<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to _______________________
COMMISSION FILE NO. 0-21526
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-0675400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 W. WALNUT HILL LANE
IRVING, TEXAS 75038-1003
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (972) 580-4000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $.01 par value per share New York Stock Exchange
Warrants to Purchase Common Stock, Series A New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of September 5, 1996, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$661,651,729.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes X No
--- ---
As of September 5, 1996, the registrant had outstanding 35,209,126
shares of its common stock, $.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE.
Part II of this report incorporates information from the registrant's
Annual Report to Stockholders for the year ended July 31, 1996. Part III of
this report incorporates information from the registrant's definitive Proxy
Statement relating to the registrant's annual meeting of stockholders to be
held on October 30, 1996.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Zale Corporation (the "Company"), founded in 1924, is the largest
specialty retailer of fine jewelry in the United States in terms of both
retail sales and number of stores. The Company had sales of $1,137.4 million
for the fiscal year ended July 31, 1996 and 1,195 locations at July 31, 1996
throughout the United States, Guam and Puerto Rico, primarily in regional
shopping malls. The Company conducts business through four distinct
divisions. The Zales-Registered Trademark- Division, with 582 stores,
represents the Company's national brand and is focused on a broad range of
mainstream consumers. The Gordon's-SM- Division operates 323 stores and is
being positioned as a major regional jeweler focusing on twelve regional
markets and offering merchandise that is more contemporary and targeted at
regional tastes. The Guild Division operates 112 upscale jewelry stores
under the Bailey, Banks & Biddle-Registered Trademark- and other locally
established names. The Diamond Park Division manages 174 leased fine jewelry
departments in several major department store chains including Marshall
Field's, Dillard's, Mercantile and Parisian. In addition, the Company
operates four outlet stores.
The Company is incorporated in Delaware. Its principal executive
offices are located at 901 W. Walnut Hill Lane, Irving, TX 75038-1003, and
its telephone number at that address is (972) 580-4000.
BUSINESS STRATEGY
The Company's management team has revitalized the Company by making it
customer-focused and instituting back-to-basics retailing disciplines. Each
of the Company's four divisions is a separate, accountable organization with
its own professional buying and management team. The Company continues to
aggressively upgrade its store base, expand and refine its key item
assortments, and achieve greater cost-efficiency in purchasing. The Company
increased the frequency and sharpened the focus of advertising, and has more
effectively staffed stores for optimum customer service with dedicated,
thoroughly trained managers and associates.
From this solid base the Company is going beyond the basics to increase
the productivity of existing stores, to open and acquire new stores, and to
develop new methods of reaching out to existing and prospective customers.
As of the end of fiscal 1996, the Company had upgraded the appearance of more
than 475 stores over the last two years and plans to continue this program
until all key stores have been touched. The Company is adding to its prime
mall base, with approximately 100 new stores slated for 1997 fiscal year,
many of which will be open by Thanksgiving. These stores are the core of the
Company's business. The Company plans to increase its presence in the
nation's malls over the next year and succeeding years.
Most of the Company's expansion will come within the Zales Division,
concentrating on parts of the country where Zales currently is
under-represented. While it is important that the Company expands its store
base, it is equally important that the expansion occurs in the right
locations. The Company will be in prime mall locations only, on corners or
in high traffic areas, with ample visibility. As part of the Company's
overall real estate strategy, the Company has set strict criteria that every
new location must meet, with ample space to allow for a productive and
appealing product presentation. The Company also plans to test freestanding
Zales stores in or near high-traffic power centers. If these stores are
successful, this concept will be rolled out in the future.
Distinct brand identities have been reemphasized for the Zales and
Gordon's Divisions. Merchandising has been refocused and strengthened.
Management continues to improve the selection and upgrade the quality of
certain top selling key item merchandise and makes certain that these items
are available in an appropriate variety of styles and a range of competitive
price points. As a result, key items now account for approximately 30% of
the Company's business. Inventory management systems continue to ensure that
these items are consistently in stock. The Company has ensured consistent
availability of quality merchandise by increasing its merchandise shipping
capacity almost 50% to handle the shipment of up to 100,000 units daily. For
example, shipments of watches are now handled through the expanded
Distribution Center, drastically reducing drop shipments from manufacturers,
so stores can always get the watch they need, when they need it.
2
<PAGE>
The Company's marketing effort has become more product and event-focused
and has been streamlined to include newspaper inserts, direct mail and
broadcast, especially television. The Zale's Division's national presence
makes television cost-effective. The Company will substantially increase
spending in that medium. This new strategy has raised the visibility of the
store. Due to technology, convenience and changing lifestyles more people
are beginning to shop from their homes. The Company has incorporated a
toll-free number in the direct mail catalogs and newspaper inserts this year.
For the long-term, the Company believes several alternative formats can be
tested and used, which will complement the Company's existing and future
store base. Additionally, Zale will expand into the mail order catalog
business in the fall of 1996 to test the mail order market.
The Company offers credit through its own private label credit cards,
which account for approximately 50% of the Company's sales and believes that
its private label credit cards increase sales, build customer loyalty and
assist in providing a customer database for direct marketing efforts. The
Company has enhanced and accelerated the approval process, whereby those
customers with a satisfactory prior credit history can be approved rapidly.
The Company's system automatically transmits customer applications to the
credit centers for review while the customer is still in the store. That
flexibility enabled the Company to open more than 165,000 new accounts over
the fiscal 1996 holiday season.
The Company just completed the second year of a three year store
remodeling and refurbishment program. This program has enabled the Company
to enhance its stores in certain key markets relative to its competition.
The Company anticipates spending approximately $61.0 million on capital
expenditures in fiscal year 1997 focusing principally on new stores. Capital
expenditures are typically scheduled for the late spring through early fall
in order to have new or renovated stores ready for the Christmas selling
season. Additionally, the Company plans significant upgrades to its
management information systems over the next several years. During the year
ended July 31, 1996, the Company made approximately $48.8 million in capital
expenditures, a significant portion of which was used to enhance the
appearance of 91 stores and to open 44 new stores. In addition, on January
18, 1996, the Company acquired Karten's Jewelers, Inc., a 20-store chain.
The addition of Karten's significantly increased the Company's presence in
the Northeast. In fiscal years 1997 and 1998, the Company intends to add
approximately 200 new locations through new store openings or strategic
acquisitions.
SELECTED DIVISIONAL DATA
The Company operates principally under four divisions as described
below. The following table presents net sales for the Zales, Gordon's, Guild
and Diamond Park Divisions of the Company.
NET SALES BY DIVISION
----------------------------------------
YEAR ENDED JULY 31,
----------------------------------------
1996 1995 1994
---------- --------- --------
(AMOUNTS IN THOUSANDS EXCEPT NUMBER OF STORES)
Net Sales:
Zales Division. . . . . . $ 525,384 $ 428,794 $374,849
Gordon's Division . . . . 264,298 262,540 234,974
Guild Division. . . . . . 205,418 197,267 182,278
Diamond Park Division . . 133,463 138,187 127,761
Other . . . . . . . . . . 8,814(1) 9,361(1) 445
---------- ---------- --------
Total. . . . . . . . $1,137,377 $1,036,149 $920,307
---------- ---------- --------
---------- ---------- --------
Number of stores (end of
period). . . . . . . . . . 1,195 1,181 1,231
----- ----- -----
----- ----- -----
(1) Other net sales in fiscal 1996 and fiscal 1995 includes sales from the
Company's Outlet stores which are being used to sell overstocked and other
merchandise no longer sold in the regular retail locations. Outlet store
sales and operating results in fiscal 1994 were not significant and were
classified in cost of sales.
3
<PAGE>
ZALES DIVISION
The Zales Division is positioned as the Company's national flagship and
is a leading brand name in jewelry retailing in the United States. At July
31, 1996, the Zales Division had 582 mall-based stores in 49 states and
Puerto Rico. Average store size is approximately 1,400 square feet and the
average purchase is $243. Zales accounted for approximately 46% of the
Company's sales in fiscal 1996.
Zales' customers represent a cross-section of mainstream America. The
product focus of the Zales Division is on bridal, diamond and gold jewelry.
Bridal merchandise represents 36% of the Division's merchandise sales, with
fashion jewelry and watches comprising most of the remaining 64%. The
Company believes that the prominence of diamond jewelry in the product
selection fosters an image of quality and trust among consumers. While
maintaining a strong focus on the bridal segment of the business, added
emphasis is being placed on the non-bridal merchandise and gift-giving
aspects of the business. New product lines, including Blue Lagoon cultured
pearls by Mikimoto, and Movado watches, have been added.
Zales' merchandise selection is generally standardized across the
nation. The combination of Zales' national presence and standardized
merchandise selection allows it to use television advertising across the
nation as its primary advertising medium, supplemented by newspaper inserts
and direct mail.
The following table sets forth the number of stores and average sales per
store for the Zales Division for the periods indicated:
YEAR ENDED JULY 31,
-------------------------------------
1996 1995 1994
------- - -------- --------
Average sales per store . . . $928,200 $849,100 $716,700
Stores opened during period . 89(1) 8 2
Stores closed during period . 6 30 4
Total stores . . . . . . . . 582 499 521
(1) Includes 40 stores transferred from the Gordon's Division during
fiscal 1996 and 20 Karten's stores acquired in January 1996.
GORDON'S DIVISION
The Company is repositioning Gordon's as a major regional brand
focusing on twelve regional markets. At July 31, 1996, the Gordon's Division
had 323 stores in 38 states and Puerto Rico, substantially all of which
operate under the trade name Gordon's Jewelers. Average store size is
approximately 1,300 square feet and the average purchase is $240. Gordon's
accounted for approximately 23% of the Company's sales in fiscal 1996.
Gordon's continues to operate as separate business unit with its
own management team and has developed its own buying and merchandising
strategy. The concept of the Division's merchandising strategy distinguishes
Gordon's stores from Zales stores by devoting a portion of store inventory to
products that seek to satisfy demand in each particular regional market and
by emphasizing a more contemporary look in its product line. A substantial
portion of the remaining merchandise sold by stores in the Gordon's Division
overlaps the Zales Division product line. Regional television advertising,
that emphasizes key items will be introduced for Gordon's in fiscal 1997,
complementing the division's radio campaigns and printed inserts.
In fiscal 1997, the Gordon's Division will continue to emphasize
its new image to match its customer base and will further tailor key items to
customer's regional preferences. Steps to upgrade Gordon's have included
store remodeling, a more distinctive and fashion-oriented product assortment,
improved displays, a reduced degree of promotional pricing and the
application of more stringent credit-approval standards.
4
<PAGE>
The following table sets forth the number of stores and average sales
per store for the Gordon's Division for the periods indicated:
Year Ended July 31,
------------------------------------
1996 1995 1994
------- -------- --------
Average sales per store . . . $796,100 $711,500 $624,900
Stores opened during period . 13 5 4
Stores closed during period . 57(1) 13 6
Total stores . . . . . . . . 323 367 375
(1) Includes 40 stores transferred to the Zales Division during fiscal 1996.
GUILD DIVISION
The Guild Division offers higher-end merchandise, more exclusive designs
and a prestigious shopping environment for the upscale customer. At July 31,
1996, the Guild Division operated 112 upscale jewelry stores in 26 states and
Guam. The Guild Division has an average purchase of $438 and the average store
is approximately 2,600 square feet. The Guild Division accounted for
approximately 18% of the Company's sales in fiscal 1996. The following table
sets forth the Guild Division's trade names and the number of stores operating
under each of those names at July 31, 1996.
TRADE NAMES NUMBER OF STORES
----------- ----------------
Bailey, Banks & Biddle-Registered Trademark-. . 78
Corrigan's-Registered Trademark-. . . . . . . . 20
Sweeney's-Registered Trademark- . . . . . . . . 4
Stifft's-Registered Trademark-. . . . . . . . . 3
Dobbins-Registered Trademark- . . . . . . . . . 2
J. Herbert Hall-Registered Trademark- . . . . . 2
Linz-Registered Trademark-. . . . . . . . . . . 1
Zell Bros.-Registered Trademark-. . . . . . . . 2
Bailey, Banks & Biddle is the name borne by 78 Guild stores. Rooted in
tradition, these stores date back to 1832. Along with the other Guild stores,
including Corrigan's, Sweeney's and Zell Bros., they are regarded as pre-eminent
in their markets. Often carrying exclusive items to appeal to the more affluent
customer, Guild stores focus on diamond, precious stone and gold jewelry,
watches and giftware, with emphasis on classic and traditional themes.
Guild stores rely heavily on upscale direct-mail catalogs, enabling the
stores to focus on specific products in specific markets. In addition, in the
fall of 1996 Guild will expand its customer base in cross-promotional campaigns
using upscale customer lists from such companies as American Express, First USA
MasterCard/VISA and American Airlines. This initiative will help Guild stores
more accurately target prospective customers in cost-efficient manner.
The following table sets forth the number of stores and average sales per
store for the Guild Division for the periods indicated:
Year Ended July 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
Average sales per store . . . $1,740,800 $1,529,200 $1,391,400
Stores opened during period . 1 4 4
Stores closed during period . 12 11 7
Total stores . . . . . . . . 112 123 130
DIAMOND PARK DIVISION
The Diamond Park Division offers services for retailers that wish to
use an outside provider for specialized management and marketing skills in
connection with the sale of fine jewelry. At July 31, 1996, the Diamond Park
Division operated 174 leased locations in department stores including
Dillard's-Registered Trademark- (59 locations), Mercantile-Registered Trademark-
(67 locations), Parisian (25 locations) and Marshall Field's-Registered
Trademark- (23 locations) in 24 states. The Diamond Park Division accounted for
approximately 12% of the Company sales in fiscal 1996 and had an average
purchase of $163.
5
<PAGE>
The Diamond Park Division is in a position to actively seek, on a
regional level, still more host department stores in which to operate. An
important such addition in fiscal 1996 was the entry into 25 stores of the
Parisian chain in the Southeast. Also in the year, the Diamond Park Division
began operating leased departments at 11 new Mercantile stores and 1 new
Marshall Field's store.
The Diamond Park Division tailors its merchandising concepts and
marketing efforts to those of the host store, tying into the store's newspaper
advertising, inserts and direct-mail catalogs. Management considers the primary
product franchise areas to be watches, gold and diamond fashion jewelry.
The following table sets forth the number of departments and average
sales per department for the Diamond Park Division for the periods indicated:
Year Ended July 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Average sales per department . . $733,300 $701,500 $591,500
Departments opened during 34 18 19
period . . . . . . . . . . . .
Departments closed during 48 35 46
period . . . . . . . . . . . .
Total departments. . . . . . . . 174 188 205
BUSINESSES OF NON-RETAIL AFFILIATES
Zale Indemnity Company, Zale Life Insurance Company and Jewel Re-Insurance
Ltd. are providers of various types of insurance coverage, which typically are
marketed to the Company's private label credit card customers. The three
companies are the insurers (either through direct written or reinsurance
contracts) of the Company's customer credit insurance coverages. In addition to
providing replacement property coverage for certain perils, such as theft,
credit insurance coverage provides protection to the creditor and cardholder for
losses associated with the disability, involuntary unemployment or death of the
cardholder. Zale Life Insurance Company also provides group life insurance
coverage for eligible employees of the Company. Zale Indemnity Company, in
addition to writing direct credit insurance contracts, also has certain
discontinued businesses that it continues to run off. Credit insurance
operations are dependent on the Company's retail sales on its private label
credit cards and are not significant on a stand-alone basis.
PURCHASING AND INVENTORY
The Company purchases substantially all of its merchandise in finished form
from a network of established suppliers and manufacturers located primarily in
the United States, Southeast Asia, Hong Kong and Italy. The Company either
purchases merchandise from its vendors or acquires merchandise on consignment.
The Company has intentionally shifted its merchandising mix over the last year
to reduce the amount of consigned merchandise and increase its investment in
owned merchandise. The Company had approximately $78.9 million and $85.9
million of consignment inventory on hand at July 31, 1996 and 1995,
respectively. The Company is subject to the risk of fluctuation in prices of
diamonds, precious stones and gold. The Company historically has not engaged in
any substantial amount of hedging activities with respect to merchandise held in
inventory, since the Company has been able to adjust retail prices to reflect
significant price fluctuations in the commodities that are used in the
merchandise it sells. No assurances, however, can be given that the Company
will be able to adjust prices to reflect commodity price fluctuations in the
future. The Company is not subject to substantial currency fluctuations because
most purchases are dollar denominated. During the years ended July 31, 1996 and
1995, the Company purchased approximately 29% of its merchandise from its top
five vendors.
COMPETITION
The retailing industry is highly competitive. The industry is fragmented,
and the Company competes with a large number of independent regional and local
jewelry retailers, as well as national jewelry chains. The Company must also
compete with other types of retailers who sell jewelry and gift items, such as
department stores, catalog showrooms, discounters, direct mail suppliers and
home shopping programs. The Company believes that it is also
6
<PAGE>
competing for consumers' discretionary spending dollars. The Company must,
therefore, also compete with retailers who offer merchandise other than
jewelry or giftware.
Notwithstanding the national or regional reputation of its competition, the
Company believes that it must compete on a mall-by-mall basis with other
retailers of jewelry as well as with retailers of other types of discretionary
items. Therefore, the Company competes primarily on the basis of reputation for
high-quality, store location, distinctive and value-priced merchandise, personal
service and its ability to offer private label credit card programs to customers
wishing to finance their purchases. The Company's success is also dependent on
its ability to react to and create customer demand for specific product lines.
The Company holds no material patents, licenses (other than its licenses to
operate its Diamond Park leased locations), franchises or concessions; however,
the established trade names for stores and products in the Company's Zales,
Gordon's and Guild Divisions are important to the Company in maintaining its
competitive position in the jewelry retailing industry.
CREDIT OPERATIONS
Jewelers Financial Services, Inc. ("JFS") has credit approval, customer
service and collection systems that management considers to be sophisticated.
The Company offers and grants credit through its private label credit card
program. See "Business Strategy". The credit programs help facilitate the sale
of merchandise to customers who wish to finance their purchases rather than use
cash or available credit limits on their major credit cards. Approximately 50%
of the Company's retail sales during fiscal 1996 through its Zales, Gordon's and
Guild Divisions were generated by credit sales on the private label credit
cards. The Company has more than 1.1 million active charge customers who have a
good credit history and available credit and more than 1.9 million customer
names on file that are not current charge customers. The Company uses many of
these customer names in its targeted marketing programs.
Credit extension, customer service, payment processing and collections for
all the accounts are performed by JFS at credit centers located in Tempe,
Arizona; Clearwater, Florida; Irving, Texas; San Marcos, Texas; San Juan, Puerto
Rico; and Guam. The Company has enhanced the approval process for its private
label credit card, whereby those customers with a satisfactory prior credit
history can be approved rapidly. Flexible payment arrangements, typically
twenty-eight to thirty-four months, are extended to credit customers.
The following table presents certain data concerning sales, credit sales
and accounts receivable for the past two fiscal years (1):
As at or for the
fiscal year ended July 31,
--------------------------
1996 1995
--------- --------
Net sales (thousands) $995,100 $888,601
Net credit sales (thousands) 500,215 458,664
Accounts receivable (thousands) 468,331 436,336
Credit sales as a percentage of net sales 50.3% 51.6%
Average number of active customer accounts
(thousands) 678 689
Average balance per customer account $687 $668
Average monthly collection percentage 9.2% 9.1%
Bad debt expense as a percentage of credit sales 10.7% 9.1%
Bad debt expenses as a percentage of net sales 5.4% 4.7%
(1) The table excludes the Diamond Park Division which does not have a
proprietary credit plan.
Credit sales have decreased as a percentage of total sales, in part
because of an upgrading in minimum credit standards at the Gordon's Division
and increased competition from issuers of major credit cards. However, bad
debt expense as a percentage of credit sales and net sales increased in
fiscal 1996 compared to fiscal 1995. The Company believes that these
increases have resulted from general economic conditions.
7
<PAGE>
EMPLOYEES
As of July 31, 1996, the Company had approximately 10,000 employees, less
than 1% of whom were represented by unions. The Company considers its
relations with its employees to be good.
This Annual Report on Form 10-K contains forward-looking statements,
including statements concerning expected capital expenditures to be made in the
future, expected significant upgrades to its management information systems over
the next several years, the addition of new locations through either new store
openings or strategic acquisitions, and the adequacy of the Company's sources of
cash to finance its current and future operations. These forward-looking
statements involve a number of risks and uncertainties. In addition to the
factors discussed above, among other factors that could cause actual results to
differ materially are the following: the impact of the general economic
conditions due to the fact that jewelry purchases are discretionary for
consumers and may be affected by adverse trends in the general economy;
competition in the jewelry business which is fragmented; the variability of
quarterly results and seasonality of the retail business; the ability to improve
productivity in existing stores and to increase comparable store sales; the
availability of alternate sources of merchandise supply in the case of an abrupt
loss of any significant supplier during the three month period leading up to the
Christmas season; the dependence on key personnel who have been hired or
retained since bankruptcy; the changes in regulatory requirements which are
applicable to the Company's business; management's decisions to pursue new
product lines which may involve additional costs; and the risk factors listed
from time to time in the Company's filings with the Securities and Exchange
Commission.
ITEM 2. PRINCIPAL PROPERTIES
The Company occupies a corporate headquarters facility, completed in March
1984 with 430,000 square feet. The Company amended and extended its corporate
headquarters lease effective at the expiration of the current five-year lease.
The lease will extend through September 2008. The facility is located on a 17-
acre tract in Las Colinas, a planned business development in Irving, Texas, near
the Dallas/Fort Worth International Airport. The Company owns 33 acres of land
surrounding the corporate headquarters facility and a 120,000 square foot
warehouse in Dallas, Texas.
The Company also leases four credit centers located in Clearwater, Florida
(30,000 square feet), Tempe, Arizona (24,200 square feet), San Juan, Puerto Rico
(2,900 square feet) and Guam (556 square feet) and one national collections
center located in San Marcos, Texas (9,000 square feet).
The Company rents most of its retail spaces, other than the Diamond Park
Division leased locations, under leases that generally range from five to ten
years and may contain minimum rent escalations. Most of the store leases
provide for the payment of base rentals plus real estate taxes, insurance,
common area maintenance fees and merchants association dues, as well as
percentage rents based on the stores' gross sales.
The following table indicates the expiration dates of the current terms of
the Company's leases as of July 31, 1996:
DIAMOND
TERM EXPIRES ZALES GORDON'S GUILD PARK PERCENTAGE
IN CALENDAR YEARS DIVISION DIVISION DIVISION DIVISION TOTAL OF TOTAL
- ----------------- -------- -------- -------- -------- ----- ---------
1997 and prior 110 71 23 72 276 23%
1998 75 52 11 16 154 13%
1999 66 37 17 0 120 10%
2000 46 21 11 29 107 9%
2001 and
thereafter 285 142 50 57 534 45%
--- --- --- --- ----- ----
Total number of
leases 582 323 112 174 1,191 100%
--- --- --- --- ----- ----
--- --- --- --- ----- ----
8
<PAGE>
Management believes substantially all of the store leases expiring in 1997
that it wishes to renew (including leases which expired earlier and are on
month-to-month extensions) will be renewed on terms not materially less
favorable to the Company than the terms of the expiring leases.
ITEM 3. LEGAL PROCEEDINGS
JEWEL RECOVERY, L.P. Pursuant to the plan of reorganization under Chapter
11 of the United States Bankruptcy Code (the "Plan"), Zale assigned certain
claims and causes of action and advanced $3.0 million to Jewel Recovery, L.P., a
limited partnership ("Jewel Recovery") which was formed upon Zale's emergence
from bankruptcy. The sole purpose of Jewel Recovery is to prosecute and settle
such assigned claims and causes of action. The general partner of Jewel
Recovery is Jewel Recovery, Inc., a subsidiary of the Company. Its limited
partners are holders of various unsecured claims against Zale. The $3.0 million
advance was fully reserved as of the effective date as its collectibility was
uncertain.
Jewel Recovery has pursued certain claims and has been awarded significant
recoveries against third parties. During the first quarter of fiscal year 1996,
Zale was notified that it would recover its $3.0 million advance to Jewel
Recovery. The $3.0 million advance was repaid to Zale in December 1995.
In addition, the Company has agreed to indemnify certain parties to
litigation settlements entered into by the Company in connection with the plan
against certain cross-claims, similar third-party claims or costs of defending
such claims brought against such parties. At October 16, 1996, no material
claims had been asserted against the Company for such indemnification.
OTHER. The Company is involved in certain other legal actions and claims
arising in the ordinary course of business. Management believes that such
litigation and claims will be resolved without material effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the quarter ended July 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals serve as executive officers of the Company.
Officers are elected by the Board of Directors, each to serve until his
successor is elected and qualified, or until his earlier resignation, removal
from office or death.
ROBERT J. DINICOLA, Age 49.
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. DiNicola has served as Chairman of the Board, Chief Executive Officer
and a director of the Company since April 18, 1994. For the three years
prior to joining the Company, Mr. DiNicola was a senior executive officer
of The Bon Marche Division of Federated Department Stores, Inc., having
served as Chairman and Chief Executive Officer of that Division from 1992
to 1994 and as its President and Chief Operating Officer from 1991 to 1992.
From 1989 to 1991, Mr. DiNicola was a Senior Vice President of Rich's
Department Store Division of Federated. For seventeen years, prior to
joining the Federated organization, Mr. DiNicola was associated with
Macy's, where he held various executive, management and merchandising
positions, except for a one-year period while he held a division officer
position with May Co.
9
<PAGE>
MERRILL J. WERTHEIMER, Age 57.
EXECUTIVE VICE PRESIDENT - FINANCE AND CHIEF FINANCIAL OFFICER
Mr. Wertheimer was appointed Executive Vice President - Finance and
Administration on January 27, 1995 and re-assumed the role of Chief
Financial Officer on June 27, 1996 following the resignation of the former
Senior Vice President and Chief Financial Officer. Currently, Mr.
Wertheimer oversees all financial responsibilities of the Company. From
June 1991 through January 1995, he served as Senior Vice President and
Controller of the Company. From February 1990 to May 1991, Mr. Wertheimer
served as President and Chief Executive Officer of Henry Silverman
Jewelers. Mr. Wertheimer served as Senior Vice President of the Company
from September 1987 to October 1989 and also served as Chief Financial
Officer of the Company from March 1987 to October 1989.
BERYL B. RAFF, Age 45.
SENIOR VICE PRESIDENT AND PRESIDENT, ZALES DIVISION
Ms. Raff joined the Company on November 21, 1994 as President of the Zales
Division. From March 1991 through October 1994, Ms. Raff served as Senior
Vice President of Macy's East with responsibilities for its jewelry
business in a twelve state region. From April 1988 to March 1991, Ms. Raff
served as Group Vice President of Macy's South/Bullocks. Prior to 1988,
Ms. Raff had seventeen years of retailing and merchandising experience with
the Emporium and Macy's department stores.
MARY L. FORTE, Age 45
SENIOR VICE PRESIDENT AND PRESIDENT, GORDON'S DIVISION
Ms. Forte joined the Company on July 18, 1994 as President of the Gordon's
Division. From January 1994 to July 1994, Ms. Forte served as Senior Vice
President of QVC - Home Shopping Network. From July 1991 through January
1994, Ms. Forte served as Senior Vice President of the Bon Marche', Home
Division. From July 1989 to July 1991, Ms. Forte was Vice President of
Rich's Department Store, Housewares Division. In addition to the above,
Ms. Forte has an additional thirteen years of retailing and merchandising
experience with Macy's, The May Company and Federated Department stores.
PAUL G. LEONARD, Age 41.
SENIOR VICE PRESIDENT AND PRESIDENT, GUILD DIVISION
Mr. Leonard was appointed President of the Company's Fine Jewelers Guild
Division on January 27, 1995. From October 1994 to January 1995, Mr.
Leonard served as President of Corporate Merchandising for the Company.
For three years prior to joining the Company, Mr. Leonard held positions as
General Manager of Jewelry and then Senior Vice President of Soft Lines for
Ames Department Store. Prior to that, Mr. Leonard was a Merchandise Vice
President with The May Company. Mr. Leonard has more than twenty years of
retailing and merchandising experience with an emphasis in jewelry.
MAX A. BROWN, Age 67.
SENIOR VICE PRESIDENT AND PRESIDENT, DIAMOND PARK DIVISION
Mr. Brown has been President of the Company's Diamond Park Division since
January 11, 1993. From July 1989 to January 1993, Mr. Brown was Vice
President and General Manager of the Diamond Park Division. Prior to 1989,
he served as the Director of Stores for the Diamond Park Division.
SUE E. GOVE, Age 38.
SENIOR VICE PRESIDENT, TREASURER
Ms. Gove was appointed Senior Vice President and Treasurer on September 9,
1996. From January 1996 to September 1996, she held the position of Senior
Vice President, Corporate Planning and Analysis. From February
10
<PAGE>
1989 through January 1996, she served as Vice President, Corporate Planning
and Analysis. Ms. Gove joined the Company in 1980 and served in numerous
assignments until her appointment to Vice President in 1989.
GREGORY HUMENESKY, Age 45
SENIOR VICE PRESIDENT, HUMAN RESOURCES
Mr. Humenesky was appointed Senior Vice President, Human Resources on April
15, 1996. From January 1995 to April 1996 he held the position of Vice
President, Personnel Development and Staffing for the Company. For eight
years prior to joining the Company, Mr. Humenesky was Senior Vice
President, Human Resources for Macy's West. From June 1973 to February
1987, Mr. Humenesky held senior level Human Resources positions within the
Macy's organization.
PAUL D. KANNEMAN, Age 39
SENIOR VICE PRESIDENT AND CHIEF INFORMATION OFFICER
Mr. Kanneman joined the Company on November 14, 1994 as Chief Information
Officer. From July 1993 to November 1994, Mr. Kanneman was an Associate
Partner with Andersen Consulting LLP. Mr. Kanneman was a Principal from
August 1991 to July 1993, and a Senior Associate from August 1989 to July
1991 with Booz, Allen & Hamilton, Inc.
ERVIN G. POLZE, Age 44.
SENIOR VICE PRESIDENT, OPERATIONS
Mr. Polze was appointed Senior Vice President, Operations on January 17,
1996. From February 1995 through January 1996, he served as Vice
President, Operations. He held the position of Vice President, Controller
from March 1988 through February 1995. Mr. Polze joined the Company in
January 1983 and served in several assignments until his appointment to
Vice President in March 1988.
ALAN P. SHOR, Age 37.
SENIOR VICE PRESIDENT, ADMINISTRATION, GENERAL COUNSEL AND SECRETARY
Mr. Shor joined the Company on June 5, 1995 as Senior Vice President,
General Counsel and Secretary. During fiscal 1996, Mr. Shor assumed
additional responsibilities in the area of administration including loss
prevention, real estate and property development. For two years prior to
joining the Company, Mr. Shor was the managing partner of the Washington,
D.C. office of the Troutman Sanders law firm, whose principal office is
based in Atlanta, Georgia. Mr. Shor, a member of Troutman Sanders since
1983, was a partner of the firm from 1990 to 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is included in the registrant's
Annual Report to Stockholders for the year ended July 31, 1996 on page 32 under
the caption "Common Stock Information," and is incorporated herein by reference.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the registrant's
Annual Report to Stockholders for the year ended July 31, 1996 on page 13
under the caption "Selected Financial Data," and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is included in the registrant's
Annual Report to Stockholders for the year ended July 31, 1996 on pages 14
through 17 under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the registrant's
Annual Report to Stockholders for the year ended July 31, 1996 on pages 18
through 31, and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors and Section
16(a) Reporting is included in the registrant's definitive Proxy Statement
relating to its annual meeting of stockholders to be held on October 30, 1996
under the captions "Proposal No. 1: Election of Directors," on pages 4 through
6, and "Section 16(a) Reporting," on page 22, and is incorporated herein by
reference. See also "EXECUTIVE OFFICERS OF THE REGISTRANT" appearing in Part I
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the registrant's
definitive Proxy Statement relating to its annual meeting of stockholders to
be held on October 30, 1996 under the caption "Executive and Director
Compensation," on pages 12 through 17, and, except as stated in the next
sentence, is incorporated herein by reference. The foregoing incorporation
by reference specifically excludes the discussion in such Proxy Statement
under the captions "Report of the Compensation Committee on Executive
Compensation" and "Stock Price Performance."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the registrant's
definitive Proxy Statement relating to its annual meeting of stockholders to be
held on October 30, 1996 under the caption "Outstanding Voting Securities of the
Company and Principal Holders Thereof," on pages 2 to 3, and is incorporated
herein by reference.
12
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the registrant's
definitive Proxy Statement relating to its annual meeting of stockholders to be
held on October 30, 1996 under the caption "Related Party Transactions," on page
17, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report.
(1) FINANCIAL STATEMENTS
See Item 8 on page 12.
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES PAGE
NUMBER
Report of Independent Public Accountants 17
Schedule II - Valuation and Qualifying Accounts 18
All other financial statements and financial statement schedules for
which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the
related instructions, are not material or are not applicable and,
therefore, have been omitted or are included in the consolidated
financial statements or notes thereto.
(3) EXHIBITS
2.1 Disclosure Statement Pursuant to Section 1125 of the Bankruptcy
Code with Respect to Plan of Reorganization under Chapter 11 of
the Bankruptcy Code for Zale Corporation and its Affiliated
Debtors, dated March 22, 1993 (Exhibit T3E-1). (1)
2.2 Motion to Approve Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and
its Affiliated Debtors, dated May 19, 1993 (Exhibit 2.6). (2)
2.3 Order Approving Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 20, 1993 (Exhibit 2.7). (2)
3.1 Restated Certificate of Incorporation of Zale Corporation, dated
July 30, 1993. (3)
3.2 Amended and Restated Bylaws of Zale Corporation, dated July 30,
1993. (7)
4.1 Warrant Agreement, dated as of July 30, 1993, between Zale
Corporation and The First National Bank of Boston, as warrant
agent, governing the Warrants to Purchase Common Stock, Series A.
(3)
4.2 Indenture, dated as of July 1, 1994, among Zale Funding Trust, as
Issuer and Bankers Trust Company, as Indenture Trustee. (6)
4.3 Purchase and Servicing Agreement, dated as of July 1, 1994, among
Zale Funding Trust, Diamond Funding Corp., Zale Delaware, Inc.,
and Jewelers Financial Services, Inc. (6)
13
<PAGE>
4.4 Revolving Credit Agreement, dated as of August 11, 1995, among
Zale Corporation, Zale Delaware, Inc., the lending institutions
set forth therein, and The First National Bank of Boston, as
Agent for such lenders. (6)
4.5 Amended and Restated Lender Security Agreement, dated as of
August 11, 1995, among Zale Delaware, Inc., Zale Corporation, and
The First National Bank of Boston, as collateral agent. (6)
* 10.1 Indemnification agreement, dated as of July 21, 1993, between
Zale Corporation and certain present and former directors
thereof. (6)
10.2 Amended and Restated Agreement of Limited Partnership of Jewel
Recovery, L.P., dated as of July 30, 1993. (3)
* 10.3 Zale Corporation Stock Option Plan. (3)
10.4 Trust Agreement, dated as of November 24, 1993, among Zale
Corporation, Zale Delaware, Inc. and United States Trust Company
of New York. (4)
10.5 Agreement for Systems Operations Services, dated as of February
1, 1993, between Zale Corporation and Integrated Systems
Solutions Corporation. (3)
10.5a Amendment #1 to Agreement for Systems Operations Services,
dated as of August 1, 1994, between Zale Corporation and
Integrated Systems Solutions Corporation. (6)
* 10.6 Severance and Settlement Agreement, dated as of December 3, 1993,
between Zale Corporation and E. Peter Healey. (4)
* 10.7 Severance and Settlement Agreement, dated as of May 15, 1995,
between Zale Corporation and Dolph B. Simon. (6)
* 10.8 The Executive Severance Plan for Zale Corporation and Its
Affiliates, as amended and restated as of February 10, 1994. (4)
* 10.8a Amendment to The Executive Severance Plan for Zale
Corporation and Its Affiliates effective May 20, 1995. (7)
* 10.9 Employment Agreement, dated as of December 22, 1993, between Zale
Corporation and Larry Pollock. (4)
* 10.10 Employment Agreement, dated as of March 14, 1994, between
Zale Corporation and Robert DiNicola. (5)
10.11 Lease Agreement Between Principal Mutual Life Insurance
Company, As Landlord, and Zale Corporation, as Debtor and
Debtor-In-Possession, As Tenant, dated as of September 17,
1992. (7)
10.11a First Lease Amendment and Agreement between Principal Mutual
Life Insurance Company and Zale Delaware, Inc., dated as of
February 1, 1996. (7)
11 Statement re computation of per share earnings. (7)
13 Incorporated Portions of the Annual Report to
Stockholders for the year ended July 31, 1996. (7)
21 Subsidiaries of the registrant. (7)
14
<PAGE>
23 Consent of Independent Public Accountants. (7)
27 Financial data schedule. (7)
- ------------------------
(1) Incorporated by reference from the exhibit shown in parenthesis
to the registrant's Form T-3 (No. 22-24-68) filed with the
Commission on April 2, 1993.
