nonaccrual loans and leases from Schedule RC-N, sum of items 1 through 8, column C) 1479. 8,913,140 M.3.c d. Floating rate loans with a remaining maturity of one year or less (included in Memorandum items 3.b.(1) through 3.b.(4) above) A246. 765,643 M.3.d 4. Loans to finance commercial real estate, construction, and land development activities (not secured by real estate) included in Schedule RC-C, part I, items 4 and 9, column A, page RC-6 (2) 2746. 0 M.4 5. Loans and leases held for sale (included in Schedule RC-C, part I, above) 5369. 1,655,120 M.5 6. Adjustable rate closed-end loans secured by first liens on 1-4 family residential properties (included in Schedule RC-C, part I, item 1.c.(2)(a), column B, page RC-6) 5370. 285,781 M.6 - ---------------------- (1) Memorandum item 3 is not applicable to savings banks that must complete supplemental Schedule RC-J. (2) Exclude loans secured by real estate that are included in Schedule RC-C, part I, item 1, column A.
23 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 8 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 18 Transit Number: 91000019
Schedule RC-D - Trading Assets and Liabilities Schedule RC-D is to be completed only by banks with $1 billion or more in total assets or with $2 billion or more in par/notional amount of off-balance sheet derivative contracts (as reported in Schedule RC-L, items 14.a through 14.e, columns A through D). C420
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------------------- ASSETS RCON 1. U.S. Treasury securities in domestic offices 3531. N/A 1. 2. U.S. Government agency and corporation obligations in domestic offices (exclude mortgage-backed securities) 3532. N/A 2. 3. Securities issued by states and political subdivisions in the U.S. in domestic offices 3533. N/A 3. 4. Mortgage-backed securities (MBS) in domestic offices: a. Pass-through securities issued or guaranteed by FNMA, FHLMC, or GNMA 3534. 0 4.a b. Other mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or GNMA (include CMOs, REMICs, and stripped MBS) 3535. N/A 4.b c. All other mortgage-backed securities 3536. N/A 4.c 5. Other debt securities in domestic offices 3537. N/A 5. 6. Certificates of deposit in domestic offices 3538. N/A 6. 7. Commercial paper in domestic offices 3539. N/A 7. 8. Bankers acceptances in domestic offices 3540. N/A 8. 9. Other trading assets in domestic offices 3541. N/A 9. 10. Trading assets RCFN in foreign offices 3542. N/A 10. 11. Revaluation gains on interest rate, foreign exchange rate, and other commodity and equity contracts: RCON a. In domestic offices 3543. 15,027 11.a b. In foreign RCFN offices 3544. N/A 11.b 12. Total trading assets (sum of items 1 through 11) RCFD (must equal Schedule RC, item 5) 3545. 15,027 12. LIABILITIES 13. Liability for short positions 3546. N/A 13. 14. Revaluation losses on interest rate, foreign exchange rate, and other commodity and equity contracts 3547. 13,619 14. 15. Total trading liabilities (sum of items 13 and 14)(must equal Schedule RC, item 15.b) 3548. 13,619 15.
24 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 9 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 19 Transit Number: 91000019
Schedule RC-E - Deposit Liabilities Part I. Deposits in Domestic Offices C425
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------------------- Transaction Accounts Nontransaction Accounts (Column A) (Column B) (Column C) Total transaction Memo: Total demand accounts (including total deposits (included in Total nontransaction demand deposits) column A) accounts(including MMDAs) ---------------- --------- ------------------------- Deposits of: RCON RCON RCON 1. Individuals, partnerships and corporations 2201. 3,130,258 2240. 2,671,364 2346 4,551,799 1. 2. U.S. Government 2202. 26,868 2280. 26,868 2520 0 2. 3. States and political subdivisions in the U.S. 2203. 44,065 2290. 41,392 2530 9,391 3. 4. Commercial banks in the U.S. 2206. 397,081 2310. 397,081 2550 0 4. 5. Other depository institutions in the U.S. 2207. 5,330 2312. 5,330 2349 0 5. 6. Banks in foreign countries 2213. 10,204 2320. 10,204 2236 0 6. 7. Foreign governments and official institu- tions (including foreign central banks) 2216. 0 2300. 0 2377 0 7. 8. Certified and official checks 2330. 37,551 2330. 37,551 8. 9. Total (sum of items 1 through 8) (sum of columns A and C must equal Schedule RC, item 13.a) 2215. 3,651,357 2210. 3,189,790 2385 4,561,190 9.
Memoranda
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------------------- 1. Selected components of total deposits (i.e., sum of item 9, columns A and C): RCON a. Total Individual Retirement Accounts (IRAS) and Keogh Plan accounts 6835. 552,931 M.1.a b. Total brokered deposits 2365. 0 M.1.b c. Fully insured brokered deposits (included in Memorandum item 1.b above): (1) Issued in denominations of less than $100,000 2343. 0 M.1.c1 (2) Issued either in denominations of $100,000 or in denominations greater than $100,000 and participated out by the broker in shares of $100,000 or less 2344. 0 M.1.c2 d. Maturity data for brokered deposits: (1) Brokered deposits issued in denominations of less than $100,000 with a remaining maturity of one year or less (included in Memorandum item 1.c.(1) above) A243. 0 M.1.d1 (2) Brokered deposits issued in denominations of $100,000 or more with a remaining maturity of one year or less (included in Memorandum item 1.b above) A244. 0 M.1.d2 e. Preferred deposits (uninsured deposits of states and political subdivisions in the U.S. reported in item 3 above which are secured or collateralized as required under state law) 5590. 45,953 M.1.e 2. Components of total nontransaction accounts (sum of Memorandum items 2.a through 2.d must equal item 9, column C above): a. Savings deposits: (1) Money market deposit accounts (MMDAs) 6810. 1,630,108 M.2.a1 (2) Other savings deposits (excludes MMDAs) 0352. 969,406 M.2.a2 b. Total time deposits of less than $100,000 6648. 1,770,590 M.2.b c. Time certificates of deposit of $100,000 or more 6645. 175,060 M.2.c d. Open-account time deposits of $100,000 or more 6646. 16,026 M.2.d 3. All NOW accounts (included in column A above) 2398. 461,567 M.3 4. Not applicable
25 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 10 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 20 Transit Number: 91000019
Schedule RC-E - Continued Part I. Continued Memoranda (Continued)
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------- 5. Maturity and repricing data for time deposits of less than $100,000 (sum of Memorandum items 5.a.(1) through 5.b.(3) must equal Memorandum item 2.b above): (1) a. Fixed rate time deposits of less than $100,000 with a remaining maturity of: RCON (1) Three months or less A225. 364,202 M.5.a1 (2) Over three months through 12 months A226. 703,665 M.5.a2 (3) Over one year A227. 702,723 M.5.a3 b. Floating rate time deposits of less than $100,000 with a repricing frequency of: (1) Quarterly or more frequently A228. 0 M.5.b1 (2) Annually or more frequently, but less frequently than quarterly A229. 0 M.5.b2 (3) Less frequently than annually A230. 0 M.5.b3 c. Floating rate time deposits of less than $100,000 with a remaining maturity of one year or less (included in Memorandum items 5.b.(1) through 5.b.(3) above) A231. 0 M.5.c 6. Maturity and repricing data for time deposits of $100,000 or more (i.e., time certificates of deposit of $100,000 or more and open-account time deposits of $100,000 or more) (sum of Memorandum items 6.a.(1) through 6.b.(4) must equal the sum of Memorandum items 2.c and 2.d above): (1) a. Fixed rate time deposits of $100,000 or more with a remaining maturity of: (1) Three months or less A232. 58,200 M.6.a1 (2) Over three months through 12 months A233. 60,996 M.6.a2 (3) Over one year through five years A234. 61,459 M.6.a3 (4) Over five years A235. 10,431 M.6.a4 b. Floating rate time deposits of $100,000 or more with a repricing frequency of: (1) Quarterly or more frequently A236. 0 M.6.b1 (2) Annually or more frequently, but less frequently than quarterly A237. 0 M.6.b2 (3) Every five years or more frequently, but less frequently than annually A238. 0 M.6.b3 (4) Less frequently than every five years A239. 0 M.6.b4 c. Floating rate time deposits of $100,000 or more with a remaining maturity of one year or less (included in Memorandum items 6.b.(1) through 6.b.(4) above) A240. 0 M.6.c - -------------- (1) Memorandum items 5 and 6 are not applicable to savings banks that must complete supplemental Schedule RC-J.
26 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 11 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 21 Transit Number: 91000019
Schedule RC-E - Continued Part II. Deposits in Foreign Offices (including Edge and Agreement subsidiaries and IBFs)
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------- Deposits of: RCFN 1. Individuals, partnerships, and corporations 2621. 444,832 1. 2. U.S. banks (including IBFs and foreign branches of U.S. banks) 2623. 1,558,691 2. 3. Foreign banks (including U.S. branches and agencies of foreign banks, including their IBFs) 2625. 28,156 3. 4. Foreign governments and official institutions (including foreign central banks) 2650. 0 4. 5. Certified and official checks 2330. 128 5. 6. All other deposits 2668. 110 6. 7. Total (sum of items 1 through 6) (must equal Schedule RC, item 13.b) 2200. 2,031,917 7.
Memorandum
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------- RCFN 1. Time deposits with a remaining maturity of one year or less (included in Part II, item 7 above) A245. 2,014,387 M.1
Schedule RC-F - Other Assets C430
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------- RCFD 1. Income earned, not collected on loans 2164. 54,809 1. 2. Net deferred tax assets (1) 2148. 0 2. 3. Excess residential mortgage servicing fees receivable 5371. 0 3. 4. Other (itemize and describe amounts that exceed 25% of this item) 2168. 493,069 4. TEXT RCFD a. 3549: LOAN & FEE PAYMENTS RECEIVABLE-AFFILIATE 3549. 337,097 4.a b. 3550: ACCOUNTS RECEIVABLE-AFFILIATE 3550. 46,871 4.b c. 3551: 3551. N/A 4.c 5. Total (sum of items 1 through 4) (must equal Schedule RC, item 11) 2160. 547,878 5.
