UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission file number 33-66342

COLE NATIONAL GROUP, INC.

(330) 486-3100
(Registrant’s telephone number, including area code)

     The Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form in the reduced disclosure format.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   No X

     All of the outstanding capital stock of the registrant is held by Cole National Corporation.

     As of May 28, 2004, 1,100 shares of the registrant’s common stock, $.01 par value were outstanding.

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MAY 1, 2004
INDEX

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)

The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)

The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.

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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Summary of Significant Accounting Policies

Basis of Presentation

     Cole National Group, Inc. is a wholly owned subsidiary of Cole National Corporation (the “Parent”). The condensed consolidated financial statements include the accounts of Cole National Group and its wholly owned subsidiaries (collectively, the “Company”). All significant intercompany transactions have been eliminated in consolidation.

     Fiscal years end on the Saturday closest to January 31 and are identified according to the calendar year in which they begin. For example, the fiscal year ended January 31, 2004 is referred to as “fiscal 2003.” The current fiscal year, which ends January 29, 2005, is referred to as “fiscal 2004.” Fiscal 2004 and fiscal 2003 each consists of 52 weeks.

     The accompanying condensed consolidated financial statements have been prepared without audit and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted, although management believes that the disclosures herein are adequate to make the information not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K/A. Results for interim periods are not necessarily indicative of the results to be expected for the full year.

Nature of Operations

     The Company is a specialty service retailer operating in both host and nonhost environments, whose primary lines of business are optical products and services and personalized gifts. The Company sells its products through 2,417 company-owned retail locations and 488 franchised locations in 50 states, Canada, and the Caribbean. In connection with its optical business, the Company is a managed vision care benefits provider and claims payment administrator whose programs provide comprehensive eyecare benefits primarily marketed directly to large employers, health maintenance organizations (HMO) and other organizations. The Company has two reportable segments: Cole Vision and Things Remembered (see Note 6).

Use of Estimates

     The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Significant estimates are required in determining the allowance for uncollectible accounts, inventory reserves, depreciation, amortization and recoverability of long-lived assets, deferred income taxes, remakes and returns allowances, managed vision underwriting results, self-insurance reserves and retirement and post-employment benefits.

Reclassifications

     Certain reclassifications have been made to prior year financial statements and the notes to conform to the current year presentation.

Deferred Revenue

     The Company sells separately priced extended warranty contracts with terms of coverage of 12 and 24 months. Revenues from the sale of these contracts are deferred and amortized over the lives of the contracts, while the costs to service the warranty claims are expensed as incurred. Incremental costs directly related to the sale of such contracts, such as sales commissions and percentage rent, are deferred in prepaid expenses and charged to expense in proportion to the revenue recognized.

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     A reconciliation of the changes in deferred revenue from the sale of warranty contracts and other deferred items follows (dollars in thousands):

Cash Flows

     Net cash flows from operating activities reflect net cash payments for income taxes and payments for interest of $0.3 million and $5.3 million, respectively, for the 13 week period ended May 1, 2004, and $0.2 million and $5.3 million, respectively, for the 13 week period ended May 3, 2003.

     Overdrafts resulting from outstanding checks at the end of each reporting period are reclassified as current liabilities in either accounts payable or accrued expenses. This reclassification to accounts payable amounted to $34.1 million, $22.4 million and $21.1 million at May 1, 2004, May 3, 2003 and January 31, 2004, respectively, and to accrued expenses amounted to $7.1 million, $6.9 million and $3.8 million at May 1, 2004, May 3, 2003 and January 31, 2004, respectively.