(2) Incorporated by reference from the exhibit shown in parenthesis
to the registrant's Form 8-A/A (No. 02-21526) filed with the
Commission on July 16, 1993.
(3) Previously filed as an exhibit to the registrant's Form 10-Q (No.
1-4129) for the quarterly period ended September 30, 1993, and
incorporated herein by reference.
(4) Incorporated by reference to the corresponding exhibit to the
registrant's Registration Statement on Form S-1 (No. 33-73310)
filed with the Commissions on December 23, 1993, as amended.
(5) Previously filed as an exhibit to the registrant's Form 10-K (No.
0-21526) for the fiscal year ended March 31, 1994, and
incorporated herein by reference.
(6) Previously filed as an exhibit to the registrant's Form 10-K (No.
0-21526) for the fiscal year ended July 31, 1995, and
incorporated herein by reference.
(7) Filed herewith.
* Management Contracts and Compensatory Plans.
(4) REPORTS ON FORM 8-K
Reports on Form 8-K were filed during the quarter ended July 31, 1996.
1. A report on Form 8-K dated July 1, 1996, was filed by the Company
announcing the resignation of Thomas E. Whiddon as Senior Vice
President and Chief Financial Officer and that Merrill J.
Wertheimer would re-assume the title of Chief Financial Officer.
2. A report on Form 8-K dated July 16, 1996, was filed by the
Company announcing the implementation of the Zale Delaware, Inc.
Supplemental Executive Retirement Plan.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 22 day of
October, 1996.
ZALE CORPORATION
By: /s/ ROBERT J. DINICOLA
--------------------------------------------
Robert J. DiNicola
Chairman of the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT J. DINICOLA Chairman of the Board and Chief October 22, 1996
- --------------------------- Executive Officer (principal
Robert J. DiNicola executive officer of the
registrant)
/s/ MERRILL J. WERTHEIMER Executive Vice President - Finance October 22. 1996
- --------------------------- and Chief Financial Officer
Merrill J. Wertheimer (principal financial officer of
the registrant)
/s/ SUE E. GOVE Senior Vice President and Treasurer October 22, 1996
- ---------------------------
Sue E. Gove
/s/ MARK R. LENZ Vice President and Controller October 22, 1996
- --------------------------- (principal accounting officer
Mark R. Lenz of the registrant)
/s/ GLEN ADAMS Director October 22, 1996
- ---------------------------
Glen Adams
/s/ FRANK E. GRZELECKI Director October 22, 1996
- ---------------------------
Frank E. Grzelecki
/s/ ANDREA JUNG Director October 22, 1996
- ---------------------------
Andrea Jung
/s/ RICHARD C. MARCUS Director October 22, 1996
- ---------------------------
Richard C. Marcus
/s/ ANDREW H. TISCH Director October 22, 1996
- ---------------------------
Andrew H. Tisch
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Zale Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Zale Corporation (a Delaware corporation)
and subsidiaries' Annual Report to Stockholders incorporated by reference in
this Form 10-K, and have issued our reports thereon dated September 9, 1996.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is the responsibility of
the Company's management and is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 9, 1996
17
<PAGE>
SCHEDULE II
ZALE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END
OF PERIOD EARNINGS DEDUCTIONS OF PERIOD
----------- ----------- ---------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal year ended July 31, 1996
Allowance for doubtful accounts $42,596 $ 53,508 $44,702(1) $51,402
Fiscal year ended July 31, 1995
Allowance for doubtful accounts 42,708 41,696 41,808(1) 42,596
Fiscal year ended July 31, 1994
Allowance for doubtful accounts 54,353 36,163 47,808 (1) 42,708
</TABLE>
(1) Accounts written off, less recoveries and other adjustments.
18
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------ -------
2.1 Disclosure Statement Pursuant to Section 1125 of the Bankruptcy
Code with Respect to Plan of Reorganization under Chapter 11 of
the Bankruptcy Code for Zale Corporation and its Affiliated
Debtors, dated March 22, 1993 (Exhibit T3E-1). (1)
2.2 Motion to Approve Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and
its Affiliated Debtors, dated May 19, 1993 (Exhibit 2.6). (2)
2.3 Order Approving Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 20, 1993 (Exhibit 2.7). (2)
3.1 Restated Certificate of Incorporation of Zale Corporation, dated
July 30, 1993. (3)
3.2 Amended and Restated Bylaws of Zale Corporation, dated July 30,
1993. (7)
4.1 Warrant Agreement, dated as of July 30, 1993, between Zale
Corporation and The First National Bank of Boston, as warrant
agent, governing the Warrants to Purchase Common Stock, Series A.
(3)
4.2 Indenture, dated as of July 1, 1994, among Zale Funding Trust, as
Issuer and Bankers Trust Company, as Indenture Trustee. (6)
4.3 Purchase and Servicing Agreement, dated as of July 1, 1994, among
Zale Funding Trust, Diamond Funding Corp., Zale Delaware, Inc.,
and Jewelers Financial Services, Inc. (6)
4.4 Revolving Credit Agreement, dated as of August 11, 1995, among
Zale Corporation, Zale Delaware, Inc., the lending institutions
set forth therein, and The First National Bank of Boston, as
Agent for such lenders. (6)
4.5 Amended and Restated Lender Security Agreement, dated as of
August 11, 1995, among Zale Delaware, Inc., Zale Corporation, and
The First National Bank of Boston, as collateral agent. (6)
* 10.1 Indemnification agreement, dated as of July 21, 1993, between
Zale Corporation and certain present and former directors
thereof. (6)
10.2 Amended and Restated Agreement of Limited Partnership of Jewel
Recovery, L.P., dated as of July 30, 1993. (3)
* 10.3 Zale Corporation Stock Option Plan. (3)
10.4 Trust Agreement, dated as of November 24, 1993, among Zale
Corporation, Zale Delaware, Inc. and United States Trust Company
of New York. (4)
10.5 Agreement for Systems Operations Services, dated as of February
1, 1993, between Zale Corporation and Integrated Systems
Solutions Corporation. (3)
10.5a Amendment #1 to Agreement for Systems Operations Services,
dated as of August 1, 1994, between Zale Corporation and
Integrated Systems Solutions Corporation. (6)
* 10.6 Severance and Settlement Agreement, dated as of December 3, 1993,
between Zale Corporation and E. Peter Healey. (4)
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------ -------
* 10.7 Severance and Settlement Agreement, dated as of May 15, 1995,
between Zale Corporation and Dolph B. Simon. (6)
* 10.8 The Executive Severance Plan for Zale Corporation and Its
Affiliates, as amended and restated as of February 10, 1994. (4)
* 10.8a Amendment to The Executive Severance Plan for Zale
Corporation and Its Affiliates effective May 20, 1995. (7)
* 10.9 Employment Agreement, dated as of December 22, 1993, between Zale
Corporation and Larry Pollock. (4)
* 10.10 Employment Agreement, dated as of March 14, 1994, between
Zale Corporation and Robert DiNicola. (5)
10.11 Lease Agreement Between Principal Mutual Life Insurance
Company, As Landlord, and Zale Corporation, as Debtor and
Debtor-In-Possession, As Tenant, dated as of September 17,
1992. (7)
10.11a First Lease Amendment and Agreement between Principal Mutual
Life Insurance Company and Zale Delaware, Inc., dated as of
February 1, 1996. (7)
11 Statement re computation of per share earnings. (7)
13 Incorporated Portions of the Annual Report to
Stockholders for the year ended July 31, 1996. (7)
21 Subsidiaries of the registrant. (7)
23 Consent of Independent Public Accountants. (7)
27 Financial data schedule. (7)
- ------------------------
(1) Incorporated by reference from the exhibit shown in parenthesis
to the registrant's Form T-3 (No. 22-24-68) filed with the
Commission on April 2, 1993.
(2) Incorporated by reference from the exhibit shown in parenthesis
to the registrant's Form 8-A/A (No. 02-21526) filed with the
Commission on July 16, 1993.
(3) Previously filed as an exhibit to the registrant's Form 10-Q (No.
1-4129) for the quarterly period ended September 30, 1993, and
incorporated herein by reference.
(4) Incorporated by reference to the corresponding exhibit to the
registrant's Registration Statement on Form S-1 (No. 33-73310)
filed with the Commissions on December 23, 1993, as amended.
<PAGE>
INDEX TO EXHIBITS
(5) Previously filed as an exhibit to the registrant's Form 10-K (No.
0-21526) for the fiscal year ended March 31, 1994, and
incorporated herein by reference.
(6) Previously filed as an exhibit to the registrant's Form 10-K (No.
0-21526) for the fiscal year ended July 31, 1995, and
incorporated herein by reference.
(7) Filed herewith.
* Management Contracts and Compensatory Plans.
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
ZALE CORPORATION
(a Delaware corporation)
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year at such date and
time, within or without the State of Delaware, as the Board of Directors
shall determine; PROVIDED, HOWEVER, that the first annual meeting of the
stockholders of the Corporation after the Effective Time shall be held as
soon as practicable after the filing with the Securities and Exchange
Commission of the Annual Report on Form 10-K of the Corporation for the
fiscal year ended March 31, 1994 but in no event later than July 31, 1994 or
such earlier date as may be required under applicable law and the rules of
any securities exchange on which the capital stock of the Corporation may be
listed.
SECTION 2. SPECIAL MEETINGS. Special meetings of stockholders for the
transaction of such business as may properly come before the meeting may be
called by order of a majority of Board of Directors, by the Chairman of the
Board of Directors or by the President or Secretary upon the written request
of stockholders holding together at least 25% of all the outstanding shares
of the Common Stock of the Corporation entitled to vote at the meeting, and
shall be held at such date and time, within or without the State of Delaware,
as may be specified by such order. Whenever the place of such a meeting is
not so specified, the meeting shall be held at the principal executive office
of the Corporation.
SECTION 3. NOTICE OF MEETINGS. Written notice of all meetings of the
stockholders, stating the place, date and hour of the meeting and the place
within the city or other municipality or community at which the list of
stockholders may be examined, shall be mailed or delivered to each
stockholder not less than 10 nor more than 60 days prior to the meeting.
Notice of any special meeting shall state in general terms the purpose or
purposes for which the meeting is to be held.
SECTION 4. STOCKHOLDER LISTS. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least 10 days before
every meeting of stockholders, a complete list of the stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name
of each
<PAGE>
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice
of the meeting, or, if not so specified, at the place where the meeting is to
be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the Corporation, or to vote in person or by proxy at
any meeting of stockholders.
SECTION 5. QUORUM. Except as otherwise provided by law or the
Certificate of Incorporation, a quorum for the transaction of business at any
meeting of stockholders shall consist of the holders of record of a majority
of the issued and outstanding shares of the capital stock of the Corporation
entitled to vote at the meeting, present in person or by proxy. At all
meetings of the stockholders at which a quorum is present, all matters,
except as otherwise provided by law or the Certificate of Incorporation,
shall be decided by the vote of the holders of a majority of the shares
entitled to vote thereat present in person or by proxy. If there be no such
quorum, the holders of a majority of such shares so present or represented
may adjourn the meeting from time to time, without further notice, until a
quorum shall have been obtained. When a quorum is once present it is not
broken by the subsequent withdrawal of any stockholder.
SECTION 6. ORGANIZATION. Meetings of stockholders shall be presided over
by the Chairman, if any, or if none or in the Chairman's absence the
Vice-Chairman, if any, or if none or in the Vice-Chairman's absence the
President, if any, or if none or in the President's absence a Vice-President,
or, if none of the foregoing is present, by a chairman to be chosen by the
stockholders entitled to vote who are present in person or by proxy at the
meeting. The Secretary of the Corporation, or in the Secretary's absence an
Assistant Secretary, shall act as secretary of every meeting, but if neither
the Secretary nor an Assistant Secretary is present, the presiding officer of
the meeting shall appoint any person present to act as secretary of the
meeting.
SECTION 7. VOTING; PROXIES; REQUIRED VOTE. (a) At each meeting of
stockholders, every Stockholder shall be entitled to vote in person or by
proxy appointed by instrument in writing, subscribed by such stockholder or
by such stockholder's duly authorized attorney-in-fact (but no such proxy
shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period), and, unless the Certificate of
Incorporation provides otherwise, shall have one vote for each share of stock
entitled to vote registered in the name of such stockholder on the books of
the Corporation on the applicable record date fixed by the Board of Directors
pursuant to Article VIII. At all elections of directors the voting may but
need not be by ballot and a plurality of the votes cast there shall elect.
Except as otherwise required by law or the Certificate of Incorporation, any
other action shall be authorized by a majority of the votes cast.
(b) Where a separate vote by a class or classes is required, a majority of
the outstanding
<PAGE>
shares of such class or classes, present in person or represented by proxy,
shall constitute a quorum entitled to take action with respect to that vote
on that matter and the affirmative vote of the majority of shares of such
class or classes present in person or represented by proxy at the meeting
shall be the act of such class, unless otherwise provided in the
Corporation's Certificate of Incorporation.
(c) Stockholders may participate in a meeting of stockholders only in
person or by proxy voted or acted upon by an individual attending in person.
Participation by conference telephone or similar communications equipment in
a meeting of stockholders shall not constitute presence in person at the
meeting.
SECTION 8. INSPECTORS. The Board of Directors, in advance of any
meeting, may, but need not, appoint one or more inspectors of election to act
at the meeting or any adjournment thereof. If an inspector or inspectors are
not so appointed, the person presiding at the meeting may, but need not,
appoint one or more inspectors. In case any person who may be appointed as
an inspector fails to appear or act, the vacancy may be filled by appointment
made by the directors in advance of the meeting or at the meeting by the
person presiding thereat. Each inspector, if any, before entering upon the
discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector at such meeting with strict impartiality and
according to the best of his ability. The inspectors, if any, shall determine
the number of shares of stock outstanding and the voting power of each, the
shares of stock represented at the meeting, the existence of a quorum, and
the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the person
presiding at the meeting, the inspector or inspectors, if any, shall make a
report in writing of any challenge, question or matter determined by such
inspector or inspectors and execute a certificate of any fact found by such
inspector or inspectors.
SECTION 9. NOTICE OF STOCKHOLDER BUSINESS. At an annual or special
meeting of the stockholders, only such business shall be conducted as shall
have been properly brought before the meeting. To be properly brought before
an annual or special meeting business must be (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors or (c) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual or special meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation, not less than 60 days nor
more than 90 days prior to the meeting; PROVIDED, HOWEVER, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to
3
<PAGE>
be timely must be so received not later than the close of business on the
10th day following the day on which such notice of the date of the annual or
special meeting was mailed or such public disclosure was made or, in the case
of an annual meeting, if earlier than such 10th day, the 60th day before the
first anniversary of the later of (i) the next preceding annual meeting or
(ii) the Effective Date (as defined in the Plan). A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual or special meeting (a) a brief description of the
business desired to be brought before the annual or special meeting and the
reasons for conducting such business at the annual or special meeting, (b)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the stockholder and (d) any
material interest of the stockholder in such business. Notwithstanding
anything in the Bylaws to the contrary, no business shall be conducted at any
annual or special meeting except in accordance with the procedures set forth
in this Section 9. The Chairman of the annual or special meeting shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this Section 9, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall
not be transacted.
SECTION 10. NOTICE OF STOCKHOLDER NOMINEES. Only persons who are
nominated in accordance with the procedures set forth in this Section 10
shall be eligible for election as directors. Nominations of persons for
election to the Board of Directors of the Corporation may be made at a
meeting of stockholders by or at the direction of the Board of Directors or
by any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 10. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the meeting; PROVIDED, however, that in the event that
less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th
day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made or, in the case of an annual
meeting, if earlier than such 10th day, the 60th day before the first
anniversary of the later of (i) the last annual meeting or (ii) the Effective
Date (as defined in the Plan). Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended
(including without limitation such person's written consent to being named in
the proxy
4
<PAGE>
statement as a nominee and to serving as a director if elected); and (b) as
to the stockholder giving the notice (i) the name and address, as they appear
on the Corporation's books, of such stockholder and (ii) the class and number
of shares of the Corporation which are owned of record by such stockholder.
At the request of the Board of Directors any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be
eligible for election as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 10. The chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed
by the Bylaws, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
SECTION 11. ADJOURNMENT. When a meeting is for any reason adjourned to
another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, any business may be
transacted which might have been transacted at the original meeting. If the
adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. Subject to paragraph (b) of Article SIXTH of
the Certificate of Incorporation, the business, property and affairs of the
Corporation shall be managed by, or under the direction of, the Board of
Directors.
SECTION 2. QUALIFICATION; NUMBER; TERM; REMUNERATION. (a) Each director
shall be at least 18 years of age. A director need not be a stockholder, a
citizen of the united States, or a resident of the State of Delaware. The
number of directors constituting the entire Board of Directors shall be seven
until the first annual meeting of stockholders after the Effective Time and
thereafter shall be seven or such greater number (not to exceed nine) as the
Board of Directors shall determine from time to time. One of the directors
shall be selected by the Board of Directors to be its Chairman. The use of
the phrase "entire Board" or "whole Board" herein refers to the total number
of directors which the Corporation would have if there were no vacancies.
(b) Directors who are elected at an annual meeting of stockholders, and
directors who are elected in the interim to fill vacancies and newly created
directorships, shall hold office until the next annual meeting of
stockholders and until their successors are elected and qualified or until
their earlier resignation or removal.
5
<PAGE>
(c) Directors shall be paid their reasonable and necessary expenses, if
any, of attendance at each meeting of the Board of Directors or any Committee
thereof and, as shall be authorized by the Board of Directors, may be paid a
fixed sum for attendance at each meeting of the Board of Directors or any
Committee thereof and a stated fee as director. No such payment shall
preclude any director form serving the Corporation in any other capacity and
receiving compensation therefore
SECTION 3. QUORUM AND MANNER OF VOTING. Except as otherwise provided by
law, a majority of the entire Board shall constitute a quorum. A majority of
the directors present, whether or not a quorum is present, may adjourn a
meeting from time to time to another time and place without notice. The vote
of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
SECTION 4. PLACES OF MEETINGS. Meetings of the Board of Directors may
be held at any place within or without the State of Delaware, as may from
time to time be fixed by resolution of the Board of Directors, or as may be
specified in the notice of meeting.
SECTION 5. ANNUAL MEETING. Following the annual meeting of
stockholders, the newly elected Board of Directors shall meet for the purpose
of the election of officers and the transaction of such other business as may
properly come before the meeting. Such meeting may be held without notice
immediately after the annual meeting of stockholders at the same place at
which such stockholders' meeting is held.
SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such times and places as the Board of Directors shall from
time to time by resolution determine. Notice need not be given of regular
meetings of the Board of Directors held at times and places fixed by
resolution of the Board of Directors.
SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board or President or by
a majority of the directors then in office.
SECTION 8. NOTICE OF MEETINGS. Subject to Article XIV, notice of the
place, date and time and the purpose or purposes of each special meeting of
the Board of Directors shall be given to each director by mailing, delivering
by facsimile transmission or telephoning the same or by delivering the same
personally, in each case at least five days before the special meeting.
SECTION 9. ORGANIZATION. At all meetings of the Board of Directors, the
Chairman, if any, or if none or in the Chairman's absence or inability to
act, the Vice-Chairman, if any, or in the Vice-Chairman's absence or
inability to act, the President, if he or she is a member of the Board of
Directors, or in the President's absence or inability to act, any
Vice-President who is a member of
6
<PAGE>
the Board of Directors, or in such Vice-President absence or inability to
act, a chairman chosen by the directors, shall preside. The Secretary of the
Corporation shall act as secretary at all meetings of the Board of Directors
when present, and, in the Secretary's absence, the presiding officer may
appoint any person to act as secretary.
SECTION 10. RESIGNATION. Any director may resign at any time upon
written notice to the Corporation and such resignation shall take effect upon
receipt thereof by the President or Secretary, unless otherwise specified in
the resignation. Any or all of the directors may be removed, with or without
cause, at a special meeting of the stockholders, by the holders of a majority
of the shares of stock outstanding and entitled to vote for the election of
directors.
SECTION 11. VACANCIES. Unless otherwise provided in these Bylaws,
vacancies on the Board of Directors, whether caused by resignation, death,
disqualification, removal, an increase in the authorized number of directors
or otherwise, may be filled by the affirmative vote of a majority of the
remaining directors, although less than a quorum, or by a sole remaining
director, or at a special meeting of the stockholders, by the holders of
shares entitled to vote for the election of directors.
SECTION 12. ACTION BY WRITTEN CONSENT. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting if all the directors consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors.
SECTION 13. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless his or her dissent is entered in the minutes of the meeting or
unless such director files his or her written dissent to such action with the
person acting as the Secretary of the meeting before the adjournment thereof
or delivers such dissent to the Secretary of the Corporation in person, by
mail or by telecopy immediately after the adjournment of the meeting or
within a reasonable time after receipt of the minutes of such meeting at
which the action was taken. Such right to dissent shall not apply to a
director who voted in favor of such action.
SECTION 14. MEETINGS BY TELEPHONE. Members of the Board or any
committee of the directors may, at the election of the Chairman, participate
in a meeting of the Board or committee by means of conference telephone or
similar communications equipment by which all persons participating in the
meeting can hear each other at the same time. Such participation shall
constitute presence in person at the meeting.
ARTICLE III
7
<PAGE>
AUDIT COMMITTEE
SECTION 1. DESIGNATION. The Board of Directors shall by a resolution
adopted by a majority of the entire Board designate an Audit committee of not
less than two directors who are not employees of the Corporation or any
Subsidiary thereof. Members of the Audit Committee may be members of other
committees of the Board of Directors. The members of the Audit committee
shall elect a Chairman by the affirmative vote of a majority of such members.
SECTION 2. POWERS. The power and authority of the Audit Committee
shall, to the extent permitted by law, be to (i) initiate or review the
results of an audit or investigation, at any time, into the business affairs
of the Corporation and its Subsidiaries; (ii) review the Corporation's
annual and quarterly reports; (iii) conduct pre-audit and post-audit reviews
with the Corporation's management, financial employees and independent
auditors; and (iv) exercise such other powers and authority as shall from
time to time be assigned thereto by resolution of the Board of Directors.
Management of the Corporation shall inform the Audit Committee regularly
with respect to the business and financial condition of the Corporation and
its Subsidiaries, and shall notify the Audit Committee promptly of (i) any
proposed material change in accounting or financial reporting practices; (ii)
any proposed change of independent auditors; and (iii) such other matters as
may from time to time be designated by the Board of Directors.
In connection with the performance of its duties, the Audit Committee
shall have unrestricted access to and assistance from the officers, employees
and independent auditors of the Corporation, and shall be furnished with such
resources and support from the Corporation as the Audit Committee shall deem
necessary. The Audit Committee shall have standing authority to employ, at
the expense of the Corporation, such experts and professionals as the Audit
Committee shall deem appropriate from time to time.
SECTION 3. REPORTS. The Audit Committee shall report to the Board of
Directors when and as required by the Board of Directors and when and as
deemed appropriate by the Audit Committee, but in any event, not less
frequently than quarterly.
SECTION 4. MEETINGS. Regular meetings of the Audit Committee shall be
held not less frequently than quarterly. Special meetings of the Audit
Committee way be called by or at the request of the Chairman of the Audit
Committee or a majority of the members of the Audit Committee or the Board of
Directors upon five Business Days, notice to the members (unless each member
waives such notice before or after the meeting).
Subject to Article XIV, a notice of the place, date and time and the
purpose or purposes of such meeting of the Audit Committee shall be given by
the Chairman of the Audit Committee and
8
<PAGE>
shall be given to each member by mailing, delivering by facsimile
transmission, telephoning the same or by delivering the same personally, in
each case at least five days before the meeting.
The Audit Committee may hold its meetings at the principal office of the
Corporation or at any other place upon which a majority of the committee may
at any time agree.
9
<PAGE>
ARTICLE IV
COMPENSATION COMMITTEE
SECTION 1. DESIGNATION. The Board of Directors shall by a resolution
adopted by a majority of the entire Board designate a Compensation Committee of
not less than two directors who are not employees of the Corporation or any
Subsidiary thereof. Members of the Compensation Committee may be members of
other committees of the Board of Directors. The members of the Compensation
Committee shall elect a Chairman by the affirmative vote of a majority of such
members.
SECTION 2. POWERS. The power and authority of the Compensation Committee
shall, to the extent permitted by law, be to (i) administer the Corporation's
stock option plan and such other incentive compensation plans for which the
Compensation Committee shall from time to time be designated as the
administrator pursuant to resolution of the Board of Directors; (ii) subject to
final decision by the entire Board of Directors, review proposed compensation of
the Chief Executive Officer and, if and to the extent required by the rules and
regulations promulgated under the Securities Exchange Act of 1934, other
executive officers of the Corporation and its Subsidiaries; (iii) subject to
final decision by the entire Board of Directors, consider senior management
succession and related matters; (iv) prepare and disseminate an annual written
Compensation Committee Report for presentation to the Board; and (v) exercise
such other powers and authority as shall from time to time be assigned thereto
by resolution of the Board of Directors.
The Compensation Committee Report shall set forth such information as may
be necessary to comply with the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder and such other information as
the committee determines.
In connection with the performance of its duties, the Compensation
Committee shall have unrestricted access to and assistance from the officers,
employees and independent auditors of the Corporation, and shall be furnished
with such resources and support from the Corporation as the Compensation
Committee shall deem necessary or advisable. The Compensation Committee shall
have standing authority to employ, at the expense of the Corporation, such
experts and professionals as the Compensation Committee shall deem appropriate
from time to time.
SECTION 3. REPORTS. The Compensation Committee shall report to the Board
of Directors when and as required by the Board of Directors and when and as
deemed appropriate by the Compensation Committee, but in any event, not less
frequently than semi-annually.
SECTION 4. MEETINGS. Regular meetings of the Compensation Committee shall
be held not less frequently than semi-annually. Special meetings of the
Compensation Committee may be called by or at the request of the Chairman
thereof or a majority of the members thereof or the
10
<PAGE>
Board of Directors, upon five Business Days' notice to the members (unless
each member waives such notice before or after the meeting).
Subject to Article XIV, a notice of the place, date and time and the
purpose or purposes of such meeting of the Compensation Committee shall be given
by the Chairman of the Compensation Committee and shall be given to each member
by mailing, delivering by facsimile transmission, telephoning the same or by
delivering the same personally, in each case at least five days before the
meeting.
The Compensation Committee may hold its meetings at the principal office of
the Corporation, or at any other place upon which a majority of the Compensation
Committee may at any time agree.
ARTICLE V
EXECUTIVE COMMITTEE
SECTION 1. DESIGNATION. The Board of Directors may by a resolution
adopted by a majority of the entire Board designate an Executive Committee of
one or more directors. Members of the Executive Committee may be members of
other committees of the Board of Directors. If the Executive Committee has more
than one member, the members of the Executive Committee shall elect a Chairman
by the affirmative vote of a majority of such members.
SECTION 2. POWERS. The power and authority of the Executive Committee
shall, to the extent permitted by law, be to (i) authorize the execution and
delivery in the name of the Corporation of any power of attorney, consignment or
purchase agreement, lease, construction or other contract, loan agreement, bond
or other obligation or instrument, which power of attorney, agreement, lease,
contract, bond, obligation or instrument (each, an "instrument") is entered into
in the ordinary course of business and involves the payment, under such
instrument and under any related instrument entered into by any Material
Subsidiary similarly authorized, by the Corporation and such Material Subsidiary
of an aggregate consideration of less than $2,500,000; (ii) authorize the
opening of bank accounts; (iii) appoint or remove financial or other entities or
persons as agents of the Corporation; (iv) authorize the filing of reports with
governmental agencies; (v) appoint or remove officers of the Corporation other
than the Chairman, the Vice-Chairman, if any, the President and Chief Executive
Officer; and (vi) authorize such other transactions in the ordinary course of
business of the Corporation so long as any such transaction or series of
substantially related transactions involves the payment by the Corporation of an
aggregate consideration of less than $2,500,000.
SECTION 3. REPORTS. The Executive Committee shall report to the Board of
Directors when and as required by the Board of Directors and when and as deemed
appropriate by the
11
<PAGE>
Executive Committee, but in any event, not less frequently than by the next
succeeding meeting of the entire Board of Directors.
SECTION 4. MEETINGS. If the Executive Committee has more than one member,
special meetings of the Executive Committee may be called by or at the request
of the Chairman of the Executive Committee or a majority of the members of the
Executive Committee or the Board of Directors upon 24 hours' notice to members
(unless each member waives such notice before or after the meeting).
If the Executive Committee has more than one member, subject to Article
XIV, a notice of the place, date and time and the purpose or purposes of such
meeting of the Executive Committee shall be given by the Chairman of the
Executive Committee and shall be given to each member by mailing, delivering by
facsimile transmission, telephoning the same or by delivering the same
personally, in each case at least 24 hours before the meeting.
The Executive Committee may hold its meetings at the principal office of
the Corporation or at any other place upon which a majority of the committee may
at any time agree.
ARTICLE VI
COMMITTEES GENERALLY
SECTION 1. APPOINTMENT. The Board of Directors by a resolution adopted by
a majority of the entire Board may from time to time appoint one or more
committees, in addition to the Audit Committee, the Compensation Committee and
the Executive Committee, for any purpose or purposes, to the extent lawful,
which shall have such powers as shall be determined and specified by the Board
of Directors in the resolution of designation.
SECTION 2. PROCEDURES - QUORUM AND MANNER OF ACTING. Each committee shall
fix its own rules of procedure, and, except as otherwise provided in Articles
III, IV and V, shall meet where and as provided by such rules or by resolution
of the Board of Directors. Except as otherwise provided by law, the presence of
a majority of the then appointed members of a committee shall constitute a
quorum for the transaction of business by that committee, and in every case
where a quorum is present the affirmative vote of a majority of the members of
the committee present shall be the act of the committee. Each member of a
committee shall have one vote on all matters that come before the committee.
Each committee shall keep minutes of its proceedings, and actions taken by a
committee shall be reported to the Board of Directors.
SECTION 3. ACTION BY WRITTEN CONSENT. Any action required or permitted to
be taken at any meeting of any committee of the Board of Directors may be taken
without a meeting if all the members of the committee consent thereto in
writing, and the writing or writings are filed with the
12
<PAGE>
minutes of proceedings of the committee.
SECTION 4. TERM; TERMINATION. In the event any person shall cease to be a
director of the Corporation, such person shall simultaneously therewith cease to
be a member of any committee designated by the Board of Directors.
Any member of any committee may be removed at any time, with or without
cause, by a resolution of a majority of the entire Board.
Any vacancy in any committee occurring for any reason whatsoever may be
filled in accordance with a resolution of a majority of the entire Board.
ARTICLE VII
OFFICERS
SECTION 1. ELECTION AND QUALIFICATIONS. The Board of Directors shall
elect the officers of the Corporation, which shall include a Chairman of the
Board, a Vice-Chairman of the Board, if any, a President and a Secretary, and
may include, by election or appointment, one or more Senior Vice-Presidents (any
one or more of whom may be given an additional designation of rank or function),
a Treasurer and such Assistant Secretaries, such Assistant Treasurers and such
other officers as the Board may from time to time deem proper. Each officer
shall have such powers and duties as may be prescribed by these Bylaws and as
may be assigned consistent with the Bylaws of the Board of Directors or the
President. Any two or more offices may be held by the same person, except the
President may not also be the Secretary.
SECTION 2. TERM OF OFFICE AND REMUNERATION. The term of office of all
officers shall be one year and until their respective successors have been
elected and qualified, but any officer may be removed from office, either with
or without cause, at any time by the Board of Directors. Any vacancy in any
office arising from any cause may be filled for the unexpired portion of the
term by the Board of Directors. Subject to Article IV, the remuneration of all
officers of the Corporation may be fixed by the Board of Directors or in such
manner as the Board of Directors shall provide.
SECTION 3. RESIGNATION; REMOVAL. Any officer may resign at any time upon
written notice to the Corporation and such resignation shall take effect upon
receipt thereof by the President or Secretary, unless otherwise specified in the
resignation. Any officer shall be subject to removal, with or without cause, at
any time by vote of a majority of the entire Board.
SECTION 4. CHAIRMAN AND VICE-CHAIRMAN OF THE BOARD. The Chairman of the
Board of Directors shall be a director and shall preside at all meetings of the
Board of Directors and shall have such other powers and duties as may from time
to time be assigned by the Board of
13
<PAGE>
Directors. The Vice-Chairman of the Board of Directors shall assist the
Chairman of the Board of Directors in the execution of his duties and shall
have such other authority as from time to time may be assigned by the Board
of Directors or the President.
SECTION 5. PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President shall be
the chief executive officer of the Corporation and shall have such duties as
customarily pertain to that office. The President shall have general management
and supervision of the property, business and affairs of the Corporation and
over its other officers; may appoint and remove assistant officers and other
agents and employees; and may execute and deliver in the name of the Corporation
powers of attorney, contracts, bonds and other obligations and instruments.
SECTION 6. SENIOR VICE-PRESIDENT. A Senior Vice-President may execute and
deliver in the name of the Corporation contracts and other obligations and
instruments pertaining to the regular course of the duties of said office, and
shall have such other authority as from time to time may be assigned by the
Board of Directors or the President.
SECTION 7. TREASURER. The Treasurer shall in general have all duties
incident to the position of Treasurer and such other duties as may be assigned
by the Board of Directors or the President.
Subject to the provisions of Article III hereof, the Treasurer shall
prescribe and maintain the methods and systems of accounting to be followed,
keep complete books and records of accounts, prepare and file all local, state
and federal tax returns, prescribe and maintain an adequate system of internal
audit, and prepare and furnish to the Chief Executive Officer, the Board and the
Audit Committee statements of account showing the financial position of the
Corporation and the results of its operations.
SECTION 8. SECRETARY. The Secretary shall in general have all the duties
incident to the office of Secretary and such other duties as may be assigned by
the Board of Directors or the President.
SECTION 9. ASSISTANT OFFICERS. Any assistant officer shall have such
powers and duties of the officer such assistant officer assists as such officer
or the Board of Directors shall from time to time prescribe.
ARTICLE VIII
BOOKS AND RECORDS
SECTION 1. LOCATION. The books and records of the Corporation may be kept
at such place or places within or outside the State of Delaware as the Board of
Directors or the respective
14
<PAGE>
officers in charge thereof may from time to time determine. The record books
containing the names and addresses of all stockholders, the number and class
of shares of stock held by each and the dates when they respectively became
the owners of record thereof shall be kept by the Secretary as prescribed in
the Bylaws and by such officer or agent as shall be designated by the Board
of Directors.
SECTION 2. ADDRESSES OF STOCKHOLDERS. Notices of meetings and all other
corporate notices may be delivered personally or mailed to each stockholder at
the stockholder's address as it appears on the records of the Corporation.
SECTION 3. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. (a) In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors and which record date shall not be more than 60 nor less than 10 days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
and which record date shall be not more than 60 days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
ARTICLE IX
CERTIFICATES REPRESENTING STOCK
SECTION 1. CERTIFICATES; SIGNATURES. The shares of the Corporation shall
be represented by certificates, provided that the Board of Directors of the
Corporation may provide by resolution or resolutions that some or all of any or
all classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such
15
<PAGE>
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board of Directors, every holder of stock represented
by certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate, signed by or in the name of the Corporation by
the Chairman or Vice-Chairman of the Board of Directors, or the President or
Senior Vice-President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Corporation, representing the number
of shares registered in certificate form. Any and all signatures on any such
certificate may be facsimiles. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
The name of the holder of record of the shares represented thereby, with the
number of such shares and the date of issue, shall be entered on the books of
the Corporation.
SECTION 2. TRANSFERS OF STOCK. Upon compliance with provisions
restricting the transfer or registration of transfer of shares of stock, if any,
shares of capital stock shall be transferable on the books of the Corporation
only by the holder of record thereof in person, or by duly authorized attorney,
upon surrender and cancellation of certificates for a like number of shares,
properly endorsed, and the payment of all taxes due thereon.
SECTION 3. FRACTIONAL SHARES. The Corporation may, but shall not be
required to, issue certificates for fractions of a share where necessary to
effect authorized transactions, or the Corporation may pay in cash the fair
value of fractions of a share as of the time when those entitled to receive such
fractions are determined, or it may issue scrip in registered or bearer form
over the manual or facsimile signature of an officer of the Corporation or of
its agent, exchangeable as therein provided for full shares, but such scrip
shall not entitle the holder to any rights of a stockholder except as therein
provided.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer
and registration of certificates representing shares of the Corporation.