Memorandum
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------- RCFD 1. Deferred tax assets disallowed for regulatory capital purposes 5610. 0 M.1
Schedule RC-G - Other Liabilities C435
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------- RCON 1. a. Interest accrued and unpaid on deposits in domestic offices (2) 3645. 32,541 1.a b. Other expenses accrued and unpaid (includes accrued RCFD income taxes payable) 3646. 316,713 1.b 2. Net deferred tax liabilities (1) 3049. 122,851 2. 3. Minority interest in consolidated subsidiaries 3000. 1,097 3. 4. Other (itemize and describe amounts that exceed 25% of this item) 2938. 21,807 4. TEXT RCFD a. 3552: 3552. N/A 4.a b. 3553: 3553. N/A 4.b c. 3554: 3554. N/A 4.c 5. Total (sum of items 1 through 4) (must equal Schedule RC, item 20) 2930. 495,009 5. (1) See discussion of deferred income taxes in Glossary entry on "income taxes." (2) For savings banks, include "dividends" accrued and unpaid on deposits.
27 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 12 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 22 Transit Number: 91000019
Schedule RC-H - Selected Balance Sheet Items for Domestic Offices C440
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------- Domestic Offices ---------------- RCON 1. Customers' liability to this bank on acceptances outstanding 2155. 20,907 1. 2. Bank's liability on acceptances executed and outstanding 2920. 20,907 2. 3. Federal funds sold and securities purchased under agreements to resell 1350. 4,715,212 3. 4. Federal funds purchased and securities sold under agreements to repurchase 2800. 3,130,492 4. 5. Other borrowed money 3190. 1,617,303 5. EITHER 6. Net due from own foreign offices, Edge and Agreement subsidiaries, and IBFs 2163. N/A 6. OR 7. Net due to own foreign offices, Edge and Agreement subsidiaries, and IBFs 2941. 1,915,823 7. 8. Total assets (excludes net due from foreign offices, Edge and Agreement subsidiaries, and IBFs) 2192. 16,912,226 8. 9. Total liabilities (excludes net due to foreign offices, Edge and Agreement subsidiaries, and IBFs) 3129. 13,794,917 9. Items 10 - 17 include held-to-maturity and available-for-sale securities in domestic offices. 10. U.S. Treasury securities 1779. 461,205 10. 11. U.S. Government agency and corporation obligations (excludes mortgage-backed securities) 1785. 7,610 11. 12. Securities issued by states and political subdivisions in the U.S. 1786. 109,522 12. 13. Mortgage-backed securities (MBS): a. Pass-through securities: (1) Issued or guaranteed by FNMA, FHLMC, or GNMA 1787. 629,795 13.a.1 (2) Other pass-through securities 1869. 0 13.a.2 b. Other mortgage-backed securities (include CMOs, REMICs, and stripped MBS): (1) Issued or guaranteed by FNMA, FHLMC, or GNMA 1877. 27,169 13.b.1 (2) All other mortgage-backed securities 2253. 3,137 13.b.2 14. Other domestic debt securities 3159. 2,192 14. 15. Foreign debt securities 3160. 0 15. 16. Equity securities: a. Investments in mutual funds 3161. 2,909 16.a b. Other equity securities with readily determinable fair values 3162. 0 16.b c. All other equity securities 3169. 211,950 16.c 17. Total held-to-maturity and available-for-sale securities (sum of items 10 through 16) 3170. 1,455,489 17.
Memorandum (to be completed only by banks with IBFs and other "foreign" offices)
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------- EITHER 1. Net due from the IBF of the domestic offices of the reporting bank 3051. N/A M.1 OR 2. Net due to the IBF of the domestic offices of the reporting bank 3059. 0 M.2
28 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 13 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 23 Transit Number: 91000019
Schedule RC-I - Selected Assets and Liabilities of IBFs To be completed only by banks with IBFs and other "foreign" offices. C445
Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------- RCFN ---- 1. Total IBF assets of the consolidated bank (component of Schedule RC, item 12) 2133. N/A 1. 2. Total IBF loans and lease financing receivables (component of Schedule RC-C, part I, item 12, column A) 2076. N/A 2. 3. IBF commercial and industrial loans (component of Schedule RC-C, part I, item 4, column A) 2077. N/A 3. 4. Total IBF liabilities (component of Schedule RC, item 21) 2898. N/A 4. 5. IBF deposit liabilities due to banks, including other IBFS (component of Schedule RC-E, part II, items 2 and 3) 2379. N/A 5. 6. Other IBF deposit liabilities (component of Schedule RC-E, part II, items 1, 4, 5, and 6) 2381. N/A 6.
Schedule RC-K - Quarterly Averages (1) C455
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------------------- ASSETS RCFD 1. Interest-bearing balances due from depository institutions 3381. 3,680 1. 2. U.S. Treasury securities and U.S. Government agency and corporation obligations(2) 3382. 988,625 2. 3. Securities issued by states and political subdivisions in the U.S.(2) 3383. 104,033 3. 4. a. Other debt securities(2) 3647. 6,479 4.a b. Equity securities (3)(includes investments in mutual funds and Federal Reserve stock) 3648. 218,933 4.b 5. Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs 3365. 3,841,271 5. 6. Loans: a. Loans in domestic offices: RCON (1) Total loans 3360. 10,060,379 6.a.1 (2) Loans secured by real estate 3385. 4,722,587 6.a.2 (3) Loans to finance agricultural production and other loans to farmers 3386. 9,381 6.a.3 (4) Commercial and industrial loans 3387. 3,668,950 6.a.4 (5) Loans to individuals for household, family, and other personal expenditures 3388. 1,051,143 6.a.5 b. Total loans in foreign offices, Edge and Agreement subsidiaries, RCFN and IBFs 3360. 143,991 6.b 7. Trading RCFD assets 3401. 111,738 7. 8. Lease financing receivables (net of unearned income) 3484. 625,982 8. 9. Total assets(4) 3368. 16,506,469 9. LIABILITIES 10. Interest-bearing transaction accounts in domestic offices (NOW accounts, ATS accounts, and telephone and preauthorized transfer accounts) (exclude demand RCON deposits) 3485. 312,038 10. 11. Nontransaction accounts in domestic offices: a. Money market deposit accounts (MMDAs) 3486. 1,637,139 11.a b. Other savings deposits 3487. 1,115,803 11.b c. Time certificates of deposit of $100,000 or more 3345. 180,789 11.c d. All other time deposits 3469. 1,828,618 11.d 12. Interest-bearing deposits in foreign offices, Edge and Agreement RCFN subsidiaries, and IBFs 3404. 1,735,212 12. 13. Federal funds purchased and securities sold under agreements to repurchase in RCFD domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs 3353. 3,252,570 13. 14. Other borrowed money 3355. 1,670,505 14. - ------------------ (1) For all items, banks have the option of reporting either (1) an average of daily figures for the quarter, or (2) an average of weekly figures (i.e., the Wednesday of each week of the quarter). (2) Quarterly averages for all debt securities should be based on amortized cost. (3) Quarterly averages for all equity securities should be based on historical cost. (4) The quarterly average for total assets should reflect all debt securities (not held for trading) at amortized cost, equity securities with readily determinable fair values at the lower of cost or fair value, and equity securities without readily determinable fair values at historical cost.