Total Comprehensive Income (Loss)

     Total comprehensive income (loss) for the 13 week periods ended May 1, 2004 and May 3, 2003 is as follows (dollars in thousands):

Stock- Based Compensation

     At May 1, 2004, the Company has various stock-based employee compensation plans which are described more fully in Note 1 of the Notes to Condensed Consolidated Financial Statements in the Company’s 2003 Annual Report on Form 10-K/A. The Company accounts for those plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting For Stock Issued to Employees”, and related Interpretations. In connection with the variable stock options, compensation expense of $0.9 million has been recorded for the 13 week period ended May 1, 2004. No stock-based employee compensation expense for variable stock options was recorded in the 13 week period ended May 3, 2003.

     The following table illustrates the pro forma effect on net income of the Company had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”.

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Recently Issued Accounting Standards

     The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) in January 2003 and revised FIN 46 (FIN 46R) in December 2003. The Interpretations require certain variable interest entities (VIE), including certain special purpose entities, to be consolidated by the primary beneficiary if the equity investors in the entity do not have all the essential characteristics of a controlling financial interest or do not have sufficient equity at risk. The Interpretations immediately applied to entities created after January 31, 2003, was effective at the end of the fourth quarter of fiscal 2003 for certain special purpose entities and was effective for the first quarter of fiscal 2004 for other existing VIE. The synthetic operating lease for the Highland Heights, Ohio facility required consolidation under this Interpretation. The consolidation resulted in an additional $2.2 million in assets and liabilities on the consolidated balance sheet as of January 31, 2004 and the consolidation of operating results into the financial statements of the Company beginning February 1, 2004.

     The remaining portion of FIN 46R was adopted in the first quarter of fiscal 2004. In adopting FIN 46R, the Company considered its financial relationships with Pearle Vision franchisees, and concluded that it is not required to consolidate any franchise entities. The Company has no equity interest in any of its franchisees, has no “off-balance sheet” exposure relative to any of its franchisees except for certain lease and other guarantees, and generally does not provide financial support to franchise entities in a typical franchise relationship. Creditors of the franchise entities have no recourse to the Company. There are certain franchise entities for which the Company has provided financial support and are considered to be VIE. However, the Company is not the primary beneficiary, as it is not the entity that is expected to absorb a majority of the risk of loss for the VIE’s activities, nor is it entitled to receive a majority of the VIE’s residual returns. The Company did not consolidate any franchise entities and the adoption of the remaining portion of FIN 46R had no effect on the Company’s financial position or results of operations.

     In December 2003, the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (SFAS 132). This statement revises employers’ disclosures about pension plans and other postretirement benefit plans to require more information about the economic resources and obligations of such plans. Certain disclosure provisions were effective for fiscal 2003 and were adopted. The remaining disclosure provisions of SFAS 132 have been adopted in fiscal 2004.

     On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) was signed into law. In accordance with FASB Staff Position 106-1 (FSP FAS 106-1), the Company’s measurement of the accumulated postretirement benefit obligation and net periodic benefit cost in the consolidated financial statements do not reflect the effects of the Act on the Company’s postretirement benefit plan because the Company is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the act. The FASB has since issued FSP FAS 106-2, which supersedes FSP FAS 106-1, and is effective for the Company’s third quarter beginning August 1, 2004. Adoption of FSP FAS 106-2 could require the Company to change previously reported information.

(2) Goodwill and Other Intangible Assets

     Goodwill and tradenames are tested at least annually for impairment and are not amortized. All other intangible assets with finite lives are amortized over their estimated useful economic lives based on management’s estimates of the period that the assets will generate revenue. Other intangible assets consist of (dollars in thousands):

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     During the first quarter of fiscal 2003, the Company purchased the operations of three Sears Optical departments in California for a total purchase price of $242,500. The amount allocated to the tangible fixed assets acquired including exam equipment and inventory was $29,500. The remainder of the purchase price was allocated to intangible assets under the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations”. Goodwill related to this transaction was $124,000 and noncompete agreements and customer records totaled $89,000. The additional changes in the carrying amount of goodwill were due to foreign currency translation at Cole Vision. The net carrying amount of goodwill at May 1, 2004, by business segment was $64.3 million at Cole Vision and $21.4 million at Things Remembered.