SECTION 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may
issue a new certificate of stock in place of any certificate, theretofore issued
by it, alleged to have been lost, stolen or destroyed, and the Board of
Directors may require the owner of any lost, stolen or destroyed certificate, or
his legal representative, to give the Corporation a bond sufficient to indemnify
the Corporation against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
any such new certificate.
ARTICLE X
16
<PAGE>
DIVIDENDS
Subject always to the provisions of law and the Certificate of
Incorporation, the Board of Directors shall have full power to determine whether
any, and, if any, what part of any, funds legally available for the payment of
dividends shall be declared as dividends and paid to stockholders; the division
of the whole or any part of such funds of the Corporation shall rest wholly
within the lawful discretion of the Board of Directors, and it shall not be
required at any time, against such discretion, to divide or pay any part of such
funds among or to the Stockholders as dividends or otherwise; and before payment
of any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, thinks proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the Board of Directors
shall think conducive to the interest of the Corporation, and the Board of
Directors may modify or abolish any such reserve in the manner in which it was
created.
ARTICLE XI
RATIFICATION
Any transaction, questioned in any law suit on the ground of lack of
authority, defective or irregular execution, adverse interest of director,
officer or stockholder, non-disclosure, miscomputation, or the application of
improper principles or practices of accounting, may be ratified before or after
judgment, by the Board of Directors or by the stockholders, and if so ratified
shall have the same force and effect as if the questioned transaction had been
originally duly authorized. Such ratification shall be binding upon the
Corporation and its stockholders and shall constitute a bar to any claim or
execution of any judgment in respect of such questioned transaction.
ARTICLE XII
CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation and shall be in such form and contain such other words and/or
figures as the Board of Directors shall determine. The corporate seal may be
used by printing, engraving, lithographing, stamping or otherwise making,
placing or affixing, or causing to be printed, engraved, lithographed,
stamped or otherwise made, placed or affixed, upon any paper or document, by
any process whatsoever, an impression, facsimile or other reproduction of
said corporate seal.
17
<PAGE>
ARTICLE XIII
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall be subject to
change, by the Board of Directors. Unless otherwise fixed by the Board of
Directors, the fiscal year of the Corporation shall be the 12 month period
ending on March 31 in each year.
18
<PAGE>
ARTICLE XIV
WAIVER OF NOTICE
Whenever notice is required to be given by these Bylaws or by the
Certificate of Incorporation or by law, a written waiver thereof, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice.
ARTICLE XV
BANK ACCOUNTS, DRAFTS, CONTRACTS, ETC.
SECTION 1. BANK ACCOUNTS AND DRAFTS. In addition to such bank accounts
as may be authorized by the Board of Directors, the primary financial officer
or any person designated by said primary financial officer, whether or not an
employee of the Corporation, may authorize such bank accounts to be opened or
maintained in the name and on behalf of the Corporation as he may deem necessary
or appropriate, payments from such bank accounts to be made upon and according
to the check of the Corporation in accordance with the written instructions of
said primary financial officer, or other person so designated by the Treasurer.
SECTION 2. CONTRACTS. The Board of Directors may authorize any person or
persons, in the name and on behalf of the Corporation, to enter into or execute
and deliver any and all deeds, bonds, mortgages, contracts and other obligations
or instruments, and such authority may be general or confined to specific
instances.
SECTION 3. PROXIES; POWERS OF ATTORNEY; OTHER INSTRUMENTS. Except as may
otherwise be provided in the Certificate of Incorporation with respect to any
Material Subsidiary, the Chairman, the President or any other person designated
by either of them shall have the power and authority to execute and deliver
proxies, powers of attorney and other instruments on behalf of the Corporation
in connection with the rights and powers incident to the ownership of stock by
the Corporation. Except as may otherwise be provided in the Certificate of
Incorporation with respect to any Material Subsidiary, the Chairman, the
President or any other person authorized by proxy or power of attorney executed
and delivered by either of them on behalf of the Corporation may attend and vote
at any meeting of stockholders of any company in which the Corporation may hold
stock, and may exercise on behalf of the Corporation any and all of the rights
and powers incident to the ownership of such stock at any such meeting, or
otherwise as specified in the proxy or power of attorney so authorizing any such
person. Except as may otherwise be provided in the Certificate of Incorporation
with respect to any Material Subsidiary, the Board of Directors, from time to
time, may confer like powers upon any other person.
19
<PAGE>
SECTION 4. FINANCIAL REPORTS. The Board of Directors may appoint the
primary financial officer or other fiscal officer to cause to be prepared and
furnished to stockholders entitled thereto any special financial notice and/or
financial statement, as the case may be, which may be required by any provision
of law.
ARTICLE XVI
AMENDMENTS
The Board of Directors shall have power to adopt, amend or repeal Bylaws
in accordance with the Certificate of Incorporation. Bylaws adopted by the
Board of Directors may be repealed or changed, and new Bylaws made, by the
stockholders in accordance with the Certificate of Incorporation, and the
stockholders may prescribe that any Bylaw made by them shall not be altered,
amended or repealed by the Board of Directors.
ARTICLE XVII
MISCELLANEOUS
All capitalized terms used herein but not defined herein shall have the
meanings assigned to such terms in the Certificate of Incorporation.
Effective as of 12:00 noon, July 30, 1993.
20
<PAGE>
EXHIBIT 10.8a
AMENDMENT TO THE EXECUTIVE SEVERANCE PLAN FOR ZALE
CORPORATION AND ITS AFFILIATES
EFFECTIVE MAY 20, 1995
(As Amended and Restated Effective February 10, 1994)
The Executive Severance Plan is hereby amended as follows:
Section 1.2(Q) "Term" is deleted and replaced with the following:
"Term" means the period commencing as of the Effective Date and ending on
July 31, 1998, or such date as determined by the Plan Administrator."
Section 8.3 - "Plan Administrator" is amended as follows:
delete "Jacquie LaBarbera" and substitute:
"Senior Vice President, Human Resources"
Section 8.4 - "Legal Process" is amended as follows:
delete "Dolph B.H. Simon" and substitute:
"General Counsel"
EXHIBIT "A" IS HEREBY DELETED AND REPLACED BY THE FOLLOWING:
"Group I Executive Officers" shall include the Executive Vice President and
Corporate Senior Vice Presidents and Division Presidents;
"Group II Vice President and Director Levels" shall include all Corporate
Vice Presidents, Directors, Division Senior Vice Presidents, Vice Presidents and
Directors.
ALL OTHER TERMS AND CONDITIONS OF THE EXECUTIVE SEVERANCE PLAN SHALL REMAIN
IN FULL FORCE AND EFFECT EXCEPT AS MAY BE AMENDED IN THE FUTURE.
Effective as of this 20th day of May, 1995.
/S/ A.H. KRANITZ 7/31/95
------------------------------------
A.H. KRANITZ
PLAN ADMINISTRATOR
<PAGE>
LEASE AGREEMENT
BETWEEN
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY,
AS LANDLORD,
AND
ZALE CORPORATION, AS DEBTOR AND DEBTOR-IN-POSSESSION,
AS TENANT
DATED SEPTEMBER 17, 1992
7/16/92
<PAGE>
TABLE OF CONTENTS
LEASE GRANT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DELINQUENT PAYMENT; HANDLING CHARGES . . . . . . . . . . . . . . . . . . . . . 5
SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
UTILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CONDITION; IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE . . . . . . . . . . 6
USE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
ASSIGNMENTAND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . . . . .13
INSURANCE; WAIVERS; SUBROGATION; INDEMNITY . . . . . . . . . . . . . . . . . .15
SUBORDINATION ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE.. . . . . . . . . . .16
RULES AND REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
DAMAGE TO PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
LANDLORD'S LIEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
DEFAULT BY LANDLORD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
PAYMENT BY TENANT; NON-WAIVER. . . . . . . . . . . . . . . . . . . . . . . . .24
SURRENDER OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
CERTAIN RIGHTS RESERVED BY LANDLORD. . . . . . . . . . . . . . . . . . . . . .25
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
HAZARDOUS WASTE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
PRIOR LEASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
<PAGE>
LEASE
THIS LEASE AGREEMENT (this "LEASE") is entered into as of September 17,
1992, between PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa corporation
("LANDLORD"), ZALE CORPORATION, as debtor and debtor-in-possession, a
Delaware corporation ("TENANT").
1. LEASE GRANT. Subject to the terms of this Lease, Landlord leases
to Tenant, and Tenant leases from Landlord the land described on Exhibit A
(the "Land"), together with the building located thereon (the "Building"),
whose street address is 901 West Walnut Hill Lane, Irving, Texas, together
with all improvements located thereon including, without limitation, all
parking facilities and areas, roadways and walkways appurtenant to the Land
and/or Building (collectively, the "Premises").
2. TERM. The term of this Lease (the "Term") shall be 60 months,
beginning no earlier than August 1, 1992, and beginning on the date hereof as
set forth above (the "Commencement Date"), and (subject to the last sentence
of this Section 2) there shall be no rights to renew or extend the Term. The
Term and Commencement Date are subject to adjustment and earlier termination
as herein provided. If the Commencement date is not the first day of a
calendar months, the Term shall be extended by the time between the
Commencement Date and the first day of the next month.
3. RENT.
a. BASIC RENTAL. "Basic Rental" (herein so called) shall be
$308,333.33 for the first three months of the Term; thereafter, Basic Rental
shall be $2,500,000 per annum and shall be payable in monthly installments of
$208,333.33 each.
b. ADDITIONAL RENT. In addition to the Basic Rental, Tenant shall pay
to Landlord "Additional Rent" (herein so called) equal to the actual Basic
Costs (defined below) incurred by Landlord and directly relating to the
Premises. "Basic Costs" shall mean all expenses and disbursements of every
kind which Landlord is obligated to pay or obligated or entitled under the
terms of this Lease to pay or incur in connection with the following items:
(i) all insurance and insurance related expenses applicable to the
Premises, including any deductible amounts not exceeding $10,000.00 per
occurrence; and
(ii) all taxes and assessments and governmental and association
charges imposed by any and all tax authorities and/or associates,
including (without limitation) federal, state, county, municipal or
private association, whether they be by taxing or management districts or
authorities presently taxing or by others subsequently created by
otherwise, or by private association, and any other taxes or assessments
(including, without limitation, all annual assessments, special
assessments and all other amounts payable pursuant to restrictive
covenants in favor of, or otherwise payable to, and all
2
<PAGE>
other amounts payable pursuant to restrictive covenants in favor of, or
otherwise payable to, Las Colinas Association), attributable to the
Premises (or its operation) and all improvements and fixtures located
therein, excluding federal and state taxes on income (collectively,
"TAXES"); however, if the present method of taxation changes so that
in lieu of the whole or any part of any Taxes levied on the Land or
Building, there is levied on Landlord a capital tax directly on the
rents received therefrom or a franchise tax, assessment, or charge
based in whole or in part upon such rents for the Premises, then all
such taxes, assessments, or charges, or the part thereof so based,
shall be deemed to be included within the term "Taxes" for purposes
hereof. Taxes shall not include any penalties incurred by virtue of
late payment by Landlord (due to any cause other than Tenant's default
in paying Taxes requires under this Lease). Landlord shall provide to
Tenant within a reasonable time after receipt by Landlord, copies of
the bills from the taxing authorities showing the Taxes that are due;
provided, however, that any failure of Landlord to forward such copies
as described shall not reduce, release, impair or affect Tenant's
obligations to pay such portion of the Additional Rent as provided in
this Lease. Taxes will be prorated to the Term and assessments shall
be charged to Tenant only for that portion falling due within the Term
computed as if Landlord elected the longest period over which same cold
be paid. Landlord shall have the right to contest the amount of
validity, in whole or in part, of any Taxes. Tenant shall also have the
right to contest the amount or validity, in whole or in part, of the
Taxes by appropriate proceedings diligently conducted, at any time
during which there exists no Event of Default under the terms of this
Lease, and, if Tenant elects to defer payment in connection with such
contest, so long as Tenant delivers to Landlord within sixty (60) days
prior to the delinquency date for payment of such Taxes (A)
documentation reasonably satisfactory to Landlord [which may include a
reasonably acceptable opinion of legal counsel as to the matters set
forth in items (3) and (4) of this subsection (A) (1) identifying the
taxing authority, applicable year and amount of Taxes being contested,
(2) evidencing the filing of an action or the commencement of appropriate
proceedings initiating such contest, (3) verifying that the postponement
of deferment of payment of such contested Taxes is allowed by law in
such a contest, (4) verifying that such proceedings will suspend the
foreclosure of any lien on the personal property of Tenant, the
leasehold estate created by this Lease and/or the Premises, and (5)
assuring Landlord that non-payment of such Taxes will not interfere
with Tenant's ability to conduct its current business and that such
postponement or deferment will not result in any action or proceedings
against Landlord, and (B) cash deposits, a clean letter of credit
naming Landlord as beneficiary, a bond or such other security as
Landlord may reasonably require in an amount sufficient to pay any
additional interest and/or penalties incurred and to be incurred in
connection with such postponement or deferment of payment of the Taxes
being contested. Landlord may pay such postponed or deferred Taxes
being contested by Tenant immediately upon the earlier to occur of a
non-appealable determination of the amount and validity thereof and, if
any event, prior to any filing of any action against Landlord and prior
to the foreclosure of any lien securing payment of such contested
Taxes. If both Landlord and Tenant choose to contest Taxes, any such
contest shall be directed and controlled (a) by Tenant, with
consultation with Landlord,
3
<PAGE>
during the first four (4) years of the Term of this Lease; and (b) by
Landlord, with consultation with Tenant, during the last year of the
Term of this Lease. Notwithstanding anything in this subsection 3.b to
the contrary, (1) Landlord shall have the right to pay prior to
delinquency any portion of the Taxes from funds held in escrow for such
purpose or from other funds, unless Landlord receives, prior to such
payment and not less than 60 days prior to the delinquency date for
such Taxes, written notice from Tenant that Tenant has elected to
contest such Taxes and to defer payment in connection with such
contest, which notice is accompanied by the items described in (A) and
(B) as provided above in this subsection 3.b(ii), and (11) Tenant
shall give Landlord written notice of any contest of all or any portion
of the Taxes, containing the information described in subsection
3.b(ii)(A)(1) above, whether or not such context involves deferring
payment of any portion of such contested Taxes.
Additional Rent (other than any Escrow Deficiency as hereinafter defined)
shall be payable in advance, based on the prior year's actual amount of Basic
Cost items for any calendar year or part thereof during the Term, in monthly
installments equal to the prior year's actual amount of such Basic Cost items
for such calendar year or part thereof, divided by the number of months in
such calendar year during the Term; provided, however, that an initial
payment of Additional Rent Attributable to Taxes only shall be paid to
Landlord contemporaneously with the execution of this Lease in an amount
equal to one twelfth of the Basic Costs items attributable to Taxes only, for
the year 1991 multiplied by the number of months which have expired in 1992
up to the date of execution in this Lease. Additional Rent shall be held by
Landlord in an interest bearing account with Landlord or in an interest
bearing account selected by Landlord in its sole discretion, with annual
reconciliation of the account. Any interest remaining in the account after
payment of Taxes will be paid to Tenant after such annual reconciliation. By
April 1 of calendar year, or as soon thereafter as practicable, Landlord
shall deliver to Tenant a statement of the actual Basic Costs for the
previous year, certified by Landlord as being true and correct, together with
back-up documentation therefor (the "ANNUAL COST STATEMENT"). If the Annual
Cost Statement reveals the Additional Rent paid by Tenant for the calendar
year in question exceeds the Basic Costs for such year, Landlord shall
promptly reimburse Tenant such excess; likewise, if the Additional Rent paid
by Tenant for such calendar year was less than the Basic Costs for such year,
Tenant shall pay to Landlord such deficiency (the "ESCROW DEFICIENCY") within
30 days after its receipt of the Annual Cost Statement. Notwithstanding
anything in this subsection 3.6 to the contrary, any Escrow Deficiency for
the year 1992 shall include an amount equal to the total amount of all Taxes
owed for 1992, less the amount of Additional Rent held in escrow by Landlord
for payment of 1992 Taxes at such time.
c. PERFORMANCE AND PAYMENT. Tenant shall timely perform all of its
obligations under this Lease. Tenant's monetary obligations under this Lease
(including, without limitation, payment of Basic Rental and Additional Rent)
are hereby agreed to collectively comprise and are herein called "RENT". All
Basic Rental and Additional Rent other than any Escrow Deficiency is
hereinafter called "SCHEDULED RENT." Tenant shall pay to Landlord Rent
required under this Lease without deduction or set offs, by payment in care
of Trammell Crow Central Office Group, Inc. by wire transfer of immediately
available funds to John Nolan.
4
<PAGE>
Scheduled Rent shall be payable monthly in advance. The first monthly
installments of Scheduled Rent shall be payable on the Commencement Date;
thereafter, Scheduled Rent shall be payable on the first day of each month
on the Term, unless the first day of a month falls on a weekend or on a
banking holiday, in which case such payment shall be due on the day after
such weekend or holiday. Scheduled Rent for any fractional month of the Term
shall be prorated on a per diem basis for each day of any partial month this
Lease is in effect.
4. DELINQUENT PAYMENT; HANDLING CHARGES. All past due payments
required of Tenant hereunder shall bear interest from the date due until paid
at the maximum lawful rate of interest, and, with respect to all Scheduled
Rent not paid when due, Landlord may alternatively charge Tenant a fee equal
to 3% of the delinquent Scheduled Rent payment to reimburse Landlord for its
cost and inconvenience incurred as a consequence of Tenant's delinquency;
provided, however, that notwithstanding any other provision of this Section 4
or of any other Section of this Lease to the contrary, the charges permitted
under this Section 4 or elsewhere in this Lease, to the extent they are
considered to be interest under law, shall not exceed the maximum lawful rate
of interest. Except as otherwise expressly provided in the last sentence of
this Section 4, the delinquent payment fee or interest provided for above
shall accrue immediately after the due date of any such late payment, without
grace or notice of any kind being required, and independently of (i) any
default or Event of Default under this Lease, or (ii) any notice or grace
periods provided for in any other Sections of this Lease. Notwithstanding
anything in this Section 4 to the contrary, Tenant shall be allowed one (1)
grace period of three (3) days in length during each consecutive twelve (12)
month period (a "LATE CHARGE GRACE PERIOD") with respect to payment of
Schedule Rent (but not with respect to any other amounts owed under the terms
of this Lease), beginning on the due date of the subject payment and without
notice of any kind, and, so long as all previous payments of Scheduled Rent
have been made on or before the due date therefor in strict accordance with
the terms of this Lease during such twelve-month period, and so long as no
Event of Default then exists under this Lease, the three percent (3%)
delinquency fee described in this Section 4 shall not accrue during any Late
Charge Grace Period; provided, however, that any Late Charge Grace Period
shall be completely independent of and unrelated to the ten-day period
described in Section 16(a) of this Lease, and nothing in this Section 4 shall
be interpreted as requiring any notice of any kind by Landlord in connection
with an Late Charge Grace Period.
5. SECURITY DEPOSIT. [Intentionally deleted.]
6. UTILITIES.
a. PAYMENT FOR UTILITIES. Tenant shall contract for and pay
directly to the appropriate utility or service providers, before delinquency
and without notice or demand from Landlord, all costs of electricity, water,
sewer services, natural gas, garbage collection, and all other utilities and
services that are provided to or used on the Premises (collectively,
"UTILITIES"). Utilities shall be prorated for any partial calendar month
during the Term with Tenant paying the portion thereof allocable to the
interval in such calendar month during which this Lease was in effect and
with Landlord paying the balance. If Tenant fails timely to pay any such
costs, and such failure results in an emergency situation as reasonably
5
<PAGE>
determined by Landlord, Landlord may pay such costs, and all amounts so paid
(including interest and penalties) shall be paid by Tenant to Landlord upon
demand.
b. SEPARATION OF UTILITIES. Tenant shall, prior to the expiration
or termination of this Lease, take all necessary action so that all utilities
serving Lot 1 ("LOT 1"), Lot 2 (the Premises) and Lot 3 ("LOT 3"),
respectively, of Las Colinas Section X, First Installment Revised as
designated on that certain plat recorded in Volume 85068, Page 2623, ET SEQ.,
of the Plat or Map records of Dallas County, Texas (the "PLAT") are (a)
separately metered, so that each of said three Lots is billed separately by
all utility companies only for utilities serving each such separately metered
Lot, and (b) provided to each of said three Lots separately, with each Lot
being independent for all purposes as to utilities, and without any of such
Lots being dependent upon either of the other two Lots for any utility
service, utility easements (other than those existing on the Premises as of
the date of this Lease) or utility equipment. Tenant shall cause the matters
described in (a) and (b) above to be accomplished at Tenant's sole cost and
expense, no later than the date of the termination or expiration of this
Lease, including disconnecting, capping and/or removing from the Premises
all pipes, wires and other conduits and equipment for utilities not serving
the Premises, creating any new utility metering, utility facilities and/or
conduits on Lot 1 and Lot 3, granting and/or releasing any utility easements
(other than those existing on the Premises as of the date of this Lease) or
rights, amending the Plat and executing and delivering any documents, all as
may be necessary to accomplish the matters described in (a) and (b) above.
Tenant's obligation under this Section 6 shall survive the expiration or
termination of this Lease, and any assignment or sublease hereof, and shall
be more fully described in an agreement executed between Principal Mutual
Life Insurance Company, as Landlord and Zale Corporation, as Debtor and
Debtor-in-Possession, as Tenant, which agreement shall be executed
contemporaneously with the execution and delivery of this Lease.
7. CONDITION; IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE.
a. CONDITION OF PREMISES. Tenant has occupied the Premises under
the Prior Lease and is thoroughly familiar with the condition thereof.
Tenant accepts the Premises AS IS, WHERE IS, and without any warranties of
any nature, expressed or implied, it being the intention of Landlord and
Tenant to expressly disclaim and exclude all warranties of any kind
whatsoever, including, without limitation, any warranty that the Premises
are suitable for their intended commercial purpose.
b. IMPROVEMENTS; ALTERATIONS. Tenant shall be entitled, without
obtaining Landlord's consent thereto, at Tenant's sole cost, to make any
alterations or additions to the Premises which do not (i) constitute a free
standing structure, (ii) affect the "footprint" of the existing improvements,
(iii) materially affect the HVAC, mechanical, electrical or plumbing systems
of the Building, or the roof structural components or appearance of the
Building, (iv) involve piercing the roof or structural floors of the
Building, or erecting any permanent walls within the Building, or (v) cost in
excess of $25,000, or cause all such alterations and additions over a 90 day
period to exceed $50,000 in cost (any alterations or additions meeting
6
<PAGE>
the requirements of (i) through (v) inclusive being hereinafter referred to
as a "NON-CONSENT Alteration"). The items specified on EXHIBIT B hereto
shall constitute a "Non-Consent Alteration"; provided, however, that the cost
limitation set forth in (v) of the preceding sentence shall not apply to
EXHIBIT B items. Landlord hereby specifically acknowledges and agrees that,
without limiting in any way the definition of alterations for which its
consent is not required, Tenant's relocation of highwall, security equipment
and related fixtures does not require Landlord's consent, as any such
alterations will satisfy the above conditions (i) through (v), inclusive.
Tenant shall not make any other alterations or additions to the Premises,
except in accordance with plans and specifications (or change orders with
respect thereto) which have been previous submitted to and approved in
writing by Landlord. Landlord shall not unreasonably withhold, condition or
delay its approval provided that (a) such plans and specifications (or change
orders) and the improvements and methods of installation described thereon
comply with applicable governmental laws, codes, rules, and regulations and
are consistent with the Zale Headquarters Standard (as defined on EXHIBIT E
attached hereto and made a part hereof), (b) such plans and specifications
(or change orders) are sufficiently detailed to allow construction of the
improvements in a good and workmanlike manner, -C- the improvements and
methods of installation described therein will not adversely affect the
Building's structure, or the Building's HVAC, plumbing, electrical, or
mechanical systems and will not affect the exterior appearance of the
Building, and (d) such plans and specifications are accompanied by a
detailed, itemized construction schedule and a budget of the cost of making
the alterations or additions described thereon. All personal property
described on SCHEDULE I attached to this Lease and made a part hereof by this
reference (including all replacements and expansions thereof) is herein
defined as "TENANT'S PROPERTY." Tenant shall not be entitled to remove any
of Tenant's Property at any time during which there exists an uncured default
or an Event of Default under this Lease, except for the Excluded Property (as
defined in Section 15 of this Lease ), which Tenant shall be entitled to
remove at any time at Tenant's sole cost and expense. Upon expiration or
termination of this Lease, Tenant shall, at Landlord's request, remove
Tenant's Property, and any of Tenant's Property not removed (1) within 10
days after such request may be removed and stored by Landlord, and Tenant
shall reimburse Landlord for all costs of such storage, or (2) at Landlord's
option, shall be deemed abandoned and shall become Landlord's property if not
removed by Tenant within 60 days after Tenant's receipt of such request to
remove it from the Premises. Upon any removal of Tenant's Property, Tenant
shall repair any damage to the Premises caused by such removal. All
alterations, additions, or improvements other than Tenant's Property (whether
temporary or permanent in character, and including without limitation all
air-conditioning equipment that does not constitute Tenant's Property and all
other equipment that is in any manner connected to the Building's plumbing
system and which is not Tenant's Property) made in or upon the Premises,
either by Landlord or Tenant, shall remain on the Premises during the Term
(unless replaced with an item of similar quality, use and value), shall be
Landlord's property at the end of the Term, and shall remain on the Premises
without compensation to Tenant. Approval by Landlord of any of Tenant's
drawings or plans and specifications shall not constitute a representation of
warranty by Landlord as to the adequacy or sufficiency of such drawings or
plans and specifications, or the improvements, alterations or additions to
which they relate, for any use, purpose, or condition, but such approval
shall merely be the approval of Landlord as required hereunder.
Notwithstanding the foregoing,
7
<PAGE>
Landlord may withhold its consent in its absolute discretion to the
construction or installation of any alterations described in (i) through (iv)
inclusive described above in this subsection 7.b. Any alterations or
additions to the Premises performed under this subsection 7.b. which cause
any liability or create the need for additional alterations under the
Americans with Disabilities Act of 1990, and the rules, regulations, and
guidelines promulgated thereunder (collectively, the "ADA") shall be done
only with Tenant's agreement to be responsible for all of such alterations,
costs and liabilities.
c. REPAIRS; MAINTENANCE. Tenant shall, at its expense, (1)
commence all work specified on EXHIBIT B hereto within thirty (30) days after
the Commencement Date, (2) diligently pursue its completion, and (3) in any
event, complete all of such work within one hundred twenty (120) days after
the Commencement Date of this Lease; provided, however, that if such work
subjects Tenant to undertake compliance work in connection with the ADA,
Landlord shall bear the cost of such compliance work. Additionally, Tenant,
at its expense, shall maintain the Premises to the Zale Headquarters Standard
and, except as hereinafter expressly provided, in good repair and condition,
and perform routine care of landscaping and regular mowing of grass, and
routine maintenance and repair of those portions of the Premises that are not
Structural/Capital Items (as hereinafter defined), all in a manner consistent
with the Zale Headquarters Standard, subject to normal wear and tear,
casualty and condemnation. As used in this Lease, "STRUCTURAL/CAPITAL ITEMS"
shall mean the roof, foundation, permanent walls, structural components and
major operating components of the Buildings and parking structure, such as
the major heating, ventilating and air conditioning systems, the plumbing,
mechanical and electrical systems, elevators, escalators and the paved
parking areas, sidewalks and driveways, except that Structural/Capital Items
shall not include any of the matters listed on EXHIBIT B (collectively, the
"REQUIRED REPAIRS") or on EXHIBIT F attached hereto and made a part hereof
(the "EXHIBIT F ITEMS"), or any underground or aboveground tanks in or on, or
later placed in or on the Premises, including any such tanks installed to
replace those described in Section 24 of this Lease, or any utility lines,
conduits, meters or other equipment pertaining to utilities other than those
serving only the Premises. "CASUALTY" shall include damage by fire, storm,
blood, explosion, falling objects, riot, insurrection, acts of war and acts
of God. Landlord, at its expense, shall maintain, repair and replace those
portions of the Premises that are Structural/Capital Items in a manner
consistent with Zale Headquarters Standard, subject thereafter to normal wear
and tear, casualty and condemnation, and subject to Tenant's obligations with
respect thereto as expressly set forth in this Lease. Tenant shall,
throughout the Term, deliver the Premises and all improvements and equipment
therein (other than Tenant's Property that Tenant elects to remove or
Landlord requires be removed) clean and free of trash and in good repair and
condition, except for reasonable wear and tear and casually between the last
necessary repair, replacement, or restoration made by Tenant or Landlord
pursuant to such party's respective obligations under this Lease. On the
first day of each month during the Term, Tenant shall deliver to Landlord a
completed maintenance checklist, the form of which is attached hereto as
EXHIBIT C, together with copies of all Service Contracts (defined below),
including, without limitation, for janitorial, landscaping, elevator and
escalator service that have not previously been delivered by Tenant to
Landlord. Landlord, at its sole cost and expense, may from time to time
inspect the Premises to ensure Tenant is complying with its obligations under
this Section 7.c. and the other provisions of this
8
<PAGE>
Lease; currently, Landlord anticipates making such inspections on a
quarter-annual basis, but may make such inspections more frequently in its
sole discretion. Any entry by Landlord under this Section 7 shall be during
Tenant's normal business hours, following reasonable oral notice by Landlord
to Tenant. Landlord's representative shall be accompanied at all times
during such inspections by representatives designated by Tenant and shall
strictly observe all security procedures promulgated by Tenant from time to
time for all other business invitees. If any inspection reveals that Tenant
is not properly and timely performing the work required to properly maintain
the portions of the Premises that are other than the Structural/Capital Items
or, with respect to the Structural/Capital Items, (i) is not repairing and/or
replacing as necessary any portions thereof costing less than $4,000.00 per
occurrence or per related series of occurrences relating to the same
Structural/Capital Item and occurring within six (6) months of such repair or
replacement, or (ii) is not performing the servicing, maintenance, repair
and/or replacement, and paying the necessary expenses therefor, with respect
to Structural/Capital Items (including equipment that constitutes
Structural/Capital Items), which would be either scheduled or nonscheduled
work needed to achieve the normal useful life of the equipment or of the
Structural/Capital Items (such work and other portions of the Premises
described in this sentence being hereinafter collectively referred to as
"NON-STRUCTURAL CAPITAL ITEMS") in the manner required hereunder, Landlord
may notify Tenant as to such matters, and Tenant shall promptly perform such
maintenance in a manner as necessary to maintain the Building to the Zale
Headquarters Standard and all improvements and equipment therein in good
working order and condition, subject to the provisions of the last
subparagraph of this Section 7c. If such failure by Tenant pertains to any
of the matters described on EXHIBIT B or EXHIBIT C attached hereto or to any
Non-Structural Capital Items or to any of the other matters necessary to
maintain the Premises to the Zale Headquarters Standard (any of such maters
constituting and being hereinafter referred too as a "MATERIAL TENANT
REPAIR"), Landlord shall notify Tenant of such failure in wiring. If (A)
Tenant fails to perform a Material Tenant Repair after receipt of written
notice from Landlord describing the work to be performed, within the period
specified in such notice by Landlord, which specified period shall be the
length of time sufficient, in Landlord's reasonable judgment, to complete the
type of work described in such notice, and may vary from notice to notice
(the "DESIGNATED CURE PERIOD"), or (B) Landlord reasonably determines that
emergency repairs for which Tenant is responsible are necessary to avoid
imminent personal injury or imminent substantial damage to the Premises (an
"EMERGENCY REPAIR"), then, Landlord may take action as follows:
If Tenant fails to perform a Material Tenant Repair (other than an Emergency
Repair) of a particular type and nature two (2) times in any consecutive
twelve (12) month period, and such failures continue past the giving of
notice and expiration of the specified Designated Cure Periods, Landlord
shall be entitled to cause such specific Material Tenant Repair to be
performed as required under the terms of this Lease during the twelve (12)
consecutive months after the second such failure by Tenant (the "CORRECTION
PERIOD"), and Tenant shall pay to Landlord within thirty (30) days after
receipt from Landlord of Landlord's written demand therefor, the actual cost
thereof, together with any additional inspection fees required in connection
with Tenant's failure to perform the Material Tenant Repair during the
Designated Cure Period contained in the first notice by Landlord pertaining
thereto (collectively, the "MAINTENANCE CHARGES"). If Tenant fails to perform
a Material Tenant Repair (other than an
9
<PAGE>
Emergency Repair) of the same particular type and nature for a third time
during the Correction Period and such failure continues past the Designated
Cure Period, Landlord shall have the further option (in addition to causing
the Material Tenant Repair to be performed and being reimbursed by Tenant as
provided above) of declaring an Event of Default under this Lease, without
any further notice, grace or cure rights.
If Tenant fails to perform Material Tenant Repairs of any five (5) types or
natures, whether or not any of said five (5) Material Tenant Repairs are of
the same particular type or nature, within any consecutive twelve (12) month
period, ad such failures continue past the Designated Cure Periods specified
by Lender as applicable thereto, Landlord shall be entitled to either (i)
cause such specific Material Tenant Repairs to be performed as required under
the terms of this Lease during the remainder of the Term, and Tenant shall
pay the Maintenance Charge therefor to Landlord within thirty (30) days after
receipt of Landlord's written demand, or (ii) declare an Event of Default
under this Lease without any further notice, grace or cure rights.
If Landlord reasonably determines that an Emergency Repair is required, and
Landlord is unable to contact Tenant, despite Landlord's reasonable, good
faith efforts to do so given the circumstances of the specific emergency, or
if, after contacting Tenant, Tenant refuses or fails to act promptly and
appropriately, Landlord shall be entitled to cause the Emergency Repair to be
made in a manner that complies, as closely as possible given the
circumstances, with all of Tenant's security procedures. Landlord shall
notify Tenant as soon as practicable of the Emergency Repair and the work
undertaken to alleviate the immediate emergency. Tenant shall pay Landlord
within thirty (30) days following written demand, for the actual cost of work
performed by or on behalf of Landlord to effect the Emergency Repair.
For purposes of this Lease the "Zale Headquarters Standard" shall be as
described on EXHIBIT E, attached hereto and made a part hereof for all
purposes.
Notwithstanding anything in this Lease to the contrary, (1) if any work,
replacement or repairs required of Tenant with respect to Structural/Capital
Items as provided above in (ii) of this Section 7.c would, in Landlord's
reasonable judgment, have the effect of extending the remaining useful life
of the Structural/Capital Item requiring such work, replacement or repair
beyond its normal useful life, Landlord will reimburse Tenant proportionately
for the cost of such work, replacement or repair, to the extent that the
remaining useful life of such Structural/Capital item is, in Landlord's
reasonable judgment, so extended, and (11) tenant accepts the Premises "as
is," with all of the matters needing repair or attention as described in
EXHIBIT B attached hereto and in EXHIBIT F attached hereto, and Landlord
shall not be obligated, in any way or to any extent, to perform any of the
Required Repairs or to repair or replace any of such items as described on
EXHIBIT B or EXHIBIT F attached hereto, nor shall Landlord have any liability
for any damage resulting from such items not being so repaired or replaced,
except with respect to future resulting damage to Structural/Capital Items
d. PERFORMANCE OF WORK. All work performed by tenant under Section
7.b of this Lease shall be performed only by contractors approved in writing by
Landlord, which
10
<PAGE>
approval shall not be unreasonably withheld, conditioned or delayed;
provided, however, that Landlord's consent to Tenant's contractors shall not
be required for (I) the performance of work of a type or scope for which
Landlord's consent is not required under this Lease; or (ii) work that is
reasonably estimated by Tenant to cost less than $10,000.00. Landlord
specifically approves all of the contractors set forth on any SCHEDULE 2
attached to this Lease and made a part hereof by this reference. Tenant
shall cause all contractors and subcontractors retained by it to procure and
maintain insurance coverage against such risks, in such amounts, and with
such companies as Landlord may reasonably require. All work performed by
Tenant under this Lease shall be performed in accordance with all laws,
rules, codes, ordinances, statutes, regulations and legal requirements
(including, without limitation, the retrofit requirements of the ADA
necessitated by any such work), and all requirements of all restrictions and
restrictive covenant pertaining to the remises, including, without
limitation, those in favor of Las Colinas Association, and shall be performed
in a good and workmanlike manner so as not to damage the premises, the
primary structure or structural qualities of the Building, Building plumbing
or electrical lines, or any other building utility transmission facility and
so as to be consistent with the standard of maintenance for the premises as
specified in this Lease. With respect to any work performed under Section
7.b of this Lease which does not constitute a non-Consent Alteration (as
therein defined). Landlord shall have the right, at Landlord's option, but
not the obligation, to supervise the work. All work to be performed by
Landlord under this Lease shall be performed in accordance with all legal
requirements (including, without limitation, the requirements of the ADA
necessitated by such work).
e. APPROVAL PROCESS. With respect to any improvements or
alterations for which Landlord's consent is required, Landlord shall within
15 business days after its receipt of any complete set of plans and
specifications for improvements, alterations, or additions and within ten
business days after its receipt of any change orders with respect thereto,
notify Tenant whether it approves or disapproves the same; any notice of
disapproval shall be accompanied by a statement in reasonable detail of the
reasons therefor. Landlord may condition any such consent with the
requirement that Tenant remove any such improvement, addition or alteration
upon expiration or earlier termination of this Lease, and such action by
Landlord shall not be considered unreasonable. If Landlord fails timely to
notify Tenant of its disapproval thereof, then Landlord shall be deemed to
have given its approval. Upon completion of the improvements, alterations,
or additions in question, Tenant shall deliver to Landlord an accurate,
reproducible "as-built" plan (e.g. sepia) thereof.
f. ANNUAL BUDGET. Within 45 days following the end of Tenant's
fiscal year, Tenant shall deliver to Landlord, for its approval, but only as
contemplated below, a budget setting forth the operating expenditures expected
to be incurred by Tenant in connection with the maintenance and operation of the
premises during the following lease year. Each such budget shall be in form and
detail reasonably satisfactory to Landlord. In the event that the amount
budgeted for repairs and maintenance required by Tenant under this Lease shows a
decrease of more than ten percent (10%) of the average of such maintenance and
repair budget amounts (in the aggregate or for any specific line item), for the
preceding three (3) calendar years (a "MATERIAL REDUCTION"), Tenant shall
include a written justification
11
<PAGE>
of such reduced amount. If landlord, acting reasonably and in good faith,
rejects Tenant's justification of the Material Reduction, Landlord shall
notify Tenant in writing within (30) days following Landlord's receipt of
Tenant's justification that Landlord reasonably disputes same and Tenant
shall promptly thereafter revise such budget to increase the amount budgeted
for Tenant's maintenance and repair required under the terms of this Lease to
the lowest actual amounts incurred by Tenant for such maintenance and repair
over the preceding three (3) calendar years. Within sixty (60) days after
the expiration of each lease year, Tenant shall deliver to Landlord a
detailed statement (I) setting forth the actual expenses incurred by Tenant
in maintaining the Premises during such lease year and (ii) stating in
comparative form the expenses actually incurred by Tenant in maintaining the
Premises during the lease year in question and the amounts set forth in such
lease year's approved budget. Each such statement shall be certified by the
either chief financial officer to Tenant or Tenant's vice president over
facilities as being true and correct in all material respects.
NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS SUBSECTION 7F, IT IS UNDERSTOOD
AND AGREED THAT NO APPROVAL BY LANDLORD OF ANY BUDGET OR ANY ITEM THEREIN,
NOR ANY FAILURE OF LANDLORD TO OBJECTION TO ANY BUDGET OR ANY ITEM THEREIN,
NOR ANY REASONS EXPRESSED FOR ANY OBJECTION BY LANDLORD, NOR THE AMOUNT OF ANY
BUDGET ITEM, WHETHER LESS THAN OR MORE THAN PRIOR YEARS', SHALL IN ANY WAY
INDICATE ANY CONSENT OF OR WAIVER BY LANDLORD, OR IN ANY WAY PERTAIN TO OR
AFFECT, (I) ANY OF TENANT'S OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO
MAINTAINING THE PREMISES AT THE ZALE HEADQUARTERS STANDARD, OR (2)
ANY OTHER PROVISIONS OF THIS LEASE PERTAINING TO TENANT'S MAINTENANCE AND REPAIR
OBLIGATIONS.
g. SERVICE CONTRACTS/ Each contract entered into by Tenant relating
to the maintenance and operation of the premises, and all improvements and
equipment located therein (a "SERVICE CONTRACT"), shall provide that it shall
not extend beyond the expiration date or earlier termination of this Lease.
None of the Service Contracts shall grant or purport to grant a lien or security
interest against any portion of the Premises, or any improvements or equipment
therein, for any amount or obligations due thereunder or be, or purport to be,
binding on Landlord.
h. NET LEASE. Landlord shall not be required to make any
expenditure, incur any obligation, or incur any liability of any kind whatsoever
in connection with this Lease or the ownership, construction, maintenance,
operation, or repair of the Premises during any portion of the Term, except as
otherwise specified by the terms of this Lease. This lease is a completely
"net" lease, intended to ensure Landlord the Rent herein reserved on a absolute
net basis, except as otherwise specified by the terms of this Lease.
i. MECHANIC'S LIENS. Tenant shall not permit any mechanic's to be
filed against the Premises for any work performed, materials furnished, or
obligation incurred by or at the request of Tenant. If such a lien is filed,
then Tenant shall, within 30 days after Landlord has delivered notice of the
filing to Tenant, either pay the amount of the lien or diligently contest such
lien and deliver to Landlord a bond or other security reasonably
12
<PAGE>
satisfactory to Landlord. If Tenant fails to timely take either such action,
then Landlord may pay the line claim without inquiry as to the validity
thereof, and any amounts so paid, including expenses and interest, shall be
paid by Tenant to Landlord within fifteen (15) days after Landlord has
delivered to Tenant an invoice therefor.
8. USE Tenant shall (a) continuously occupy at least fifty-one
percent (51%) of the Building and use the premises only for lawful purposes
consistent with the uses permitted which are consistent with other office
building in the vicinity of the Building (the "PERMITTED USE"), (b) comply with
all laws, orders, rules, private restrictions and restrictive covenants, and
regulations relating to the use, condition, and occupancy of the premises, -C-
within sixty (60) days after the Commencement Date, deliver to Landlord a
narrative description of a life safety plan for the Building and make such
modifications thereto as Landlord may reasonably request (the "Safety PLAN"),
and (d) continuously implement the Safety Plan (with such modifications thereto
as Landlord may from time to time reasonably request) and deliver to Landlord
narrative descriptions of any amendments thereto (provided, however, that except
(i) as specifically required in Sections 7.c and 7.d of this Lease, or (ii) for
repairs to Structural/Capital Items required due to Tenant's negligence or
wrongful acts in managing the Premises, Landlord and not Tenant shall be
required to undertake repairs or improvements to the Structural/Capital Items in
order to comply with all laws, orders, rules and regulations). The Premises
shall not be used for any use which is disreputable or creates extraordinary
fire hazards or for the storage of any hazardous materials or substances except
for "Permitted Materials" (as defined in Section 23 of this Lease). Permitted
Use may include, without limitation, use of portions of the Building for
operation of incidental service facilities for the primary use by and for the
benefit of Tenant's employees (an "EMPLOYEE SERVICE FACILITY"), so long as such
uses comply with the other provisions of this Section 8. By way of example, an
Employee Service Facility may include, without limitation, a cafeteria, credit
union, company store, barber/beauty shop or fitness center, which otherwise
comply with the provisions of this Section 8.
9. ASSIGNMENT AND SUBLETTING.
a. TRANSFERS; CONSENT. Tenant may assign or sublet the Building to
a "Permitted Transferee" (hereinafter defined) without Landlord's prior written
consent, provided that Tenant promptly notifies Landlord thereof after such
assignment or subletting. As used in this Lease, "PERMITTED TRANSFEREE" shall
mean (i) the entity or entities that emerge as the reorganized company(ies)
under the "Plan of Reorganization" (hereafter defined) on the Confirmation Date,
(ii) one or more persons or entities that control, are controlled by or are
under common control with the entity or entities described in (i) above
["control", as used herein, shall be determined as of each of the Commencement
Date and/or the Confirmation Date and shall mean the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of such controlled person or entity; the ownership, directly or
indirectly, of at least fifty-one percent (51%) of the voting securities of, or
possession of the right to vote, in the ordinary direction of its affairs, at
least fifty-one percent (51%) of the voting interest in any entity shall be
presumed to constitute such control], and (iii) independent operators and/or
owners of one or more Employee Service Facilities. As used in this Lease,
13
<PAGE>
"PLAN OF REORGANIZATION" means the plan of reorganization for Zale
Corporation that is confirmed by the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "COURT"), in the cases
pending under Chapter 11 of the United States Bankruptcy Code in which Zale
Corporation and certain of its direct and indirect subsidiaries are debtors
and debtors in possession; which cases are consolidated for administrative
purposes only under Case No. 392-30001-SAF-11. As used in this Lease,
"CONFIRMATION DATE" shall mean the date on which an order of the Court
confirming the Plan of Reorganization is entered on the docket of the Court.
Except to Permitted Transferees, Tenant shall not, without the prior written
consent of Landlord, (I) assign, transfer, or encumber this Lease or any
estate or interest herein, whether directly or by operation of law, (ii)
permit any other entity to become Tenant hereunder by merger, consolidation,
or other reorganization, (iii) if Tenant is an entity other than a
corporation whose stock is publicly traded, permit the transfer of an
ownership interest in Tenant so as to result in a change in the current
control of Tenant, (iv) sublet any portion of the Premises, (v) grant any
license, concession, or other right of occupancy of any portion of the
Premises, or (vi) permit the use of the Premises by any parties other than
Tenant (any of the events listed in clauses (i) through (vi) shall be herein
called a "TRANSFER"). Landlord's consent to any assignment or subletting of
the Building shall not be unreasonably withheld, conditioned or delayed to
any assignment or subletting of the Building to a party which (a) intends to
use the Building for a Permitted Use in accordance with this Lease, (b) is
rated by Moody's Investor Service, Inc. or Standard & Poor's Corporation, and
(c) has a rating of at least Baa3 by Moody's Investor Service, Inc. or BBB-
by Standard & Poor's Corporation. If Tenant requests Landlord's consent to a
Transfer, then Tenant shall provide Landlord with a written description of
all terms and conditions of the proposed Transfer, copies of the proposed
documentation, and the following information about the proposed transferee:
name and address; reasonably satisfactory information about its business and
business history; its proposed use of the portion of the Building to be
Transferred; banking, financial, and other credit information; and general
references sufficient to enable Landlord to determine the proposed
transferee's creditworthiness and character. Tenant shall reimburse Landlord
for its reasonable attorneys' fees and other expenses incurred in connection
with a Transfer. If Landlord consents to a proposed Transfer, then the
proposed transferee shall deliver to Landlord a written agreement whereby it
expressly assumes the Tenant's obligations hereunder; however, any transferee
of less than all of the space in the Building shall be liable only for
obligations under this Lease that are properly allocable to the space subject
to the Transfer, and only to the extent of the rent it has agreed to pay
Tenant therefor. No Transfer shall release Tenant from performing its
obligations under this Lease, but rather Tenant and (subject to the previous
sentence) its transferee shall be jointly and severally liable therefor.
Landlord's consent to any Transfer shall not waive Landlord's rights as to
any subsequent Transfers. If an Event of Default occurs while the Building
or any part thereof is subject to a Transfer, then Landlord, in addition to
its other remedies, may collect directly from such transferee all rents
becoming due to Tenant and apply such rents against Rent. Tenant authorizes
its transferees to make payments of rent directly to Landlord upon receipt of
notice from Landlord to do so; each such transferee may rely on this
authorization to do so, and any such payment to Landlord shall constitute a
payment required under its Transfer documents. Tenant may not Transfer, and
Landlord may withhold its consent to any Transfer of, any portion of the
Premises, other than the Building. Whether or not Landlord's consent is
required
14
<PAGE>
therefor, Tenant shall deliver to Landlord written notice of any Transfer,
and no Transfer shall be effective until Landlord has received such notice.
Notwithstanding anything in this Section 9 to the contrary, no assignment or
subletting of all or any portion of the Building or Premises to a Permitted
Transferee or to any other entity shall release, reduce, extinguish,
terminate, impair or affect Tenant's liability for payment of Rent or
performance of Tenant's obligations under this Lease.
b. ADDITIONAL COMPENSATION. Tenant shall pay to Landlord,
immediately upon receipt thereof, the excess of (i) all compensation received by
Tenant for a transfer over (ii) the sum of (1) the Basic Rental and Additional
Rent allocable to the portion of the Building covered thereby, and (2) the
applicable portion after division as described below, of all reasonable costs
incurred by Tenant in consummating such Transfer (including, without limitation,
reasonable leasing commissions, reasonable leasehold improvement costs, value of
reasonable rent concessions and reasonable attorneys' fees). For purposes of
(2) above, the reasonableness of the costs described shall be determined by
Landlord acting in good faith, and such costs shall be (A) equal to zero with
respect to any Transfer to a Permitted Transferee, and (B) divided by the term
of the subject sublease or assigned portion of this Lease, and such resulting
portions shall be each deducted from such additional compensation as paid to
Landlord (but without any negative amortization).
10. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY.
a. INSURANCE. Landlord shall insure, at Tenant's cost, the Premises
with a policy or policies covering the following: (i) "All Risk" property
insurance excluding any coinsurance provision, in an amount adequate to cover
the full replacement cost of the Building and other improvements, (ii) Boiler
and Machinery coverage to the extent not covered under the "All Risk" above, and
(iii) such other insurance as Landlord may reasonably require to the extent
customarily carried on properly similar to the Premises. Further, Tenant shall
keep in force during the Term, at Tenant's cost, the following insurance
coverage: (1) commercial general liability insurance covering the Premises in
an amount of not less than a combined single limit of $5,000,000 or such other
amount as Landlord or Landlord's Mortgagee may from time to time reasonably
require consistent with requirements of lending institutions for similar
properties in the area, insuring Tenant (and naming Landlord and Landlord's
Mortgagee as additional insureds) against all liability for injury to or death
of a person or persons or damage to property arising from the use and occupancy
of the Premises; (2) contractual liability insurance coverage sufficient to
cover Tenant's indemnity obligations hereunder and (3) insurance covering the
full value of Tenant's property other than the Excluded Property, improvements,
and other property )(including property of others) in the Premises. Tenant's
insurance shall provide primary coverage to Landlord wen any policies issued to
Landlord provide duplicate or similar coverage, and in such circumstances,
Landlord's policy will be excess over Tenant's policy. Landlord and Tenant
shall each furnish certificates to the other party of the insurance carried by
such party hereunder and such other evidence satisfactory to the other party of
the maintenance of all insurance coverages required hereunder. Landlord and
Tenant shall obtain a written obligation on the part of each insurance company
to notify the other party at least 30 days before cancellation or a material
change of any such insurance. All insurance policies shall be in form
15
<PAGE>
and issued by companies licensed to do business in the State of Texas and
having a Best's rating of at least A, with a financial class of VIII, and
shall name the other party as a loss payee. Landlord's obligations under
this Section to provide certificates and other documentation shall arise only
after receipt of a written annual request from Tenant. Landlord's failure to
provide such certificates and other documentation shall not create a default
by Landlord under this Lease so long as Principal Mutual Life Insurance
Company or any subsidiary or affiliate of Principal Mutual Life Insurance
Company owns the Premises; provided, however, that if neither Principal
Mutual Life Insurance Company nor any subsidiary or affiliate of Principal
Mutual Life Insurance Company is the owner of the Premises, Landlord's
failure to provide certificates and other documentation within thirty (30)
days after receipt of a written request therefor from Tenant shall create a
default by Landlord under this Lease.
b. WAIVER; NO SUBROGATION. Landlord and Tenant each waives any
claim it might have against the other for any injury to or death of any person
or persons or the damage to or theft, destruction, loss, or loss of use of any
property (a "LOSS"), to the extent the same is insured against under any
insurance policy that covers the Premises, Landlord's or Tenant's fixtures,
personal property, leasehold improvements, or business, or is required to be
insured against under the terms hereof, regardless of whether the negligence of
the other party caused such loss. Each party shall cause its insurance carrier
to endorse all applicable policies waiving the carrier's rights of recovery
under subrogation or otherwise against the other party.
c. INDEMNITY. Subject to Section 10.b, Tenant shall defend,
indemnify, and old harmless Landlord, Landlord's Mortgagee, and their agents
from and against all claims, demands, liabilities, causes of action, suits,
judgments, and expenses (including reasonable attorneys' fees and expenses) for
any Loss arising from any occurrence on the Premises or from Tenant's failure to
perform its obligations under this Lease (including, without limitation, the
obligations under Section 6 and Section 24 of this Lease, but excluding a Loss
arising from the willful act or sole or gross negligence of Landlord, Landlord's
Mortgagee, or their agents, against which Loss Landlord hereby indemnifies
Tenant) even though caused or alleged to be caused by the negligence or fault of
Landlord or its agents, and even though any such claim, cause of action, or suit
is based upon or alleged to be based upon the strict liability of Landlord,
Landlord's Mortgagee, or their agents. This indemnity provision shall survive
termination or expiration of this Lease.
11. SUBORDINATION ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE.
a. SUBORDINATION. Subject to Landlord obtaining a non-disturbance
and attornment agreement that is reasonably acceptable to Tenant, Tenant shall
subordinate this Lease to any deed of trust, mortgage, or other security
instrument, or any ground lease, master lease, or primary lease, that hereafter
covers all or any part of the Premises and runs in favor of the party granting
such nondisturbance (the mortgagee under any such mortgagee or the lessor under
any such lease is referred to herein as a "LANDLORD'S MORTGAGEE".
16
<PAGE>
b. ATTORNMENT. Provided such party assumes Landlord's future
obligations in writing, Tenant shall attorn to any party succeeding to
Landlord's interest in the Premises, whether by purchase, foreclosure, deed in
lieu of foreclosure, power of sale, termination of lease, or otherwise, upon
such party's request, and shall execute such agreements confirming such
attornment as such party may reasonably request.
c. NOTICE TO LANDLORD'S MORTGAGEE. Tenant shall not seek to enforce
any remedy it may have for any default on the part of the Landlord without first
giving written notice by certified mail, return receipt requested, specifying
the default in reasonable detail, to any Landlord's Mortgagee whose address has
been given to Tenant, and affording such Landlord's Mortgagee a reasonable
opportunity to perform Landlord's obligations hereunder.
12. RULES AND REGULATIONS. [Intentionally deleted]
13. CONDEMNATION. If any material (in scope or nature) part of the
Building, parking or access areas of the Premises is taken under the power of
eminent domain (a "TAKING") such that Tenant's ability to carry on its
business at the Premises would be substantially impaired, then Tenant may
elect, by delivering notice to Landlord not more than 30 days after the
conclusion of the eminent domain proceeding, to terminate this Lease. If
this Lease is not so terminated, then all of the terms and provisions hereof
shall continue in full force; however, if such Taking condemns a portion of
the Building, parking or access areas of the Premises or materially impairs
the parking or access areas of the Premises, then Basic Rental shall be
reduced on a reasonable basis based on the portion and area of the Building,
parking or access areas of the Premises taken. There shall be no abatement
of Rent for a Taking of the Land or any part thereof except for a Taking of
parking or access areas or a material impairment of parking or access areas
as referenced in this Section 13. If any Taking occurs (whether or not it
materially impairs Tenant's ability to carry on its business), then Landlord
shall receive the entire award or other compensation for the Premises and
improvements taken, and Tenant may separately pursue a claim against the
condemnor for the value of Tenant's Property and other personal property
which Tenant is entitled to remove under this Lease, moving costs, loss of
business, and other claims it may have.
14. DAMAGE TO PREMISES. Tenant shall give the Landlord notice of any
casualty damage to any portion of the Premises immediately after becoming
aware of same. If the Premises are damaged or destroyed by fire or any other
casualty during the Term to such an extent that the damage cannot, in
Landlord's reasonable judgment, be (1) repaired within 270 days thereafter,
or (2) if such damage or destruction occurs during the last 18 months of the
Term, repaired by the end of the penultimate year of the Term, then each of
Landlord and Tenant shall have the option, exercisable by written notice to
the other within 45 days after such damage or destruction, to terminate this
Lease effective as of the date of such damage or destruction. If neither
Landlord nor Tenant has a right to terminate this Lease, or if neither Tenant
nor Landlord elects to terminate this Lease during the 45 day period, then the
Premises shall be repaired, rebuilt and/or restored as provided in this
Section 14. So long as Principal Mutual Life Insurance Company or any
subsidiary or affiliate of Principal Mutual Life Insurance Company owns the
Premises, the provisions of subsection 14(a) below shall apply with respect
to
17
<PAGE>
the procedure for repair and restoration of the Premises and the provisions
of subsection 14(b) shall not apply. At any time during which Principal
Mutual Life Insurance Company or any subsidiary or affiliate of Principal
Mutual Life Insurance Company does not own the Premises, the provisions of
subsection 14(a) shall not apply to the procedure for repair and restoration
of the Premises, and the provisions of subsection 14(b) shall apply to same.
(a) Landlord shall promptly repair and rebuild the damaged or destroyed
Premises to substantially the same condition as existed immediately prior to
such damage or destruction, subject to changes reasonably deemed by Landlord to
be necessary or advisable, but in all respects limited to the amount of net
insurance proceeds received by Landlord, so long as Landlord carries the
insurance and coverages as required of Landlord by the terms of this Lease, and
attempts in good faith to obtain the proceeds of such insurance; provided,
however that Landlord agrees that Landlord shall not grant any third party any
rights n or to such insurance proceeds. From the occurrence of the damage or
destruction, through the completion of the restoration work, Tenant shall be
entitled to a partial abatement of Basic Rental in proportion to the unusable
portion of the Premises.
(b) Landlord shall promptly repair and rebuild the damaged and destroyed
portions of the Premises to substantially the same condition as existed
immediately prior to such damage or destruction, and all net insurance proceeds
shall be made available to Landlord for the restoration work (the
"RESTORATION"). In the event that Landlord reasonably estimates that the total
cost to repair any damage or destruction of the Premises arising from a single
accident or loss will be $100,000.00 or less, Landlord shall promptly commence
and diligently pursue the completion of the Restoration of the Premises.
In the event that the total cost to repair any damage or destruction of the
Premises arising from a single accident or loss is reasonably estimated by
Landlord to exceed the sum of $100,000.00 (a "MAJOR CASUALTY"), then Landlord
shall settle any and all claims against insurance companies arising out of any
policies of casualty insurance carried by either party hereunder, including,
without limitation, the execution of proofs of loss, and adjustments of losses.
Landlord and Tenant shall jointly direct that all insurance proceeds payable on
account of such Major Casualty shall be held and invested in a manner to be
directed jointly by Landlord and Tenant, by the party holding any first mortgage
or deed of trust on the Premises or, if there is then no first mortgage or first
deed of trust on the Premises, by an unrelated institutional trustee designated
by Landlord (hereinafter referred to in either case as "TRUSTEE"). Landlord
and Tenant shall each pay one-half (1/2) of all reasonable fees and expenses
charged or incurred by the Trustee in connection with the performance of the
Trustee's duties and obligations. The Trustee shall be protected in acting upon
any certificate reasonably believed by the Trustee to be genuine and to have
been executed by the proper party, and shall receive such certificate as
conclusive evidence of any fact or as to any matter therein set forth. Such
certificate shall be full warrant, authority and protection to the Trustee in
acting thereon, and the Trustee shall be under no duty to take any action other
than as set forth in this Section.
All amounts deposited with the Trustee on account of any Major Casualty as
aforementioned, together with interest earned on such amounts or any part
thereof (less the costs, fees and
18
<PAGE>
expenses incurred by Landlord and Tenant in the collection thereof,
including, without limitation, adjusters' and attorneys' fees and expenses)
[the "RESTORATION ACCOUNT")] shall be applied as follows:
(A) Not more than once each thirty (30) days following Landlord's
commencement of the Restoration of the Premises, Landlord may request of
Trustee advances from the Restoration Account for the payment of costs of
labor, materials and services supplied for the Restoration of the Premises,
as set forth in the budget prepared by Landlord, for work actually
performed during the preceding thirty (30) days. Landlord's request shall
be in writing to the Trustee and accompanied by (i) a certificate of a
supervising architect or engineer describing in reasonable detail the work
and material in question and the cost thereof, stating that the same were
necessary or appropriate to the Restoration and constitute a completed part
thereof, and that no part of the cost thereof has theretofore been
reimbursed, and specifying the estimated additional amount, if any,
necessary to complete the Restoration; (ii) evidence reasonably
satisfactory to the Trustee that ninety percent (90%) of the balance in the
Restoration Account following such requested advance will not be less than
the estimated cost to complete the Restoration of the Premises, as set
forth in the budget prepared by Landlord (it being understood and agreed
that ten percent (10%) of each draw amount shall be retained in compliance
with statutory retainage requirements) and evidence that all mechanics and
materialmen and other parties providing labor and material have been paid
to date; and
(B) Upon receipt by the Trustee of evidence of the character required by
the foregoing clauses (A)(i) and (A)(ii) that Restoration has been
completed in accordance with the plans and specifications, and all
applicable laws, ordinances, regulations, codes and private restrictions
and restrictive covenants, as evidenced by any obtainable certificates, and
the cost thereof paid in full, and that there are no mechanics',
materialmen's or similar liens for labor or materials supplied in
connection therewith, then the balance, if any, in the Restoration Account
shall be paid to Landlord or as Landlord may direct after all retainage
periods have expired.
Landlord shall, as soon as practicable after preparation of a budget and plans
and specifications, commence and diligently proceed with the Restoration of the
Premises. In the event that Landlord does not so commence Restoration (provided
that if the casualty loss is insured, Landlord shall not be required to commence
Restoration until the insurance proceeds have been delivered to the Trustee), or
after commencement, Landlord does not diligently proceed to the completion of
same, Tenant shall have the right to commence or complete Restoration after
Tenant has given Landlord thirty (30) days prior written notice requesting the
commencement, Landlord does not diligently proceed to the completion of same,
Tenant shall have the right to commence or complete Restoration after Tenant has
given Landlord thirty (30) days prior written notice requesting the commencement
of Restoration or that Landlord diligently proceed to the completion of same, if
Landlord during such thirty (30) day period does not so commence or proceed to
diligently complete Restoration. In such event, the Trustee shall disburse the
Restoration Account to Tenant in accordance with the foregoing procedures. If
Tenant undertakes to commence and/or complete Restoration, Tenant agrees to use
due reasonable diligence to pursue Restoration to completion.
19
<PAGE>
Rent shall abate under this Lease for the portion of the Premises and for the
period of time as the Premises are affected by such damage or destruction.
(c) Nothing in this Section 14 shall be construed as granting Tenant any right
of approval or consent with respect to any settlement concerning the amount of
insurance proceeds resulting from any claim by Landlord, or to be involved in
any negotiations regarding same.
15. LANDLORD'S LIEN. Landlord shall not be entitled to and hereby
disclaims any lien to which Landlord may otherwise be entitled on any
inventory now or hereafter located at the Premises or on any property of
Tenant's on which Tenant has granted or, as part of the Plan of
Reorganization, is required to grant a lien to another party and the terms of
the agreements with such other party prohibit the granting of a subordinate
lien to Landlord (the "EXCLUDED PROPERTY"). Landlord shall have a landlord's
lien on all property of Tenant on the Premises other than the Excluded
Property. In addition to the statutory landlord's lien, Tenant grants to
Landlord, to secure performance of Tenant's obligations hereunder, a security
interest in all equipment, fixtures, furniture, improvements, and other
personal property of Tenant on the Premises, other than the Excluded
Property. Landlord acknowledges and agrees that any lien to which Landlord
is entitled on Tenant's property at the Premises that does not constitute
Excluded Property shall be subordinate to (I) any lien now or hereafter
granted by Tenant to a third party as purchase money financing; or (ii) any
lien now existing or hereafter granted by Tenant as part of the Plan of
Reorganization in all equipment and trade fixtures, of Tenant now or
hereafter situated on the Premises (collectively, the "Third Party Liens"),
and all proceeds therefrom (the "COLLATERAL"), and, subject to the rights of
the beneficiaries of the "Third Party Liens, the Collateral shall not be
removed from the Premises without the consent of Landlord until all
obligations of Tenant have been fully performed. Upon the occurrence of an
Event of Default, Landlord may, in addition to all other remedies, without
notice or demand except as provided below, exercise the rights afforded a
secured party under the Texas Uniform Commercial Code (the "UCC"). In
connection with any public or private sale under the UCC, Landlord shall give
Tenant ten (10) days' prior written notice of the time and place of any
public sale of the Collateral or of the time after which any private sale or
other intended disposition thereof is to be made, which is agreed to be a
reasonable notice of such sale or other disposition. Tenant grants to
Landlord a power of attorney to execute and file any financing statement or
other instrument necessary to perfect Landlord's security interest under this
Section, which power is coupled with an interest and shall be irrevocable
during the Term. Landlord may also file a copy of this Lease as a financing
statement to perfect its security interest in the Collateral.
16. EVENTS OF DEFAULT. Each of the following occurrences shall be an
"EVENT OF DEFAULT":
a. Tenant's failure to pay any Scheduled Rent within ten (10) days
after Landlord has delivered notice to Tenant that the same is due; provided,
however, that (I) any Event of Default shall occur hereunder without any
obligation of Landlord to give any notice to Tenant if landlord has previously
given Tenant written notice under this Section 16.a on two
20
<PAGE>
(2) occasions in any consecutive twelve (12) month period, or four (4)
occasions during the Term, and (ii) no grace or notice periods in this
subsection 16a. shall apply to the accrual of any charge for payment received
after its due date;
b. Other than with respect to matters described in other subsections
of this Section 16, Tenant's failure to perform, comply with, or observe any
other agreement or obligation of Tenant under this Lease for a period of more
than 30 days after Landlord has delivered to Tenant written notice of such
failure; however, if such failure is of a nature that it cannot be cured within
such 30-day period and Tenant commences to cure such failure within such 30-day
period and thereafter diligently pursues such cure without interruption, then
such failure shall not be an Event of Default;
c. Except with respect to cases currently pending in the Court,
after the date hereof, the filing of a petition by or against Tenant (the term
"Tenant") shall include, for the purpose of this Section 16.c, any guarantor of
the Tenant's obligations hereunder (i) in any bankruptcy or other insolvency
proceeding; (ii) seeking any relief under any state or federal debtor relief
law; (iii) for the appointment of a liquidator or receiver for all or
substantially all of Tenant's property or for Tenant's interest in this Lease;
or (iv) for the reorganization or modification of Tenant's capital structure;
however, if such a petition is filed against Tenant, then such filing shall not
be an Event of Default unless Tenant fails to have the proceedings initiated by
such petition dismissed within 90 days after the filing thereof;
d. Any abandonment of more than fifty percent (50%) of the Building;
provided, however, that if and so long as such abandonment is the sole Event of
Default under this Lease, Landlord's sole remedy for such Event of Default shall
be termination of this Lease, and Tenant shall not be held liable for the
payment of any rent accruing after any such termination based solely on the
Event of Default of abandonment;
e. the conversion of Tenant's bankruptcy proceeding currently
pending in the United States Bankruptcy Court for the Northern District of Texas
to a Chapter 7 proceeding; provided, however, that if and so long as such
conversion to a Chapter 7 proceeding is the sole Event of Default under this
Lease, and Tenant continues to perform all of its obligations under this Lease
in strict accordance with the terms hereof, including, without limitation,
payment of all Rent in full, Tenant shall be entitled to remain in possession
and have the rights of Tenant under this Lease so long as all of such
obligations continue to be met in accordance with the provisions of this Lease,
and are not modified by Tenant or any trustee, or otherwise, in any such Chapter
7 bankruptcy proceeding.
f. A Transfer (other than to a Permitted Transferee) without
Landlord's prior written consent, or Tenant in conjunction with this Lease makes
any material misrepresentation in a document submitted to Landlord or its agents
by or on behalf of Tenant (either of which shall be an immediate Event of
Default without any prior written notice thereof from Landlord); and
21
<PAGE>
g. Landlord is entitled to and elects to declare an Event of Default
under the terms of Section 7(c) of this Lease.
17. REMEDIES. Upon any Event of Default, except as otherwise expressly
provided in subsections 16d. and 16e. of this Lease, and in the last
paragraph of this Section 17, Landlord may, in addition to all other rights
and remedies afforded Landlord hereunder or by law or equity, take any of the
following actions:
a. Terminate this Lease by giving Tenant written notice thereof, in
which event, Tenant shall pay to Landlord the sum of (I) all Rent accrued
hereunder through the date of termination, (ii) all amounts due under Section
19.a, and (iii) an amount equal to (A) the total Rent that Tenant would have
been required to pay for the remainder of the Term discounted to present value
at a per annum rate equal to the difference between the "Prime Rate" as
published on the date this Lease is terminated by The Wall Street Journal,
Southwest Edition, in its listing of "Money Rates" and one percent per annum,
minus (B) the then present faire rental value of the Premises for such period as
reasonably determined by Landlord, similarly discounted.
b. Terminate Tenant's right to possess the Premises without
terminating this Lease by giving written notice thereof to Tenant, in which
event Tenant shall pay to Landlord (I) all Rent and other amounts accrued
hereunder to the date of termination of possession, (ii) all amounts due from
time to time under Section 18.a, and (iii) all Rent and other sums required
hereunder to be paid by Tenant during the remainder of the Term, diminished by
any sums thereafter received by Landlord through reletting the Premises during
such period. Landlord shall use reasonable and good faith efforts to relet the
Premises on such terms as Landlord in its sole discretion may determine
(including a term different from the Term, rental concessions, a rental amount
different than that required under this Lease, and alterations to, and
improvement of, the Premises). Landlord shall not be liable for, nor shall
Tenant's obligations hereunder be diminished because of, Landlord's failure,
despite its reasonable and good faith efforts to relet the Premises or to
collect rent due for such reletting or for reletting the Premises on terms
different than those contained in this Lease. Tenant shall not be entitled to
the excess of any consideration obtained by reletting over the Rent due
hereunder. Reentry by Landlord in the Premises shall not affect Tenant's
obligations hereunder for the unexpired Term; rather, Landlord may, from time
to time, bring an action against Tenant to collect amounts due by Tenant,
without the necessity of landlord's waiting until the expiration of the Term.
Unless Landlord delivers written notice to Tenant expressly stating that it has
elected to terminate this Lease, all actions taken by Landlord to dispossess or
exclude Tenant from the Premises shall be deemed to be taken under this Section
17.b. If Landlord elects to proceed under this Section 17.b, it may at any time
elect to terminate this lease under Section 17.a;
c. foreclosure of any liens or security interests that Landlord may
have against Tenant's property (whether by statute or pursuant to the terms
hereof);
22
<PAGE>
d. institute a suit for specific performance of Tenant's obligations
hereunder; or
e. setoff and apply any indebtedness or obligation of Tenant to
Landlord (including, without limitation, Rent) against any indebtedness or
obligation of Landlord to Tenant, without notice to or demand upon Tenant.
Additionally, in the case of an Event of Default specified in Section 16.a,
without notice except as provided below, Landlord may after locks or other
security devices at the Premises to deprive Tenant of access thereto, and
Landlord shall not be required to provide anew key or right of access to
Tenant, provided that Landlord notifies Tenant in writing of such Event of
Default and such Event of Default remains uncured for more than thirty (30)
days.
In the case of an Event of Default other than an Event of Default specified
in Section 16.a, if such Event of Default is not of a nature such that the
condition creating same will materially worsen if not cured within one hundred
twenty (120) days, and if within ten (10) days of Tenant's receipt of such
notice of such Event of Default, Tenant pays to Landlord by wire transfer as set
forth below, immediately available funds in an amount equal to twice the amount
of Scheduled Rent for the immediately following four (4) months, plus an amount
equal to twice the amount of Scheduled Rent for the immediately following four
(4) months, plus an amount equal to all accrued, but unpaid amounts then due and
owing under the terms of this Lease, Tenant shall have the right thereunder to
remain in possession of the Premises for one hundred twenty (120) days after
Landlord's receipt of the wire transferred amounts described above, to
facilitate Tenant's relocation, and Tenant shall promptly vacate the Premises on
the expiration of such one hundred twenty (120) day period. For purposes of
this paragraph, so long as Landlord is Principal Mutual Life Insurance Company,
the funds to be paid as described above shall be wire transferred in accordance
with the following wiring instructions until such time as such wiring
instructions are changed by written notice to Tenant:
Norwest Bank Des Moines, N.A.
7th and Walnut Streets
Des Moines IA 50304
Principal Mutual Life Insurance Company
General Account No.: 014752
ABA No.: 073000228
All remedies provided to Landlord under this Lease shall be cumulative, and
may be exercised jointly, consecutively and/or concurrently, and the exercise of
any of remedy by Landlord shall not exclude Landlord's right to exercise any
other remedy to which Landlord may be entitled.