29 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 14 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 24 Transit Number: 91000019
Schedule RC-L - Off-Balance Sheet Items Please read carefully the instructions for the preparation of Schedule RC-L. Some of the amounts reported in Schedule RC-L are regarded as volume indicators and not necessarily as measures of risk. C460
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------------------- 1. Unused commitments: a. Revolving, open-end lines secured by 1-4 family residential properties, RCFD e.g., home equity lines 3814. 170,734 1.a b. Credit card lines 3815. 0 1.b c. Commercial real estate, construction, and land development: (1) Commitments to fund loans secured by real estate 3816. 80,684 1.c.1 (2) Commitments to fund loans not secured by real estate 6550. 150 1.c.2 d. Securities underwriting 3817. 0 1.d e. Other unused commitments 3818. 3,650,754 1.e 2. Financial standby letters of credit and foreign office guarantees 3819. 841,133 2. a. Amount of financial standby letters of credit RCFD conveyed to others 3820. 320,471 2.a 3. Performance standby letters of credit and foreign office guarantees 3821. 75,678 3. a. Amount of performance standby letters of credit RCFD conveyed to others 3822. 27,020 3.a 4. Commercial and similar letters of credit 3411. 334,387 4. 5. Participations in acceptances (as described in the instructions) conveyed to others by the reporting bank 3428. 0 5. 6. Participations in acceptances (as described in the instructions) acquired by the reporting (nonaccepting) bank 3429. 0 6. 7. Securities borrowed 3432. 3,486,560 7. 8. Securities lent (including customers' securities lent where the customer is indemnified against loss by the reporting bank) 3433. 261,954 8. 9. Loans transferred (i.e., sold or swapped) with recourse that have been treated as sold for Call Report purposes: a. FNMA and FHLMC residential mortgage loan pools: (1) Outstanding principal balance of mortgages transferred as of the report date 3650. 22,947 9.a.1 (2) Amount of recourse exposure on these mortgages as of the report date 3651. 22,947 9.a.2 b. Private (nongovernment-issued or guaranteed) residential mortgage loan pools: (1) Outstanding principal balance of mortgages transferred as of the report date 3652. 0 9.b.1 (2) Amount of recourse exposure on these mortgages as of the report date 3653. 0 9.b.2 c. Farmer Mac agricultural mortgage loan pools: (1) Outstanding principal balance of mortgages transferred as of the report date 3654. 0 9.c.1 (2) Amount of recourse exposure on these mortgages as of the report date 3655. 0 9.c.2 d. Small business obligations transferred with recourse under Section 208 of the Riegle Community Development and Regulatory Improvement Act of 1994: (1) Outstanding principal balance of small business obligations transferred as of the report date A249. 0 9.d.1 (2) Amount of retained recourse on these obligations as of the report date A250. 0 9.d.2 10. When-issued securities: a. Gross commitments to purchase 3434. 0 10.a b. Gross commitments to sell 3435. 0 10.b 11. Spot foreign exchange contracts 8765. 282,774 11. 12. All other off-balance sheet liabilities (exclude off-balance sheet derivatives) (itemize and describe each component of this item over 25% of Schedule RC, item 28, "Total equity capital") 3430. 0 12. TEXT RCFD a. 3555: 3555 N/A 12.a b. 3556: 3556 N/A 12.b c. 3557: 3557 N/A 12.c d. 3558: 3558 N/A 12.d
30 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 15 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 25 Transit Number: 91000019
Schedule RC-L - Continued
Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------ 13. All other off-balance sheet assets (exclude off-balance sheet derivatives) (itemize and describe each component of this item over 25% of Schedule RC, item 28, "Total equity capital") 5591. 0 13. TEXT RCON a. 5592: 5592. N/A 13.a b. 5593: 5593. N/A 13.b c. 5594: 5594. N/A 13.c d. 5595: 5595. N/A 13.d
C461
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------- (Column A (Column B) (Column C) (Column D) Off-balance Sheet Equity Commodity Derivatives Interest Rate Foreign Exchange Derivative And Other Position Indicators Contracts Contracts Contracts Contracts - ------------------- --------- --------- --------- --------- 14. Gross amounts (e.g., notional amounts)(for each column, sum of items 14.a through 14.e must equal sum of items 15, 16.a, and 16.b): a. Futures contracts 316,500 103 0 0 14.a RCFD 8693 RCFD 8694 RCFD 8695 RCFD 8696 b. Forward contracts 0 578,924 0 0 14.b RCFD 8697 RCFD 8698 RCFD 8699 RCFD 8700 c. Exchange-traded option contracts: (1) Written options 0 0 0 0 14.c1 RCFD 8701 RCFD 8702 RCFD 8703 RCFD 8704 (2) Purchased options 0 0 0 0 14.c2 RCFD 8705 RCFD 8706 RCFD 8707 RCFD 8708 d. Over-the-counter option contracts: (1) Written options 421,925 6,058 0 0 14.d1 RCFD 8709 RCFD 8710 RCFD 8711 RCFD 8712 (2) Purchased options 798,767 8,058 0 0 14.d2 RCFD 8713 RCFD 8714 RCFD 8715 RCFD 8716 e. Swaps 3,776,092 0 0 785 14.e RCFD 3450 RCFD 3826 RCFD 8719 RCFD 8720 15. Total gross notional amount of derivative contracts held for trading 2,723,213 593,143 0 785 15. RCFD A126 RCFD A127 RCFD 8723 RCFD 8724 16. Total gross notional amount of derivative contracts held for purposes other than trading: a. Contracts marked to market 0 0 0 0 16.a RCFD 8725 RCFD 8726 RCFD 8727 RCFD 8728 b. Contracts not marked to market 2,590,071 0 0 0 16.b RCFD 8729 RCFD 8730 RCFD 8731 RCFD 8732
31 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 16 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 26 Transit Number: 91000019
Schedule RC-L - Continued
Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------- (Column A) (Column B) (Column C) (Column D) Off-balance Sheet Equity Commodity Derivatives Position Interest Rate Foreign Exchange Derivative And Other Indicators Contracts Contracts Contracts Contracts - --------------------------------------------------------------------------------------------------------- 17. Gross fair values of derivative contracts: a. Contracts held for trading: RCFD RCFD RCFD RCFD ---- ---- ---- ---- (1) Gross positive fair value 8733. 9,592 8734. 5,435 8735. 0 8736. 0 17.a1 (2) Gross negative fair value 8737. 9,126 8738. 4,494 8739. 0 8740. 0 17.a2 b. Contracts held for purposes other than trading that are marked to market: (1) Gross positive fair value 8741. 0 8742. 0 8743. 0 8744. 0 17.b1 (2) Gross negative fair value 8745. 0 8746. 0 8747. 0 8748. 0 17.b2 c. Contracts held for purposes other than trading that are not marked to market: (1) Gross positive fair value 8749. 14,172 8750. 0 8751. 0 8752. 0 17.c1 (2) Gross negative fair value 8753. 67,038 8754. 0 8755. 0 8756. 0 17.c2
Memoranda
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------------------- RCFD 1.-2. Not applicable 3. Unused commitments with an original maturity xceeding one year that are reported in Schedule RC-L, items 1.a through 1.e, above (report only the unused portions of commitments that are fee paid or otherwise legally binding) 3833. 3,467,678 M.3 a. Participations in commitments with an original RCFD maturity exceeding one year conveyed to others 3834 . 50,917 M.3a 4. To be completed only by banks with $1 billion or more in total assets: Standby letters of credit and foreign office guarantees (both financial and performance) issued to non-U.S. acdressees (domicile) included in Schedule RC-L, items 2 and 3, above 3377. N/A M.4 5. Installment loans to individuals for household, family, and other personal expenditures that have been securitized and sold without recourse (with servicing retained), amounts outstanding by type of loan: a. Loans to purchase private passenger automobiles (to be completed for the September report only) 2741. N/A M.5.a b. Credit cards and related plans (TO BE COMPLETED QUARTERLY) 2742. 0 M.5.b c. All other consumer installment credit (including mobile home loans)(to be completed for the September report only) 2743. N/A M.5.c
32 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 17 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 27 Transit Number: 91000019
Schedule RC-M - Memoranda C465
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------------------- 1. Extensions of credit by the reporting bank to its executive officers, directors, principal shareholders, and their related interests as of the report date: a. Aggregate amount of all extensions of credit to all executive officers, directors, RCFD principal shareholders, and their related interests 6164. 36,688 1.a b. Number of executive officers, directors, and principal shareholders to whom the amount of all extensions of credit by the reporting bank (including extensions of credit to related interests) equals or exceeds the lesser of $ 500,000 or 5 percent of total capital RCFD Number as defined for this purpose in agency regulations 6165. 7 1.b 2. Federal funds sold and securities purchased under agreements to resell with U.S. branches and agencies of foreign banks (1) (included in Schedule RC, items 3.a and 3.b) 3405. 0 2. 3. Not applicable. 4. Outstanding principal balance of 1-4 family residential mortgage loans serviced for others (include both retained servicing and purchased servicing): a. Mortgages serviced under a GNMA contract 5500. 0 4.a b. Mortgages serviced under a FHLMC contract: (1) Serviced with recourse to servicer 5501. 0 4.b.1 (2) Serviced without recourse to servicer 5502. 0 4.b.2 c. Mortgages serviced under a FNMA contract: (1) Serviced under a regular option contract 5503. 0 4.c.1 (2) Serviced under a special option contract 5504. 0 4.c.2 d. Mortgages serviced under other servicing contracts 5505. 356,752 4.d 5. To be completed only by banks with $1 billion or more in total assets: Customers' liability to this bank on acceptances outstanding (sum of items 5.a and 5.b must equal Schedule RC, item 9): a. U.S. addressees (domicile) 2103. 32,497 5.a b. Non-U.S. addressees (domicile) 2104. 8,733 5.b 6. Intangible assets: a. Mortgage servicing rights 3164. 0 6.a b. Other identifiable intangible assets: (1) Purchased credit card relationships 5506. 0 6.b.1 (2) All other identifiable intangible assets 5507. 448 6.b.2 c. Goodwill 3163. 13,368 6.c d. Total (sum of items 6.a through 6.c) (must equal Schedule RC, item 10) 2143. 13,816 6.d e. Amount of intangible assets (included in item 6.b.(2) above) that have been grandfathered or are otherwise qualifying for regulatory capital purposes 6442. 0 6.e 7. Mandatory convertible debt, net of common or perpetual preferred stock dedicated to redeem the debt 3295. 0 7. (1) Do not report federal funds sold and securities purchased under agreements to resell with other commercial banks in the U.S. in this item.
33 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 18 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 28 Transit Number: 91000019
Schedule RC-M - Continued
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------------------- 8. a. Other real estate owned: RCFD (1) Direct and indirect investments in real estate ventures 5372. 0 8.a.1 (2) All other real estate owned: RCON (a) Construction and land development in domestic offices 5508. 0 8.a.2a (b) Farmland in domestic offices 5509. 0 8.a.2b (c) 1-4 family residential properties in domestic offices 5510. 5,416 8.a.2c (d) Multifamily (5 or more) residential properties in domestic offices 5511. 0 8.a.2d (e) Nonfarm nonresidential properties in domestic offices 5512. 127 8.a.2e (f) In foreign RCFN offices 5513. 0 8.a.2f (3) Total (sum of items 8.a.(1) and 8.a.(2)) RCFD (must equal Schedule RC, item 7) 2150. 5,543 8.a.3 b. Investments in unconsolidated subsidiaries and associated companies: (1) Direct and indirect investments in real estate ventures 5374. 0 8.b.1 (2) All other investments in unconsolidated subsidiaries and associated companies 5375. 0 8.b.2 (3) Total (sum of items 8.b.(1) and 8.b.(2)) (must equal Schedule RC, item 8) 2130. 0 8.b.3 c. Total assets of unconsolidated subsidiaries and associated companies 5376. 0 8.c 9. Noncumulative perpetual preferred stock and related surplus included in Schedule RC, item 23, "Perpetual preferred stock and related surplus" 3778. 0 9. 10. Mutual fund and annuity sales in domestic offices during the quarter (include proprietary, private label, and third party mutual funds): RCON a. Money market funds 6441. 3,365,630 10.a b. Equity securities funds 8427. 0 10.b c. Debt securities funds 8428. 0 10.c d. Other mutual funds 8429. 30,806 10.d e. Annuities 8430. 13,693 10.e f. Sales of proprietary mutual funds and annuities (included in items 10.a through 10.e above) 8784. 3,019,944 10.f
Memorandum
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------------------- 1. Interbank holdings of capital instruments (to be completed for the December report only): RCFD a. Reciprocal holdings of banking organizations' capital instruments 3836. N/A M.1.a b. Nonreciprocal holdings of banking organizations' capital instruments 3837. N/A M.1.b
34 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 19 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 29 Transit Number: 91000019
Schedule RC-N - Past Due and Nonaccrual Loans, Leases, and Other Assets The FFIEC regards the information reported in all of Memorandum item 1, in items 1 through 10, column A, and in Memorandum items 2 through 4, column A, as confidential. C470
Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------------- (Column A) (Column B) Column C) Past due 30 through 89 Past due 90 days or more Nonaccrual days and still accruing and still accruing ----------------------- ------------------------ ------------------- 1. Loans secured by real estate: RCFD RCFD RCFD a. To U.S. addressees (domicile) 1245. 30,342 1246. 1,293 1247. 7,755 1.a b. To non-U.S. addressees (domicile) 1248. 0 1249. 0 1250. 0 1.b 2. Loans to depository institutions and acceptances of other banks: a. To U.S. banks and other U.S. depository institutions 5377. 0 5378. 0 5379. 0 2.a b. To foreign banks 5380. 0 5381. 0 5382. 0 2.b 3. Loans to finance agricultural production and other loans to farmers 1594. 0 1597. 0 1583. 6 3. 4. Commercial and industrial loans: a. To U.S. addressees (domicile) 1251. 46,986 1252. 144 1253. 11,218 4.a b. To non-U.S. addressees (domicile) 1254. 0 1255. 0 1256. 0 4.b 5. Loans to individuals for household, family, and other personal expenditures: a. Credit cards and related plans 5383. 167 5384. 689 5385. 0 5.a b. Other (includes single payment, installment, and all student loans) 5386. 16,052 5387. 4,303 5388. 126 5.b 6. Loans to foreign governments and official institutions 5389. 0 5390. 0 5391. 0 6. 7. All other loans 5459. 13 5460. 116 5461. 7,814 7. 8. Lease financing receivables: a. Of U.S. addressees (domicile) 1257. 0 1258. 0 1259. 16,469 8.a b. Of non-U.S. addressees (domicile) 1271. 0 1272. 0 1791. 0 8.b 9. Debt securities and other assets (exclude other real estate owned and other repossessed assets) 3505. 0 3506. 0 3507. 0 9.
