<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1998.
REGISTRATION NO. 333-39473
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<C> <C>
ZALE CORPORATION 5944
ZALE DELAWARE, INC. 5944
(Exact name of registrant as specified in its charter) (Primary Standard Industrial Classification Code Number)
DELAWARE 75-0675400
DELAWARE 75-2080834
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
ALAN P. SHOR, ESQ.
ZALE CORPORATION ZALE CORPORATION
ZALE DELAWARE, INC. ZALE DELAWARE, INC.
901 W. WALNUT HILL LANE 901 W. WALNUT HILL LANE
IRVING, TEXAS 75038-1003 IRVING, TEXAS 75038-1003
(972) 580-4000 (972) 580-4000
(Address, including zip code, and telephone number, including (Name, address, including zip code, and telephone number, including
area code, of each registrant's principal executive offices) area code, of agent for service of each registrant)
</TABLE>
Please send copies of all correspondence to:
THOMAS J. HARTLAND, JR.
TROUTMAN SANDERS LLP
600 PEACHTREE STREET, N.E., SUITE 5200
ATLANTA, GEORGIA 30308
(404) 885-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2)(4)
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<S> <C> <C> <C> <C>
Exchange Notes, principal amount $1,000
per Original Note of Zale Corporation... $100,000,000 100% $100,000,000 $30,304
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Zale Delaware, Inc. Exchange Notes
Guarantee(2)............................ -- -- -- --
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Total(3).................................. $100,000,000 100% $100,000,000 $30,304
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(1) Estimated for the sole purpose of computing the registration fee. Pursuant
to Rule 547(n) under the Securities Act, no separate fee is payable with
respect to the Exchange Notes Guarantee (the "Exchange Notes Guarantee").
(2) No separate consideration will be received for the Exchange Notes Guarantee.
(3) Such amount represents the principal amount of the Zale Corporation Exchange
Notes to be exchanged hereunder.
(4) Previously paid.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 27, 1998
PROSPECTUS
ZALE CORPORATION
LOGO
OFFER TO EXCHANGE ITS
8 1/2% SERIES B SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER EXCHANGE NOTE)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
8 1/2% SERIES A SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER ORIGINAL NOTE)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON FEBRUARY , 1998, UNLESS EXTENDED.
Zale Corporation, a corporation formed under the laws of the State of
Delaware (the "Company"), hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus (as the same may be amended or
supplemented from time to time, the "Prospectus") and in the accompanying Letter
of Transmittal (which together constitute the "Exchange Offer"), to exchange up
to $100,000,000 aggregate principal amount of its 8 1/2% Series B Senior Notes
(the "Exchange Notes") which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
(as defined herein) of which this Prospectus constitutes a part, for a like
principal amount of its outstanding 8 1/2% Series A Senior Notes (the "Original
Notes"), of which $100,000,000 aggregate principal amount are issued and
outstanding. Pursuant to the Exchange Offer, Zale Delaware, Inc., a Delaware
corporation ("ZDel" or the "Guarantor"), is also offering to exchange its
guarantee of the obligations of the Company under the Original Notes (the
"Original Notes Guarantee") for a like guarantee in respect of the Exchange
Notes (the "Exchange Notes Guarantee"), which Exchange Notes Guarantee also has
been registered under the Securities Act. The Original Notes and the Original
Notes Guarantee are collectively referred to herein as the "Original Securities"
and the Exchange Notes and the Exchange Notes Guarantee are collectively
referred to herein as the "Exchange Securities."
(continued on following page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO
TENDER ORIGINAL NOTES IN THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY , 1998.
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(continued from previous page)
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of Original Notes on January , 1998.
The terms of the Exchange Notes are identical in all respects to the
respective terms of the Original Notes, except that (i) the Exchange Notes have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Original Notes and (ii)
interest on the Exchange Notes shall accrue from the most recent date to which
interest has been paid on the Notes (as hereinafter defined), or, if no such
interest has been paid, from the date of issuance of the Original Notes. The
Exchange Notes are being offered for exchange in order to satisfy certain
obligations of the Company and the Guarantor under the Registration Rights
Agreement dated as of September 30, 1997 among the Company, the Guarantor and
the Initial Purchasers (as defined therein) (the "Registration Rights
Agreement").