(3) Long-Term Debt

     On August 15, 2003, the Company retired $385,000 of 8-5/8% Senior Subordinated Notes due December 31, 2006. The notes were contributed to the Company by its parent, Cole National Corporation, after receiving them as part of the full payment for a note receivable from the Company’s former Chairman. A $15,400 gain on early extinguishment of debt and $15,400 of compensation expense were recorded in connection with the transaction.

     On May 22, 2002, Cole National Group issued $150.0 million of 8-7/8% Senior Subordinated Notes that mature in 2012. Interest on the notes is payable semi-annually on each May 15 and November 15.

     On August 22, 1997, the Company issued $125.0 million of 8-5/8% Senior Subordinated Notes that mature in 2007 with no earlier scheduled redemption or sinking fund payments. Interest on the 8-5/8% notes is payable semi-annually on February 15 and August 15.

     The 8-5/8% notes and the 8-7/8% notes are general unsecured obligations of the Company, subordinated in right of payment to senior indebtedness of the Company and senior in right of payment to any current or future subordinated indebtedness of the Company. The indentures pursuant to which the 8-5/8% notes and the 8-7/8% notes were issued restrict dividend payments to the Company’s parent, Cole National Corporation. The indentures also contain certain optional and mandatory redemption features and other financial covenants.

     The Company has no significant principal payment obligations under its outstanding indebtedness until 2007, when the $125.0 million of 8-5/8% Senior Subordinated Notes become due. Following the consummation of the merger of the Parent and Luxottica (see Note 9 of the Notes to Condensed Consolidated Financial Statements), the holders of the 8-5/8% notes and the 8-7/8% notes will have the right to put the notes to the Company at a price of 101% plus accrued interest.

     During the third quarter of fiscal 2002, the Company entered into interest rate swap agreements to take advantage of favorable market interest rates. These agreements require the Company to pay an average floating interest rate based on six-month LIBOR plus 4.5375% to a counter party while receiving a fixed interest rate on a portion of the Company’s $125.0 million of 8-5/8% Senior Subordinated Notes due 2007. The counter party is a major commercial bank. The agreements mature August 15, 2007 and qualify as fair value hedges. The aggregate notional amount of the interest rate swap agreements is $50.0 million. At May 1, 2004, the floating rate of the swaps was approximately 5.9% and the fair value of the swap agreements was an unrealized loss of approximately $0.1 million. There was no impact to earnings in the first three months of fiscal 2004 due to hedge ineffectiveness.

     The Company leases an office and general operating facility in Highland Heights, Ohio from a special purpose entity (the “Trust”), which was created in 1997 specifically for the purpose of structuring a four-year operating lease with annual renewal options

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up to six years. The lease provides for regular payments based on LIBOR plus 1.50%. In accordance with this agreement, the Company must maintain compliance with a minimum net worth covenant. At the end of this lease in 2007, the Company has the option to purchase the property or arrange for the sale of the property. If the Company does not exercise its purchase option at the end of the lease, it is contingently liable to the Trust for up to $1.7 million. The Company does not believe it will have any payment obligation at the end of the lease because either the Company will exercise the purchase option, or the net proceeds from the sale of the property will exceed the amount payable to the Trust. The Trust assets and liabilities have been consolidated into the financial statements of the Company as of January 31, 2004 and operating results beginning February 1, 2004.

(4) Credit Facility

     The operating subsidiaries of the Company have a working capital credit facility of $60.0 million with their bank lenders that extends to February 1, 2007. Borrowings under the credit facility presently bear interest based on leverage ratios of the Company at a rate equal to either (a) the Eurodollar Rate plus 2.50% or (b) 1.50% plus the highest of (i) the CIBC prime rate, (ii) the three-week moving average of the secondary market rates for three-month certificates of deposit plus 1.0% or (iii) the federal funds rate plus 0.5%. The Company pays a commitment fee of 0.75% per annum on the total unused portion of the facility based on the percentage of revolving credit commitments used. Cole National Corporation and the Company guarantee this credit facility. The credit facility is secured by the assets of the operating subsidiaries of the Company. The credit facility permits indebtedness of up to $10.0 million of documentary letters of credit from sources other than the lenders and liens on inventory pursuant to documentary letters of credit issued under such financing.