================================================================================ Amounts reported in items 1 through 8 above include guaranteed and unguaranteed portions of past due and nonaccrual loans and leases. Report in item 10 below certain guaranteed loans and leases that have already been included in the amounts reported in items 1 through 8. 10. Loans and leases reported in items 1 through 8 above which are wholly or partially guaranteed by the U.S. RCFD RCFD RCFD Government 5612. 1,472 5613. 87 5614. 403 10. a. Guaranteed portion of loans and leases included in item 10 above 5615. 1,189 5616. 57 5617. 248 10.a
35 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC-20 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 30 Transit Number: 91000019
Schedule RC-N - Continued Memoranda C473
Dollar Amounts in Thousands - -------------------------------------------------------------------------------------------------------------------------------- (Column A) (Column B) (Column C) Past due 30 through 89 Past due 90 days or more Nonaccrual days and still accruing and still accruing ----------------------- ------------------ ----------------- 1. Restructured loans and leases included in Schedule RC-N, items 1 through 8, above (and not reported in Schedule RC-C, RCFD RCFD RCFD Part I, Memorandum item 2) 1658. 0 1659. 0 1661. 0 M.1 2. Loans to finance commercial real estate, construction, and land development activities (not secured by real estate) included in Schedule RC-N, items 4 and 7, above 6558. 0 6559. 0 6560. 0 M.2 3. Loans secured by real estate in domestic offices (included in Schedule RC-N, item 1, above): RCON RCON RCON a. Construction and land development 2759. 30 2769. 0 3492. 25 M.3a b. Secured by farmland 3493. 0 3494. 0 3495. 0 M.3b c. Secured by 1-4 family residential properties: (l) Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit 5398. 49 5399. 93 5400. 0 M.3c1 (2) All other loans secured by 1-4 family residential properties 5401. 18,355 5402. 1,123 5403. 5,526 M.3c2 d. Secured by multifamily (5 or more) residential properties 3499. 0 3500. 0 3501. 647 M.3d e. Secured by nonfarm nonresidential properties 3502. 11,908 3503. 77 3504. 1,557 M.3e
(Column A) Past due 30 through (Column B) 89 days Past due 90 days or more ----------------------- ------------------------ 4. Interest rate, foreign exchange rate, and other commodity and equity contracts: a. Book value of amounts carried as RCFD RCFD assets 3522. 0 3528. 0 M.4.a b. Replacement cost of contracts with a positive replacement cost 3529. 0 3530. 0 M.4.b
36 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC- 21 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 31 Transit Number: 91000019
Schedule RC-O - Other Data for Deposit Insurance Assessments C475
Dollar Amounts in Thousands - -------------------------------------------------------------------------------------------------------------------------------- 1. Unposted debits (see instructions): RCON a. Actual amount of all unposted debits 0030. N/A 1.a OR b. Separate amount of unposted debits: (1) Actual amount of unposted debits to demand deposits 0031. 0 1.b1 (2) Actual amount of unposted debits to time and savings deposits (1) 0032. 0 1.b2 2. Unposted credits (see instructions): a. Actual amount of all unposted credits 3510. N/A 2.a OR b. Separate amount of unposted credits: (1) Actual amount of unposted credits to demand deposits 3512. 0 2.b1 (2) Actual amount of unposted credits to time and savings deposits (1) 3514. 0 2.b2 3. Uninvested trust funds (cash) held in bank's own trust department (not included in total deposits in domestic offices) 3520. 0 3. 4. Deposits of consolidated subsidiaries in domestic offices and in insured branches in Puerto Rico and U.S. territories and possessions (not included in total deposits): a. Demand deposits of consolidated subsidiaries 2211. 19,716 4.a b. Time and savings deposits (1) of consolidated subsidiaries 2351. 0 4.b c. Interest accrued and unpaid on deposits of consolidated subsidiaries 5514. 0 4.c 5. Deposits in insured branches in Puerto Rico and U.S. territories and possessions: a. Demand deposits in insured branches (included in Schedule RC-E, Part II) 2229. 0 5.a b. Time and savings deposits (1) in insured branches (included in Schedule RC-E, Part II) 2383. 0 5.b c. Interest accrued and unpaid on deposits in insured branches (included in Schedule RC-G, item 1.b) 5515. 0 5.c Item 6 is not applicable to state nonmember banks that have not been authorized by the Federal Reserve to act as pass-through correspondents. 6. Reserve balances actually passed through to the Federal Reserve by the reporting bank on behalf of its respondent depository institutions that are also reflected as deposit liabilities of the reporting bank: a. Amount reflected in demand deposits (included in Schedule RC-E, Part I, item RCON 4 or 5, column B) 2314. 375 6.a b. Amount reflected in time and savings deposits (1) (included in Schedule RC-E, Part I, item 4 or 5, column A or C, but not column B) 2315. 0 6.b 7. Unamortized premiums and discounts on time and savings deposits:(1) a. Unamortized premiums 5516. 46 7.a b. Unamortized discounts 5517. 84,070 7.b 8. To be completed by banks with "Oakar deposits." Total "Adjusted Attributable Deposits" of all institutions acquired under Section 5(d)(3) of the Federal Deposit Insurance Act (from most recent FDIC Oakar Transaction Worksheet(s)) 5518. 2,403,177 8. 9. Deposits in lifeline accounts 9. 10. Benefit-responsive "Depository Institution Investment Contracts" (included in total deposits in domestic offices) 8432. 0 10. - ----------------- (1) For FDIC insurance assessment purposes, "time and savings deposits" consists of nontransaction accounts and all transaction accounts other than demand deposits.
37 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC-22 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 32 Transit Number: 91000019
Schedule RC-O - Continued
Dollar Amounts in Thousands - -------------------------------------------------------------------------------------------------------------------------------- 1. Adjustments to demand deposits reported in Schedule RC-E for certain reciprocal demand balances: a. Amount by which demand deposits would be reduced if reciprocal demand balances between the reporting bank and savings associations were reported on a net basis RCON rather than a gross basis in Schedule RC-E 8785 0 11.a b. Amount by which demand deposits would be increased if reciprocal demand balances between the reporting bank and U.S. branches and agencies of foreign banks were reported on a gross basis rather than a net basis in Schedule RC-E A181 0 11.b c. Amount by which demand deposits would be reduced if cash items in process of collection were included in the calculation of net reciprocal demand balances between the reporting bank and the domestic offices of U.S. banks and savings associations in Schedule RC-E A182 0 11.c
Memoranda
(to be completed each quarter except as noted) Dollar Amounts in Thousands - ----------------------------------------------------------------------------------------------------------------------------------- 1. Total deposits in domestic offices of the bank (sum of Memorandum items 1.a.(1) and 1.b.(1) must equal Schedule RC, item 13.a): a. Deposit accounts of $100,000 or less: RCON (1) Amount of deposit accounts of $100,000 or less 2702. 5,045,562 M.1a1 (2) Number of deposit accounts of $100,000 or less RCON Number (to be completed for the June report only) 3779. N/A M.1a2 b. Deposit accounts of more than $100,000: (1) Amount of deposit accounts of more than $100,000 2710. 3,166,985 M.1b1 (2) Number of deposit accounts of more than RCON Number $100,000 2722. 6,225 M.1b2 2. Estimated amount of uninsured deposits in domestic offices of the bank: a. An estimate of your bank's uninsured deposits can be determined by multiplying the number of deposit accounts of more than $100,000 reported in Memorandum item 1.b.(2) above by $100,000 and subtracting the result from the amount of deposit accounts of more than $100,000 reported in Memorandum item 1.b.(1) above. Indicate in the appropriate box at the right whether your bank has a method or procedure for determining a better estimate of uninsured deposits than the RCON YES NO estimate described above 6861. X M.2.a b. If the box marked YES has been checked, report the estimate of uninsured deposits determined by using your bank's method or procedure 5597. N/A M.2.b
C477 - -------------------------------------------------------------------------------- Person to whom questions about the Reports of Condition and Income should be directed: BRIAN BARNETT, MANAGER OF BANK ACCOUNTING (612) 667 - 8147 - -------------------------------------------------------------------------------- Name and Title (TEXT 8901) Area code/phone number/extension (TEXT 8902) 38 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC-23 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 33 Transit Number: 91000019
Schedule RC-R - Regulatory Capital This schedule must be completed by all banks as follows: Banks that reported total assets of $1 billion or more in Schedule RC, item 12, for June 30, 1995, must complete items 2 through 9 and Memoranda items 1 and 2. Banks with assets of less than $1 billion must complete items 1 through 3 below or Schedule RC-R in its entirety, depending on their response to item 1 below.