The Exchange Notes are redeemable for cash at any time on or after October
1, 2002, at the option of the Company, in whole or in part, at the redemption
prices set forth herein, together with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time on or prior to October 1, 2000,
the Company may, at its option, use the net proceeds of one or more Public
Equity Offerings to redeem up to an aggregate of 30% of the aggregate principal
amount of Exchange Notes originally issued under the Indenture at a redemption
price equal to 108.5% of the aggregate principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the redemption date; provided that at
least 70% of the aggregate principal amount of Exchange Notes originally issued
under the Indenture remains outstanding immediately after the occurrence of such
redemption. See "Description of Notes -- Optional Redemption."
Upon the occurrence of a Change of Control Triggering Event, each holder of
the Exchange Notes may require the Company to purchase all or a portion of such
holder's Notes at a cash purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase. If a Change of Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay the purchase price for
all of the Notes that might be tendered by holders of Notes seeking to accept
the Change of Control Offer. If the Company fails to repurchase all of the Notes
tendered for purchase, such failure will constitute an Event of Default under
the Indenture. See "Description of the Notes -- Change of Control Triggering
Event."
The Indenture does not necessarily afford the holders any protection in the
event of a Change of Control or other highly leveraged transaction that does not
necessarily result in a Change of Control.
The Exchange Notes will be unsecured senior obligations of the Company and,
as such, will rank pari passu in right of payment with all other existing and
future senior indebtedness of the Company and senior in right of payment to all
existing and future subordinated indebtedness of the Company. The Exchange Notes
will be guaranteed on a senior basis by the Guarantor. The Exchange Guarantee
will be an unsecured senior obligation of the Guarantor and will rank pari passu
with all existing and future senior indebtedness of the Company and the
Guarantor. The Exchange Notes and the Exchange Guarantee will also be
effectively subordinated to secured indebtedness of the Company and the
Guarantor. As of July 31, 1997, on a pro forma basis after giving effect to the
Offering and the application of the estimated net proceeds therefrom, the
Company and the Guarantor would have had $381.1 million in aggregate principal
amount of Indebtedness outstanding which ranked pari passu in right of payment
with the Exchange Notes and the Exchange Notes Guarantee (all of which would
have been secured) and no Indebtedness outstanding which ranked either senior or
subordinate in right of payment to the Exchange Notes and the Exchange Notes
Guarantee. The Indenture contains certain restrictive covenants including, but
not limited to, a covenant with respect to limitation on indebtedness. See
"Description of the Notes -- Certain Covenants."
The net proceeds from the sale of the Original Notes (the "Original
Offering" or the "Offering") were used by the Company to repay outstanding
indebtedness under its Revolving Credit Agreement and for general corporate
purposes.
Except as described herein, the Exchange Notes initially will be
represented by a global certificate or certificates registered in the name of
The Depository Trust Company ("DTC") or its nominee. Beneficial interests in
such Exchange Notes will be shown on, and transfers thereof will be effected
only through, records maintained by Participants (as defined herein) in DTC.
Except as described herein, Exchange Notes in certificated form will not be
issued in exchange for the global certificates. See "Description of the Exchange
Notes -- Book-Entry, Delivery and Form."
The Company is making the Exchange Offer of the Exchange Notes in reliance
on the position of the staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the "Commission") as set forth in certain
interpretive letters addressed to third parties in other transactions. However,
neither the
<PAGE> 4
(continued from previous page)
Company nor the Guarantor has sought its own interpretive letter and there can
be no assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance of the
Commission, and subject to the two immediately following sentences, the Company
and the Guarantor believe that Exchange Notes issued pursuant to this Exchange
Offer in exchange for Original Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than a holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's business and that such
holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder of Original Notes who is an
"affiliate" of the Company or the Guarantor or who intends to participate in the
Exchange Offer for the purpose of distributing Exchange Notes, or any
broker-dealer who purchased Original Notes from the Company to resell pursuant
to Rule 144A under the Securities Act ("Rule 144A") or any other available
exemption under the Securities Act, (a) will not be able to rely on the
interpretations of the staff of the Division of Corporation Finance of the
Commission set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Original Notes in the Exchange Offer and
(c) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or other transfer of such
Original Notes unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds
Original Notes acquired for its own account as a result of market-making or
other trading activities and exchanges such Original Notes for Exchange Notes,
then such broker-dealer must deliver a prospectus meeting the requirements of
the Securities Act in connection with any resales of such Exchange Notes.