     The credit facility requires the principal operating subsidiaries of the Company to comply with various operating covenants that restrict corporate activities, including covenants restricting the ability of the subsidiaries to incur additional indebtedness, pay dividends, prepay subordinated indebtedness, dispose of certain investments or make acquisitions. The credit facility also requires the Company to comply with certain financial covenants, including covenants regarding interest coverage and maximum leverage. The Company is in compliance with the covenants in the credit agreement as of May 1, 2004.

     The credit facility restricts dividend payments to the Company from its subsidiaries to amounts needed to pay interest on the 8-7/8% notes and the 8-5/8% notes, certain amounts related to taxes and $7.5 million for direct expenses of the Company, along with up to 0.25% of the Company’s consolidated net revenue annually for other direct expenses of the Company. If certain maximum leverage targets are met, the credit facility restricts dividend payments to the Company in an aggregate amount not to exceed $25.0 million to allow for the repurchase of Senior Subordinated Notes.

     As of May 1, 2004, the total availability under the credit facility totaled $45.9 million after reduction for commitments outstanding of $14.1 million under letters of credit. There were no working capital borrowings under the credit facility outstanding as of May 1, 2004 and May 3, 2003 and there were no borrowings during the first quarter of fiscal 2004 and fiscal 2003.

     The Company has an agreement with a bank to provide documentary letters of credit for import inventory purchases not to exceed $7.0 million. The letters of credit are secured by the inventory purchased. As of May 1, 2004, the Company had $1.4 million outstanding under this facility.

(5) Retirement Plans

     The Company uses a December 31 measurement date for its plans. Net pension expense and postretirement expense for the 13 week period ended May 1, 2004 and May 3, 2003 is as follows (dollars in thousands):

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     The Company previously disclosed in its financial statements for the year ended January 31, 2004, that it expected to contribute $7.5 million to its pension plan in 2004. As of May 1, 2004, $1.8 million of contributions have been made. The Company presently anticipates contributing an additional $4.0 million to fund its pension plan in 2004 for a total of $5.8 million. The decrease in expected funding for fiscal 2004 is due to passage of further pension relief by Congress.

(6) Segment Information

     Information on the Company’s reportable segments is as follows (dollars in thousands):

(7) Commitments and Contingencies

     The Company leases a substantial portion of its computers, equipment and facilities including laboratories, office and warehouse space, and retail store locations. These leases generally have initial terms of up to 10 years and often contain renewal or purchase options. Operating and capital lease obligations are based upon contractual minimum rates and, in most leases covering retail store locations, additional rents are payable based on store sales. In addition, Cole Vision operates departments in various host stores paying occupancy costs solely as a percentage of sales. The Sears agreement contains a short-term cancellation clause. 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 Company guarantees future minimum lease payments for certain store locations leased directly by franchisees. These guarantees totaled approximately $12.8 million, $13.6 million and $13.4 million as of May 1, 2004, May 3, 2003 and January 31, 2004, respectively. Performance under a guarantee by the Company is triggered by default of a franchisee in their lease commitment. Generally, these guarantees also extend to payments of taxes and other normal expenses payable under these leases, the amounts of which are not readily quantifiable.

     In fiscal 2003, the Company entered into an agreement to guarantee a portion of the amount owed to a bank by a franchisee as a result of a loan granted in connection with the purchase of five stores. The guaranteed amount equals the cumulative value of the store assets. The Company is released from its obligation once the landlords of the store locations execute subordination agreements or the bank is granted access to the store assets in the event of the default by the franchisee. The Company received four executed subordination agreements as of May 1, 2004. The maximum exposure under the agreement is $47,000 as of May 1, 2004.