1. Test for determining the extent to which Schedule RC-R must be completed. C480 To be completed only by banks with total assets of less than $1 billion. RCFD YES NO Indicate in the appropriate box at the right whether the bank has total 6056 N/A 1. capital greater than or equal to eight percent of adjusted total assets For purposes of this test, adjusted total assets equals total assets less cash, U.S. Treasuries, U.S. Government agency obligations, and 80 percent of U.S. Government-sponsored agency obligations plus the allowance for loan and lease losses and selected off-balance sheet items as reported on Schedule RC-L (see instructions). If the box marked YES has been checked, then the bank only has to complete items 2 and 3 below. If the box marked NO has been checked, the bank must complete the remainder of this schedule. A NO response to item 1 does not necessarily mean that the bank's actual risk-based capital ratio is less than eight percent or that the bank is not in compliance with the risk-based capital guidelines.
Dollar Amounts in Thousands - -------------------------------------------------------------------------------------------------------------------------------- NOTE: All banks are required to complete (Column A) (Column B) items 2 and 3 below. See optional Subordinated Debt (1) and worksheet for items 3.a through 3.f. Intermediate Term Other Limited-Life Preferred Stock Capital Instruments --------------- ------------------- 2. Subordinated debt(1) and other limited-life capital instruments (original weighted average maturity of at least five years) with a remaining maturity of: RCFD RCFD a. One year or less 3780. 8 3786. 0 2.a b. Over one year through two years 3781. 8 3787. 0 2.b c. Over two years through three years 3782. 8 3788. 0 2.c d. Over three years through four years 3783. 8 3789. 0 2.d e. Over four years through five years 3784. 8 3790. 0 2.e f. Over five years 3785. 155 3791. 0 2.f
3. Amounts used in calculating regulatory capital ratios (report amounts determined by the bank for its own internal regulatory capital analyses consistent with applicable capital standards): RCFD a. Tier 1 capital 8274. 1,182,261 3.a b. Tier 2 capital 8275. 150,139 3.b c. Total risk-based capital 3792. 1,132,400 3.c d. Excess allowance for loan and lease losses A222. 48,871 3.d e. Risk-weighted assets (net of all deductions, including excess allowances) A223. 11,948,441 3.e f. "Average total assets" (net of all assets deducted from Tier 1 capital) (2) A224. 16,485,212 3.f
Items 4-9 and Memoranda items 1 and 2 are to be completed by banks that answered NO to item 1 above and by banks with total assets of $1 billion or more.
(Column A) (Column B) Assets Recorded on the Credit Equivalent Amount Balance Sheet of Off-Balance Sheet Items (3) ------------- ------------------------------ 4. Assets and credit equivalent amounts of off-balance sheet items assigned to the Zero percent risk category: a. Assets recorded on the balance sheet: (1) Securities issued by, other claims on, and claims unconditionally guaranteed by, the U.S. Government and its agencies and other OECD RCFD RCFD central governments 3794. 573,212 4.a.1 (2) All other 3795. 481,635 4.a.2 b. Credit equivalent amount of off-balance sheet items 3796. 0 4.b - ------------ (1) Exclude mandatory convertible debt reported in Schedule RC-M, item 7. (2) Do not deduct excess allowance for loan and lease losses. (3) Do not report in column B the risk-weighted amount of assets reported in column A.
39 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC-24 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 34 Transit Number: 91000019
Schedule RC-R - Continued
Dollar Amounts in Thousands - -------------------------------------------------------------------------------------------------------------------------------- (Column A) (Column B) Assets Recorded on the Credit Equivalent Amount Balance Sheet of Off-Balance Sheet Items(1) ------------- ----------------------------- 5. Assets and credit equivalent amounts of off-balance sheet items assigned to the 20 percent risk category: a. Assets recorded on the balance sheet: (1) Claims conditionally guaranteed by the U.S. Government and its agencies and other OECD RCFD RCFD central governments 3798. 506,378 5.a.1 (2) Claims collateralized by securities issued by the U.S. Government and its agencies and other OECD central governments; by securities issued by U.S. Government-sponsored agencies; and by cash on deposit 3799. 0 5.a.2 (3) All other 3800. 6,508,173 5.a.3 b. Credit equivalent amount of off-balance sheet items 3801. 636,500 5.b 6. Assets and credit equivalent amounts of off-balance sheet items assigned to the 50 percent risk category: a. Assets recorded on the balance sheet 3802. 1,999,577 6.a b. Credit equivalent amount of off-balance sheet items 3803. 129,593 6.b 7. Assets and credit equivalent amounts of off-balance sheet items assigned to the 100 percent risk category: a. Assets recorded on the balance sheet 3804. 7,168,214 7.a b. Credit equivalent amount of off-balance sheet items 3805. 2,248,038 7.b 3. On-balance sheet asset values excluded from the calculation of the risk-based capital ratio(2) 3806. 20,588 8. 9. Total assets recorded on the balance sheet (sum of items 4.a, 5.a, 6.a, 7.a, and 8, column A) (must equal Schedule RC, item 12 plus items 4.b and 4.c) 3807. 17,257,777 9.
Memoranda
Dollar Amounts in Thousands - -------------------------------------------------------------------------------------------------------------------------------- 1. Current credit exposure across all off-balance sheet derivative contracts covered by RCFD the risk-based capital standards 8764. 28,461 M.1
(Column B) (Column A) With a remaining maturity of (Column C) Over one year One year or less through five years Over five years ---------------- ------------------ --------------- 2. Notional principal amounts of off-balance sheet derivative contracts:(3) a. Interest rate RCFD RCFD RCFD contracts 3809. 2,301,742 8766. 1,145,935 8767. 592,182 M.2a b. Foreign exchange contracts 3812. 567,541 8769. 14,237 8770. N/A M.2b c. Gold contracts 8771. N/A 8772. N/A 8773. N/A M.2c d. Other precious metals contracts 8774. N/A 8775. N/A 8776. N/A M.2d e. Other commodity contracts 8777. N/A 8778. N/A 8779. N/A M.2e f. Equity derivative contracts A000. N/A A001. N/A A002. N/A M.2f - -------------- 1) Do not report in column B the risk-weighted amount of assets reported in column A. 2) Include the difference between the fair value and the amortized cost of available-for-sale securities in item 8 and report the amortized cost of these securities in items 4 through 7 above. Item 8 also includes on-balance sheet asset values (or portions thereof) of off-balance sheet interest rate, foreign exchange rate, and commodity contracts and those contracts (e.g. future contracts) not subject to risk-based capital. Exclude from item 8 margin accounts and accrued receivables not included in the calculation of credit equivalent amounts of off-balance sheet derivatives as well as any portion of the allowance for loan and lease losses in excess of the amount that may be included in Tier 2 capital. 3) Exclude foreign exchange contracts with an original maturity of 14 days or less and all futures contracts.
40 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC-25 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 35 Transit Number: 91000019
Optional Narrative Statement Concerning the Amounts Reported in the Reports of Condition and Income at close of business on September 30, 1996 Norwest Bank Minnesota, N.A. Minneapolis MN - ---------------------------- ----------- -- Legal Title of Bank City State The management of the reporting bank may, if it wishes, submit a brief narrative statement on the amounts reported in the reports of Condition and Income. This optional statement will be made available to the public, along with the publicly vailable data in the Reports of Condition and Income, in reponse to any request for individual bank report data. However, the information reported in column A and in all of Memorandum item 1 of Schedule RC-N is regarded as confidential and will not be released to the public. BANKS CHOOSING TO SUBMIT THE NARRATIVE STATEMENT SHOULD ENSURE THAT THE STATEMENT DOES NOT CONTAIN THE NAMES OR OTHER IDENTIFICATIONS OF INDIVIDUAL BANK CUSTOMERS, REFERENCES TO THE AMOUNTS REPORTED IN THE CONFIDENTIAL ITEMS IN SCHEDULE RC-N, OR ANY OTHER INFORMATION THAT THEY ARE NOT WILLING TO HAVE MADE PUBLIC OR THAT WOULD COMPROMISE THE PRIVACY OF THEIR CUSTOMERS. Banks choosing not to make a statement may check the "No comment" box below and should make no entries of any kind in the space provided for the narrative statement; i.e., DO NOT enter in this space such phrases as "No statement," "Not applicable," "N/A," "No comment," and "None." The optional statement must be entered on this sheet. The statement should not exceed 100 words. Further, regardless of the number of words, the statement must not exceed 750 characters, including punctuation, indentation, and standard spacing between words and sentences. If any submission should exceed 750 characters, as defined, it will be truncated at 750 characters with no notice to the submitting bank and the truncated statement will appear as the bank's statement both on agency computerized records and in computer-file releases to the public. All information furnished by the bank in the narrative statement must be accurate and not misleading. Appropriate efforts shall be taken by the submitting bank to ensure the statement's accuracy. The statement must be signed, in the space provided below, by a senior officer of the bank who thereby attests to its accuracy. If, subsequent to the original submission, material changes are submitted for the data reported in the Reports of Condition and Income, the existing narrative statement will be deleted from the files, and from disclosure; the bank, at its option, may replace it with a statement, under signature, appropriate to the amended data. The optional narrative statement will appear in agency records and in release to the public exactly as submitted (or amended as described in the preceding paragraph) by the management of the bank (except for the truncation of statements exceeding the 750-character limit described above). THE STATEMENT WILL NOT BE EDITED OR SCREENED IN ANY WAY BY THE SUPERVISORY AGENCIES FOR ACCURACY OR RELEVANCE. DISCLOSURE OF THE STATEMENT SHALL NOT SIGNIFY THAT ANY FEDERAL SUPERVISORY AGENCY HAS VERIFIED OR CONFIRMED THE ACCURACY OF THE INFORMATION CONTAINED THEREIN. A STATEMENT TO THIS EFFECT WILL APPEAR ON ANY PUBLIC RELEASE OF THE OPTIONAL STATEMENT SUBMITTED BY THE MANAGEMENT OF THE REPORTING BANK. - -------------------------------------------------------------------------------- C471 C472 No comment: X (RCCN 6979) BANK MANAGEMENT STATEMENT (please type or print clearly) (TEXT 6980): -------------------------------------- ----------------- Signature of Executive Officer of Bank Date of Signature 41 Norwest Bank Minnesota, N.A. Call Date: 09/30/96 ST-BK: 27-4095 FFIEC 031 Sixth Street and Marquette Avenue Page RC-26 Minneapolis, MN 55479 Vendor ID: D CERT: 05208 36 Transit Number: 91000019
THIS PAGE IS TO BE COMPLETED BY ALL BANKS - -------------------------------------------------------------------------------- OMB No. For OCC: 1557-0081 OMB No. For FDIC: 3064-0052 OMB No. For Federal Reserve: 7100-0036 Expiration Date: 03/31/99 SPECIAL REPORT (Dollar Amounts in Thousands) CLOSE OF BUSINESS DATE: FDIC Certificate Number: September 30, 1996 05208 C700 - -------------------------------------------------------------------------------- LOANS TO EXECUTIVE OFFICERS (Complete as of each Call Report Date) - -------------------------------------------------------------------------------- The following information is required by Public Laws 90-44 and 102-242, but does not constitute a part of the Report of Condition. With each Report of Condition, these Laws require all banks to furnish a report of all loans or other extensions of credit to its executive officers made since the date of the previous Report of Condition. Data regarding individual loans or other extensions of credit are not required. If no such loans or other extensions of credit were made during the period, insert "none" against subitem (a). (Exclude the first $15,000 of indebtedness of each executive officer under bank credit card plan.) See Sections 215.2 and 215.3 of Title 12 of the Code of Federal Regulations (Federal Reserve Board Regulation O) for the definitions of "executive officer" and "extension of credit," respectively. Exclude loans and other extensions of credit to directors and principal shareholders who are not executive officers. - --------------------------------------------------------------------------------
RCFD a. Number of loans made to executive officers since the previous Call Report date 3561. NONE a. b. Total dollar amount of above loans (in thousands of dollars) 3562. 0 b. c. Range of interest charged on above loans (example: 9-3/4% = 9.75) 7701/7702. 0.00% to 0.00% c.