Each holder of Original Notes who wishes to exchange Original Notes for
Exchange Notes in the Exchange Offer will be required to represent that (i) it
is not an "affiliate" of the Company or the Guarantor, (ii) any Exchange Notes
to be received by it are being acquired in the ordinary course of its business,
(iii) it has no arrangement or understanding with any person to participate in a
distribution (within the meaning of the Securities Act) of such Exchange Notes,
and (iv) if such holder is not a broker-dealer, such holder is not engaged in,
and does not intend to engage in, a distribution (within the meaning of the
Securities Act) of such Exchange Notes. In addition, the Company and the
Guarantor may require such holder, as a condition to such holder's eligibility
to participate in the Exchange Offer, to furnish to the Company and the
Guarantor (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) on behalf of whom such
holder holds the Original Notes to be exchanged in the Exchange Offer. Each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Original Notes for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the staff of the
Division of Corporation Finance of the Commission in the interpretive letters
referred to above, the Company and the Guarantor believe that broker-dealers who
acquired Original Notes for their own accounts, as a result of market-making
activities or other trading activities ("Participating Broker-Dealers"), may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes received upon exchange of such Original Notes with a prospectus meeting
the requirements of the Securities Act, which may be the prospectus prepared for
an exchange offer so long as it contains a description of the plan of
distribution with respect to the resale of such Exchange Notes. Accordingly,
this Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes acquired by such broker-dealer as a result of
market-making activities or other trading activities. However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of Exchange Notes received in exchange for Original Notes pursuant to the
Exchange Offer must notify the Company or the Guarantor, or cause the Company or
the Guarantor to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at one of the addresses set forth herein under "The Exchange
Offer -- Exchange Agent." Any Participating Broker-Dealer who is an "affiliate"
of the Company or the Guarantor may not rely on such interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See "The Exchange
Offer -- Resales of Exchange Notes."
<PAGE> 5
(continued from previous page)
In that regard, each Participating Broker-Dealer who surrenders Original
Notes pursuant to the Exchange Offer will be deemed to have agreed, by execution
of the Letter of Transmittal or delivery of an Agent's Message (as defined
herein), that upon receipt of notice from the Company or the Guarantor of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of
Exchange Notes pursuant to this Prospectus until the Company has amended or
supplemented this Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer, or the Company or the Guarantor has given notice that the sale of
the Exchange Notes may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary market
and no public market for the Original Notes. The Exchange Notes will be a new
issue of Securities for which there currently is no market. Although Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and BancBoston
Securities Inc., the initial purchasers of the Original Notes (the "Initial
Purchasers"), have informed the Company and the Guarantor that they each
currently intend to make a market in the Exchange Notes, they are not obligated
to do so, and any such market making may be discontinued at any time without
notice. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Notes. The Company and the Guarantor
currently do not intend to apply for listing of the Exchange Notes on any
securities exchange or for quotation through the NASD Automated Quotation
System.
Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Indenture (except
for those rights which terminate upon consummation of the Exchange Offer).
Following consummation of the Exchange Offer, the holders of Original Notes will
continue to be subject to all of the existing restrictions upon transfer thereof
and neither the Company nor the Guarantor will have any further obligation to
such holders (other than under certain limited circumstances) to provide for
registration under the Securities Act of the Original Notes held by them. To the
extent that Original Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered Original Notes could be adversely affected.
See "Risk Factors -- Consequences of a Failure to Exchange Original Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF ORIGINAL NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
ORIGINAL NOTES PURSUANT TO THE EXCHANGE OFFER.
Original Notes may be tendered for exchange on or prior to 5:00 p.m., New
York City time, on February , 1998 (such time on such date being hereinafter
called the "Expiration Date"), unless the Exchange Offer is extended by the
Company (in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended). Tenders of Original Notes may be
withdrawn at any time on or prior to the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Original Notes being
tendered for exchange. However, the Exchange Offer is subject to certain events
and conditions which may be waived by the Company or the Guarantor and to the
terms and provisions of the Registration Rights Agreement. Original Notes may be
tendered in whole or in part in any integral multiple of $1,000. The Company and
the Guarantor have agreed to pay all expenses of the Exchange Offer. See "The
Exchange Offer -- Fees and Expenses." Holders of Original Notes whose Original
Notes are accepted for exchange will not receive accrued interest on such
Original Notes for any period from and after the last Interest Payment Date to
which interest has been paid or duly provided for on such Original notes prior
to the original issue date of the Exchange Notes or, if no such interest has
been paid or duly provided for, will not receive any accrued interest on such
Original Notes, and the undersigned waives the right to receive any interest on
such Original Notes accrued from and after such Interest Payment Date or, if no
such interest has been paid or duly provided for, from and after September 30,
1997. See "The Exchange Offer -- Interest on Exchange Notes."
Neither the Company nor the Guarantor will receive any cash proceeds from
the issuance of the Exchange Notes offered hereby. No dealer-manager is being
used in connection with this Exchange Offer. See "Use of Proceeds" and "Plan of
Distribution."