23
<PAGE>
Notwithstanding anything in this Section 17 to the contrary, with respect
to any Event of Default under this Lease comprised solely of a Monitoring
Default (hereinafter defined), Landlord's sole remedy with respect to any such
Monitoring Default shall be to take over, or have its agent take over, the
duties involved with respect to such Monitoring Default, and Tenant shall
reimburse Landlord for all costs and expenses incurred in connection with
exercising such remedy, including, without limitation, reimbursement for
compensation of agents or employees performing such tasks. It is understood and
agreed that after exercising such remedy, Landlord may continue to perform or
have performed such monitoring and recordation activities for so long as
Landlord may desire, or may discontinue such activities at such time as
Landlord may, in its sole discretion decide, and any such discontinuance of such
activities by Landlord shall have no effect on the future exercise of such
remedy by Landlord. A "MONITORING DEFAULT" shall mean an Event of Default
(i.e., following expiration of any notice or grace periods provided therefor in
Section 7c.) consisting solely of the failure of Tenant to perform its
obligations in connection with any monitoring of equipment and/or recordation of
information obtained from such monitoring, which is required to be done daily or
on a more frequent basis as described on EXHIBIT C to this Lease.
18. DEFAULT BY LANDLORD.
If Landlord fails to perform any of its obligations under this lease,
Tenant shall notify Landlord of such default, in writing, setting forth in
reasonable detail the nature and extent of such failure. Landlord shall be
deemed to be in "Default" under this Lease if such failure by Landlord is of a
material nature and is not cured within the thirty (30) day period following
delivery of such notice. If such failure cannot reasonably be cured within such
thirty (30) days period, the length of such period shall be extended for the
period reasonably required therefor provided that Landlord commences curing such
failure within such thirty (30) day period and continues the curing thereof with
diligence and continuity. If Landlord becomes in Default hereunder, Tenant
shall have the option to seek whatever legal or equitable remedies are available
at law or in equity. All remedies provided to Tenant under this Lease shall be
cumulative and may be exercised jointly, consecutively or concurrently and the
exercise of any one remedy by Tenant shall not exclude Tenant's right to
exercise any other remedy to which Tenant may be entitled.
19. PAYMENT BY TENANT; NON-WAIVER.
a. PAYMENT BY TENANT. Upon any Event of Default, Tenant shall pay
to Landlord all costs incurred by Landlord (including court costs and reasonable
attorneys' fees and expenses) in (I) obtaining possession of the Premises
(including, without limitation, changing locks and obtaining keys), (ii)
removing and storing Tenant's or any other occupant's property, (iii) necessary
repairing, restoring, altering, remodeling, painting, cleaning, otherwise
putting the Premises into condition to relet the Premises to another single
tenant in the Las Colinas, Texas market, but excluding any work on
Capital/Structural Items necessitated by such reletting, (iv) if Tenant is
dispossessed of the Premises and this Lease is not terminated, reletting all of
any part of the Premises (including brokerage commissions attributable to the
unexpired portion of this Lease; cost of such necessary tenant finish work,
24
<PAGE>
and other costs incidental to such reletting, but excluding any work on
Capital/Structural Items necessitated by such reletting), (v) performing
Tenant's obligations which Tenant failed to perform (including, without
limitation, payment of all utility charges and costs of paying all Taxes or
amounts secured by liens against the Premises), and (vi) enforcing, or
advising Landlord or, its rights, remedies, an recourses arising out of the
Event of Default including foreclosing Landlord's liens and security
interests against Tenant's property.
b. NO WAIVER. Landlord's acceptance of Rent or partial payment
thereof following an Event of Default shall not waive Landlord's rights
regarding such Event of Default. No waiver by Landlord or Tenant of any
violation or breach of any of the terms contained herein shall waive such
party's rights regarding any future violation of such term by the other party.
20. SURRENDER OF PREMISES. No act by Landlord shall be deemed an
acceptance of a surrender of the Premises, and no agreement to accept a
surrender of the Premises shall be valid unless it is in writing and signed
by Landlord. Subject to the following sentence, at the expiration or
termination of this Lease, Tenant shall deliver to Landlord the Premises with
all improvements and equipment located herein or thereon in such repair and
condition as is required of Tenant under this Lease, except for reasonable
wear and tear between the last necessary repair, replacement, or restoration
made by Tenant pursuant to its obligations under this Lease and damage by
casualty and condemnation excepted, and shall deliver to Landlord all keys to
the Premises. Tenant may remove all trade fixtures, furniture, and personal
property placed in the Premises by Tenant provided that Tenant has performed
all of its obligations hereunder, and shall remove such alterations,
additions and improvements as Landlord notified Tenant in writing in
connection with any consent thereto by Landlord, or prior to the data on
which such alteration, addition or improvement was made, of the need for such
removal upon the expiration of this Lease in writing. Tenant shall repair
all damage caused by such removal. Without limiting or otherwise affecting
Tenant's obligations to remove such items, all items not so removed shall be
deemed to have been abandoned by Tenant and may be appropriated, sold,
stored, destroyed, or otherwise disposed of by Landlord without notice to
Tenant and without any obligation to account for such items. The provisions
of this Section 20 shall survive the end of the Term.
21. HOLDING OVER. Subject to the provisions of Section 17, if Tenant
fails to vacate the Premises at the end of the Term, then Tenant shall be a
tenant at will and, in addition to all other damages and remedies to which
Landlord may be entitled for such holding over, Tenant shall pay, in addition
to the Additional Rent, a daily Basic Rental equal to 150% of the daily Basic
Rental payable during the last month of the Term.
22. CERTAIN RIGHTS RESERVED BY LANDLORD. Provided that the exercise of
such rights does not unreasonably interfere with Tenant's occupancy of the
Premises, Landlord may enter the Premises at reasonable hours and upon
reasonable notice of two (2) days or more to show the Premises to prospective
purchasers, lenders, or tenants. Landlord's representative shall be
accompanied at all times during such entry into the Premises by
25
<PAGE>
representatives designated by Tenant and shall strictly observe all security
procedures promulgated by Tenant from time to time for all business invitees.
23. MISCELLANEOUS.
a. LANDLORD TRANSFER; TERMINATION OF LEASE. Landlord may transfer
the Premises and any of its rights under this Lease. If Landlord assigns its
rights under this Lease, then Landlord shall thereby be released from any
obligations thereunder arising from and after the day of the transfer, provided
that the assignee assumes Landlord's obligations hereunder in writing.
b. LANDLORD'S LIABILITY. The liability of Landlord to Tenant for
any default by Landlord under the terms of this Lease shall be recoverable only
from the interest of Landlord in the Premises, including proceeds arising
therefrom, and Landlord shall not be personally liable for any deficiency. This
Section shall not limit any remedies which Tenant may have for Landlord's
defaults hereunder which do not involve the personal liability of Landlord.
c. FORCE MAJEURE. Other than for Tenant's monetary obligations
under this Lease (including the payment of Rent) and obligations which can be
performed by the payment of money (including, without limitation, maintaining
insurance and payment of Taxes), whenever a period of time is herein prescribed
for action to be taken by either party hereto, such party shall not be liable or
responsible for, and there shall be excluded from the computation for any such
period of time, any delays due to approval periods in favor of Las Colinas
Association (or its successors), strikes, riots, acts of God, shortages of labor
or materials, war, governmental laws, regulations, or restrictions, or any other
similar causes which are beyond the control of such party. Notwithstanding
anything in this subsection 23c to the contrary, it is understood and agreed
that this subsection 23c shall apply only to non-monetary defaults by Tenant
under this Lease.
d. BROKERAGE. Pursuant to the terms of a separate agreement which
must be acceptable in all respects to Landlord, Landlord shall pay a fee to the
Swearingen Company out of Basic Rental received, in connection with the
consummation of this Lease. Neither Landlord nor Tenant has dealt with any
other broker or agent in connection with the negotiation or execution of this
Lease. Tenant and Landlord shall each indemnify the other against all other
costs, expenses, attorneys' fees, and other liability for commissions or other
compensation claimed by any other broker or agent claiming the same by, through,
or under the indemnifying party.
e. ESTOPPEL CERTIFICATES. From time to time, Landlord and Tenant
shall each furnish to any party designated by the other party within thirty (30)
days after the requesting party has made a request therefor, a certificate
signed by the other party confirming and containing such factual certifications
and representations as to this Lease, if true, as the requesting party may
reasonably request.
26
<PAGE>
f. NOTICES. All notices and other communications given pursuant to
this Lease shall be in writing and shall be (I) mailed by first class, United
States Mail, postage prepaid, certified, with return receipt requested, and
addressed to the parties hereto at the address specified next to their signature
block, or (ii) forwarded by overnight delivery service, with receipt evidencing
delivery. All notices shall be effective upon the earlier to occur of actual
delivery to the address of the addressee or refusal of delivery by the
addressee. The parties hereto may change their addresses by giving notice
thereof to the other in conformity with this provision.
g. SEPARABILITY. If any clause or provision of this Lease is
illegal, invalid, or unenforceable under present or future laws, then the
remainder of this Lease shall not be affected thereby and in lieu of such clause
or provision, there shall be added as a part of this Lease a clause or provision
as similar in terms to such illegal, invalid, or unenforceable clause or
provisions as may be possible and be legal, valid, and enforceable.
h. AMENDMENTS; AND BINDING EFFECT. This Lease may not be amended
except by instrument in writing signed by Landlord and Tenant. No provision of
this Lease shall be deemed to have been waived by Landlord or Tenant unless such
waiver is in writing signed by the waiving party, and no custom or practice
which may evolve between the parties in the administration of the terms hereof
shall waive or diminish the right of either party to insist upon the performance
by the other party in strict accordance with the terms hereof. The terms and
conditions contained in this Lease shall inure to the benefit of and be binding
upon the parties hereto, and (subject to Section 9 hereof) upon their respective
successors as assigns. This Lease is for the sole benefit of Landlord and
Tenant, and, other than Landlord's Mortgagee, no third party shall be deemed a
third party beneficiary hereof.
i. QUIET ENJOYMENT. Provided Tenant has performed all of its
obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the
Premises for the Term, without hindrance from Landlord or any party claiming by,
through, or under Landlord, but not otherwise, subject to the terms and
conditions of this Lease.
j. NO MERGER. There shall be no merger of the leasehold estate
hereby created with the fee estate in the premises or any part thereof if the
same person acquires or holds, directly or indirectly, this Lease or any
interest in this Lease and the fee estate in the leasehold Premises or any
interest in such fee estate.
k. EXHIBITS. All exhibits and attachments attached hereto are
incorporated herein by this reference.
Exhibit A - Property Description
Exhibit B - Description of Work to be Performed
Exhibit C - Form of Maintenance Checklist
Exhibit D- DTPA Waiver
Exhibit E - Zale Headquarters Standard
Exhibit F- Recommended Repair Items
27
<PAGE>
l. ENTIRE AGREEMENT. This Lease constitutes the entire agreement
between Landlord and Tenant regarding the subject matter hereof and supersedes
all oral statements and prior writings relating thereto. Except for those set
forth in this Lease, no representations, warranties, or agreements have been
made by Landlord or Tenant to the other with respect to this Lease or the
obligations of Landlord and Tenant in connection therewith.
m. COUNTERPARTS. This Lease may be executed in one or more
counterpart, each of which shall be deemed an original, but all of which shall
together constitute one and the same agreement.
24. HAZARDOUS WASTE. The term "Hazardous Substances" as used in this
Lease shall mean pollutants, contaminants, toxic or hazardous wastes, or any
other substances, the use and/or the removal of which is required or the use
of which is restricted, prohibited or penalized by any "Environmental Law",
which term shall mean any federal, state or local law, ordinance or other
statute or any applicable governmental or quasi-governmental authority
relating to pollution or protection of the environment. Tenant hereby agrees
that (I) no activity will be conducted on the Premises that will produce any
Hazardous Substance, except for such activities that are part of the ordinary
course of Tenant's business activities and/or the ordinary course of
operations and maintaining the Premises (the "PERMITTED ACTIVITIES"),
provided the Permitted Activities are conducted in accordance with all
Environmental Laws and have been approved in advance in writing by Landlord,
and Tenant shall be responsible for obtaining any required permits and paying
any fees and providing any testing required by any governmental agency; (ii)
the Premises will not be used in any manner for the storage of any Hazardous
Substances except for Permitted Materials (defined below), provided such
Permitted Materials are properly stored in a manner and location meeting all
Environmental Laws and approved in advance in writing by Landlord, and Tenant
shall be responsible for obtaining any required permits and paying any fees
and providing any testing required by any governmental agency; (iii) no
portion of the Premises will be used as a landfill or a dump; (iv) Tenant
will not install any underground tanks of any type; (v) Tenant will not take
actions or conduct its operations in a manner that constitute, or with the
passage of time may constitute a public or private nuisance; and (vi) Tenant
will not permit any Hazardous Substances to be brought onto the Premises,
except for the Permitted Materials and if so brought or found located
thereon, Tenant shall notify Landlord and Landlord and Tenant shall come to a
reasonable plan as to how to store, hand and/or dispose of such Hazardous
Substances and Tenant shall diligently implement such plan, in accordance
with all Environmental Laws; provided, however, that in the event of a
disagreement regarding same, Landlord shall have the right, at its option, to
make all final decisions. Landlord or Landlord's representative shall have
the right but not the obligation to enter the Premises in accordance with
Section 7.c of this lease, for the purpose of inspecting the storage, use and
disposal of Permitted Materials to ensure compliance with all Environmental
Laws. Should it be determined, in Landlord's sole opinion, that the
Permitted Materials are being improperly stored, used, or disposed of, then
Tenant shall immediately take such reasonable corrective action as requested
by Landlord. Should Tenant fails to take such corrective action within a
reasonable period of time given the nature of such hazard, Landlord shall
have the right to perform such necessary work and
28
<PAGE>
Tenant shall promptly reimburse Landlord within thirty (30) days following
written demand by Landlord for any and all actual costs associated therewith.
If at any time during or after the Term, the Premises are found to be so
contaminated or subject to the conditions, Tenant shall diligently institute
proper and thorough cleanup procedures at Tenant's sole cost, provided,
however, that in the event of a disagreement regarding same, Landlord shall
have the right, at its option, to make all final decisions, and Tenant shall
indemnify and hold Landlord harmless from all claims, demands, actions,
liabilities, costs, expenses, damages and obligations of any nature arising
from or as a result of the use of the Premises by Tenant (including, without
limitation, those arising from Landlord's joint, comparative, or concurrent
negligence with any party, but excluding Landlord's intentional acts or sole
or gross negligence). The negligence with any party, but excluding
Landlord's intentional acts or sole or gross negligence). The foregoing
indemnification and the responsibilities of Tenant shall survive the
termination or expiration of this Lease. The Permitted Materials are:
construction materials that now comprise a portion of the Building, routine
office supplies (including, without limitation, liquid paper and copier
toner), cleaning solvents and supplies, jewelry repair materials, fertilizer
and landscaping chemicals. Tenant acknowledges the presence of underground
tanks on the Premises, hereby agrees to register same as required by law,
indemnifies and holds harmless Landlord with respect to such tanks, and shall
promptly remove same from the Premises under Landlord's supervision and
direction, so long as Landlord pays the costs of such removal (which costs
are to be approved in writing by Landlord in advance).
LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES
ARE SUITABLE FOR TENANTS INTENDED COMMERCIAL PURPOSE, AND TENANTS OBLIGATION TO
PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE
PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE
EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT
ABATEMENT, SETOFF, DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS
DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED.
25. PRIOR LEASE. Landlord and Tenant acknowledge and agree that, upon
the execution of this Lease, Tenant is occupying the Premises under the terms
of that certain Lease dated March 31, 1985 by and between The Connecticut
Bank and Trust Company, National Association, not individually, but as
Trustee under Zale Trust No. 85-1, as the lessor thereunder ("PRIOR TRUSTEE"),
and Tenant, as the Lessee thereunder ("PRIOR LEASE"). This Lease shall take
effect in place of and simultaneously with the rejection of the Prior Lease.
Contemporaneously with the execution and delivery of this Lease, to the extent
that such execution and delivery occurs after August 1, 1992, Landlord shall
credit Tenant as hereinafter provided, with any amount (the "Reduction
Amount"), to be applied against Basic Rental (but not against any Additional
Rent or any other amounts becoming due under the terms of this Lease) thereafter
accruing under the is Lease, equal to the remainder of (I) the basic rental
rate actually paid by Tenant under the Prior Lease from August 1, 1992, through
the date on which this Lease is executed and delivered; less (ii) the Basic
Rental that Tenant
29
<PAGE>
would have paid for such period under this Lease if this Lease had been
executed and delivered prior to August 1, 1992; provided, however, that (1)
nothing in this Section 25 shall constitute, evidence or effect any waiver,
release, termination, extinguishment, reduction or impairment under or with
respect to the Prior Lease, including, without limitation, any claims
regarding (a) the Prior lease, or (b) any rejection or the Prior lease in the
bankruptcy case hereinbefore described, it being understood and agreed that
this Section 25 shall be automatically deleted from this Lease without
further action or documentation by any party in the event that it would
otherwise be given such interpretation or effect, and (2) the Reduction
Amount shall in no event reduce the first three (3) monthly payments of Basic
Rental under this Lease to less than $100,000 each, and Tenant shall be
obligated to pay all amounts of accrued Additional Rent in full, plus Basic
Rental for each of said three (3) months in amounts of no less than $100,000
each, regardless of the application of any portion of any Reduction Amount.
26. FINANCIAL STATEMENTS. Tenant shall deliver to Landlord, upon
written request by Landlord, whatever financial information Tenant makes
available to the public.
DATED as of the date first above written.
TENANT:
ZALE CORPORATION Address:
AS DEBTOR AND DEBTOR-IN-POSSESSION
901 West Walnut Hill Lane
MS 5A-13, Real Estate Department
Irving, Texas 75083-1003
By: /s/ Andreas Ludwig
--------------------------------
Name: Andreas Ludwig with a copy to:
Its: Executive Vice President -
Finance, and Chief Financial Chief Financial Officer
Officer 901 West Walnut Hill Lane
MS 7A-5
Irving, Texas 75083-1003
30
<PAGE>
LANDLORD:
PRINCIPAL MUTUAL LIFE INSURANCE Address:
COMPANY
Trammell Crow Central Office Group, Inc.
2200 Ross Ave., Suite 3700
By: /s/ Thomas J. Bell Dallas, Texas 75201
------------------------------ Attn: John E. Nolen, III
Name: Thomas J. Bell
Its: Associate Director Commercial
Real Estate
By: /s/ S. P. Franzenburg
------------------------------
Name: S. P. Franzenburg
Its: Director & Secretary Asset
Preservation
With a copy to:
Principal Mutual Life Insurance Company
711 High Street
Des Moines, Iowa 50392
Attn: Doug Achtemeir
31
<PAGE>
FIRST LEASE AMENDMENT
AND
AGREEMENT
This First Lease Amendment and Agreement (this "Amendment") is made and
entered into to be effective as of February 1, 1996, by and between PRINCIPAL
MUTUAL LIFE INSURANCE COMPANY, an Iowa corporation ("Landlord") and ZALE
DELAWARE, INC., a Delaware corporation ("Tenant"), as tenant.
RECITALS
A. Landlord entered into that certain dated as of September 17, 1992
(the "Original Lease") with Zale Corporation, as debtor and
debtor-in-possession, as tenant ("Original Tenant") with respect to the land
described on Exhibit A attached hereto and made a part hereof and the
remainder of the "Premises" as defined in the Original Lease (and hereinafter
so referenced), the street address of which is 901 West Walnut Hill Lane,
Irving, Texas.
B. Original Tenant assigned to Tenant all of Original Tenant's rights,
title and interests in and to the Original Lease, and Tenant accepted such
assignment and expressly assumed and agreed to perform all of the terms,
covenants, conditions, obligations and liabilities required of the Original
Tenant under the Original Lease, all as evidenced by that certain Memorandum of
Assignment of Lease dated as of July 30, 1993, executed between Original Tenant
and Tenant.
C. Landlord is the current owner of the Premises and the landlord's
interest under the Original Lease, and Tenant is the current owner of the
leasehold estate and all of the tenant's rights, title, interests, obligations
and liabilities under the Original Lease, free and clear of any mortgages or
encumbrances on said leasehold estate.
D. Landlord and Tenant desire to amend the Original Lease as hereinafter
provided.
NOW, THEREFORE, FOR TEN DOLLARS ($10.00) IN HAND PAID, the mutual covenants
and agreements herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
<PAGE>
AGREEMENT
1. RECITALS AND ATTACHMENT I. The Recitals set forth above are
incorporated herein and made a part hereof by this reference and ATTACHMENT I
and ATTACHMENT II attached hereto are hereby made a part of this Amendment and
of the Original Lease.
2. AMENDMENTS. The Original Lease is hereby amended as follows:
(a) The following words are included at the top of the title page and
again at the top of page 1 of the Lease so as to appear underlined and in
all upper case letters above the title "Lease":
"NOTICE: CERTAIN PROVISIONS OF THIS LEASE ARE SUBJECT TO ARBITRATION
IN ACCORDANCE WITH THE TERMS HEREOF UNDER THE TEXAS GENERAL
ARBITRATION ACT, TEXAS CIVIL PRACTICE AND REMEDIES CODE, CHAPTER 171."
(b) The first sentence of Section 2 is deleted in its entirety and the
following is substituted therefor:
"(a) The term of this Lease (the "Term") shall be 60 months (plus any
Extension Periods properly effectuated as hereinafter described),
beginning on September 17, 1992 (the "Commencement Date"). Subject to
the last sentence of this Section 2(a), there shall be no rights to
renew or extend the initial Term of 60 months, except as expressly
provided in subsection 2(b) below."
(c) The following shall be added as a new subsection (b) to Section 2:
"(b) So long as no Event of Default by Tenant exists at the time of
the Extension Notice (hereinafter defined) or at the time for the
commencement of the Extension Period (hereinafter defined), Tenant
shall have the option to extend the initial Term for three (3)
successive periods (each being hereinafter referred to as an
"Extension Period"), the first such Extension Period being for a
period of 126 months (the "First Extension Period"), and the two
following Extension Periods being each for a period of five (5) years,
without any gap or lapse in the Term, subject to the following
conditions. An Extension Period can be
-2-
<PAGE>
effected only by Tenant giving written notice to Landlord of
Tenant's election to exercise its option to do so no later than
twelve (12) months prior to the then-scheduled expiration date of
the then current Term (an "Extension Notice") and, with respect to
any Extension Period other than the First Extension Period, by Basic
Rental for the subject Extension Period being determined as provided
on ATTACHMENT I attached hereto and made a part hereof, or otherwise
agreed upon in writing by Tenant and Landlord, all before the first
day of the twelve (12) month notice period for the Extension Notice
as described above. Tenant's option to effect an Extension Period
shall expire and terminate automatically without the necessity or
any further notice or action by any party if an Extension Notice is
not timely delivered to Landlord or, with respect to the Extension
Periods other than the First Extension Period, the Basic Rental for
such Extension Period is not determined as provided on ATTACHMENT I
or otherwise agreed upon in writing by Tenant and Landlord before
the first day of the twelve (12) month notice period for the
Extension Notice as described above. Any Extension Period properly
effectuated as herein provided shall begin immediately after the
scheduled expiration date of the Term in effect at the time that
Tenant forwards the Extension Notice. All terms and conditions of
this Lease during any Extension Period shall be the same as in
effect immediately prior to the commencement of that Extension
Period, except that (i) for the First Extension Period, Basic Rental
shall be as indicated in Section 3a. of this Lease, and (ii) with
respect to any Extension Period other than the First Extension
Period, the Basic Rental for such Extension Period shall be
determined as described above, expressed as an amount per annum
(payable in monthly installments)."
(d) Subsection 3(a) is amended by deleting the period at the end thereof
and substituting the following language therefor:
", until the expiration of the 60th month of the Term. If Tenant
exercises its option to extend the Term of this Lease for the First
Extension Period, the following provisions shall apply and Basic
Rental during the First Extension Period shall be as follows:
Beginning on the first day of the 61st month of the
-3-
<PAGE>
Term and continuing through and including the 120th month of the
Term, the Basic Rental shall be $2,906,960.40 per annum and shall be
payable in monthly installments of $242,246.70 each. Beginning on
the first day of the 121st month of the Term and continuing through
and including the 156th month of the Term, the Basic Rental shall be
$3,140,235.00 per annum, and shall be payable in monthly
installments of $261,686.25 each. Beginning on the first day of the
157th month of the Term and continuing through and including the
186th month of the Term, the Basic Rental shall be $3,319,677.00 per
annum, and shall be payable in monthly installments of $276,639.75
each."
-4-
<PAGE>
(e) The lead in paragraph of subsection 3(b) is deleted and the following
is substituted therefor:
"b. Additional Rent. In addition to the Basic Rental, Tenant shall
pay on behalf of Landlord "Additional Rent" (herein so called) equal
to the actual Basic Costs (defined below) incurred and directly
related to the Premises. "Basic Costs" shall mean all expenses and
disbursements of every and pertaining to the Premises in connection
with the following items:"
(f) Subsection 3(b)(ii) is amended by deleting from the next-to-the-last
sentence thereof the words "the first four (4) years" and substituting
therefor the words "all except the last year", and by deleting from the
last sentence thereof the words "from funds held in escrow for such purpose
or from other funds".
(g) The last paragraph of subsection 3(b), beginning with the words
"Additional Rent" is deleted in its entirety, and the following is
substituted therefor:
"Additional Rent shall be payable directly to the entity requiring
such payment as such amounts become due and payable."
(h) Subsection 3(c) is amended as follows:
(i) the third sentence is deleted in its entirety and replaced with
the following:
"Basic Rental is also sometimes referred to in this Lease
as "Scheduled Rent"."
(ii) the fourth sentence is amended by deleting the sixth word
("Rent") and replacing same with the words "Scheduled Rent", by
inserting the word "either" prior to the words "by wire
transfer", by deleting the words "Trammell Crow Central Office
Group, Inc." and substituting therefor the words "Trammell Crow
Dallas/Fort Worth, Inc.", and by adding the words "or by check
delivered to Trammell Crow Dallas/Fort Worth, Inc., at 2200 Ross
Avenue, Suite 3700, Dallas, Texas 75201, either method of payment
being at Tenant's option." after "ABA no. 3001964".
-5-
<PAGE>
(iii) the following sentence is added to the end of subsection 3(c) so
as to constitute the new last sentence thereof:
"Tenant shall deliver to Landlord evidence satisfactory to
Landlord of payment in full of all Taxes and insurance
premiums prior to the date on which any such amounts would
become delinquent, and shall, at Landlord's written request,
deliver evidence of payment in full of any other portions of
the Additional Rent as Landlord may reasonably require."
(i) Subsection 6(b) is amended by (1) deleting from the first sentence
thereof the words "prior to the expiration or termination of this Lease"
and substituting therefor the words "no later than the Utilities Separation
Date (as hereinafter defined),", (2) deleting from the second sentence the
words "no later than the date of termination or expiration of this Lease,"
and (3) adding the following as the new last two sentences of subsection
6(b):
"As used in this Lease, the term "Utilities Separation Date"
shall mean the earlier to occur of (i) the termination of this
Lease, (ii) sixty (60) days after Tenant has received written
notice from Landlord that Landlord has entered into a bona fide
contract to sell the Land and/or the Building to a third party
(which contract may contain conditions and/or a "free look"
period), or (iii) September 30, 1997 (unless Tenant exercises its
option to extend the Term of this Lease for the First Extension
Period, in which case such date set forth in this clause (iii)
shall be March 30, 2007); provided, however, that with respect to
any executed contract described in clause (ii) above, Landlord
shall give Tenant written notice of any termination of such
contract by its terms within two (2) business days of receiving
notice of such termination, and (A) if Tenant has not commenced
the separation of utilities described in this subsection 6(b) at
the time that such notice of termination is received from
Landlord, Tenant shall not be obligated to commence such
separation of utilities until such time as Tenant receives notice
that such contract
-6-
<PAGE>
has been reinstated or that a new contract as described in
clause (ii) has been executed, at which time the Utilities
Separation Date shall be sixty (60) days after such notice; and
(B) if Tenant has already commenced the separation of utilities
described in this subsection 6(b) at the time that such notice
of termination is received from Landlord, such notice from
Landlord shall have no effect on the then time Utilities
Separation Date, nor relieve Tenant of its obligations to
timely complete such separation of utilities by such date, and
Tenant shall continue to diligently pursue such work until the
separation of utilities contemplated by this subsection 6(b) is
completed. Notwithstanding anything in this Lease to the
contrary, it is agreed and understood that upon receipt by
Tenant of written notice from Landlord that a bona fide
contract has been entered into with a third party as described
in clause (ii) above, Tenant will promptly commence all actions
necessary to effectuate the separation of utilities as
contemplated by this subsection 6(b) and any separate agreement
executed with Landlord, and will diligently pursue same, taking
all necessary action so as to be able to complete such
separation of utilities within sixty (60) days after receiving
such notice, until such time, if any, as the Utilities
Separation Date is recalculated as described in (A) above
pursuant to a notice from Landlord of the, termination of such
contract."
(j) Subsection 7(b) is amended as follows:
(i) after the words "free standing structure" in (i), the
following words are added:
", which, for purposes of this Lease, shall be deemed to
mean a permanent improvement containing walls and a roof,
and which is not attached to the Premises"
(ii) the words "or (v) cost in excess of $25,000, or cause all of
such alterations and additions over a 90-day period to
exceed $50,000 in costs (any alterations or
-7-
<PAGE>
additions meeting the requirements of (i) through (v)
inclusive" are deleted and replaced with the words "(any
alteration or addition meeting the requirements of (i)
through (iv) inclusive";
(iii) the words "; provided, however, that the cost limitations
set forth in (v) of the preceding sentence shall not apply
to Exhibit B items" are deleted;
(iv) the third sentence of subsection 7(b) is amended by deleting
the words "through (v)" and substituting therefor the words
"through (iv)";
(v) the fifth sentence of subsection 7(b) is amended by adding
the following words after the words "Landlord shall not
unreasonably withhold, condition or delay its approval":
"(A) with respect to construction or installation of any
alterations described above in (iii) or (iv), inclusive, in
this subsection 7b, or (B) with respect to the construction
or installation of any alterations described above in (i) or
(ii), inclusive, in this subsection 7b.,";
(vi) the fifth sentence of subsection 7(b) is further amended by
adding the following words in clause (c) immediately after
the words "mechanical systems and":
", except for two exterior doors which may be installed for
Tenant's security purposes to serve Tenant's credit union
area at its location as of January, 1996,";
(vii) the next to the last sentence of subsection 7(b) is deleted
in its entirety.
(viii) the following sentence is added to the end of subsection
7(b):
"Except with respect to the two exterior doors for the
credit union described above,
-8-
<PAGE>
Landlord may condition its consent to alterations for
which its consent is required upon Tenant's agreement and
obligation to remove such alterations at the expiration or
termination of this Lease, including, without limitation,
any consent regarding any structures on the Premises which
are free standing structures or which would otherwise
constitute free standing structures if not for the lack of
one or more walls."
(k) Subsection 7(b) is further amended by adding the following to the end
thereof.
"Landlord shall reimburse or disburse to Tenant for alterations,
purchases, work or payments made or performed by Tenant in compliance
with all of the requirements and conditions set forth in this Section
7b, which are commenced after February 1, 1996 (as described below,
the "Reimbursable Tenant Expenditures") in an amount not to exceed
$4,719,324.60 (the "Tenant Allowance Amounts"), subject to the
limitations and conditions hereafter provided. The Reimbursable
Tenant Expenditures shall be comprised o and only of (1) any tenant
improvements performed in compliance with the provisions of this
Section 7b., including, without limitations, purchase and installation
of telephone and data cabling and any other equipment and materials
which are to remain in the Building, (2) payment of remodeling tax,
moving costs, design-related costs paid to third parties, up to
$358,884 of design-related costs for work performed by Tenant's
in-house staff or related employees (the "In-house Design Allowance"),
and furniture and furniture systems pertaining to the Premises, (3)
any costs associated with a first amendment of this Lease, which are
Tenant's responsibility (subject to the provisions of Section 6 of
this Amendment), (4) the value of any use by Tenant of Tenant's
internal resources to provide any of the services or material
described in (1) or (2) above, except for the value of the work
pertaining to the In-house Design Allowance, but including any
design-related costs performed by Tenant's in-house staff or related
employees in excess of $358,884, and (5) the Construction Management
Fee (hereinafter defined). Landlord shall be obligated to fund to
Tenant the Tenant Allowance Amounts only as
-9-
<PAGE>
reimbursement or payment to Tenant for Reimbursable Tenant
Expenditures within twenty (20) days after Tenant's delivery to
Landlord of a written request therefor, accompanied by documentation
sufficient to satisfy the following conditions precedent to such
reimbursement or payment:
(A) With respect to any Reimbursable Tenant Expenditures which relate to
Hard Construction (as hereinafter defined) described in (1) above:
(i) prior to commencement, such alterations were the subject of at
least three (3) competitive bids by qualified contractors, mutually
acceptable to both Landlord and Tenant (Tenant reserving the right to
pre-select the general contractor based on fee and general conditions
negotiations, so long as such general -contractor is acceptable to
both Tenant and Landlord, Tenant agreeing to request in writing
Landlord's written approval prior to pre-selecting any general
contractor, which request by Tenant shad be accompanied by any
necessary information regarding such general contractor as Landlord
may reasonably require, and Landlord agreeing not to unreasonably
withhold or delay its approval after receipt of such written request
and accompanying documentation from Tenant, with Landlord's approval
being deemed given if Landlord does not respond to such request within
fifteen (15) business days after receipt of Tenant's request and
accompanying documentation);
(ii) Tenant or Tenant's representatives prepared the bid instructions,
conducted the bid opening and clarified and qualified all construction
bids for the alterations (unless the general contractor is pre-selected
by Tenant and approved by Landlord as provided above);
(iii) such alterations were the subject of a contract properly entered
into with Tenant on the Approved Contract Form (as used in this Lease,
"Approved Contract Form" shall mean. the form of AIA Construction
Contract agreed to in writing between Tenant and Landlord as
constituting the "Approved Contract Form," and containing no changes
therefrom which are not beneficial to the "Owner" under the terms
thereof, or any other form of contract approved in writing by
-10-
<PAGE>
Landlord for the specific work in question);
(iv) at Landlord's option and cost, the selection of the contractor,
the preparation of the bid package, Landlord's confirmation that any
construction contract is on the Approved Contract Form, Landlord's
approval of the plans and specifications and the performance of the
construction were all coordinated with and monitored by Landlord or
its representative;
(v) any alterations which affect in any way the structural elements of
the Building (including, without limitation, the roof, foundation,
"footprint" of the shell of the existing improvements, the HVAC,
mechanical, electrical or plumbing systems, structural floors or other
structural components, or load bearing walls, firewalls or restroom
walls within the Building) were the subject of (a) Landlord's approval
(written, or deemed in accordance with the provisions of Section 7(e))
prior to commencement, including, without limitation, Landlord's prior
approval of the plans and specifications therefor, and (b) Landlord's
or Landlord's representative's reasonable supervision throughout the
progress of the work involved;
(vi) Tenant has delivered to Landlord with respect to such alterations
for which no prior disbursement of Tenant Allowance Amounts has been
made, a written request therefor (a) specifying by name, current
address, telephone number and amount owed, all parties to whom Tenant
has paid or is obligated to pay such Reimbursable Tenant Expenditures,
and describing in reasonable detail the work done or material
purchased which constitutes the subject Reimbursable Tenant
Expenditures; (b) accompanied by copies of all statements, vouchers,
or invoices from the parties named therein, in form reasonably
satisfactory to Landlord; (c) accompanied by appropriate recordable
waivers of lien rights satisfactory to Landlord, executed by all
contractors, subcontractors, laborers, and materialmen who have
furnished labor or material in connection with such Reimbursable
Tenant Expenditures; and (d) certifying that all bills for labor and
material of every kind and character incurred by Tenant and due and
payable on or before the date of the application for such disbursement
have been paid, except bills to be paid from the proceeds of such
-11-
<PAGE>
request for disbursement or being contested in accordance with the
provisions of this Lease; provided, however, that this condition (vi)
shall be deemed unsatisfied with respect to, and Landlord shall not be
obligated to make any disbursement under this Subsection (A) in
connection with, any request by Tenant for a disbursement to the
extent that such disbursement relates to matters which are then the
subject of an inspection report by Landlord's representative
indicating that the subject work is unfinished or defective, or
involves substandard materials, or has not been completed in a good
and workmanlike manner in accordance with all applicable plans and
specifications therefor and in accordance with all applicable private
or deed restrictions, and all applicable federal, state and local
laws, codes, ordinances, regulations and statutes, or requires
corrective action.
Notwithstanding anything in this Subsection (A) to the contrary, it is
agreed that (1) any Reimbursable Tenant Expenditures described in this
Subsection (A) relating to labor or materials which (1) cost, in the
aggregate for the job, less than $50,000, and (II) do not constitute a
portion of a larger amount of work of similar nature being done
contemporaneously or work which would ordinarily be included under a
contract of greater scope, but are segregated so as to be below the
$50,000 limit, shall be subject to satisfying only the conditions of
clauses (v) (to the extent applicable) and (vi) above to entitle
Tenant to disbursements therefor as herein provided (the work
described in this clause (1) being hereinafter referred to as the
"Small Expenditure Items"), and (2) to the extent that any
Reimbursable Tenant Expenditures described in this Subsection (A)
pertain to work which, by its nature and customary practice in the
construction industry, is never or rarely the subject of plans
(including, without limitation, those items described on Attachment II
attached hereto and made a part hereof), Tenant shall not be obligated
to provide plans therefor as one of the conditions which must be
satisfied to entitle Tenant to disbursements for such Reimbursable
Tenant Expenditures (the work described in this clause (2) and on
Attachment II being hereinafter referred to as the "No Plan Required
items").