- -------------------------------------------------------------------------------- SIGNATURE AND TITLE OF OFFICER DATE (Month, Day, Year) AUTHORIZED TO SIGN REPORT Mark P. Wagener /s/ Mark P. Wagener Director of Bank & Service Accounting 10/29/96 - -------------------------------------------------------------------------------- NAME AND TITLE OF PERSON TO WHOM (TEXT 8903) AREA CODE/PHONE NUMBER/EXTENSION: INQUIRIES MAY BE DIRECTED: (TEXT 8904) (612) 667 - 8147 BRIAN BARNETT, MANAGER OF BANK ACCOUNTING - -------------------------------------------------------------------------------- FDIC 8040/53 (6-95) EX-99.1 9 EXHIBIT 99.1 1 Exhibit 99.1 COLE NATIONAL GROUP, INC. LETTER OF TRANSMITTAL 9 7/8% Senior Subordinated Notes due 2006 CUSIP 193292AB5 To: Norwest Bank Minnesota, National Association, The Exchange Agent THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF ORIGINAL NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
By Registered or Certified Mail: By Overnight Courier: Norwest Bank Minnesota, National Association Norwest Bank Minnesota, National Association Corporate Trust Operations Corporate Trust Operations P.O. Box 1517 Norwest Center Minneapolis, MN 55480-1517 Sixth and Marquette Minneapolis, MN 55479-0113 By Hand: By Facsimile: Norwest Bank Minnesota, National Association Norwest Bank Minnesota, National Association Corporate Trust Operations Corporate Trust Operations Northstar East, 12th Floor (612) 667-4927 608 2nd Avenue Confirm by telephone: Minneapolis, MN 55479-0113 (612) 667-9764 ----------
Delivery of this instrument to an address other than as set forth above or transmission of instructions via a facsimile number other than the one listed above will not constitute a valid delivery. The instructions accompanying this Letter of Transmittal should be read carefully before this Letter of Transmittal is completed. HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE NOTES FOR THEIR ORIGINAL NOTES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR ORIGINAL NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. The undersigned acknowledges receipt of the Prospectus dated December , 1996 (the "Prospectus") of Cole National Group, Inc. (the "Company") and this Letter of Transmittal (the "Letter of Transmittal"), which together constitute the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of its 9 7/8% Senior Subordinated Notes due 2006 (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for each $1,000 principal amount of its outstanding 9 7/8% Senior Subordinated Notes due 2006 (the "Original Notes"), of which $150,000,000 principal amount is outstanding, upon the terms and conditions set forth in the Prospectus. Other capitalized terms used but not defined herein have the meaning given to them in the Prospectus. 2 For each Original Note accepted for exchange, the holder of such Original Note will receive an Exchange Note having a principal amount equal to that of the surrendered Original Note. Interest on the Exchange Notes will accrue from the last interest payment date on which interest was paid on the Original Notes surrendered in exchange therefor or, if no interest has been paid on the Original Notes, from the date of original issue of the Original Notes. Holders of Original Notes accepted for exchange will be deemed to have waived the right to receive any other payments or accrued interest on the Original Notes. The Company reserves the right, at any time or from time to time, to extend the Exchange Offer at its discretion, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Company shall notify holders of the Original Notes of any extension by means of a press release or other public announcement prior to P.M., Exchange York City time, on the next business day after the previously scheduled Expiration Date. This Letter of Transmittal is to be used by Holders if: (i) certificates representing Original Notes are to be physically delivered to the Exchange Agent herewith by Holders; (ii) tender of Original Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to the procedures set forth in the Prospectus under "The Exchange Offer - Procedures for Tendering" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Original Notes; or (iii) tender of Original Notes is to be made according to the guaranteed delivery procedures set forth in the prospectus under "The Exchange Offer - Guaranteed Delivery Procedures." DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The term "Holder" with respect to the Exchange Offer means any person: (i) in whose name Original Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered Holder, or (ii) whose Original Notes are held of record by DTC who desires to deliver such Original Notes by book-entry transfer at DTC. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. The instructions included with this Letter of Transmittal must be followed. Questions and requests for assistance or for additional copies of the Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Exchange Agent. See Instruction 11 herein. HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR ORIGINAL NOTES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE CHECKING ANY BOX BELOW
___________________________________________________________________________________________________ | DESCRIPTION OF 9 7/8% SENIOR SUBORDINATED NOTES DUE 2006 (ORIGINAL NOTES) | |___________________________________________________________________________________________________| | | | | | | | | Aggregate | Principal | | | | Principal | Amount | | | | Amount | Tendered | |Names(s) and Address(es) of Registered Holder(s) | Certificate | Represented | (If less | | (Please fill in, if blank) | Number(s)* | by Certificate(s) | than all)** | |_________________________________________________|_____________|___________________|_______________| | | | | | |_________________________________________________|_____________|___________________|_______________| | | | | | |_________________________________________________|_____________|___________________|_______________| | | | | | |_________________________________________________|_____________|___________________|_______________| | | | | | |_________________________________________________|_____________|___________________|_______________| | | | | | |_________________________________________________|_____________|___________________|_______________| | | | | | | | Total | | | |_________________________________________________|_____________|___________________|_______________| | | | * Need not be completed by Holders tendering by book-entry transfer. | | | | ** Unless indicated in the column labeled "Principal Amount Tendered," any | | tendering Holder of Original Notes will be deemed to have tendered the entire | | aggregate principal amount represented by the column labeled "Aggregate | | Principal Amount Represented by Certificate(s)," If the space provided above | | is inadequate, list the certificate numbers and principal amounts on a | | separate signed schedule and affix the list to this Letter of Transmittal. | | | | The minimum permitted tender is $1,000 in principal amount of Original Notes. All | | other tenders must be integral multiples of $1,000. | |___________________________________________________________________________________________________|
3 - -------------------------------------------------------------------------------- SPECIAL PAYMENT INSTRUCTIONS (See Instructions 4,5 and 6) To be completed ONLY if certificates for Original Notes in a principal amount not tendered or not accepted for exchange, or Exchange Notes issued in exchange for Original Notes accepted for exchange, are to be issued in the name of someone other than the undersigned, or if the Original Notes tendered by book-entry transfer that are not accepted for exchange are to be credited to an account maintained by DTC. Issue certificate(s) to: Name: __________________________________________ (Please Print) Address: _______________________________________ ________________________________________________ (Include Zip Code) ________________________________________________ (Tax identification or Social Security No.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (See Instructions 4,5 and 6) To be completed ONLY if certificates for Original Notes in a principal amount not tendered or not accepted for exchange, or Exchange Notes issued in exchange for Original Notes accepted for exchange, are to be sent to someone other than the undersigned, or to the undersigned at an address other than that shown above. Mail to: Name: __________________________________________ (Please Print) Address: _______________________________________ ________________________________________________ (Include Zip Code) ________________________________________________ (Tax Identification or Social Security No.) - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- [ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution:_____________________________ DTC Book-Entry Account Number:________________________ Transaction Code Number:_____________________________ [ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s):_________________________________________ Window Ticket Number (if any):____________________________________________ Date of Execution of Notice of Guaranteed Delivery:_______________________ IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING: Account Number:___________________________ Transaction Code Number:__________________ [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name:_____________________________________________________________________ Address:__________________________________________________________________ - -------------------------------------------------------------------------------- 5 Ladies and Gentlemen: Subject to the terms and conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of Original Notes indicated above. Subject to and effective upon the acceptance for exchange of the principal amount of Original Notes tendered in accordance with this Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to the Original Notes tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Company and as Trustee under the Indenture for the Original Notes and Exchange Notes) with respect to the tendered Original Notes with full power of substitution to (i) deliver certificates for such Original Notes to the Company, or transfer ownership of such Original Notes on the account books maintained by DTC and deliver all accompanying evidence of transfer and authenticity to, or upon the order of, the Company and (ii) present such Original Notes for transfer on the books of the Company and receive all benefits and otherwise exercise all rights of beneficial ownership of such Original Notes, all in accordance with the terms and subject to the conditions of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Original Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, when the same are acquired by the Company. The undersigned hereby further represents that any Exchange Notes acquired in exchange for Original Notes tendered hereby will have been acquired in the ordinary course of business of the Holder receiving such Exchange Notes, whether or not such person is the Holder, that neither the Holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such Exchange Notes and that neither the Holder nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act, of the Company or any of its subsidiaries. The undersigned also acknowledges that this Exchange Offer is being made in reliance on an interpretation by the staff of the Securities and Exchange Commission (the "SEC") that the Exchange Notes issued in exchange for the Original Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders have no arrangements with any person to participate in the distribution of such Exchange Notes. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Original Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" withing the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the assignment, transfer and purchase of the Original Notes tendered hereby. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death, incapacity or dissolution of the undersigned and every obligation of the undersigned under this Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, successors and assigns, trustees in bankruptcy or other legal representatives of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer - Withdrawal of Tenders" section of the Prospectus. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Original Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. If any tendered Original Notes are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Original Notes will be returned (except as noted below with respect to tenders 6 through DTC), without expense, to the undersigned at the address shown below or at a different address as may be indicated under Special Delivery Instructions" as promptly as practicable after the Expiration Date. The undersigned understands that tenders of Original Notes pursuant to the procedures described under the caption "The Exchange Offer - Procedures for Tendering Original Notes" in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Exchange Offer. Unless otherwise indicated under "Special Payment and Delivery Instructions," please issue the certificates representing the Exchange Notes issued in exchange for the Original Notes accepted for exchange and return any Original Notes not tendered or not exchanged in the name(s) of the undersigned (or in either such event in the case of the Original Notes tendered by DTC, by credit to the undersigned's account, at DTC). Similarly, unless otherwise indicated under "Special Payment and Delivery Instructions," please send the certificates representing the Exchange Notes issued in exchange for the Original Notes accepted for exchange and any certificates for Original Notes not tendered or not exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s), unless, in either event, tender is being made through DTC. In the event that both "Special Payment Instructions" and "Special Payment and Delivery Instructions" are completed, please issue the certificates representing the Exchange Notes issued in exchange for the Original Notes accepted for exchange and return any Original Notes not tendered or not exchanged in the name(s) of, and send said certificates to, the person(s) so indicated. The undersigned recognizes that the Company has no obligation pursuant to the "Special Payment Instructions" and "Special Delivery Instructions" to transfer any Original Notes from the name of the registered Holder(s) thereof if the Company does not accept for exchange any of the Original Notes so tendered. Holders of Original Notes who wish to tender their Original Notes and (i) whose Original Notes are not immediately available or (ii) who cannot deliver their Original Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to the Expiration Date, may tender their Original Notes according to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer - Guaranteed Delivery Procedures." See Instruction 1 regarding the completion of the Letter of Transmittal printed below. 