<PAGE> 6
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder, and in accordance therewith files periodic reports,
proxy and information statements, and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and information
statements, and other information filed by the Company with the Commission may
be inspected at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission also maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements regarding registrants, such as the
Company, that file electronically with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not include all the information set forth in the
Registration Statement and the exhibits thereto, to which reference is made for
further information with respect to the Company. Copies of the Registration
Statement and the exhibits thereto are on file at the office of the Commission
and may be obtained from the Commission upon payment of prescribed rates or may
be examined without charge at the public reference facilities of the Commission
as prescribed above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
pursuant to the Exchange Act and are incorporated herein by reference and made a
part of this Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1997;
(b) the Company's Current Report on Form 8-K dated September 12, 1997;
and
(c) the Company's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1997.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated herein by reference and made a part of this Prospectus from the
respective dates of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A
COPY OF ANY OR ALL DOCUMENTS INCORPORATED HEREIN BY REFERENCE (OTHER THAN THE
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE). SUCH REQUESTS SHOULD BE DIRECTED TO MR. ALAN P. SHOR, ESQ., ZALE
CORPORATION, 901 W. WALNUT HILL LANE, IRVING, TEXAS 75038-1003, TELEPHONE: (972)
580-4000.
3
<PAGE> 7
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements, including statements
regarding, among other items, (i) expected capital expenditures to be made in
the future, (ii) expected significant upgrades to the Company's management
information systems over the next several years, (iii) the addition of new
locations through new store openings, (iv) the renovation and remodeling of the
Company's existing store locations, (v) the Company's effort to reduce costs,
(vi) the adequacy of the Company's sources of cash to finance its current and
future operations, (vii) the terms of renewal of the Company's store leases and
(viii) resolution of litigation without material adverse effect on the Company.
These forward-looking statements involve a number of risks and uncertainties.
Among others, factors that could cause actual results to differ materially are
the following: development of trends in the general economy; competition in the
fragmental retail jewelry business; 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 during the three month period leading up
to the Christmas season; the dependence on key personnel who have been hired or
retained by the Company; the changes in regulatory requirements which are
applicable to the Company's business; management's decisions to pursue new
distribution channels which may involve additional costs; and the risk factors
listed herein and from time to time in the Company's Securities and Exchange
Commission reports, including but not limited to, its Annual Reports on Form
10-K.
4
<PAGE> 8
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. The following summary information is qualified in its entirety
by reference to, and should be read in conjunction with, the more detailed
information and Consolidated Financial Statements (including the notes thereto)
included elsewhere in this Prospectus or incorporated by reference in this
Prospectus. Unless otherwise indicated, (i) the "Company" refers to Zale
Corporation and its subsidiaries and (ii) financial information provided herein
includes the Diamond Park Division, whose assets the Company agreed to sell
effective October 6, 1997.
THE COMPANY
The Company is the largest specialty retailer of fine jewelry in the United
States. At July 31, 1997, the Company operated 1,065 retail jewelry stores
(excluding 186 Diamond Park stores) located primarily in shopping malls
throughout the United States, Guam and Puerto Rico. The Company operates three
well-differentiated operating divisions: Zales(R) (638 stores), Gordon's(SM)
(310 stores) and Bailey, Banks and Biddle(R) (113 stores). The Zales Division is
a nationally recognized chain which provides more traditional, moderately priced
jewelry to a broad range of customers. The Gordon's Division is a regional
jeweler which offers contemporary merchandise targeted to regional preferences
at somewhat higher price points than Zales. The Bailey, Banks and Biddle
Division operates upscale jewelry stores which are considered among the pre-
eminent jewelry stores in their markets. In addition, the Company operates four
outlet stores in three states. During the fiscal year ended July 31, 1997, the
Company generated $1.3 billion and $130.0 million of net sales and EBITDA,
respectively.