-12-
<PAGE>
(B) With respect to any Reimbursable Tenant Expenditures consisting of
matters other than those described above in (1) and (4) and those
pertaining to the In-house Design Allowance, Tenant has delivered to
Landlord evidence reasonably satisfactory to Landlord of the cost of such
of items or matters.
(C) With respect to any Reimbursable Tenant Expenditures consisting of the
matters described above in (4) and those pertaining to the In-house Design
Allowance, Tenant has delivered to Landlord evidence reasonably
satisfactory to Landlord as to the value of such services or resources at
current market value and that such services or resources are directly
related to Tenant's occupancy and use of the Premises.
As used in this Section 7, "Hard Construction" shall mean any construction,
improvements, demolition or alterations, including, without limitation, the
installation of voice and data cabling, full height, moveable partitions
("highwall"), tenant improvements and installation of tenant fixtures,
performed pursuant to this Section 7(b), commenced prior to October 1,
1999, but shall not include nonattached fixtures or equipment of Tenant
such as computers, telephones or telephone switches or furniture or
appliances which are not fixtures, artwork or graphics, or design,
consulting or moving services. Tenant shall pay Landlord's representatives
(as designated by Landlord) a construction management fee equal to 2.5% of
all costs for materials and labor required for all Hard Construction, up to
but not exceeding the total of all Tenant Allowance Amounts pertaining to
Hard Construction (the "Construction Management Fee"). To the extent that
Tenant is entitled to receive same as a portion of the Tenant Allowance
Amounts, the Construction Management Fee shall be paid to Landlord's
representative on behalf of Tenant directly by Landlord upon receipt by
Landlord from Landlord's representative of an inspection report regarding
the work to which such portion of the Construction Management Fee pertains
and any other matters reasonably required by Landlord.
Notwithstanding anything in this Section 7 to the contrary, a) Tenant shall
not be entitled to any Tenant Allowance Amounts for, and Landlord shall not
be obligated to make any payment to Tenant with respect to, any of the
types expenditures by Tenant described in (3) or (4) above or with respect
to expenditures for furniture or furniture systems
-13-
<PAGE>
(collectively, the "Limited Tenant Categories"), to the extent that any
such disbursement or payment by Landlord would cause the total amount
paid or disbursed by Landlord for any or all of such types of
expenditures to exceed, in the aggregate, $1,130,484.60, (b) other than
with respect to the Small Expenditure Items not of the described in
subsection 7(b)A(v), all plans (except with respect to the No Plan
Required Items) and specifications and all construction contracts
pertaining to any Reimbursable Tenant Expenditures must be previously
approved in writing by Landlord (or deemed approved as hereinbefore
provided) prior to any related construction, and (c) Tenant shall not
request and Landlord shall have no obligation to fund (i) more than one
(1) disbursement of Reimbursable Tenant Expenditures in any thirty (30)
day period, or (ii) any request for disbursement of any Reimbursable
Tenant Expenditures which is, in the aggregate, for less than $5,000.00.
If Tenant exercises its option to extend the Term of this Lease for the
First Extension Period, the following provisions shall apply: To the extent
that any portion of the Tenant Allowance Amounts pertaining to the Limited
Tenant Categories have not and will not be requested by Tenant to be funded
by Landlord on or prior to October 1, 1999, Tenant may, at Tenant's option,
so advise Landlord in writing no later than September 1, 1999, requesting
that such remaining Tenant Allowance Amounts pertaining to the Limited
Tenant Categories which could otherwise be funded to Tenant be divided
among and allocated equally toward payment of the remaining Basic Rental
payments for the remaining months of the First Extension Period, and
Landlord shall give Tenant credit in such amounts against such remaining
monthly Basic Rental payments; provided, however, that (a) if no such
notice is timely given to Landlord, Tenant shall have no right to any
credit against future monthly installment payments of Basic Rental, and (b)
in no event shall any such credited amounts exceed, in the aggregate,
$1,130,484.60, less all amounts previously disbursed to Tenant as
reimbursements or payments for items of Limited Tenant Categories."
(l) The first sentence of Section 7(d) is amended by deleting the first
word ("All") and substituting therefor the following:
"Subject to the provisions of this Lease regarding Hard
-14-
<PAGE>
Construction which is the subject of Reimbursable Tenant Expenditures,
all"
(m) Section 7(f) is hereby deleted in its entirety.
(n) Section 8 is amended by deleting the last portion of the first
sentence beginning with the words "provided, however" through the end of
said sentence, and by inserting such deleted language immediately after the
word "Premises" and prior to the words "(c) within sixty (60) days" in said
first sentence of Section 8.
(o) Section 9(a) is amended as follows:
i) in the fifth sentence after the words "Except to Permitted
Transferees" the words "and except as expressly provided in
clause or (A) in the last sentence of this Section 9a.," are
added; and
ii) the last sentence is amended by adding, after the words
"Notwithstanding anything in this Section 9 to the contrary," the
words (A) so long as no Event of Default exists under this Lease
at the time of the giving of the notice hereinafter described in
this sentence, Tenant shall have the right, from time to time, to
assign or sublet any portion of the Building, up to but not
exceeding 30% of the rentable space thereof after delivering to
Landlord fifteen (15) days' prior written notice of Tenant's
intention to do so, accompanied by (1) a copy of all
documentation to be executed in connection with such assignment
or subletting, (2) such information about the prospective
assignee's or sublessee's business activities and intended use as
Landlord shall reasonably require, (3) an accurate description of
the space which will be affected, and (4) Tenant's written
reconfirmation of Tenant's continued liability and obligations
under this Lease, notwithstanding and unaffected in any way by
such assignment or subletting (any such assignment or subletting
described in this clause (A) not requiring Landlord's consent,
but still constituting a "Transfer" as such term is used in this
Lease), and (B)".
(p) Section 9(b) is amended as follows:
-15-
<PAGE>
i) the following words are added immediately after the title of
Section 9(b) and immediately prior to the word "Tenant" in the first
line of said Section 9(b):
"Subject to the last sentence of this Section 9(b),"; and
ii) the following sentence is added to the end of Section 9(b):
"Notwithstanding anything in this Section 9b. to the contrary, so
long as no Event of Default exists under this Lease, in the event
that Tenant requests in writing Landlord's approval of an
assignment or subletting of a portion of the Building,
accompanied by the items described in (1), (2), (3) and (4) of
Section 9a. above, and Landlord, acting in its sole and absolute
discretion and without any limitation on Landlord's right to deny
such approval, delivers to Tenant its written approval of such
proposed sublease or assignment, Tenant may retain twenty-five
percent (25%) of the excess compensation described above in this
Section 9b. and shall be required to pay to Landlord only
seventy-five percent (75%) of such excess compensation for such
Transfer."
(q) Section 10(a) is amended by adding the following sentence as the new
last sentence thereof.
"Notwithstanding the above, at such time as Principal Mutual Life
Insurance Company or any party related to or affiliated with Principal
Mutual Life insurance Company is no longer the "Landlord" under this
Lease, and Tenant is able to obtain the insurance coverage described
above for less than the then current Landlord under this Lease could
obtain such insurance, Tenant shall have the right to obtain its own
coverage of the Premises, so long as such coverage is as described
above."
(r) Section 10(c) is amended by deleting same and substituting therefor
the following:
"INDEMNITY" Subject to Section 10.b, Tenant shall defend, indemnify,
and hold harmless Landlord,
-16-
<PAGE>
Landlord's mortgagee, and their agents from and against all claims,
demands, liabilities, causes of action, suits, judgments, and
expenses (including reasonable attorneys' fees and expenses) for any
loss arising from any occurrence on the Premises or from Tenant's
failure to perform its obligations under this Lease (including,
without limitation, the obligations under Section 6 and Section 24
of this Lease), but not if caused by the negligence or fault of
Landlord or its agents. Notwithstanding the above, Tenant does not
indemnify any party with respect to any loss arising from the
willful act or sole or gross negligence of Landlord, Landlord's
mortgagee, or their agents, and Landlord hereby indemnifies Tenant
with respect to any such loss. This indemnity provision shall
survive termination or expiration of this Lease."
(s) Section 11(a) is deleted in its entirety and the following substituted
therefor:
"a. SUBORDINATION. Subject to Landlord obtaining a non-disturbance
and attornment agreement as described below, Tenant shall subordinate
this Lease to any future deed of trust, mortgage or other security
instrument, or any ground lease, master lease or primary lease, that
hereafter covers all or any part of the Premises and runs in favor of
the party granting such nondisturbance (the mortgagee under any such
mortgage, the lessor under any such lease or any other beneficiary
under any of such other instruments is hereinafter referred to as a
"Landlord's Mortgagee".) Tenant shall not be obligated to subordinate
this Lease unless and until a non-disturbance and attornment agreement
containing the following provisions is entered into with Tenant
(Tenant agreeing that Tenant shall not object to the inclusion of any
of the provisions described in (iv) or (v) below):
i) assurance that Tenant's tenancy and its enjoyment of rights
under this Lease shall not be disturbed by any exercise of
rights under or in connection with such superior instrument
to which this Lease is being subordinated;
ii) assurance that Tenant's tenancy may be terminated only in
accordance with the
-17-
<PAGE>
default provisions of this Lease;
iii) provisions that any successor to Landlord's interest in this
Lease, upon foreclosure or otherwise, shall assume all of
the Landlord's obligations under this Lease arising after
such party obtains an interest in this Lease;
iv) provisions whereby Tenant agrees to attorn to such successor
of Landlord's interest; and
v) provisions whereby Tenant agrees to provide Landlord's
Mortgagee with commercially reasonable notice and
opportunity to cure periods for any default by Landlord
under this Lease (A reasonable opportunity to cure shall not
extend beyond thirty (30) days unless (A) Landlord's default
cannot be cured within said thirty (30) day period, and (B)
Landlord's mortgagee has proceeded promptly to cure and has
pursued such cure with diligence and continuity, in which
event the cure period shall not exceed one hundred twenty
(120) days.)"
(t) Section 16(a) is deleted in its entirety and the following substituted
therefor.
"a. Tenant's failure to pay any Basic Rental or Additional Rent within
ten (10) days after Landlord has delivered notice to Tenant that the
same is due; provided, however, that (i) an Event of Default shall
occur hereunder without any obligation of Landlord to give any notice
to Tenant if Landlord has previously given Tenant written notice under
this Section 16.a on two (2) occasions in any consecutive twelve (12)
month period, or on eight (8) occasions during the Term, and (ii) no
grace or notice periods in this Section 16a. shall apply to the
accrual of any charge for payment received after its due date;"
(u) Section 16(b) is amended by deleting the words "within such 30-day
period and thereafter diligently pursue such cure without interruption" and
substituting therefor the words "promptly after receipt of written notice
and diligently pursues such cure, without interruption, to completion,".
-18-
<PAGE>
(v) Section 17(a) is amended by adding after the words "as reasonably
determined by Landlord" in clause (B) thereof, the words "or, if then the
subject of judicial proceedings, by the court,".
(w) Section 17(b) is amended by deleting the words "Section 18.a" and
substituting therefor the words "Section 19.a"
(x) Section 17 is further amended by adding the following to the end of
the paragraph therein beginning with the word "Additionally" (immediately
after the words "thirty (30) days"):
"The above-described rights of lock out in favor of Landlord shall be
in lieu of lock out rights specified in subsection 93.002(c)(3) of the
Texas Property Code, Landlord hereby waiving any additional lock out
rights as provided in said subsection 93.002(c)(3) of the Texas
Property Code."
(y) Section 18 is amended by inserting "a. LANDLORD'S DEFAULT."
immediately prior to the first word thereof deleting the word "lease" and
replacing it with the word "Lease" in the first line thereof, and adding
the words ", subject to the provisions of Section 18b. below," to the end
of the fourth sentence thereof
(z) Section 18 is further amended by adding thereto the following as a new
subsection 18b.:
"b. TENANT'S REMEDIES. If a "default" by Landlord exists as
described above in Section 18a., including with respect to the
funding of Tenant Allowance Amounts as required by this Lease
(with all notice and grace periods described therein having
expired and no cure having been made), Tenant shall have the
right, after the expiration of such periods and during the
continuance of any such uncured default by Landlord, to the
following remedy as hereinafter provided:
(i) At any time after the expiration of an additional five (5)
days of notice by Tenant to Landlord of Tenant's intention to do
so, Tenant may, in place of Landlord, perform the obligations
which Landlord failed to perform and which caused the then
existing default by Landlord as described
-19-
<PAGE>
in Section 18a. and, upon furnishing proof reasonably
satisfactory to Landlord of amounts reasonably and necessarily
expended for such purposes by Tenant, Landlord shall within
forty-five (45) days after such proof is furnished to Landlord,
reimburse Tenant for such expenses. If Landlord shall fail to
reimburse Tenant for such expenses within such 45-day period,
any dispute or disagreement between Landlord and Tenant with
respect to the occurrence or continuance of such default by
Landlord or Tenant's exercise of rights under this Section 18b.
including, without limitation, Tenant's right to reimbursement
for expenditures as above described shall be settled by
arbitration in accordance with the "Expedited Procedures" and
other procedures of the Commercial Arbitration Rules of the
American Arbitration Association (the "AAA"). Any judgment or
award entered as a result of such arbitration may be entered in
any court having jurisdiction thereof. Either Tenant or
Landlord may, immediately after the end of the above-described
45-day period, institute the arbitration procedure in
accordance with the requirements of the AAA, and the "Expedited
Procedures" of the AAA shall be applied to such arbitration
process. Submission of three (3) copies of this Lease by
Landlord or Tenant at any regional office of the AAA shall
constitute three (3) copies of the "arbitration provisions of
the contract" as required by Commercial Arbitration Rules. A
neutral arbitrator shall be appointed by the AAA in accordance
with the Expedited Procedures of the Commercial Arbitration
Rules of the AAA, whether or not the amount in controversy is
less than or exceeds $50,000.00, exclusive of interest and
arbitration costs. Once the arbitration process is commenced
by Landlord or Tenant, the parties shall have no other rights
or remedies at law or in equity with respect to the obligations
which are to be the subject of the arbitration, and the
decision and/or award which is the result of the arbitration
process herein described shall be dispositive as to all rights,
remedies and controversies with respect to such obligations.
Satisfaction of any award shall constitute the sole and
exclusive remedy with respect to the subject matter of the
arbitration,
-20-
<PAGE>
all subject to the provisions of subsection (ii) below. The
decision and/or award by the arbitrator shall be final and
binding upon both Landlord and Tenant. The cost and expenses
of each arbitration proceeding shall be borne by or between the
parties as determined by the arbitrator. This agreement to
arbitrate shall be specifically enforceable.
(ii) At all times prior to the end of the ten (10), day period
described below, Tenant shall continue to perform all of its
obligations under this Lease as provided in this Lease,
including, without limitation, those with respect to the payment
of Rent. In the event that the arbitration results in a decision
in favor of Tenant requiring Landlord to reimburse Tenant for
expenditures by Tenant, Landlord shall comply with the
requirements of such arbitration decision within ten (10) days of
the time to do so as specified in the decision. If Landlord
fails to comply within such ten (10) day period with any
arbitration decision in favor of Tenant, Tenant shall have the
right immediately after such ten-day period to offset any such
arbitration award against the next payment of Basic Rental
becoming due and, if such award is greater than the payment of
Basic Rental next becoming due, against each successive payment
of Basic Rental becoming due, until the total of all amounts so
offset against Basic Rental equals the amount of the arbitration
award."
(aa) Section 20 is amended by adding the following words to the next to the
last sentence thereof.
"upon the earlier to occur of (i) the expiration of thirty (30) days
after Landlord's written notice to Tenant to remove same, and (ii)
Landlord's receipt of written notice from Tenant that such items have
been abandoned to Landlord."
(ab) Section 24 is amended by deleting the phrase "(including, without
limitation, those arising from Landlord's joint comparative or concurrent
negligence with any party" and substituting therefor the words "(INCLUDING,
WITHOUT LIMITATION, THOSE ARISING FROM LANDLORDS JOINT,
-21-
<PAGE>
COMPARATIVE OR CONCURRENT NEGLIGENCE WITH ANY PARTY."
(ac) The following sections are added:
"27. PARKING. Tenant shall be entitled to the exclusive use of all
parking spaces in the parking garage constituting a portion of the
Premises, free of charge, and shall determine if any spaces shall be
designated and marked as reserved spaces.
28. ROOF RIGHTS AND CONNECTIVITY. Tenant shall have the exclusive
use of the roof of the Building for installation of telecommunications
equipment, such as satellite dish antennae. Tenant may use existing
conduits, shafts and ducts located in the Building and may install
conduit and additional Building entrance links, as necessary to
connect Tenant's telecommunications equipment inside the Building to
other tenants of the Building and to telecommunications facilities
outside the Building, all subject to Landlord's reasonable written
approval of the method of installation thereof."
(ad) The addresses for Landlord as shown beside Landlord's execution are
deleted and replaced with the following:
"Trammell Crow Dallas/Fort Worth, Inc.
2200 Ross Avenue, Suite 3700
Dallas, Texas 75201
Attention: Tony Click
With a copy to:
Principal Mutual Life Insurance Company
711 High Street
Des Moines, Iowa 50392-0300
Attention: Dan Thornton"
3. REPRESENTATIONS BY LANDLORD. Landlord hereby represents to Tenant as
follows:
(a) Landlord is the current owner of the Premises, subject to various
easements and other title exceptions; provided, however, that such title
exceptions do not include any mortgages, deeds of trust or other security
instruments pursuant to which Landlord has encumbered the Premises.
-22-
<PAGE>
(b) Landlord has the power and authority to execute and deliver this
Amendment and to perform its obligations hereunder, and Landlord has taken
all necessary action to authorize the execution and delivery of this
Amendment. This Amendment has been duly authorized, executed and delivered
by Landlord and does not conflict with, contravene or constitute a default
under or breach of any (i) agreements, contracts or documents to which
Landlord is a party or by which Landlord is bound, or (ii) law, statute,
rule, ordinance, regulation or public or private restriction governing or
pertaining to Landlord. The execution and delivery of this Amendment by
Landlord requires no consent, approval, joinder or action by any other
party or entity (governmental, judicial or private) or by any other
officer, director, or committee or board of Landlord, which has not been
previously and properly obtained.
4. REPRESENTATIONS BY TENANT. Tenant hereby represents to Landlord as
follows:
(a) Neither Tenant nor, to the best of Tenant's knowledge, any portion of
the Premises, is in default with respect to any of the restrictions,
covenants, conditions or requirements of The Las Colinas Association or any
of the restrictions, covenants, conditions or requirements contained in the
Las Colinas Declaration recorded in Volume 73166, Page 1001, ET SEQ., that
certain Correction of Declaration dated August 8, 1977, recorded in Volume
77154, Page 1096, ET SEQ., that certain Second Correction to Declaration
dated June 19, 1979, recorded in Volume 79122, Page 0749, ET SEQ., that
certain Third Correction to Declaration dated March 1, 1982 recorded in
Volume 82071, Page 3244, ET SEQ., or the Supplementary Declaration No. 23
dated November 13, 1980, recorded in Volume 80245, Page 2756, ET SEQ., all
of such references being to the Real Property Records of Dallas County,
Texas. There are no delinquent monetary obligations, assessments or other
fees or amounts owed to the Association which have not been paid.
(b) Tenant has the power and authority to execute and deliver this
Amendment and to perform its obligations hereunder, and Tenant has taken
all necessary action to authorize the execution and delivery of this
Amendment. This Amendment has been duly authorized, executed and delivered
by Tenant and does not conflict with, contravene or constitute a default
under or breach of any (i) agreements, contracts or documents to which
Tenant is a
-23-
<PAGE>
party or by which Tenant is bound, (ii) law, statute, rule, ordinance,
regulation or public or private restriction governing or pertaining to
Tenant, or (iii) any litigation or legal or administrative proceedings
affecting Tenant, and is not adversely affected by any litigation or
legal or administrative proceedings affecting Tenant. The execution and
delivery of this Amendment by Tenant requires no consent, approval,
joinder or action by any other party or entity (governmental, judicial or
private) or by any other officer, director, committee or board of Tenant,
which has not been previously and properly obtained.
(c) Tenant is not currently the subject of or involved in, any insolvency
proceeding or bankruptcy case.
5. ADA COMPLIANCE. As of the date of this Amendment, Landlord assumes
the responsibility to evaluate the lobby areas, building access and egress, and
related sidewalks, driveways, ramps and curbs, and parking areas, escalators and
elevators of the Building for compliance with the Americans With Disabilities
Act of 1990 ("ADA") and to bring any of such areas which are not in compliance
with the requirements of the ADA into compliance as provided below. Any work or
alterations required by this Section will be performed by Landlord at Landlord's
sole cost and expense, in phases and at such times and in such manner as may be
reasonably determined by Landlord to be necessary so as to comply with
applicable laws. Notwithstanding anything in this Section to the contrary, (a)
Landlord's obligations hereunder are limited to Landlord's interest in and to
the Premises, (b) Tenant shall be responsible for the compliance with ADA of all
areas of the Premises except for the lobby areas, building access and egress,
and related sidewalks, driveways, ramps and curbs, and parking areas, escalators
and elevators of the Building, and (c) any liability concerning or necessity for
any additional alterations to any portion of the Premises under, the ADA or any
of the rules, regulations or guidelines promulgated thereunder, caused or
created by any alterations or additions to the Premises performed under Section
7b. of the Lease shall be the responsibility of Tenant and any additional
alterations so necessitated shall be the responsibility of and shall be
performed by Tenant, and Tenant agrees to be responsible for all of the costs
and liabilities with respect thereto, arising under the ADA or the rules,
regulations or guidelines promulgated thereunder.
6. BROKER'S FEE. Landlord and Tenant represent to each other that the
only brokers, finders or similar parties involved
-24-
<PAGE>
with respect to the execution of this Amendment are The Staubach Company,
representing Tenant, and Trammell Crow Dallas/Fort Worth, Inc., representing
Landlord, and Landlord and Tenant hereby indemnify and hold harmless each
other with respect to any fees or commissions claimed by any other brokers,
finders or similar parties. Landlord shall be responsible for paying to The
Staubach Company within thirty (30) days after the execution of this
Amendment, a fee for all services rendered in connection with the execution
of this Amendment, as specified in and as required by the terms of a separate
agreement pertaining thereto executed between Landlord and The Staubach
Company. In the event that Landlord fails to pay such brokerage commission
to The Staubach Company within said thirty (30) day period in accordance with
the terms of such separate agreement, Tenant shall have the right to pay such
amount to The Staubach Company as payment in full, and, upon Landlord's
receipt from The Staubach Company of written acknowledgment of such payment
in full by Tenant, to receive a credit for such amount paid against the
installment of Basic Rental next becoming due. Except for the fee to be paid
to The Staubach Company as specified in and as required by the terms of the
separate agreement pertaining thereto between Landlord and The Staubach
Company described in this Section 6, no other amounts shall be owed to The
Staubach Company by Landlord or payable out of any of the Tenant Allowance
Amounts in Connection with the execution of this Amendment and/or the other
documents executed contemporaneously herewith.
7. AGREEMENT REGARDING UTILITIES. Tenant hereby reaffirms its
obligations under that certain Agreement Regarding Utilities dated as of
September 17, 1992, originally executed between Landlord, Original Tenant,
and the Trustees of the Zale Employees Child Care Association Plan and Trust,
as amended by that certain First Amendment to Agreement Regarding Utilities
dated as of even date herewith executed between Landlord, Tenant, as
successor-in-interest of Original Tenant, and the Trustees of the Zale
Employees Child Care Association Plan and Trust (collectively, the "UTILITY
SEPARATION AGREEMENT"), and agrees and confirms that Tenant is responsible
for all obligations, duties and liabilities of Original Tenant thereunder as
if Tenant had been the original signatory to the Utility Separation Agreement
instead of Original Tenant.
8. MISCELLANEOUS.
(a) The terms and conditions hereof may not be modified, amended, altered
or otherwise affected except by instrument in writing executed by Landlord
and Tenant.
-25-
<PAGE>
(b) Except as extended and expressly modified hereby, the terms and
conditions of the Original Lease are and will remain in full force and
effect as originally written.
(c) This Amendment may be executed in several counterparts, and all so
executed will constitute one and the same instrument, binding on the
parties hereto, notwithstanding that the parties are not signatories to the
same counterpart.
(d) This Amendment shall be binding upon the parties hereto, their
successors and assigns, and shall inure to the benefit of the parties'
respective legal representatives, successors and assigns.
(e) If any provision of this Amendment is held to be illegal or
unenforceable, such fact shall not affect any other provision of this
Amendment, and this Amendment shall be construed as if such provision had
never been contained herein.
(f) The captions, headings and arrangements used in this Amendment are for
convenience only and do not in any way affect, limit, amplify or otherwise
modify the terms and provisions hereof.
(g) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES
APPLICABLE TO THE TRANSACTIONS IN TEXAS.
(h) This Amendment, the Original Lease and the Utilities Separation
Agreement, as amended by that certain First Amendment to Agreement
Regarding Utilities dated as of even date herewith, executed by Landlord,
Tenant and Trustees of the Zale Employees Child Care Association Plan and
Trust, contain the entire agreement between the parties hereto with respect
to the matters set forth herein. No variations, modifications or changes
hereof shall be binding upon any party unless set forth in a document duly
executed by the parties hereto. Except as expressly provided in this
Amendment, this Amendment completely supersedes and replaces all prior
written and oral communications between Landlord and Tenant and their
respective agents and representatives, all such communications being
entirely merged into this Amendment and extinguished for all purposes upon
the execution hereof and being of no further force or effect
-26-
<PAGE>
whatsoever.
(i) Contemporaneously with the execution of this Amendment, Landlord and
Tenant will execute and deliver that certain Memorandum of First Amendment
to Lease, dated as of February 2, 1996, to be recorded in the Real Property
Records of Dallas County, Texas, for the purpose of putting all parties on
notice of the existence of this Amendment.
EXECUTED TO BE EFFECTIVE AS OF THE DATE ABOVE FIRST WRITTEN.
TENANT: ZALE DELAWARE, INC.
a Delaware corporation
By: /S/ROBERT J. DINICOLA
-----------------------------
Name: ROBERT J. DINICOLA
---------------------------
Title: CHAIRMAN AND CEO
--------------------------
-27-
<PAGE>
LANDLORD: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY,
an Iowa corporation
By: /S/ STEVEN GRAVES
-----------------------------
Name: STEVEN GRAVES
---------------------------
Title: 2ND VICE PRESIDENT
--------------------------
COMMERCIAL REAL ESTATE LOANS
---------------------------------
By: /S/MARTY CHOPP
-----------------------------
Name: MARTY CHOPP
---------------------------
Title: ASSISTANT DIRECTOR
--------------------------
COMMERCIAL REAL ESTATE
---------------------------------
-28-
<PAGE>
ATTACHMENT I
Calculation of Basic Rental for Extension
Periods other than the First Extension Period
The Basic Rental to be paid by Tenant per annum for each Extension Period
other than the First Extension Period shall be the "Fair Market Rental Rate"
as hereinafter defined, and determined in accordance with the provisions of
this Attachment I.
The "FAIR MARKET RENTAL RATE" shall mean the market rental rate per annum
for the 5 year extension term for which such determination is being made, for
office space in comparable buildings of comparable age, quality, and
condition, and for space of comparable quality, size, utility, and location
(in the Greater Dallas/Fort Worth metropolitan area), taking into account all
relevant factors applicable to lease transactions in the market, including,
without limitation, parking rates which will be in effect, allowances, the
value of improvements in the premises, special use tenant improvements which
would not be removed at expiration, the basis for payment of taxes, operating
expenses and electricity, the length of term, the creditworthiness of Tenant,
the value attributable to rights of first offer or lack thereof, and all
other factors affecting rent in the market for new lease and lease renewal
transactions, all adjusted so as to reflect such items as of the beginning of
the period of time covered by the subject 5 year extension.
Landlord shall deliver to Tenant notice of the Fair Market Rental Rate
(the "FMR Notice") for the subject Extension Period on or before 18 months
before the expiration of the then current Term. If Landlord shall fail to
deliver to Tenant the FMR Notice 16 months before the expiration of the then
current Term, Tenant shall then also have the right to prepare and deliver
the FMR Notice (the party first delivering the FMR Notice being hereinafter
referred to as the "Notifying Party" and the party receiving such FMR Notice
being hereinafter referred to as the "Notice Recipient"). The FMR Notice
shall specify the Notifying Party's assessment of the Fair Market Rental Rate
for the Premises for the subject Extension Period. The Notifying Party shall
also specify in the FMR Notice the extent to which, if at all, allowances,
concessions or other tenant inducements for the subject Extension Period for
the Premises are included; however, Landlord shall not be required to give
any such allowances, concessions or other tenant inducements, but the
calculation of Fair Market Rental Rate for the Premises shall be
appropriately
-29-
<PAGE>
reduced by the value of such tenant inducements to the extent that they are
not included in the FMR Notice, if such tenant inducements would be
customarily granted to a comparable tenant for comparable space (as described
above) during the subject Extension Period.
If the Notice Recipient disagrees with the Notifying Party's assessment
of the Fair Market Rental Rate specified in a FMR Notice, then the Notice
Recipient shall so advise the Notifying Party in writing within 30 days after
delivery of such FMR Notice; otherwise, the rates set forth in such FMR
Notice shall be the Fair Market Rental Rate. If the Notice Recipient timely
delivers to the Notifying Party written notice that it disagrees with the
Notifying Party's assessment of the Fair Market Rental Rate, then Landlord
and Tenant shall meet to attempt to determine the Fair Market Rental Rate.
If Tenant and Landlord are unable to agree in writing on such Fair Market
Rental Rate within 15 business days after the Notice Recipient advises the
Notifying Party of its disagreement with the Notifying Party's assessment of
the Fair Market Rental Rate, then, within 10 days after such 15-day period
expires, Landlord and Tenant shall each appoint an independent MAI real
estate appraiser with at least 5 years commercial real estate appraisal
experience in the Greater Dallas/Fort Worth metropolitan area. The two
appraisers shall then, within 10 days after their designation, select an
independent third appraiser with like qualifications.
If the two appraisers are unable to agree on the third appraiser within
such 10 day period, either Landlord or Tenant, by giving 5 days prior written
notice thereof to the other, may submit the dispute as to the identity of a
third appraiser who meets the qualifications stated above to be settled by
arbitration in accordance with the "Expedited Procedures" and other
procedures of the Commercial Arbitration Rules of the American Arbitration
Association (the "AAA"), and any decision entered as a result of such
arbitration shall be final and binding as to the identity of the third
appraiser. Submission of three (3) copies of this Lease by Landlord or
Tenant at any regional office of the AAA shall constitute three (3) copies of
the "arbitration provisions of the contract" as required by the Commercial
Arbitration Rules. The costs and expenses of any such arbitration proceeding
shall be borne between Landlord and Tenant equally, and this agreement to
arbitrate shall be specifically enforceable.
If either Landlord or Tenant shall fail to timely appoint an appraiser as
provided above, such party shall forfeit its right
-30-
<PAGE>
to appoint an appraiser and the Fair Market Rental Rate shall be determined
solely by the qualified appraiser timely appointed by the other party,
without the necessity for any third appraiser being appointed.
If both Landlord and Tenant timely appoint an appraiser as provided
above, then within 30 days after the selection of the third appraiser
(whether by agreement or as a result of the arbitration process described
above), a majority of the appraisers shall determine the Fair Market Rental
Rate based upon the factors described in this Attachment I. If a majority of
the appraisers is unable to agree upon the Fair Market Rental Rate by such
time, the two closest appraisals shall be averaged and the average will be
the Fair Market Rental Rate.
If any appraiser fails to complete his or her appraisal within said
30-day period after selection of the third appraiser so that it may be used
in determining the Fair Market Rental Rate as provided above, the Fair Market
Rental Rate shall be determined by averaging the other two appraisals and no
portion of the uncompleted appraisal shall have any bearing thereon. Tenant
and Landlord shall each bear the entire cost of the appraiser selected by it
and shall share equally the cost of any third appraiser. The Fair Market
Rental Rate determined by the appraisal process described in this ATTACHMENT
I shall be binding upon the parties for all purposes.
-31-
<PAGE>
ATTACHMENT II
1. carpet installation
2. painting
3. wallcovering
4. installation and relocation of movable components and equipment which
are not attached to the Building
5. installation of energy efficient light fixtures, which (i) require no
rewiring, and (ii) cause no change in the outward appearance of the
Building
6. replacement of existing restroom and breakroom flooring with material
of the same type and of equal quality as that replaced
-32-
<PAGE>
EXHIBIT A
BEING a 15.221 acre tract of land situated in the Anton Kuhn Survey, Abstract
No. 729 in the City of Irving, Dallas County, Texas and being a part of a
30.91 acre tract of land conveyed to Zales Corporation by deed recorded in
Volume 80243, Page 2774 of the Deed Records of Dallas County, Texas, and
being more particularly described as follows:
COMMENCING at a 3/8 inch iron rod set at an angle point of the most Easterly
intersection of the North right-of-way line of Walnut Hill Lane (110 feet
wide at tangent) and the East right-of-way line of MacArthur Boulevard (100
feet wide at tangent);
THENCE along the North right-of-way line of said Walnut Hill Lane as follows:
North 89 degrees 39 minutes 20 seconds East a distance of 163.08 feet to a
5/8 inch iron rod set for corner;
South 84 degrees 52 minutes 06 seconds East a distance of 87.02 feet to a
5/8 inch iron rod set for corner;
North 05 degrees 07 minutes 54 seconds East a distance of 11.00 feet to a
3/8 inch iron rod set for corner;
South 84 degrees 32 minutes 06 seconds East a distance of 9.51 feet to a
5/8 inch iron rod set for corner;
North 89 degrees 59 minutes 20 seconds East a distance of 98.78 feet to an
"X" cut in concrete set for the POINT OF BEGINNING of the herein described
tract of land;
THENCE departing the North right-of-way line of said Walnut Hill Lane North
00 degrees 04 minutes 27 seconds East a distance of 92.02 feet to a 5/8 inch
iron rod set at the beginning of a curve to the right from which the radius
point bears South 89 degrees 55 minutes 33 seconds East a distance of 344.50
feet;
CONTINUE along said curve to the right through a central angle of 16 degrees
02 minutes 22 seconds and an ac length of 96.44 feet to an "X" cut in
concrete set for corner;
THENCE North 73 degrees 33 minutes 11 seconds West a distance of 32.00 feet
to a 5/8 inch iron rod set in the Southeasterly line of a 1.142 acre tract of
land as recorded in Volume 84065, page 3783 of the Deed Records of Dallas
County, Texas said iron rod
-33-
<PAGE>
EXHIBIT A
also being the beginning of a non-tangent curve to the right from which the
radius point bears South 73 degrees 53 minutes 11 seconds East a distance of
376.50 feet;
CONTINUING along said curve to the right through a central angle of 51
degrees 52 minutes 59 seconds and an arc length of 340.93 feet to a 5/8 inch
iron rod set for the most Easterly Southeast corner of said 1.142 acre tract
of land;
THENCE South 22 degrees 00 minutes 12 seconds East a distance of 10.00 feet
to a 5/8 inch iron rod set for corner, said iron rod being at the beginning
of a curve to the right from which the radius point bears South 22 degrees 00
minutes 12 seconds East a distance of 366.50 feet;
CONTINUING along said curve to the right through a central angle of 02
degrees 32 minutes 52 seconds and an arc length of 16.30 feet to an "X" cut
in concrete set for corner;
THENCE North 00 degrees 07 minutes 44 seconds East a distance of 90.04 feet
to a 3/8 inch iron rod set for corner;
THENCE North 89 degrees 46 minutes 23 seconds West a distance of 39.31 feet
to a 3/8 inch iron rod set for corner;
THENCE North 00 degrees 13 minutes 37 seconds East a distance of 181.10 feet
to a 5/8 inch iron rod set at the beginning of a curve to the right from
which the radius point bears North 30 degrees 19 minutes 39 seconds East a
distance of 57.02 feet;
CONTINUING along said curve to the right through a central angle of 59
degrees 57 minutes 30 seconds and an arc length of 39.68 feet to a 5/8 inch
iron rod set at the point of tangency;
THENCE North 00 degrees 17 minutes 27 seconds East a distance of 158.67 feet
to an "X" cut in concrete set for corner;
THENCE North 65 degrees 41 minutes 15 seconds East a distance of 40.61 feet
to an "X" cut in concrete set at the beginning of a curve to the right from
which the radius point bears South 24 degrees 18 minutes 46 seconds East a
distance of 876.50 feet;
CONTINUING along said curve to the right through a central angle of 34
degrees 14 minutes 41 seconds and an arc length of 523.87 feet to a 3/8 inch
iron rod set at the point of tangency;
-34-
<PAGE>
EXHIBIT A
THENCE South 80 degrees 04 minutes 03 seconds East a distance of 66.60 feet
to an "X" cut in concrete set for corner;
THENCE South 00 degrees 23 minutes 43 seconds West a distance of 12.00 feet
to an "X" cut in concrete set for corner;
THENCE South 80 degrees 01 minutes 01 seconds East a distance of 36.18 feet
to an "X" cut in concrete set for corner;
THENCE South 00 degrees 10 minutes 45 seconds West a distance of 167.74 feet
to a 3/8 inch iron rod set at the beginning of a curve to the right from
which the radius point bears North 89 degrees 49 minutes 15 seconds West a
distance of 60.17 feet;
CONTINUING along said curve to the right through a central angle of 57
degrees 40 minutes 20 seconds and an arc length of 60.57 feet to a 5/8 inch
iron rod set for corner;
THENCE South 00 degrees 03 minutes 41 seconds West a distance of 381.26 feet
to a 5/8 inch iron rod set for corner;
THENCE South 89 degrees 36 minutes 19 seconds East a distance of 10.37 feet
to a 5/8 inch iron rod set for corner;
THENCE South 00 degrees 03 minutes 41 seconds West a distance of 85.82 feet
to a 5/8 inch iron rod set at the beginning of a curve to the right from
which the radius point bears South 59 degrees 44 minutes 26 seconds West a
distance of 55.79 feet;
CONTINUING along said curve to the right through a central angle of 30
degrees 03 minutes 23 seconds and an arc length of 29.27 feet to a 5/8 inch
iron rod set at the point of tangency;
THENCE South 00 degrees 12 minutes 11 seconds East a distance of 255.72 feet
to an "X" cut in concrete set in the North right-of-way line of said Walnut
Hill Lane;
THENCE along the North right-of-way line of said Walnut Hill Lane as follows:
North 89 degrees 55 minutes 33 seconds West a distance of 204.60 feet to a
5/8 inch iron rod set for corner;
South 00 degrees 04 minutes 27 seconds West a distance of 11.00 feet to an
"X" cut in concrete set for corner;
-35-
<PAGE>
EXHIBIT A
North 89 degrees 33 minutes 33 seconds West a distance of 405.00 feet to a
3/8 inch iron rod set for corner;
North 00 degrees 04 minutes 27 seconds East a distance of 11.00 feet to a
5/8 inch iron rod set for corner;
North 89 degrees 33 minutes 33 seconds West a distance of 130.00 feet to a
5/8 inch iron rod set for corner;
South 89 degrees 52 minutes 20 seconds West a distance of 16.83 feet to the
POINT OF BEGINNING and containing within these metes and bounds 15.221
acres of 663,030 square feet of land more or less and being subject to
easements of record.