7 - -------------------------------------------------------------------------------- PLEASE SIGN HERE WHETHER OR NOT ORIGINAL NOTES ARE BEING PHYSICALLY TENDERED HEREBY X ____________________________________________________________ ________________ Date X ____________________________________________________________ ________________ Signature(s) of Registered Holder(s) or Authorized Signatory Date Area Code and Telephone Number: _______________________________________________ The above lines must be signed by the registered Holder(s) of Original Notes as their name(s) appear(s) on the Original Notes or, if the Original Notes are tendered by a participant in DTC, as such participant's name appears on a security position listing as the owner of Original Notes, or by person(s) authorized to become registered Holder(s) by a properly completed bond power from the registered Holder(s), a copy of which must be transmitted with this Letter of Transmittal. If Original Notes to which this Letter of Transmittal relates are held of record by two or more joint Holders, then all such Holders must sign this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person must (i) set forth his or her full title below and (ii) unless waived by the Company, submit evidence satisfactory to the Company of such person's authority to act. See Instruction 4 regarding the completion of this Letter of Transmittal printed below. Name(s): _____________________________________________________________________ _______________________________________________________________________________ (Please Print) Capacity: ____________________________________________________________________ Address: ____________________________________________________________________ (Include Zip Code) SIGNATURE GUARANTEE BY AN ELIGIBLE INSTITUTION (If Required by Instruction 4) Certain signatures must be Guaranteed by an Eligible Institution. _______________________________________________________________________________ (Authorized Signature) ________________________________________________________________________________ (Title) _______________________________________________________________________________ (Name of Firm) Dated: ________________________________________________________________, 1996 - -------------------------------------------------------------------------------- 8 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES. This Letter is to be completed by noteholders, either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer - Book-Entry Transfer" section of the Prospectus. Certificates for all physically tendered Original Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter (or manually signed facsimile hereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Original Notes tendered hereby must be in denominations of principal amount of maturity of $1,000 and any integral multiple thereof. Noteholders whose certificates for Original Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Original Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer - Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution (as defined in Instruction 4 below), (ii) prior to the Expiration Date, the Exchange Agent must receive from such Eligible Institution a properly completed and duly executed Letter (or facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Original Notes and the amount of Original Notes tendered, stating that the tender is being made thereby and guaranteeing that within five Exchange York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Original Notes, or a Book-Entry Confirmation, and any other documents required by the Letter will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Original Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may be, and all other documents required by this Letter, are received by the Exchange Agent within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. The method of delivery of this Letter, the Original Notes and all other required documents is at the election and risk of the tendering holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If Original Notes are sent by mail, it is suggested that the mailing be made sufficiently in advance of the Expiration Date to permit the delivery to the Exchange Agent prior to 5:00 p.m., Exchange York City time, on the Expiration Date. See "The Exchange Offer" section in the Prospectus. 2. TENDER BY HOLDER. Only a holder of Original Notes may tender such Original Notes in the Exchange Offer. Any beneficial holder of Original Notes who is not the registered holder and who wishes to tender should arrange with the registered holder to execute and deliver this Letter on his or her behalf or must, prior to completing and executing this Letter and delivering his or her Original Notes, either make appropriate arrangements to register ownership of the Original Notes in such holder's name or obtain a properly completed bond power from the registered holder. 3. PARTIAL TENDERS. Tenders of Original Notes will be accepted only in integral multiples of $1,000. If less than the entire principal amount of any Original Notes is tendered, the tendering holder should fill in the principal amount tendered in the fourth column of the box entitled "Description of 9 7/8% Senior Subordinated Notes due 2006 (Original Notes)" above. The entire principal amount of Original Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of all Original Notes is not tendered, then Original Notes for the principal amount of Original Notes not tendered and a certificate or certificates representing Exchange Notes issued in exchange for any Original Notes accepted will be sent to the Holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal, promptly after the Original Notes are accepted for exchange. 9 4. SIGNATURES ON THIS LETTER; POWERS OF ATTORNEY AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter is signed by the registered holder of the Original Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Original Notes are owned of record by two or more joint owners, all such owners must sign this Letter. If any tendered Original Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered holder or holders of the Original Notes specified herein and tendered hereby, no endorsements of certificates or separate powers of attorney are required. If, however, the Exchange Notes are to be issued, or any untendered Original Notes are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate powers of attorney are required. Signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter is signed by a person other than the registered holder or holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate powers of attorney, in either case signed exactly as the name or names on the registered holder or holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter or any certificates or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. Endorsements on certificates for Original Notes or signatures on powers of attorney required by this Instruction 4 must be guaranteed by a firm which is a participant in a recognized signature guarantee medallion program ("Eligible Institutions"). Signatures on this Letter must be guaranteed by an Eligible Institution unless the Original Notes are tendered (i) by a registered holder of Original Notes (which term, for purposes of the Exchange Offer, includes any participant in the Book-Entry Transfer Facility system whose name appears on a security position listing as the holder of such Original Notes) who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter, or (ii) for account of an Eligible Institution. 5. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Tendering holders should indicate, in the applicable box or boxes, the name and address to which Exchange Notes or substitute Original Notes for principal amounts not tendered or not accepted for exchange are to be issued or sent, if different from the name and address of the person signing this Letter of Transmittal (or in the case of tender of Original Notes through DTC, if different from DTC). In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. Noteholders tendering Original Notes by book-entry transfer may request that Original Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such noteholder may designate hereon. If no such instructions are given, such Original Notes not exchanged will be returned to the name and address of the person signing this Letter. 6. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder whose offered Original Notes are accepted for exchange must provide the Company (as payer) with his, her or its correct taxpayer identification number ("TIN"), which, in the case of an exchanging holder who is an individual, is his or her social security number. If the Company is not provided with the correct TIN or an adequate basis for exemption, such holder may be subject to a $50 penalty imposed by the Internal Revenue Service (the "IRS"), and payments made with respect to Original Notes purchased pursuant to the Exchange Offer may be subject to backup withholding at a 31% rate. If withholding results in an overpayment of taxes, a refund may be obtained. Exempt holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9." 10 To prevent backup withholding, each exchanging holder must provide his, her or its correct TIN by completing the Substitute Form W-9 enclosed herewith, certifying that the TIN provided is correct (or that such Holder is awaiting a TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder has been notified by the IRS that he, she or it is subject to backup withholding as a result of a failure to report all interest or dividends, or (iii) the IRS has notified the holder that he, she or it is no longer subject to backup withholding. In order to satisfy the Exchange Agent that a foreign individual qualifies as an exempt recipient, such holder must submit a statement signed under penalty of perjury attesting to such exempt status. Such statements may be obtained from the Exchange Agent. If the Original Notes are in more than one name or are not in the name of the actual owner, consult the Substitute Form W-9 for information on which TIN to report. If you do not provide your TIN to the Company within 60 days, backup withholding will begin and continue until you furnish your TIN to the Company. 7. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the exchange of Original Notes pursuant to the Exchange Offer. If, however, certificates representing Exchange Notes or Original Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Original Notes tendered hereby, or if tendered Original Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Original Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or on any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering holder. Except as provided in this Instruction 7, it will not be necessary for transfer tax stamps to be affixed to the Original Notes listed in this Letter of Transmittal. 8. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend, waive or modify specified conditions in the Exchange Offer in the case of any Original Notes tendered. 9. NO CONDITIONAL TRANSFERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders of Original Notes, by execution of this Letter, shall waive any right to receive notice of the acceptance of their Original Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Original Notes nor shall any of them incur any liability for failure to give any such notice. 10. MUTILATED, LOST, STOLEN OR DESTROYED Original NOTES. Any tendering holder whose Original Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated herein for further instructions. 11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance for additional copies of the Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Exchange Agent at the address specified in the Prospectus. - -------------------------------------------------------------------------------- (DO NOT WRITE IN THE SPACE BELOW)
Certificate Original Notes Original Notes Surrendered Tendered Accepted ----------- -------------- -------------- ------------------- --------------------- ------------------ ------------------- --------------------- ------------------ =================== ===================== ==================
Delivery Prepared by___________ Checked By_____________ Date________________ - -------------------------------------------------------------------------------- 11 PAYER'S NAME: COLE NATIONAL GROUP, INC. - ------------------------------------------------------------------------------- Name (if joint names, list first and circle the name of the person or entity whose number you enter in Part 1 below. See instructions if your name has changed.) - ------------------------------------------------------------------------------- Address - ------------------------------------------------------------------------------- City, state and ZIP Code - ------------------------------------------------------------------------------- List account number(s) here (optional) - -------------------------------------------------------------------------------
SUBSTITUTE Part I--Please provide your Tax- FORM W-9 payer Identification Number ("TIN") in the box at right and ________________________________ certify by signing and dating below. Social Security Number Department of the Treasury OR ______________________________ Internal Revenue Service TIN ________________________________________________________________________________ Part II--Check the box if you are NOT subject to backup withholding under the provisions of section 3408(a)(1)(C) of the Internal Revenue Code because (1) you have not been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to backup withholding. [ ] ________________________________________________________________________________ Part III--AWAITING TIN
- ------------------------------------------------------------------------------- Payer's request for Taxpayer Identification Number - ------------------------------------------------------------------------------- Certification--Under the penalties of perjury, I certify that the information provided on this form is true, correct and complete. - ------------------------------------------------------------------------------- SIGNATURE DATE , 1996 - ------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 12 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. -- Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer.