(8) Legal Proceedings

     The Company and its optical subsidiaries have been sued by the State of California, which alleges claims for various statutory violations related to the operation of 23 Pearle Vision Centers in California. The claims include untrue or misleading advertising, illegal dilation fees, unlawful advertising of eye exams, maintaining an optometrist on or near the premises of a registered dispensing optician, unlawful advertising of an optometrist, unlicensed practice of optometry, and illegal relationships between

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dispensing opticians, optical retailers and optometrists. The action seeks unspecified damages, restitution and injunctive relief. In July 2002, the State of California obtained a preliminary injunction to enjoin certain advertising practices and from charging dilation fees. The trial court’s decision was appealed by both the Company and the State. On November 26, 2003, the appellate court ruled on the appeal in a manner adverse to the Company with respect to continued advertising in California by Pearle Vision that expressly or implicitly advertises the furnishing of optometric services, disallowing continued advertising of the availability of optometric services with a disclaimer that had been previously approved by the trial court. The appellate court ruled in the Company’s favor with respect to charging dilation fees. On March 3, 2004, the California Supreme Court granted the Company’s petition for review of the Appellate Court’s decision. Although the Company believes that its advertising and operational practices in California complied with California law, the appellate ruling may, if unmodified by the Supreme Court, compel the Company to modify or close its activities in California. Further, the Company might be required to pay damages and or restitution in a currently undeterminable amount, the cost of which might have a material adverse effect on the Company’s operating results and cash flow in one or more periods.

     Cole National Corporation settled a class action lawsuit alleging claims for various violations of federal securities laws related to the Company’s publicly reported revenues and earnings. The action, which pleaded claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, and named the Company and certain present and former officers and directors as defendants, sought unspecified compensatory damages, punitive damages “where appropriate”, costs, expenses and attorneys’ fees. On May 30, 2003, the Company and the plaintiffs reached an agreement to resolve the lawsuit. On September 29, 2003, the Court approved final settlement of the lawsuit. A charge of $2,687,500 was recorded in the first quarter of fiscal 2003 with respect to the Company’s portion of the settlement.

     Following the Company’s announcement in November 2002 of the restatement of the Company’s financial statements, the Securities and Exchange Commission began an investigation into the Company’s previous accounting. The course of this investigation or other litigation or investigations arising out of the restatement of the Company’s financial statements cannot be predicted. In addition, under certain circumstances the Company would be obliged to indemnify the individual current and former directors and officers who are named as defendants in litigation or who are or become involved in an investigation. The Company believes it has insurance that should be available with respect to a portion of its indemnification obligations. If the Company is unsuccessful in defending against the current investigation or any litigation, there may be a material adverse effect on the Company’s financial condition, cash flow and results of operations.

     Cole National Group, Inc. has been named as a defendant along with numerous other retailers, in patent infringement litigation challenging the defendants’ use of bar code technology. A stay of the proceeding has been sought and was granted, in deference to prior pending declaratory judgment suits brought by the manufacturers and suppliers of the implicated technology seeking to declare the patents in suit invalid, unenforceable and not infringed. On January 23, 2004, a court in Nevada entered a memorandum of decision in favor of the manufacturers declaring the patents unenforceable and not infringed. This judgment is expected to be appealed, and the infringement litigation against Cole National Group will remain stayed pending the final resolution of any such appeal. Cole National Group, Inc. believes it has available defenses and does not expect any liability. However, if Cole National Group, Inc. were to be found liable for an infringement, it might have a material adverse effect on its operating results and cash flow in the period incurred.

     In the ordinary course of business, the Company is involved in various other legal proceedings. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, liquidity or financial position of the Company.