-36-
<PAGE>
EXHIBIT 11
ZALE CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
(amounts in thousands except per share amounts)
YEAR ENDED JULY 31,
-------------------------
1996 1995 1994
------- ------- -------
Primary:
Net earnings applicable to common stock $43,898 $31,470 $21,557
------- ------- -------
------- ------- -------
Shares
Weighted average number of common shares
outstanding 35,068 34,969 34,965
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 648 382 - - -
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 749 498 - - -
------- ------- -------
Weighted average number of common shares
outstanding as adjusted 36,465 35,849 34,965
------- ------- -------
------- ------- -------
Net earnings per common share $ 1.20 $ 0.88 $ 0.62
------- ------- -------
------- ------- -------
Fully Diluted:
Net earnings applicable to common stock $43,898 31,470 $21,557
------- ------- -------
------- ------- -------
Shares
Weighted average number of common shares
outstanding 35,068 34,969 34,965
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 720 559 - - -
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 830 1,037 -
------- ------- -------
Weighted average number of common shares
outstanding as adjusted 36,618 36,565 34,965
------- ------- -------
------- ------- -------
Net earnings per common share $ 1.20 $ 0.86 $ 0.62
------- ------- -------
------- ------- -------
<PAGE>
EXHIBIT 13
ZALE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selected Financial Data
<TABLE>
----------------------------------------------
Pro Forma(1)
Year Four Mos.
Ended Ended
Year Ended July 31, July 31, July 31, Year Ended March 31,
---------------------------------- ---------- ---------- ----------------------
(amounts in thousands except per share amounts) 1996 1995 1994 1993 1993 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
|(unaudited)
<S> <C> <C> <C> |<C> <C> <C> <C>
INCOME STATEMENT DATA: |
- ---------------------------------------------- |
Net sales $1,137,377 $1,036,149 $ 920,307 |$ 956,447 $ 244,539 $ 980,832 $1,156,455
Cost of sales 576,764 524,010 460,060 | 533,080 127,484 534,420 663,707
---------- ---------- ---------- |---------- ---------- ---------- ----------
Gross margin 560,613 512,139 460,247 | 423,367 117,055 446,412 492,748
Selling, general and administrative expenses 457,371 434,101 401,744 | 402,116 119,786 418,133 575,592
Depreciation and amortization expense (credit) 7,538 381 (4,385)| 26,459 8,973 26,316 50,899
Unusual items (2) (4,486) --- --- | 20,200 --- 20,200 574,336
Reorganization and restructure costs --- --- --- | 143,690 47,879 137,937 175,659
Net reduction of reserves for preacquisition |
contingencies --- --- --- | --- --- --- 5,566
Gain on sale of assets --- --- --- | --- --- --- 2,667
---------- ---------- ---------- |---------- ---------- ---------- ----------
Operating earnings (loss) 100,190 77,657 62,888 | (169,098) (59,583) (156,174) (875,505)
Interest expense, net 30,102 29,837 28,142 | 23,508 6,623 24,829 84,885
---------- ---------- ---------- |---------- ---------- ---------- ----------
|
Earnings (loss) before fresh-start revaluation, |
income taxes, extraordinary items and |
cumulative effect of accounting change 70,088 47,820 34,746 | (192,606) (66,206) (181,003) (960,390)
Fresh-start revaluation --- --- --- | (246,236) (246,236) --- ---
---------- ---------- ---------- |---------- ---------- ---------- ----------
|
Earnings (loss) before income taxes, |
extraordinary items and cumulative |
effect of accounting change 70,088 47,820 34,746 | (438,842) (312,442) (181,003) (960,390)
Income taxes 25,094 16,350 11,621 | --- --- --- ---
---------- ---------- ---------- |---------- ---------- ---------- ----------
|
Earnings (loss) before extraordinary items and |
cumulative effect of accounting change $ 44,994 $ 31,470 $ 23,125 |$ (438,842) $ (312,442) $ (181,003) $ (960,390)
---------- ---------- ---------- |---------- ---------- ---------- ----------
---------- ---------- ---------- |---------- ---------- ---------- ----------
|
Net earnings (loss) $ 43,898 $ 31,470 $ 21,557 |$ 664,991 $ 791,391 $ (181,003) $ (960,390)
---------- ---------- ---------- |---------- ---------- ---------- ----------
---------- ---------- ---------- |---------- ---------- ---------- ----------
Earnings per common share (3):
Primary:
Earnings before extraordinary item $ 1.23 $ 0.88 $ 0.66
Net earnings $ 1.20 $ 0.88 $ 0.62
Assuming full dilution:
Earnings before extraordinary item $ 1.23 $ 0.86 $ 0.66
Net earnings $ 1.20 $ 0.86 $ 0.62
Weighted average number of common
shares outstanding (3):
Primary 36,465 35,849 34,965
Assuming full dilution 36,618 36,565 34,965
BALANCE SHEET DATA:
- ----------------------------------------------
Working capital $ 775,500 $ 781,802 $ 763,216 $ 676,677 $ 676,677 |$ 961,671 $ 809,417
Total assets 1,163,811 1,110,708 1,112,647 1,013,523 1,013,523 | 1,252,448 1,088,060
Total debt 404,354 443,624 447,478 355,125 355,125 | 284,554 ---
Total stockholders' investment (deficit) 476,258 391,890 342,740 311,070 311,070 | (791,391) (610,388)
|
STORES OPEN AT END OF PERIOD 1,195 1,181 1,231 1,265 1,265 | 1,265 1,521
</TABLE>
(1) Income statement data in this column represents historical income
statement data for the twelve months ended July 31, 1993, which includes the
four month period ended July 31, 1993 and the eight month period ended
March 31, 1993.
(2) Unusual items consist of reorganization recoveries of ($4,486) for the
year ended July 31, 1996, and provisions for valuation of assets of $20,200
as of the pro forma year ended July 31, 1993 and for the year ended March 31,
1993, and $574,336 for the year ended March 31, 1992.
(3) Earnings (loss) per share is not presented in the "Predecessor" columns
because such presentation would not be meaningful. The old stock, which
was not publicly traded, was canceled under the Plan of Reorganization and
the new stock was not issued until July 30, 1993 (the "Effective Date").
1
<PAGE>
This discussion and analysis should be read in conjunction with "Selected
Financial Data" and Zale Corporation's (the "Company") Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report. The
"Selected Financial Data" presented are derived from the audited Consolidated
Financial Statements of the Company, unless otherwise indicated.
GENERAL
On July 30, 1993 (the "Effective Date"), the Company completed a
comprehensive restructuring of its capital structure through implementation
of its Plan of Reorganization as confirmed on May 20, 1993 by the bankruptcy
court. As a result of the restructuring transaction and the implementation
of fresh-start reporting, the Company's results of operations subsequent to
July 31, 1993 are not comparable to results of operations for prior periods.
Fresh-start reporting resulted in a revaluation of the Company's assets and
liabilities as of the Effective Date to reflect allocation of the
reorganization value based upon the estimated fair market values of those
assets and liabilities. The most significant effects of fresh-start
reporting on results of operations are the reduction in amortization and
depreciation expense from the write-off of substantially all the Company's
fixed assets and the amortization of the "Excess of Revalued Net Assets Over
Stockholders' Investment."
On December 13, 1993, the Board of Directors of the Company authorized the
change in the Company's fiscal year end to July 31. Such change was
effective as of April 1, 1994. To facilitate a comparison of the Company's
operating performance for the years ended July 31, 1996, 1995 and 1994, the
four months ended July 31, 1993 and the years ended March 31, 1993 and 1992,
the results of operations include a presentation of historical income
statement data for twelve months ended July 31, 1993. This includes the four
month period ended July 31, 1993 and the eight month period ended March 31,
1993. This twelve month period ended July 31, 1993 is referred to as "pro
forma year ended July 31, 1993" and is unaudited.
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's audited consolidated statements of operations expressed as a
percentage of net sales and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in
this Annual Report.
Year Ended July 31,
--------------------------
1996 1995 1994
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 50.7 50.6 50.0
------ ------ ------
Gross margin 49.3 49.4 50.0
Selling, general and administrative expenses 40.2 41.9 43.7
Depreciation and amortization expense (credit) 0.7 --- (0.5)
Unusual items -- reorganization recoveries (0.4) --- ---
------ ------ ------
Operating earnings 8.8 7.5 6.8
Interest expense, net 2.6 2.9 3.0
------ ------ ------
Earnings before income taxes and
extraordinary items 6.2 4.6 3.8
Income taxes 2.2 1.6 1.3
------ ------ ------
Earnings before extraordinary items 4.0 3.0 2.5
Extraordinary items:
Loss on early extinguishment of debt,
net of income taxes (0.1) --- (0.2)
------ ------ ------
Net earnings 3.9% 3.0% 2.3%
------ ------ ------
------ ------ ------
2
<PAGE>
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
NET SALES. Net Sales for the year ended July 31, 1996 increased by
$101.2 million to $1,137.4 million, a 9.8 percent increase compared to the
previous year. Sales for stores open for comparable periods increased by 9.9
percent. The sales increase primarily resulted from improved merchandise
assortments, successful product promotions during the holiday and non-holiday
periods and strong store level execution.
GROSS MARGIN. Gross Margin as a percentage of net sales decreased by
0.1 percent. The Company achieved this result while adhering to its
merchandise strategy which included a transition in sales mix to more key
item merchandise as well as reducing discontinued merchandise inventory
during the current year. Key item merchandise produces higher sales volumes
but has a slightly lower gross margin rate, on average, than other
merchandise. The LIFO provision was $2.4 million and $2.8 million for the
years ended July 31, 1996 and 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.7 percent as a percentage of net sales.
Store payroll expense decreased 1.0 percent as a percentage of net sales as a
result of focused productivity measures. Other store expenses decreased 0.9
percent of net sales principally related to store occupancy costs, which
increased at a lower rate than net sales. Corporate expenses decreased by
0.9 percent of net sales principally as a result of lower costs for payroll,
outside services and insurance. The current year demonstrates the Company's
ability to leverage its fixed store and corporate operating expenses while
increasing sales in the stores. These improvements were partially offset by
an increased provision for chargeoffs of customer accounts resulting from
general economic conditions.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION EXPENSE,
EXTRAORDINARY ITEM AND UNUSUAL ITEMS. Earnings Before Interest, Taxes,
Depreciation and Amortization Expense, Extraordinary Item and Unusual Items
were $103.2 million and $78.0 million for the years ended July 31, 1996 and
1995, respectively, an increase of 32.3 percent.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $7.2 million. Amortization of the Excess of Revalued Net
Assets Over Stockholders' Investment was $5.9 million in both periods.
However, depreciation and amortization of property and equipment increased
from $6.2 million to $13.1 million as new assets have been purchased in
connection with the Company's store expansion and remodeling programs.
UNUSUAL ITEMS - REORGANIZATION RECOVERIES. Unusual Items -
Reorganization Recoveries were $4.5 million for the year ended July 31, 1996.
There were no unusual items for the prior year. See the note to the
Consolidated Financial Statements "Unusual Items - Reorganization Recoveries".
INTEREST EXPENSE, NET. Interest Expense, Net was $30.1 million and
$29.8 million for the years ended July 31, 1996 and 1995, respectively.
Interest expense primarily remained constant due to the early redemption of
the $60.0 million 11.0 Percent Second Priority Senior Secured Notes on
September 11, 1995 partially offset by the increase in interest expense due
to higher borrowings under the Revolving Credit Agreement and a reduction in
interest income due to lower average balances in short-term investments.
Also, the prior year included $1.2 million of interest income on funds
escrowed for previous bankruptcy matters.
INCOME TAXES. The income tax expense for the years ended July 31, 1996
and 1995 was $24.5 million and $16.4 million, respectively, reflecting an
effective tax rate of 35.8 percent and 34.2 percent, respectively. As a
result of guidelines regarding accounting for income taxes of companies
utilizing fresh-start reporting, the Company reports earnings on a
fully-taxed basis even though it does not expect to pay any significant
income taxes for the near future. The Company will realize the cash benefit
from utilization of the tax net operating loss carryforward ("NOL") (after
limitations) against current and future tax liabilities. As of July 31,
1996, the Company had a NOL (after limitations) of approximately $324
million.
EXTRAORDINARY ITEM. The extraordinary charge of $1.1 million, net of an
income tax benefit of $0.6 million, for the year ended July 31, 1996 was the
result of the early redemption of the $60.0 million 11.0 Percent Second
Priority Senior Secured Notes. See the note to the Consolidated Financial
Statements "Long-Term Debt".
3
<PAGE>
YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1994
NET SALES. Net Sales for the year ended July 31, 1995 increased by
$115.8 million to $1,036.1 million, a 12.6 percent increase compared to the
previous year. The increase was primarily the result of new management's
implementation of a key item merchandising strategy, product-focused
marketing and improved execution in the stores. Sales for stores open for
comparable periods increased by approximately 12.8 percent.
GROSS MARGIN. Gross Margin as a percentage of net sales decreased by
0.6 percent from higher markdowns for clearance of discontinued merchandise.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses, which increased by $32.4 million, were 41.9 percent
and 43.7 percent of sales for the years ended July 31, 1995 and 1994,
respectively. Store expenses decreased by 1.7 percent of sales as store
occupancy costs and payroll increased at a lower rate than sales. Promotional
expenditures decreased as both a percentage of sales and in total dollars.
Corporate expenses decreased by 1.2 percent of sales principally as a result
of lower costs for management information systems and insurance. These
improvements were offset by a decrease in net credit income principally from
reduced finance charge income on a lower average receivables portfolio in
relation to the prior year. The reduction in the average receivables
portfolio resulted from the decrease of accounts from significant store
closings in 1992 and 1993, coupled with faster cash collections of customer
balances than in the prior year.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION EXPENSE
(CREDIT) AND EXTRAORDINARY ITEM. Earnings Before Interest, Taxes,
Depreciation and Amortization Expense (Credit) and Extraordinary Item were
$78.0 million and $58.5 million for the years ended July 31, 1995 and 1994,
respectively, an increase of 33.4 percent.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $4.8 million. Amortization of the Excess of Revalued Net
Assets Over Stockholders' Investment was $5.9 million in both periods.
However, depreciation and amortization of property and equipment increased
from $1.4 million to $6.2 million as new assets have been purchased since
the fresh-start reporting write-off of substantially all fixed assets of the
Company at July 31, 1993.
INTEREST EXPENSE, NET. Interest Expense, Net was $29.8 million
and $28.1 million for the years ended July 31, 1995 and 1994,
respectively. The increase was principally due to the refinancing of the
Receivables Securitization Facility in July 1994 at a higher amount,
partially offset by an increase in investment income. Fiscal year 1995 also
included $1.2 million of interest income on funds escrowed for bankruptcy
matters.
INCOME TAXES. Income Taxes for the years ended July 31, 1995 and 1994
were $16.4 million and $10.6 million, respectively, reflecting an effective
tax rate of 34.2 percent and 32.9 percent, respectively. As of July 31,
1995, the Company had a NOL (after limitations) of approximately $378 million.
EXTRAORDINARY ITEM. The extraordinary charge of $1.6 million, net of an
income tax benefit of $1.0 million, for the year ended July 31, 1994 was the
result of early redemption of the Diamond Funding Corp. Receivables Notes
upon consummation of a new securitization program. See the note to the
Consolidated Financial Statements "Long-Term Debt".
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory
and receivables growth, capital expenditures primarily for renovations and
new store growth, and debt service. As of July 31, 1996, the Company had
cash and cash equivalents of $50.0 million, including $31.5 million
restricted primarily by the collateral requirements under the Receivables
Securitization Facility established by the Company in July 1994 (the
"Receivables Securitization Facility"). The retail jewelry business is
highly seasonal, with a significant proportion of sales and operating income
being generated in November and December of each year. Approximately 39.7
percent and 41.2 percent of the Company's annual sales were made during the
three months ended January 31, 1996 and 1995, respectively, which includes
the Christmas selling season. The Company's working capital requirements
fluctuate during the year, increasing substantially during the fall season as
a result of higher planned seasonal inventory levels.
4
<PAGE>
Zale Funding Trust, a limited purpose Delaware business trust for the
Company formed to finance customer accounts receivable, issued approximately
$380.6 million, net of discount, aggregate principal amount of Receivables
Backed Notes ("ZFT Receivables Notes") in July 1994 pursuant to the
Receivables Securitization Facility. The ZFT Receivables Notes are secured
by a lien on all customer accounts receivable and mature in July 1999.
On August 11, 1995, the Company entered into a three year revolving
credit agreement (the "Revolving Credit Agreement") which provides for
revolving credit loans in an aggregate amount of up to $150.0 million, with a
$30.0 million sublimit for letters of credit. At no time may the total
amount of loans outstanding under the Revolving Credit Agreement exceed the
lesser of the total commitment of $150.0 million and a defined borrowing base
($204.1 million at July 31, 1996, based on a fixed percentage of eligible
inventory, as defined).
The Revolving Credit Agreement was structured to increase the Company's
flexibility through less restrictive loan covenants, lower collateral
requirements and a lower fee and interest rate structure than its earlier
agreement. The increased flexibility allowed in the new Revolving Credit
Agreement combined with the increased liquidity from the Receivables
Securitization Facility enabled the Company to redeem its 11.0 percent notes,
redeem the Series B Warrants and continue to invest in its capital
improvement and store growth initiatives.
Approximately $60.0 million of Second Priority Senior Secured Notes due
2000 bearing interest at 11.0 percent per annum were issued by the Company
upon its emergence from bankruptcy. These notes were redeemed on September
11, 1995 utilizing cash on hand. Upon redemption, the Company paid an early
redemption premium and other costs associated with the redemption of
approximately $1.7 million. An extraordinary charge of $1.1 million, net of
an income tax benefit of $0.6 million, was recorded in the first quarter of
fiscal year 1996. See the note to the Consolidated Financial Statements
"Long-Term Debt".
On August 31, 1995, Zale redeemed the Series B Warrants and acquired all
Swarovski International Holding, A.G. ("Swarovski") rights, title and
interest under the warrant agreement and paid $9.3 million to Swarovski in
consideration of the redemption. As a result of this, the Series B Warrants
were canceled and are no longer outstanding. See the note to the
Consolidated Financial Statements "Capital Stock".
The Company just completed the second year of a three year store
remodeling and refurbishment program. This program will enable the Company
to enhance its stores in certain key markets relative to its competition.
Additionally, the Company plans significant upgrades to its management
information systems over the next several years. The Company anticipates
spending approximately $61.0 million on capital expenditures in fiscal year
1997. Capital expenditures are typically scheduled for the late spring
through early fall in order to have new or renovated stores ready for the
Christmas selling season. During the year ended July 31, 1996, the Company
made approximately $48.8 million in capital expenditures, a significant
portion of which was used to enhance the appearance of 91 stores and to open
44 new stores. In addition, on January 18, 1996, the Company acquired
Karten's Jewelers, Inc., a 20-store chain. The addition of Karten's
significantly increased the Company's presence in the Northeast. By the 1996
Christmas selling season, these stores will begin transitioning to the Zales
name. The Company acquired all the outstanding shares of common stock for
$3.0 million in cash and assumption of all liabilities. In fiscal years 1997
and 1998, the Company intends to add approximately 200 new locations through
new store openings or strategic acquisitions.
There has been an increase of approximately $82 million, or 22 percent,
in owned merchandise inventories at July 31, 1996 compared to the balance at
July 31, 1995. The increase in inventory levels is primarily a result of
improving the depth and breadth of merchandise available in the stores to
accommodate increasing sales and to a lesser extent the Company shifting its
merchandise mix to reduce the amount of consigned merchandise. As a result
of the above, the Company had outstanding borrowings of $23.6 million under
the Revolving Credit Agreement at July 31, 1996, compared to no such
borrowings at July 31, 1995.
Future liquidity will also be enhanced to the extent that the Company is
able to realize the cash benefit from utilization of its NOL against current
and future tax liabilities. The cash benefit realized in fiscal 1996 was
approximately $23 million. Guidelines regarding accounting for income taxes
of companies utilizing fresh-start reporting, require the Company to report
earnings on a fully-taxed basis even though it does not expect to pay any
significant income taxes for the near future. As of July 31, 1996, the
Company has a NOL (after limitations) of approximately $324 million, which
represents up to $126 million in future tax benefits. The utilization of
this asset is subject to limitations. The most restrictive is the Internal
Revenue Code Section 382 annual limitation. The NOL will begin to expire in
fiscal year 2002 but can be utilized through 2009.
5
<PAGE>
Management believes that operating cash flow, amounts available under
the Revolving Credit Agreement and amounts available under the Receivables
Securitization Facility should be sufficient to fund the Company's current
operations, debt service and currently anticipated capital expenditure
requirements.
This Management's Discussion and Analysis contains forward-looking
statements, including statements concerning expected capital expenditures to
be made in the future, expected significant upgrades to its management
information systems over the next several years, the addition of new
locations through either new store openings or strategic acquisitions, and
the adequacy of the Company's sources of cash to finance its current and
future operations. These forward-looking statements involve a number of risks
and uncertainties. In addition to the factors discussed above, among other
factors that could cause actual results to differ materially are the
following: the impact of the general economic conditions due to the fact that
jewelry purchases are discretionary for consumers and may be affected by
adverse trends in the general economy; competition in the jewelry business
which is fragmented; the variability of quarterly results and seasonality of
the retail business; the ability to improve productivity in existing stores
and to increase comparable store sales; the availability of alternate sources
of merchandise supply in the case of an abrupt loss of any significant
supplier during the three month period leading up to the Christmas season;
the dependence on key personnel who have been hired or retained since
bankruptcy; the changes in regulatory requirements which are applicable to
the Company's business; management's decisions to pursue new product lines
which may involve additional costs; and the risk factors listed from time to
time in the Company's Securities and Exchange Commission reports, including
but not limited to, its Annual Report on Form 10-K for the year ended July
31, 1996.
INFLATION
In management's opinion, changes in Net Sales and Net Earnings that have
resulted from inflation and changing prices have not been material. There is
no assurance, however, that inflation will not materially affect the Company
in the future.
6
<PAGE>
MANAGEMENT'S REPORT
To the Stockholders of Zale Corporation:
The integrity and consistency of the consolidated financial statements
of Zale Corporation (the "Company"), which were prepared in accordance with
generally accepted accounting principles, are the responsibility of
management and properly include some amounts that are based upon estimates
and judgments.
The Company maintains a system of internal accounting controls, which is
supported by a program of internal audits with appropriate management
follow-up action, to provide reasonable assurance, at appropriate cost, that
the Company's assets are protected and transactions are properly recorded.
Additionally, the integrity of the financial accounting system is based on
careful selection and training of qualified personnel, organizational
arrangements which provide for appropriate division of responsibilities and
communication of established written policies and procedures.
The consolidated financial statements of the Company have been audited
by Arthur Andersen LLP, independent public accountants. Their report
expresses their opinion as to the fair presentation, in all material
respects, of the financial statements and is based upon their independent
audit conducted in accordance with generally accepted auditing standards.
The Audit Committee, composed solely of outside directors, meets
periodically with the independent public accountants, the internal auditors
and representatives of management to discuss auditing and financial reporting
matters. In addition, the independent public accountants meet periodically
with the Audit Committee without management representatives present and have
free access to the Audit Committee at any time. The Audit Committee is
responsible for recommending to the Board of Directors the engagement of the
independent public accountants, which is subject to stockholder approval, and
the general oversight review of management's discharge of its
responsibilities with respect to the matters referred to above.
Robert J. DiNicola Merrill J. Wertheimer
Chairman of the Board and Executive Vice President - Finance and
Chief Executive Officer Chief Financial Officer
Sue E. Gove
Senior Vice President -
Treasurer
7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Zale Corporation:
We have audited the accompanying consolidated balance sheets of Zale
Corporation (a Delaware corporation) and subsidiaries as of July 31, 1996 and
1995, and the related consolidated statements of operations, cash flows, and
stockholders' investment for each of the three years in the period ended July
31, 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 Zale
Corporation and subsidiaries as of July 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended July 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Dallas, Texas
September 9, 1996
8
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1996 1995 1994
---------- ---------- --------
Net Sales $1,137,377 $1,036,149 $920,307
Cost of Sales 576,764 524,010 460,060
---------- ---------- --------
Gross Margin 560,613 512,139 460,247
Selling, General and Administrative
Expenses 457,371 434,101 401,744
Depreciation and Amortization Expense
(Credit) 7,538 381 (4,385)
Unusual Items -- Reorganization Recoveries (4,486) --- ---
---------- ---------- --------
Operating Earnings 100,190 77,657 62,888
Interest Expense, Net 30,102 29,837 28,142
---------- ---------- --------
Earnings Before Income Taxes and
Extraordinary Items 70,088 47,820 34,746
Income Taxes 25,094 16,350 11,621
---------- ---------- --------
Earnings Before Extraordinary Items 44,994 31,470 23,125
Extraordinary Items:
Loss on Early Extinguishment of Debt,
Net of Income Taxes of $(603) and
$(1,045), respectively (1,096) --- (1,568)
---------- ---------- --------
Net Earnings $ 43,898 $ 31,470 $ 21,557
---------- ---------- --------
---------- ---------- --------
Earnings Per Common Share:
Primary:
Earnings Before Extraordinary Items $ 1.23 $ 0.88 $ 0.66
Extraordinary Items (0.03) --- (0.04)
---------- ---------- --------
Net Earnings $ 1.20 $ 0.88 $ 0.62
---------- ---------- --------
---------- ---------- --------
Assuming full dilution:
Earnings Before Extraordinary Items $ 1.23 $ 0.86 $ 0.66
Extraordinary Items (0.03) --- (0.04)
---------- ---------- --------
Net Earnings $ 1.20 0.86 $ 0.62
---------- ---------- --------
---------- ---------- --------
Weighted Average Number of Common
Shares Outstanding:
Primary 36,465 35,849 34,965
Assuming full dilution 36,618 36,565 34,965
See Notes to the Consolidated Financial Statements.
9
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
JULY 31, JULY 31,
1996 1995
---------- ----------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 50,046 $ 154,905
Customer Receivables, Net 419,877 396,380
Merchandise Inventories 457,862 375,413
Other Current Assets 25,535 23,859
---------- ----------
Total Current Assets 953,320 950,557
Property and Equipment, Net 108,254 71,487
Other Assets 45,737 39,864
Deferred Tax Asset, Net 56,500 48,800
---------- ----------
Total Assets $1,163,811 $1,110,708
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 26 $ 2,907
Accounts Payable and Accrued Liabilities 145,794 117,048
Deferred Tax Liability, Net 32,000 48,800
---------- ----------
Total Current Liabilities 177,820 168,755
Non-current Liabilities 34,627 32,670
Long-term Debt 404,328 440,717
Excess of Revalued Net Assets Over Stockholders'
Investment, Net 70,778 76,676
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- ---
Common Stock 352 350
Additional Paid-In Capital (Includes Stock Warrants) 383,042 337,534
Unrealized Gains on Securities 1,013 979
Accumulated Earnings 91,851 53,027
---------- ----------
Total Stockholders' Investment 476,258 391,890
---------- ----------
Total Liabilities and Stockholders' Investment $1,163,811 $1,110,708
---------- ----------
---------- ----------
See Notes to the Consolidated Financial Statements.
10
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 43,898 $ 31,470 $ 21,557
Non cash expenses, gains and losses:
Depreciation and amortization
expense (credit) 8,904 1,498 (4,186)
Utilization of pre-emergence net
operating loss 23,208 16,204 10,439
Other adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Extraordinary loss on early extinguishment
of debt 1,699 --- 2,613
Changes in:
Customer receivables, net (22,323) 1,506 27,214
Merchandise inventories (74,739) 25,621 (19,609)
Other current assets (1,253) (2,385) 8,148
Other assets (768) (55) 6,360
Accounts payable and accrued liabilities 18,014 (27,752) (43,279)
Non-current liabilities 1,957 (203) 4,885
-------- -------- ---------
Net Cash Provided by (Used in) Operating
Activities (1,403) 45,904 14,142
-------- -------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (48,790) (42,295) (27,838)
Dispositions of property and equipment 829 1,987 63
Acquisition, net of cash acquired (2,547) --- ---
Other (340) (205) 103
-------- -------- ---------
Net Cash Used in Investing Activities (50,848) (40,513) (27,672)
-------- -------- ---------
</TABLE>
See Notes to the Consolidated Financial Statements.
11
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(amounts in thousands)
<TABLE>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt $ (66,608) $ (3,896) $ (3,630)
Net borrowings under revolving credit
agreement 23,600 --- ---
Payment for redemption of Series B Warrants (9,264) --- ---
Borrowings under accounts receivable
securitization facility --- --- 380,551
Repayments of prior accounts receivable
securitization facility --- --- (284,700)
Payment of prepayment penalty and other
related costs on early extinguishment of debt (1,699) --- (2,613)
Debt issue and capitalized financing costs (629) (461) (5,400)
Proceeds from exercise of stock options
and warrants 1,992 171 ---
Other --- --- (243)
----------- ---------- ----------
Net Cash Provided by (Used in) Financing
Activities (52,608) (4,186) 83,965
----------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents (104,859) 1,205 70,435
Cash and Cash Equivalents at Beginning of Period 154,905 153,700 83,265
----------- ---------- ----------
Cash and Cash Equivalents at End of Period $ 50,046 $ 154,905 $ 153,700
----------- ---------- ----------
----------- ---------- ----------
Supplemental cash flow information:
Interest paid $ 35,020 $ 36,443 $ 27,278
Interest received $ 3,233 $ 7,641 $ 1,724
Income taxes paid (net of refunds received) $ 1,653 $ 568 $ 470
Restricted cash - at period end date $ 31,510 $ 51,422 $ 58,528
</TABLE>
See Notes to the Consolidated Financial Statements.
12
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(amounts in thousands)
<TABLE>
NUMBER OF ADDITIONAL UNREALIZED
COMMON SHARES COMMON PAID-IN GAINS (LOSSES) ACCUMULATED
OUTSTANDING STOCK CAPITAL ON SECURITIES EARNINGS TOTAL
------------- ------ ---------- -------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
POST-EMERGENCE -
Balance, July 31, 1993
(Fresh-Start Reporting Date) 34,972 $ 350 $310,720 $ --- $ --- $ 311,070
Net Earnings --- --- --- --- 21,557 21,557
Utilization of Pre-Emergence
Net Operating Loss --- --- 10,439 --- --- 10,439
Treasury Stock Acquired (7) --- --- --- --- ---
Unrealized Loss on Securities --- --- --- (326) --- (326)
-------- ---- -------- ------ ------- ---------
Balance, July 31, 1994 34,965 350 321,159 (326) 21,557 342,740
Net Earnings --- --- --- --- 31,470 31,470
Utilization of Pre-Emergence
Net Operating Loss --- --- 16,204 --- --- 16,204
Exercise of Stock Options
and Warrants 19 --- 171 --- --- 171
Treasury Stock Acquired (1) --- --- --- --- ---
Unrealized Gain on Securities --- --- --- 1,305 --- 1,305
-------- ---- -------- ------ ------- ---------
Balance, July 31, 1995 34,983 350 337,534 979 53,027 391,890
Net Earnings --- --- --- --- 43,898 43,898
Purchase of B Warrants --- --- (4,190) --- (5,074) (9,264)
Utilization of Pre-Emergence
Net Operating Loss --- --- 23,208 --- --- 23,208
Change in Estimate of
Realization of Deferred
Income Tax Asset --- --- 24,500 --- --- 24,500
Exercise of Stock Options
and Warrants 216 2 1,990 --- --- 1,992
Unrealized Gain on Securities --- --- --- 34 --- 34
-------- ---- -------- ------ ------- ---------
Balance, July 31, 1996 35,199 $ 352 $383,042 $ 1,013 $ 91,851 $476,258
-------- ---- -------- ------ ------- ---------
-------- ---- -------- ------ ------- ---------
</TABLE>
See Notes to the Consolidated Financial Statement
13
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS include the accounts of
Zale Corporation and its wholly-owned subsidiaries (the "Company" or "Zale").
The Company consolidated substantially all its retail operations into Zale
Delaware, Inc. ("ZDel") at the time of emergence from bankruptcy. ZDel is the
parent company for several subsidiaries, including three that are engaged
primarily in providing credit insurance to credit customers of the Company. All
significant intercompany transactions have been eliminated. On January 18,
1996, the Company acquired Karten's Jewelers, Inc., ("Karten's") a privately
owned chain of 20 fine jewelry stores. The Company acquired all the outstanding
shares of common stock for $3.0 million in cash and assumption of all
liabilities.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS includes cash on hand, deposits in banks and
short-term marketable securities at varying interest rates with maturities of
three months or less. The carrying amount approximates fair value because of
the short maturity of those instruments. At July 31, 1996, $31.5 million was
restricted of which $30.3 million was restricted based on collateral
requirements under the Receivables Securitization Facility.
CUSTOMER RECEIVABLES are classified as current assets, including amounts
which are due after one year, in accordance with industry practices. The
allowance for doubtful accounts was $51.4 million and $42.6 million at July 31,
1996 and 1995, respectively. Finance charge income of $79.5 million, $79.3
million and $82.4 million for the years ended July 31, 1996, 1995 and 1994,
respectively, has been reflected as a reduction of Selling, General and
Administrative Expenses.
MERCHANDISE INVENTORIES are stated at the lower of cost or market, which is
determined primarily in accordance with the retail inventory method.
Substantially all inventories represent finished goods which are valued using
the last-in, first-out ("LIFO") method. The Company employs a methodology which
provides better inventory turnover and profitability information in order to
identify and determine the appropriate merchandising action for problem
merchandise on a more timely basis and ensure that such inventory is valued at
the lower of cost or market.
DEPRECIATION AND AMORTIZATION are computed using the straight-line method
over the estimated useful lives of the assets or remaining lease life.