- ------------------------------------------------------------------------------- GIVE THE FOR THIS TYPE SOCIAL SECURITY OF ACCOUNT: NUMBER OF -- - ------------------------------------------------------------------------------- 1. An individual's account The individual 2. Two or more individuals The actual owner of the account or, if combined funds, any one of the individuals(1) 3. Husband and wife (joint The actual owner of the account or, if account) joint funds, either person(1) 4. Custodian account of a The minor(2) minor (Uniform Gift to Minors Act) 5. Adult and minor (joint The adult or, if the minor is the only account) contributor, the minor(1) 6. Account in the name of The ward, minor, or incompetent guardian or committee for person(3) a designated ward, minor or incompetent person 7. a. The usual revocable The grantor trustee(1) savings trust account (grantor is also trustee) b. So-called trust account The actual owner(1) that is not a legal and valid trust under State law 8. Sole proprietorship The owner(4) account 9. A valid trust, estate or The legal entity (do not furnish the pension trust identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, or The organization educational organization account 12. Partnership account held The partnership in the name of the business 13. Association, club, or other The organization tax-exempt organization 14. A broker or registered The broker or nominee nominee 15. Account with the Department The public entity of Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - ------------------------------------------------------------------------------- (1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: IF NO NAME IS CIRCLED WHEN THERE IS MORE THAN ONE NAME, THE NUMBER WILL BE CONSIDERED TO BE THAT OF THE FIRST NAME LISTED. 13 Obtaining a Number If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. Payees Exempt from Backup Withholding Payees specifically exempted from backup withholding on ALL payments include the following: - A corporation. - A financial institution. - An organization exempt from tax under section 501(a), or an individual retirement plan. - The United States or any agency or instrumentality thereof. - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - An international organization or any agency, or instrumentality thereof. - A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. - A real estate investment trust. - A common trust fund operated by a bank under section 584(a). - An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(l). - An entity registered at all times under the Investment Company Act of 1940. - A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under section 1441. - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. - Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - Payments described in section 6049(b)(5) to non-resident aliens. - Payments on tax-free covenant bonds under section 1451. - Payments made by certain foreign organizations. - Payments made to a nominee. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. Privacy Act Notice -- Section 6109 requires most recipients of dividend, interest, or other payments to give tax-payer identification numbers to payers who must report for payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Beginning January 1, 1994, payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. Penalties (1) Penalty for Failure to Furnish Taxpayer Identification Number. -- If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) Failure to Report Certain Dividend and Interest Payments. -- If you fail to include any portion of an includible payment for interest, dividends, or patronage dividends in gross income, such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an underpayment attributable to that failure unless there is clear and convincing evidence to the contrary. (3) Civil Penalty for False Information with Respect to Withholding. - -- If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) Criminal Penalty for Falsifying Information. -- Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.2 10 EXHIBIT 99.2 1 Exhibit 99.2 NOTICE OF GUARANTEED DELIVERY for 9 7/8% Senior Subordinated Notes Due 2006 of COLE NATIONAL GROUP, INC. CUSIP 193292AB5 As set forth in the Prospectus dated December , 1996 (the "Prospectus"), of Cole National Group, Inc. ("the Company") and in the accompanying Letter of Transmittal and instructions thereto (the "Letter of Transmittal"), this form or one substantially equivalent hereto must be used to accept the Company's Exchange Offer (the "Exchange Offer") to exchange all of its outstanding 9 7/8% Senior Subordinated Notes due 2006 (the "Original Notes") for its 9 7/8% Senior Subordinated Notes due 2006, which have been registered under the Securities Act of 1933, as amended, if certificates for the Original Notes are not immediately available or if the Original Notes, the Letter of Transmittal or any other documents required thereby cannot be delivered to the Exchange Agent, or the procedure for book-entry transfer cannot be completed, prior to 5:00 P.M., Exchange York City time, on the Expiration Date (as defined in the Prospectus). This form may be delivered by an Eligible Institution by hand or transmitted by facsimile transmission, overnight courier or mail to the Exchange Agent as set forth below. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. ________________________________________________________________________________ THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON 1997, UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF ORIGINAL NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE BUSINESS DAY PRIOR TO THE EXPIRATION DATE. ________________________________________________________________________________ To: Norwest Bank Minnesota, National Association, The Exchange Agent By Registered or Certified Mail: By Overnight Courier: Norwest Bank Minnesota, National Association Norwest Bank Minnesota, National Corporate Trust Operations Association P.O. Box 1517 Corporate Trust Operations Minneapolis, MN 55480-1517 Norwest Center Sixth and Marquette Minneapolis, MN 55479-0113 By Hand: By Facsimile: Norwest Bank Minnesota, National Association Norwest Bank Minnesota, National Corporate Trust Operations Association Northstar East, 12th Floor Corporate Trust Operations 608 2nd Avenue (612) 667-4927 Minneapolis, MN 55479-0113 Confirm by telephone: (612) 667-9764 _____________________ DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal to be used to tender Original Notes is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the Letter of Transmittal. 2 Ladies and Gentlemen: The undersigned hereby tenders to Cole National Group, Inc. a Delaware corporation (the "Company"), upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal (which together constitute the "Exchange Offer"), receipt of which is hereby acknowledged, Original Notes pursuant to the guaranteed delivery procedures set forth in Instruction I of the Letter of Transmittal. The undersigned understands that tenders of Original Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof. The undersigned understands that tenders of Original Notes pursuant to the Exchange Offer may not be withdrawn after 5:00 p.m., Exchange York City time, on the business day prior to the Expiration Date. All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death, incapacity or dissolution of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. NOTE: SIGNATURES MUST BE PROVIDED WHERE INDICATED BELOW. Certificate No(s). for Original Notes Address (if available) _______________________________________ ____________________________________ _______________________________________ ____________________________________ Principal Amount of Original Notes Area Code and Tel. No. _______________________________________ ____________________________________ _______________________________________ ____________________________________ Name(s) of Record Holder(s) Signature(s) _______________________________________ ____________________________________ _______________________________________ ____________________________________ Dated: ____________________________________ If Original Notes will be delivered by book-entry transfer at the Depository Trust Company, Depository Account No: ____________________________________ This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Original Notes exactly as its (their) name(s) appear on certificates for Original Notes or on a security position listing as the owner of Original Notes, or by person(s) authorized to become registered holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information: 3 ________________________________________________________________________________ PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Capacity: - -------------------------------------------------------------------------------- Address(es): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ________________________________________________________________________________ 4 ________________________________________________________________________________ GUARANTEE (Not To Be Used for Signature Guarantee) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), hereby (a) represents that the above named person(s) "own(s)" the Original Notes tendered hereby within the meaning of Rule 14e-4 under the Exchange Act, (b) represents that such tender of Original Notes complies with Rule 14e-4 under the Exchange Act and (c) guarantees that delivery to the Exchange Agent of certificates for the Original Notes tendered hereby, in proper form for transfer (or confirmation of the book-entry transfer of such Original Notes into the Exchange Agent's Account at the Depository Trust Company, pursuant to the procedures for book-entry transfer set forth in the Prospectus), with delivery of a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signatures and any other required documents, will be received by the Exchange Agent at one of its addresses set forth above within five business days after the Expiration Date. THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF TRANSMITTAL AND ORIGINAL NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME PERIOD SET FORTH AND THAT FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS TO THE UNDERSIGNED. Name of Firm:___________________________________________________________________ Address:________________________________________________________________________ (Zip Code) Area Code and Tel. No.:_________________________________________________________ Authorized Signature:___________________________________________________________ Name:___________________________________________________________________________ (Please Type or Print) Title:__________________________________________________________________________ Date:_____________________________________ ________________________________________________________________________________ NOTE: DO NOT SEND ORIGINAL NOTES WITH THIS FORM; ORIGINAL NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL SO THAT THEY ARE RECEIVED BY THE EXCHANGE AGENT WITHIN FIVE NEW YORK STOCK EXCHANGE TRADING DAYS AFTER THE EXPIRATION DATE. -----END PRIVACY-ENHANCED MESSAGE-----