The Company is well-positioned to compete in the approximately $37 billion,
highly fragmented retail jewelry industry due to its established brand names,
economies of scale and geographic and demographic diversity. The Company enjoys
significant brand name recognition as a result of its long-standing presence in
the industry and its regional and national advertising campaigns. Zales has been
in existence since 1924 and is supported by national television advertising
campaigns while Gordon's and Bailey, Banks and Biddle have been in existence
since 1905 and 1832, respectively, and are supported by regional advertising
campaigns. The Company believes that name recognition is an important advantage
in jewelry retailing as products are generally unbranded and consumers must
trust in a retailer's reliability and credibility. In addition, as the largest
specialty retailer of fine jewelry in the United States, the Company believes it
realizes economies of scale in purchasing and distribution, real estate,
advertising and administrative costs. The Company also believes that the
geographic diversity of its retail distribution network through all 50 states
and the demographic breadth of its target customer groups may serve to mitigate
earnings volatility typically associated with local or regional economic
conditions or poor weather conditions.
BUSINESS INITIATIVES
In April 1994, Robert J. DiNicola joined the Company as Chairman and Chief
Executive Officer and began recruiting other experienced retailing executives to
build a new management team. The new team revitalized the Company by
strengthening its merchandise and customer focus and instituting a highly
disciplined approach to the execution of the Company's merchandising strategy.
Under the leadership of the new management team, the Company has realized
dramatic improvements in profitability. EBITDA increased from $58.5 million, or
6.3% of net sales, in fiscal 1994 to $130.0 million, or 10.4% of net sales, in
fiscal 1997, a 30.5% compound annual increase. These profitability gains were
achieved through significant improvements in store productivity levels combined
with a tight control over expense levels. Average annual store sales (excluding
the Diamond Park Division) increased from $773,000 in fiscal 1994 to $1,073,000
in fiscal 1997, while the Company's total selling, general and administrative
expense as a percentage of net sales decreased from 43.7% in fiscal 1994 to
38.3% in fiscal 1997. The Company believes that the following initiatives were
the primary contributors to the Company's improved operating performance since
1994:
Reestablished Brand Identities. The Company, through separate divisional
management and buying teams, has created and implemented individualized
merchandising and marketing strategies to reestablish and
5
<PAGE> 9
promote distinct brand identities for its three divisions. Target markets have
been reemphasized for the Zales, Gordon's and Bailey, Banks & Biddle Divisions.
Refocused Merchandising. The Company has refocused and strengthened its
merchandising efforts. Management has developed a large selection of key items
from among the best selling products in the retail jewelry industry, such as
tennis bracelets, bridal sets and diamond stud earrings, and made certain that
these items are available in an appropriate variety of styles at a range of
competitive price points. At the same time, the Company has adopted an
aggressive approach to inventory management to keep key items in stock and
inventories more current. This is achieved through enhancements to the
merchandise system which provides regular reporting to the Company's merchandise
buyers on in stock position and slow moving merchandise. Since 1994, the Company
has employed a consistent methodology which provides better inventory turnover
and profitability information to identify slow moving merchandise and determine
appropriate merchandising actions on a more timely basis. Under this
methodology, inventory the Company considers to be slow moving decreased over
50% since fiscal 1994.
Initiated Product and Event-Focused Marketing. The Company's marketing
efforts have become more product and event-focused. Television, radio, newspaper
inserts, and direct mail advertising now feature selected key items at a variety
of price points. The Company has also broadened its marketing efforts beyond the
Christmas season to tie in with other gift-giving holidays, such as Valentine's
Day and Mother's Day. In addition, advertising and in-store promotions have been
synchronized with mall marketing efforts to take advantage of other periods of
high mall traffic, such as Labor Day, which are typically not considered jewelry
oriented holidays.
Strengthened Buying Organization. The Company has recruited experienced
buyers, centralized purchasing at a divisional level and eliminated store-level
buying to ensure consistency of quality and cost. In addition, management
believes that the Company is now leveraging its size to achieve better prices,
payment terms, return privileges and cooperative advertising arrangements with
its suppliers for certain products.
Enhanced Price-Competitive Image. The Company's image as a provider of fine
jewelry at competitive prices has been enhanced by establishing price points for
merchandise that are perceived by customers as good values. Certain items are
labeled "Brilliant Buys," "Gordon's Gems" and "Best Buys" in the Zales, Gordon's
and Bailey, Banks & Biddle stores, respectively. These items are prominently
displayed along with their prices throughout the store, a practice that is
uncommon in the U.S. jewelry retailing industry and one that the Company
believes enhances its reputation for pricing integrity.
Improved Store Environment and Management. Over the last three years,
nearly 50% of the Company's store base has been either refurbished or remodeled.