Estimated useful lives of the assets range from three to forty years. Original
cost and related accumulated depreciation or amortization are removed from the
accounts in the year assets become retired. Gains or losses on dispositions of
property and equipment are included in operations in the year of disposal.
Computer software costs related to the development of major systems are
capitalized as incurred and are amortized over their useful lives.
EXCESS OF REVALUED NET ASSETS OVER STOCKHOLDERS' INVESTMENT is being
amortized over fifteen years. Amortization was $5.9 million for the years ended
July 31, 1996, 1995 and 1994. Accumulated amortization was $17.7 million and
$11.8 million at July 31, 1996 and 1995, respectively.
STORE PREOPENING COSTS are charged to results of operations in the period
in which the store is opened. Store closing costs are estimated and recognized
in the period in which the Company makes the decision that the store will close.
Such costs include the present value of estimated future rentals net of
anticipated sublease income, loss on retirement of property and equipment and
other related occupancy costs.
ADVERTISING EXPENSES are charged against operations when incurred. Amounts
charged against operations were $37.6 million, $35.2 million and $36.9 million
for the years ended July 31, 1996, 1995 and 1994, respectively. The amounts of
prepaid advertising at July 31, 1996 and 1995 are $2.4 million and $1.8 million,
respectively.
RECLASSIFICATIONS. The classifications in use at July 31, 1996 have been
applied to the financial statements for July 31, 1995 and 1994.
14
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
MERCHANDISE INVENTORIES
The Company uses the LIFO method of accounting for inventory, which results
in a matching of current costs with current revenues. The estimated cost of
replacing the Company's inventories exceeds its net LIFO cost by approximately
$12.2 million and $9.9 million at July 31, 1996 and 1995, respectively.
Inventories on a first-in, first-out ("FIFO") basis were $470.1 million and
$385.3 million at July 31, 1996 and 1995, respectively. The Company also
maintained consigned inventory at its retail locations of approximately $78.9
million and $85.9 million at July 31, 1996 and 1995, respectively. This
consigned inventory and related contingent obligation are not reflected in the
Company's financial statements. At the time of sale, the Company records the
purchase liability in accounts payable and the related cost of merchandise in
Cost of Sales.
PROPERTY AND EQUIPMENT
The Company's property and equipment consists of the following:
JULY 31, 1996 JULY 31, 1995
------------- -------------
(AMOUNTS IN THOUSANDS)
Buildings and Leasehold Improvements $ 39,439 $ 21,357
Furniture and Fixtures 64,569 36,976
Construction in Progress 14,835 10,752
Property Held for Sale 9,557 9,896
--------- ---------
128,400 78,981
Less: Accumulated Amortization and
Depreciation (20,146) (7,494)
--------- ---------
Total Net Property and Equipment $ 108,254 $ 71,487
--------- ---------
--------- ---------
Property Held for Sale represents land and buildings which are being held
for future sale and are not being used in the Company's operations.
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES
The Company's accounts payable and accrued liabilities consists of the
following:
JULY 31, 1996 JULY 31, 1995
------------- -------------
(AMOUNTS IN THOUSANDS)
Accounts Payable $ 67,492 $ 43,108
Accrued Payroll 19,759 20,690
Accrued Taxes 14,833 14,000
Other Accruals 43,710 39,250
--------- ---------
Total Accounts Payable and Accrued
Liabilities $ 145,794 $117,048
--------- ---------
--------- ---------
The Company's non-current liabilities consists principally of the accumulated
obligation for postretirement benefits under Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," and loss reserves for insurance subsidiaries.
15
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES (CONTINUED)
POSTRETIREMENT BENEFITS. The Company provides medical and dental insurance
benefits for all eligible retirees and spouses with benefits to the latter
continuing after the death of the retiree for a maximum of thirty-six months.
Substantially all of the Company's full-time employees, who were hired on or
before November 14, 1994, become eligible for those benefits upon reaching age
55 while working for the Company and having ten years of continuous service.
The medical and dental benefits are provided under a single plan. The lifetime
maximum on medical benefits is $500,000 up to the age of 65 and $50,000
thereafter. These benefits include deductibles, retiree contributions and co-
insurance provisions that are assumed to grow with the health care cost trend
rate.
Effective April 1, 1993, the Company adopted the provisions of SFAS No.
106. This standard requires that the costs of the postretirement benefits
described in the preceding paragraph be recognized in the financial statements
over an employee's active working career on an accrual basis. In previous
years, the Company recognized the costs on a cash basis.
The accumulated postretirement benefits obligation ("APBO"), which
represents the actuarial present value of benefits attributed to employee
service rendered as of July 31, 1996 and 1995 for the unfunded plan, include the
following components:
JULY 31, JULY 31,
1996 1995
-------- --------
(AMOUNTS IN THOUSANDS)
Active Employees Under Retirement Age $ 4,260 $ 6,574
Active Employees Eligible to Retire 2,161 3,624
Current Retirees 7,641 10,488
------- --------
Accumulated Benefit Obligation 14,062 20,686
Unrecognized Prior Service Cost (348) (406)
Unrecognized Net Gain (Loss) 7,019 (1,607)
------- --------
Total Accrued Postretirement Benefit
Liability $20,733 $ 18,673
------- --------
------- --------
The unrecognized gain of $7.0 million at July 31, 1996, resulted
primarily from changes in plan experience and actuarial assumptions,
including a reduction in average claim cost and a reduction in the number of
eligible participants. The gain will be amortized in accordance with SFAS
No. 106.
The annual expense relating to postretirement benefits, which are reflected
in Selling, General and Administrative Expenses, are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1996 1995 1994
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Service Cost $ 1,130 $ 1,035 $ 818
Interest Cost 1,557 1,465 1,144
Amortization 58 16 ---
------- ------ -------
Total Postretirement
Benefit Cost $ 2,745 $ 2,516 $ 1,962
------- ------ -------
------- ------ -------
16
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES (CONTINUED)
The weighted-average discount rate used in determining the APBO at July 31,
1996 and 1995 was 7.75 percent. The weighted-average annual assumed rates of
increase in the cost of covered medical and dental benefits at July 31, 1995
were 13.0 percent and 8.5 percent, respectively, and are assumed to gradually
decrease to 6.0 percent over eight years. At July 31, 1996, the initial medical
and dental trend rates are 12.0 percent and 8.25 percent, respectively, and are
assumed to gradually decrease to 6.0 percent in the year 2003. The effect of a
one percent increase in the health care cost trend rate on the APBO and the net
periodic expense would be an increase of approximately $2.4 million and $0.2
million, respectively.
LONG-TERM DEBT
Long-term debt consists of the following:
JULY 31, 1996 JULY 31, 1995
------------- -------------
(AMOUNTS IN THOUSANDS)
Revolving Credit Agreement $ 23,600 $ ---
Receivables Securitization Facility 380,635 380,593
Second Priority Senior Secured Notes --- 60,017
Capital Lease Obligations --- 2,499
Other (primarily mortgages) 119 515
--------- ---------
404,354 443,624
Less Current Portion (26) (2,907)
--------- ---------
Total Long-Term Debt $ 404,328 $ 440,717
--------- ---------
--------- ---------
Fiscal year scheduled maturities of long-term debt at July 31, 1996 were
as follows: 1997 - $-0- million; 1998 - $-0- million; 1999 - $404.3 million;
2000 - $-0- million; 2001 - $-0- million; thereafter - $-0- million; for a
total of $404.3 million.
REVOLVING CREDIT AGREEMENT. On August 11, 1995, Zale and ZDel (the
"Borrowers") entered into a three year revolving credit agreement (the
"Revolving Credit Agreement") which provides for revolving credit loans in an
aggregate amount of up to $150.0 million, with a $30.0 million sublimit for
letters of credit. At no time may the total amount of loans outstanding under
the Revolving Credit Agreement exceed the lesser of the total commitment of
$150.0 million and a defined borrowing base ($204.1 million at July 31, 1996,
based on a fixed percentage of eligible inventory, as defined).
The Borrowers' obligations under the Revolving Credit Agreement are primarily
secured by a first lien on and security interest in all inventory (excluding
inventory on consignment).
The revolving credit loans bear interest at floating rates, currently
LIBOR + 2.0 percent or the agent's adjusted base rate + 0.75 percent, at the
Borrowers' option, and can be adjusted based on certain future performance
levels attained by the Borrowers. The Company pays a commitment fee of 3/8
percent per annum on the preceding month's unused Revolving Credit Agreement
commitment. The Borrowers may repay the revolving credit loans at any time
without penalty. At July 31, 1996, there were $23.6 million in loans
outstanding under the Revolving Credit Agreement at a weighted-average
interest rate of 7.68 percent. There were approximately $0.5 million of
letters of credit outstanding at July 31, 1996.
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, keep within certain limits the Borrowers ability to
pay dividends and make other restricted payments, incur additional indebtedness,
engage in certain transactions with affiliates, incur liens, make investments
and sell assets. The Revolving Credit Agreement also requires the Borrowers to
maintain certain financial ratios and specified levels of net worth.
17
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
LONG-TERM DEBT (CONTINUED)
RECEIVABLES SECURITIZATION FACILITIES. Effective July 15, 1994, the
Company refinanced its $284.6 million, net of discount, aggregate principal
amount of 6.35 percent Receivables Backed Notes ("DFC Receivables Notes"),
through a new securitization program discussed below. Upon consummation of the
new securitization program, the DFC Receivables Notes were redeemed. The
Company was required to pay a special redemption premium in the amount of
approximately $2.6 million upon early redemption of the DFC Receivables Notes.
This amount, net of an income tax benefit of $1.0 million, has been classified
as an extraordinary charge on the Consolidated Statement of Operations as of
July 31, 1994.
In connection with the refinancing, Zale Funding Trust ("ZFT"), a limited
purpose Delaware business trust was formed to finance customer accounts
receivable. ZFT established an accounts receivable securitization facility (the
"ZFT Securitization"), pursuant to which it issued approximately $380.6 million,
net of discount, aggregate principal amount of Receivables Backed Notes ("ZFT
Receivables Notes"). The proceeds from the ZFT Receivables Notes were used to
buy the revolving credit card accounts receivable of ZDel and other affiliates.
Collections from those receivables are used in part to pay interest on the ZFT
Receivables Notes and to purchase daily ZDel's customer accounts receivable.
The ZFT Receivables Notes are secured by a lien on all customer accounts
receivable and are nonrecourse with regard to Zale and ZDel.
The ZFT Receivables Notes bear interest at the following rates, payable
monthly in arrears (amounts in thousands):
PRINCIPAL RATE
--------- ---------------------------------
$ 37,620 LIBOR + .40%, not to exceed 12.0%
294,100 7.325%
28,600 7.50%
20,440 8.15%
--------
$380,760
--------
--------
The effective interest rate, based on a current LIBOR rate of 5.5
percent, including amortization of debt issuance costs, approximated 7.54
percent at July 31, 1996.
Jewelers Financial Services, Inc. (the "Servicer"), a subsidiary of ZDel,
is the servicing entity for the collection of the customer accounts receivable
and its servicing obligations are guaranteed by ZDel.
The ZFT Receivables Notes will be subject to redemption at the option of
ZFT in whole but not in part, on the scheduled redemption date of July 15, 1999
at a redemption price equal to the outstanding principal amount of the ZFT
Receivables Notes together with accrued and unpaid interest thereon at the
applicable interest rates. If ZFT has not given notice by June 15, 1999 that
it will redeem the ZFT Receivables Notes in full on the scheduled payment date
occurring in July 1999, the Servicer will promptly solicit bids for the purchase
of all or a portion of the receivables. If the Servicer is unable to sell the
receivables for a price such that the proceeds of such sale, together with other
available funds, is sufficient to pay in full the outstanding principal amount
of the ZFT Receivables Notes and interest thereon to the Scheduled Redemption
Date, the ZFT Receivables Notes will remain outstanding and will begin
amortizing based on collections of customer accounts receivable beginning in
August 1999.
The ZFT Securitization imposes certain reporting obligations on the Company
and limits ZFT's ability, among other things, to grant liens, incur certain
indebtedness, or enter into other lines of business. Additionally, under
certain conditions as defined, including among other things, failure to pay
principal or interest when due, failure to cure a borrowing base deficiency and
breach of any covenant that is not cured, the ZFT Securitization is subject to
an early amortization whereby the ZFT Receivables Notes may be declared due and
payable immediately. The restricted cash balance shown on the Consolidated
Statements of Cash Flows as of July 31, 1996 and 1995 primarily represents the
restricted cash of ZFT which is based on the relationship between the ZFT
Receivables Notes outstanding and gross accounts receivable as of July 31, 1996
and 1995.
18
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
LONG-TERM DEBT (CONTINUED)
11.0 PERCENT SECOND PRIORITY SENIOR SECURED NOTES DUE 2000. The 11.0
Percent Second Priority Senior Secured Notes due 2000 (the "Notes") were issued
by ZDel under an indenture dated as of July 30, 1993 among ZDel, as issuer,
Zale, as guarantor and IBJ Schroder Bank & Trust Company, as trustee. At
July 31, 1995, there was approximately $60.0 million principal amount of Notes
outstanding. The Notes were guaranteed by Zale and were secured by second liens
on substantially all the assets of Zale and ZDel.
The increased flexibility allowed in the new Revolving Credit Agreement
enabled the Company to redeem early the Notes on September 11, 1995 utilizing
cash on hand. The Notes were optionally redeemable by ZDel at a redemption
price equal to 102 percent of their principal amount together with accrued
interest to the redemption date. Upon redemption, the Company paid an early
redemption premium and other costs associated with the redemption of
approximately $1.7 million resulting in an extraordinary charge of $1.1 million,
net of an income tax benefit of $0.6 million, being recorded in the first
quarter of fiscal year 1996.
LEASE COMMITMENTS
The Company rents most of its retail space under leases that generally
range from five to ten years and may contain minimum rent escalations. The
Company amended and extended its corporate headquarters lease effective at the
expiration of the current five year lease, which will be treated as an operating
lease starting in September 1997. Lease incentives of approximately $4.7
million for reimbursement of certain leasehold improvement expenditures will be
amortized against lease payments over the life of the lease. All existing real
estate leases are treated as operating leases. Sublease rental income under
noncancellable leases is not material.
Rent expense is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1996 1995 1994
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Retail Space:
Minimum Rentals $61,724 $55,645 $52,064
Rentals Based on Sales 27,752 28,365 25,346
------- ------- -------
89,476 84,010 77,410
Equipment and Corporate Headquarters 3,368 3,386 3,478
------- ------- -------
Total Rent Expense $92,844 $87,396 $80,888
------- ------- -------
------- ------- -------
Contingent rentals paid to lessors of certain store facilities are
determined principally on the basis of a percentage of sales in excess of
contractual limits.
Future minimum rent commitments as of July 31, 1996, for all noncancellable
leases of ongoing operations were as follows: 1997 - $58.7 million; 1998 -
$52.6 million; 1999 - $46.7 million; 2000 - $41.8 million; 2001 - $36.6 million;
thereafter - $123.5 million; for a total of $359.9 million.
INTEREST
Interest expense for the years ended July 31, 1996, 1995 and 1994 was
approximately $33.2 million, $37.5 million and $30.3 million, respectively.
Interest income for the years ended July 31, 1996, 1995 and 1994 was $3.1
million, $7.7 million and $2.1 million, respectively.
19
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on estimated
future tax effects of the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates.
Currently, the Company files a consolidated income tax return. The
effective income tax rate varies from the federal statutory rate as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1996 1995 1994
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Federal Income Tax Expense
at Statutory Rate $24,531 $16,737 $12,161
Amortization of Excess of Revalued
Net Assets Over Stockholders'
Investment (2,064) (2,064) (2,064)
State Income Taxes, Net of Federal
Income Tax Benefit 2,520 1,677 1,524
Other 107 -- --
------- ------- -------
Total Income Tax Expense 25,094 16,350 11,621
Tax Benefit on Extraordinary Item (603) -- (1,045)
------- ------- -------
Total Income Tax Expense $24,491 $16,350 $10,576
------- ------- -------
------- ------- -------
Effective Income Tax Rate 35.8% 34.2% 32.9%
------- ------- -------
------- ------- -------
Pursuant to the guidance provided by the American Institute of Certified
Public Accountants in Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company
adopted fresh-start reporting as of the close of business on July 31, 1993. In
connection with the adoption of fresh-start reporting, the net book values of
substantially all non-current assets existing at July 30, 1993 (the "Effective
Date") were eliminated. As a consequence, SFAS No. 109, in conjunction with SOP
90-7, requires that any tax benefits realized for book purposes after the
Effective Date, from the reduction of the valuation allowance existing as of the
Effective Date be reported as an increase to additional paid-in capital rather
than as a reduction in the tax provision in the Consolidated Statements of
Operations. However, the Company will realize the cash benefit from utilization
of the tax net operating loss ("NOL") against current and future tax
liabilities. The cash benefit realized was approximately $23 million, $16
million and $10 million for the years ended July 31, 1996, 1995 and 1994,
respectively.
As of July 31, 1996, the Company has a NOL carryforward (after limitations)
of approximately $324 million. A majority of the tax basis NOL carryforward,
which will be available to offset future taxable income of the Company, was
determined based upon the initial equity valuation of the Company as determined
upon the Effective Date. The utilization of this asset is subject to
limitations. The most restrictive is the Internal Revenue Code Section 382
annual limitation. The NOL carryforward will begin to expire in fiscal year 2002
but can be utilized through 2009.
As of July 31, 1996, all years through fiscal year 1989 have been settled
with the Internal Revenue Service ("IRS") and all income tax liabilities thereon
have been paid. In addition, the IRS did not file any income tax claims in the
bankruptcy case; therefore, the Company believes that under the bankruptcy laws
any potential income tax liabilities have been discharged through the Effective
Date.
20
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
INCOME TAXES (CONTINUED)
Tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at July
31, 1996 and 1995 are presented below.
JULY 31, JULY 31,
1996 1995
-------- --------
(AMOUNTS IN THOUSANDS)
Current Deferred Taxes:
Assets --
Customer receivables $ 20,046 $ 17,628
Accrued liabilities 13,919 11,883
State and local taxes 1,950 2,194
Net operating loss carryforward 24,500 7,601
Other -- 78
-------- --------
Total Assets 60,415 39,384
Less -- Valuation Allowance (33,071) (28,793)
-------- --------
27,344 10,591
Liabilities --
Merchandise inventories, principally due to LIFO
reserve (59,326) (59,391)
Other (18) --
-------- --------
Deferred Current Tax Liability, Net $(32,000) $ (48,800)
-------- --------
-------- --------
Non-current Deferred Taxes:
Assets --
Property and equipment, principally due to fresh-
start adjustments $ 6,287 $ 24,997
Net operating loss carryforward 101,878 139,894
Postretirement benefits 9,886 9,333
Other 7,497 7,402
-------- --------
Total Assets 125,548 181,626
Less -- Valuation Allowance (68,586) (132,641)
-------- --------
56,962 48,985
Liabilities --
Other (462) (185)
-------- --------
Deferred Non-current Tax Asset, Net $ 56,500 $ 48,800
-------- --------
-------- --------
Pursuant to the requirements of SFAS No. 109, a valuation allowance must
be provided when it is more likely than not that the deferred income tax
asset will not be realized. The valuation reserve was approximately $101.6
million and $161.4 million as of July 31, 1996 and 1995, respectively. The
Company believes that, as of July 31, 1996, a sufficient history of earnings
has been established to make realization of a $24.5 million deferred income
tax asset more likely than not. The change in the valuation allowance from
July 31, 1995 to July 31, 1996 was $59.8 million. This amount was comprised
of the following (amounts in thousands):
Utilization of pre-emergence net deferred tax assets $(23,208)
Decrease in net deferred tax assets resulting from
identification of additional temporary differences (13,290)
Change in estimate of realization of deferred income
tax asset (24,500)
Other 1,221
--------
Net change in valuation allowance account $(59,777)
--------
--------
21
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
CAPITAL STOCK
COMMON STOCK. At July 31, 1996 and 1995, 70,000,000 shares of Common
Stock, par value of $0.01 per share, were authorized and 35,199,383 shares and
34,983,258 shares, respectively, were outstanding. The Company held 35,942
treasury shares at July 31, 1996 and 1995.
PREFERRED STOCK. At July 31, 1996 and 1995, 5,000,000 shares of Preferred
Stock, par value of $0.01, were authorized. None are issued or outstanding.
WARRANTS. Pursuant to the plan of reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Plan"), Zale had authorized 2,000,000 Series
A Warrants to purchase common stock. At July 31, 1996 and 1995, 1,972,750 and
1,999,550 Series A Warrants, respectively, were outstanding. Each Series A
Warrant entitles the holder to purchase, for $10.368 per share, one share of
Zale common stock (subject to certain anti-dilution adjustments). The Series A
Warrants are exercisable on or before July 30, 1998, although their expiration
date may be shortened if the market value of Zale's common stock increases to at
least 150.0 percent of the warrant exercise price for a specified number of days
and less than 5.0 percent of the Series A Warrants originally issued under the
Plan are outstanding on the date on which Zale gives the acceleration notice.
As part of Zale's settlement of certain bankruptcy litigation in 1993 with
Swarovski International Holding, A.G. ("Swarovski"), Zale issued its Series B
Warrants to purchase common stock. Each Series B Warrant entitled the holder to
purchase for $10.368 per share, one share of Zale common stock (subject to
certain anti-dilution adjustments). The Series B Warrants were presently
exercisable and, if not previously exercised, would expire on September 9, 1998,
subject to the Company's right to accelerate the expiration date of the Series B
Warrants if certain conditions were met. At July 31, 1995, the Series B
Warrants issued entitled the holders to purchase an aggregate of 1,852,884
shares of Zale common stock. On August 31, 1995, Zale redeemed the Series B
Warrants and acquired all Swarovski's rights, title and interest under the
warrant agreement and paid $9.3 million to Swarovski in consideration of the
redemption. As a result of this, the Series B Warrants were canceled and are no
longer outstanding. Additional Paid-In Capital decreased $4.2 million, whereas
Accumulated Earnings decreased $5.1 million due to this transaction.
STOCK OPTION PLAN. As of the Effective Date, the Company adopted a stock
option plan (the "Stock Option Plan") to enable the Company to attract, retain
and motivate officers and key employees by providing for proprietary interest of
such individuals in the Company. Options to purchase an aggregate of 3,055,000
shares of Common Stock may be granted under the Stock Option Plan to eligible
employees. Options granted under the Stock Option Plan (i) must be granted at
an exercise price not less than the fair market value of the shares of Common
Stock into which such options are exercisable, (ii) vest ratably over a four-
year vesting period and (iii) expire ten years from the date of grant.
Stock option transactions are summarized as follows:
<TABLE>
SHARES GRANT PRICE
------------------------- -------------------------------
FISCAL 1996 FISCAL 1995 FISCAL 1996 FISCAL 1995
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 2,212,925 1,629,200 $ 8.68 - 14.00 $ 8.68 - 9.74
Granted 1,103,100 779,000 13.75 - 17.88 10.75 - 14.00
Exercised (189,325) (18,750) 8.77 - 11.81 8.87 - 9.74
Cancelled (404,625) (176,525) 8.73 - 14.00 8.87 - 13.19
----------- ----------- -------------- --------------
Outstanding, end of year 2,722,075 2,212,925 $8.68 - 17.88 $ 8.68 - 14.00
----------- ----------- -------------- --------------
----------- ----------- -------------- --------------
</TABLE>
As of July 31, 1996 and 1995, 654,875 and 359,350, respectively, of options
outstanding were exercisable.
22
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
UNUSUAL ITEMS - REORGANIZATION RECOVERIES
Pursuant to the Plan, Zale assigned certain claims and causes of action and
advanced $3.0 million to Jewel Recovery, L.P., a limited partnership ("Jewel
Recovery") which was formed upon Zale's emergence from bankruptcy. The sole
purpose of Jewel Recovery is to prosecute and settle such assigned claims and
causes of action. The general partner of Jewel Recovery is Jewel Recovery,
Inc., a subsidiary of the Company. Its limited partners are holders of various
prior unsecured claims against Zale. The $3.0 million advance was fully
reserved as of the Effective Date as its collectibility was uncertain.
Jewel Recovery has pursued certain claims and has been awarded significant
recoveries against third parties. During the first quarter of fiscal year 1996,
Zale was notified that it would recover its $3.0 million advance to Jewel
Recovery. The $3.0 million advance was repaid to Zale in December 1995.
Additionally, Shawmut Bank ("Shawmut") was elected as Disbursement Agent
and held all cash and common stock to be used in settlements of creditors
claims. During fiscal 1996, Shawmut provided Zale with information on creditors
whose claim rights have terminated. As a result, during the fiscal year 1996,
Zale recovered cash funds of approximately $1.5 million held by Shawmut related
to cash approved for distribution to pre-confirmation creditors of Zale but not
claimed by such pre-confirmation creditors. The $3.0 million and the $1.5
million recoveries were recorded as unusual items in the Company's first quarter
of fiscal year 1996 and are reflected on the Consolidated Statements of
Operations for the year ended July 31, 1996 and had an after-tax impact of $0.08
per share.
COMMITMENTS AND CONTINGENCIES
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such litigation
and claims will be resolved without material effect on the Company's financial
position or results of operations.
The Company has an operations services agreement for management information
systems with a third-party servicer. The agreement, which originally began in
February 1993, was amended on August 1, 1994 and, requires payments totaling
$31.5 million over a thirty-six month term and is paid monthly on a straight-
line basis.
BENEFIT PLANS
PROFIT SHARING PLAN
At July 31, 1996, the Company maintains The Zale Corporation Savings &
Investment Plan. Substantially all employees who are at least age 21 are
eligible to participate in the plan. Each employee can contribute from one
percent to fifteen percent of their annual salary. Under this plan, the Company
will match 50 cents in Zale stock for every dollar an employee contributes up to
two percent of annual earnings. In order for an employee to be eligible for the
Company match, the employee must have worked at least 1,000 hours during the
plan year and be employed on the last day of the plan year.
An employee is 33.3 percent vested in the Zale stock after one year of
service, 66.7 percent vested after two years of service and 100 percent vested
after three years of service. As of July 31, 1996, approximately 6,400
employees participated in The Zale Corporation Savings & Investment Plan.
Also, under this plan, the Company may make a profit sharing cash
contribution at its sole discretion. To be eligible for such discretionary
profit sharing contributions, an employee must have at least twelve consecutive
months of service, have worked at least 1,000 hours during the plan year and be
employed on the last day of the plan year.
23
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
BENEFIT PLANS (CONTINUED)
PROFIT SHARING PLAN (CONTINUED)
An employee is 20 percent vested in the profit sharing contributions after
three years of service, 40 percent vested after four years of service, 60
percent vested after five years of service, 80 percent vested after six years of
service and 100 percent vested after seven years of service. The Company's
contribution to the plan was $2.8 million, $2.5 million and $2.2 million for
fiscal years 1996, 1995 and 1994, respectively.
RETIREMENT PLAN
On September 14, 1995, the Boards of Directors of Zale and ZDel approved
the preparation and implementation of the Zale Delaware, Inc. Supplemental
Executive Retirement Plan (the "Plan"), which was executed on behalf of the
Company February 23, 1996, to be effective as of September 15, 1995. The
purpose of the Plan is to provide eligible executives with the opportunity to
receive payments each year after retirement equal to a portion of their final
average pay as defined.
FINANCIAL INSTRUMENTS
The Company has adopted SFAS No. 107 "Disclosures about Fair Value of
Financial Instruments" which extends existing fair value disclosure practices by
requiring all entities to disclose the fair value of financial instruments, for
which it is practicable to estimate fair value.
As cash and short-term cash investments, customer receivables, trade
payables and certain other short-term financial instruments are all short-term
in nature, their carrying amount approximates fair value. The carrying amount
of the $380.6 million, net of discount, Receivables Securitization Facility also
approximates fair value. The carrying amount of the $60.0 million 11.0 Percent
Second Priority Senior Secured Notes which were secured by second liens on
substantially all the assets of Zale and ZDel were redeemed on September 11,
1995 for 102 percent of face value plus an early redemption premium. The
investments of the Company's insurance subsidiaries, primarily stocks and bonds
in the amount of $25.5 million, approximate market value at July 31, 1996 and
are reflected in Other Assets on the Consolidated Balance Sheets.
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments and customer receivables. The Company maintains
cash and cash equivalents, short and long-term investments and certain other
financial instruments with various financial institutions. These financial
institutions are located throughout the country. Concentrations of credit risk
with respect to customer receivables are limited due to the Company's large
number of customers and their dispersion across many regions. As of July 31,
1996 and 1995, the Company had no significant concentrations of credit risk.
RELATED PARTY TRANSACTIONS
One of the Company's directors serves as a director of a company from which
the Company purchased approximately $0.5 million and $0.4 million of jewelry
merchandise during fiscal year 1996 and 1995, respectively. The Company
believes the terms were equivalent to those of unrelated parties.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." This pronouncement is effective for fiscal
years beginning after December 15, 1995 and requires the Company to evaluate its
long-term assets against certain impairment indicators. The Company believes
the impact of adopting this standard will not be material.
24
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provision no later than
fiscal years beginning after December 15, 1995 and adoption of the recognition
and measurement provision for nonemployee transactions entered into after
December 15, 1995. Pursuant to the new standard, companies are encouraged, but
are not required, to adopt the fair value method of accounting for employee
stock-based transactions. The Company expects to continue to account for stock
transactions under Accounting Principles Board Opinion No. 25 and to comply with
the disclosure provisions relative to SFAS No. 123.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for the years ended July 31, 1996
and 1995 were as follows (amounts in thousands except per share data):
<TABLE>
FISCAL 1996
FOR THE THREE MONTHS ENDED
-------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1996 1996 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $248,858 $222,283 $451,962 $214,274
Gross margin 122,760 107,797 225,952 104,104
Net earnings (loss) 12 (2,439) 46,234 91
Net earnings (loss) per primary common share 0.00 (0.07) 1.27 0.00
FISCAL 1995
FOR THE THREE MONTHS ENDED
-------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1995 1995 1995 1994
-------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $211,400 $192,083 $427,194 $205,472
Gross margin 100,708 94,871 214,675 101,885
Net earnings (loss) (3,132) (3,994) 41,771 (3,175)
Net earnings (loss) per primary common share (0.09) (0.11) 1.19 (0.09)
</TABLE>
25
<PAGE>
[Logo]
Z A L E C O R P O R A T I O N A N D S U B S I D I A R I E S
DIRECTORS AND OFFICERS
<TABLE>
BOARD OF DIRECTORS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ROBERT J. DINICOLA FRANK E. GRZELECKI* RICHARD C. MARCUS *Mr. Grzelecki will
Chairman of the Board, President, Principal not stand for
Chief Executive Officer Chief Operating Officer InterSolve Group, Inc re-election.
Zale Corporation Handy & Harman
GLEN ADAMS ANDREA JUNG ANDREW H. TISCH
Director President Director
Global Marketing Loews Corporation
Avon Products, Inc.
------------------------------------------------------
AUDIT COMMITTEE COMPENSATION COMMITTEE
Glen Adams Richard C. Marcus
Andrea Jung Andrew H. Tisch
OFFICERS OF THE COMPANY
- -----------------------------------------------------------------------------------------------------------------------------
ROBERT J. DINICOLA MARY L. FORTE SUE E. GOVE ERVIN G. POLZE
Chairman of the Board and Senior Vice President Senior Vice President-- Senior Vice President--
Chief Executive Officer and President, Treasurer Operations
Gordon's Division
MERRILL J. WERTHEIMER PAUL G. LEONARD GREGORY HUMENESKY ALAN P. SHOR
Executive Vice President-- Senior Vice President Senior Vice President-- Senior Vice President -
Finance and and President, Human Resources Administration and
Chief Financial Officer Guild Division General Counsel
MAX A. BROWN PAUL D. KANNEMAN
BERYL B. RAFF Senior Vice President Senior Vice President--
Senior Vice President and President, Management Information Systems
and President, Diamond Park Division
Zales Division
CORPORATE INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICES STOCKHOLDER INFORMATION INDEPENDENT PUBLIC STOCK LISTINGS
901 West Walnut Hill Lane Stockholder Communications ACCOUNTANTS New York Stock Exchange
Irving, Texas 75038-1003 901 West Walnut Hill Lane Arthur Andersen LLP, Dallas Common -- Symbol: ZLC
(972) 580-4000 M.S. 6B-3 Series A Warrants --
Irving, Texas 75038-1003 Symbol: ZLC/WS
REGISTRAR & TRANSFER AGENT (972) 580-4149
Boston EquiServe
Shareholder Services Division FORM 10-K REQUESTS
P.O. Box 644 Stockholders may obtain, without charge, a copy of the Corporation's Form 10-K as filed with
Mail Stop: 45-02-09 the Securities and Exchange Commission for the year ended July 31, 1996. Requests should be
Boston, MA 02102-0644 addressed to Stockholder Communications.
(617) 575-3120
INTERNET ACCESS
Our Internet address is www.zales.com.
</TABLE>
NOTICE OF ANNUAL MEETING
- -------------------------------------------------------------------------------
Zale Corporation's 1996 Annual Meeting of Stockholders will be held at 10 a.m.,
Wednesday, October 30, 1996 at the Company's headquarters located at 901 West
Walnut Hill Lane in Irving, Texas.
COMMON STOCK INFORMATION
- -------------------------------------------------------------------------------
The Common Stock is listed on the NYSE under the symbol ZLC. Prior to June 19,
1996, the Common Stock was listed on the National Association of Securities
Dealers, Inc.'s National Market ("NASDAQ") under the symbol ZALE. The following
table sets forth the high and low sale prices for the Common Stock for each
fiscal quarter during the two most recent fiscal years.
1996 1995
Quarter High Low High Low
----------------------------------------------------------------
First $15-5/8 $13-5/8 $13-5/8 $ 8-3/8
Second 16-11/16 13-1/2 13 10-1/4
Third 18-5/8 13-11/16 12 10-1/4
Fourth 20-1/4 16-1/2 14-3/8 11-1/4
As of September 5, 1996, the outstanding shares of Common Stock were held by
approximately 1,300 holders of record. The Company has not paid dividends on
the Common Stock since the issuance on July 30, 1993, and does not anticipate
paying dividends on the Common Stock in the foreseeable future. In addition,
the terms of the Company's long-term indebtedness places certain restrictions on
the Company's ability to declare and pay dividends on its Common Stock.
26
<PAGE>
EXHIBIT 21
Subsidiaries of the Company -
The following companies are subsidiaries of Zale Corporation:
Zale Delaware, Inc.
Diamond Funding Corp. (iv)
Zale Acquisition Corporation (iv)
Jewel Recovery, Inc.
JHC Holding Corporation (i) (iv)
Zale Holding Corporation (ii)
ZHCL Corporation (iii) (iv)
The following companies are subsidiaries of Zale Delaware, Inc.:
Zale Puerto Rico, Inc.
Dobbins Jewelers, Inc.
Jewelers Financial Services, Inc.
Zale Life Insurance Company
Zale Indemnity Company
Diamond Guaranty Insurance Company (iv)
Jewel Re-Insurance Ltd.
Zale Employees Child Care Association, Inc.
Karten's Jewelers, Inc.
(i) Jewelers Holding Corporation, former parent company of Zale Holding
Corporation, merged into JHC Holding Corporation, which was formed on
July 30, 1993 (the "Effective Date") for purposes of the merger.
(ii) Former parent company of Zale Corporation and currently a subsidiary
of JHC Holding Corporation.
(iii) Former sister company of Zale Corporation and currently a
subsidiary of JHC Holding Corporation.
Through reorganization, all of these companies became subsidiaries of Zale
Corporation on the Effective Date.
(iv) Currently an inactive corporation.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports incorporated by reference in this Form 10-K, into the Company's
previously filed Form S-3 Registration Statement File No. 333-05131 and Form
S-8 Registration Statement File No. 333-01789.
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 22, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JULY 31, 1996 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 50,046
<SECURITIES> 0
<RECEIVABLES> 471,279
<ALLOWANCES> 51,402
<INVENTORY> 457,862
<CURRENT-ASSETS> 953,320
<PP&E> 128,400
<DEPRECIATION> 20,146
<TOTAL-ASSETS> 1,163,811
<CURRENT-LIABILITIES> 177,820
<BONDS> 404,328
0
0
<COMMON> 352
<OTHER-SE> 475,906
<TOTAL-LIABILITY-AND-EQUITY> 1,163,811
<SALES> 1,137,377
<TOTAL-REVENUES> 1,137,377
<CGS> 576,764
<TOTAL-COSTS> 576,764
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 53,508
<INTEREST-EXPENSE> 30,102
<INCOME-PRETAX> 70,088
<INCOME-TAX> 25,094
<INCOME-CONTINUING> 44,994
<DISCONTINUED> 0
<EXTRAORDINARY> (1,096)
<CHANGES> 0
<NET-INCOME> 43,898
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