(9) Merger Agreement

     On January 23, 2004, the Parent and Luxottica Group S.p.A. (“Luxottica”) entered into a merger agreement (the “Luxottica merger”) pursuant to which the Parent would become a subsidiary of Luxottica. Under the agreement, Luxottica will acquire all of the outstanding shares of the Parent in a merger for a cash purchase price of $22.50 per share, together with the purchase of all outstanding options and similar equity rights at the same price per share, less their respective exercise price. The Luxottica merger is subject to approval by the holders of a majority of the outstanding shares of the Parent’s common stock and the satisfaction of other customary conditions, including compliance with applicable antitrust clearance requirements. On February 27, 2004, the Parent and Luxottica filed pre-merger notifications with the U.S. antitrust authorities pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“the HSR Act”). On March 30, 2004, the Parent and Luxottica jointly announced that they had received a request from the Federal Trade Commission (FTC) for additional information and documentary material with respect to the Luxottica merger. Accordingly, the waiting period under the HSR Act has been extended until the 30th day after the date of substantial compliance with the request by both parties, unless earlier terminated by the FTC. The Parent is working cooperatively with the FTC to provide the additional information requested.

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     On April 15, 2004, the Parent received an unsolicited, non-binding offer from Moulin International Holdings Limited (“Moulin”) to acquire the Parent in a merger at a price of $25.00 per share in cash. The offer was subject to, among other things, the execution of definitive agreements, approval by the Parent’s stockholders, receipt of regulatory approvals and other customary conditions. The proposal contemplated that HAL Holdings, N.V. (“HAL”), which owns approximately 19.14% of the Parent’s outstanding shares, would provide substantial financing for the transaction, including by means of a $33 million loan and by purchasing the shares of Pearle Europe B.V. and Pearle Inc. at the closing of the Moulin merger for aggregate consideration of $262 million.

     On May 12, 2004, the Parent was informed by Moulin that one of Moulin’s financing sources was not prepared to provide senior debt financing on the terms originally proposed which were contemplated in Moulin’s acquisition proposal. Moulin advised the Parent that HAL and Moulin’s mezzanine financing source were willing to proceed with the transaction on the basis of the terms originally proposed and that Moulin was continuing to evaluate alternatives which could allow Moulin’s proposal to proceed.

     On May 31, 2004, representatives of Moulin, advised the Parent that the financing source for the senior debt financing was prepared to participate in a restructured financing arrangement for Moulin’s proposal, although the terms and conditions of such financing had not yet been negotiated. Moulin’s representatives also advised that Moulin was in discussions with a third party regarding possible additional equity financing for Moulin’s proposal, that Moulin was in discussions with its mezzanine financing source regarding possible restructuring of the financing as part of a restructured financing arrangement and that HAL continued to be willing to proceed with the transaction on the basis of the terms originally proposed. Moulin’s representatives stated that they did not expect Moulin to be able to finalize these financing arrangements for at least another week, but no assurance was given as to when and if any revised proposal would be made. There can be no assurance as to whether discussions with Moulin will continue, whether Moulin will be able to obtain financing for its proposal, whether any agreement with the Parent would result from any such discussions, or the terms and conditions thereof.

     On June 1, 2004 the Parent’s Board of Directors unanimously approved an amendment to the Luxottica merger agreement, and set July 20, 2004 as the date of its annual meeting of stockholders to consider the Luxottica merger agreement, as amended, and elect the Parents’s directors. Under the amendment to the Luxottica merger agreement, which was entered into on June 2, 2004, the original $22.50 per share cash merger consideration would be increased by an amount equal to 4% per annum from the date on which the Parent’s stockholders approve the Luxottica merger agreement, as amended, through the closing date of the Luxottica merger, if the Luxottica merger agreement is approved at the annual meeting of stockholders on July 20, 2004. No other change was made to the Luxottica merger agreement in connection with the amendment. The Parent’s Board of Directors has reaffirmed its recommendation of the Luxottica merger agreement, as amended. The Luxott