Sales for refurbished or remodeled stores have historically increased by over
10% in the year following refurbishment or remodeling. The Company has taken
steps to provide upgraded sales and product training to sales personnel
company-wide through employee and manager training programs. Staffing schedules
are now coordinated to better allocate employees during peak periods.
Strengthened Management Team. The Company continues to act to strengthen
and retain its senior management in an effort to achieve its growth and
strategic objectives. In August 1996, the Company entered into a five-year
employment agreement with Robert J. DiNicola, its Chairman and Chief Executive
Officer since 1994. Among other recent appointments, the Company also named
Beryl B. Raff as Executive Vice President, Chief Operating Officer, Alan P. Shor
as Executive Vice President, Chief Logistics Officer, Mary L. Forte as Executive
Vice President, Chief Administrative Officer, and Sue E. Gove as Group Vice
President and Chief Financial Officer.
BUSINESS STRATEGY
The Company's business objective is to maximize profit and shareholder
value by expanding its core business through improved store productivity, new
store openings and operating margin expansion while maintaining disciplined
credit policies and a strong capital structure. The Company believes that
further improvement in operating performance can be achieved by pursuing the
strategies described below.
6
<PAGE> 10
Further Improve Store Productivity. The Company's strategy is to continue
to increase store productivity and profitability at all divisions by: (i)
focusing on the core categories of bridal, fashion and watches; (ii) using key
item merchandise to drive volume; (iii) remodeling and renovating all existing
stores; (iv) enhancing merchandising systems to assist buyer decision making;
(v) executing tailored staffing and training programs for store personnel; (vi)
focusing advertising on brand building and product distinction; and (vii)
providing exclusive products to develop brand distinction.
Strengthen and Expand Store Base. The Company plans to open approximately
220 new stores, principally in the Zales Division, for which it will incur
approximately $50 million in capital expenditures during the combined fiscal
years 1998 and 1999. These stores will solidify the Company's core mall business
by further penetrating markets where the Company is underrepresented. The
Company targets premier regional mall locations throughout the country and
selects sites based on a variety of well-defined demographic and store expense
characteristics. The Company has identified the specific malls for this planned
expansion which satisfy the Company's real estate strategy. The Company also
plans to refurbish, remodel or relocate approximately 300 stores at a cost of
approximately $50 million during the same period.
Cost Effectiveness Initiatives. As increases in store productivity, an
expanding store base and new distribution channels increase sales, the Company
expects to leverage expenses, such as administrative, general corporate and
advertising expenses over a larger sales base, resulting in higher operating
profit margins. The Company has instituted a focused effort to reduce selling,
general and administrative expenses by eliminating duplicative areas,
streamlining processes and leveraging technology where possible. Initiatives
include: (i) improving the return on credit operations, including establishing a
credit card bank which will allow greater flexibility in establishing finance
charge rates to customers and will simplify the regulatory requirements under
which the Company operates; (ii) outsourcing certain non-strategic functions,
including certain aspects of MIS operations, credit card remittance processing,
and the internal audit department among other areas; and (iii) streamlining
corporate operations through review and improvement of current processes and
application of new technology in areas such as merchandising, credit, store
point of sale and financial systems.
Disciplined Credit Policies. The Company continues to apply a disciplined
approach to its credit policies, which are controlled centrally for all
divisions. Behavioral scoring models, which are reevaluated quarterly, are
utilized to assess risk in making credit granting decisions. The Company has
tightened credit standards, particularly in the Gordon's Division, where
standards were increased in 1995 in connection with its repositioning as a more
upscale regional brand. Delinquency as a percentage of accounts receivable has
declined from 10.1% to 9.1% from fiscal 1994 to fiscal 1997. Private label
credit cards are used in approximately 50% of the Company's net sales (excluding
the Diamond Park Division).
Maintain Strong Capital Structure. The Company intends to maintain a strong
balance sheet to support its growth objective. The Company believes that future
cash flows from operations (supplemented by borrowings under its senior credit
facility and amounts available under its receivables securitization facility)
will be sufficient to fund the Company's current operations, debt service and
capital expenditure requirements for the foreseeable future.
7
<PAGE> 11
RECENT DEVELOPMENT
On September 3, 1997, the Company signed a purchase agreement to sell the
majority of the assets of its Diamond Park Division (the "Diamond Park Asset
Sale"). The Diamond Park Division, which manages leased fine jewelry departments
in major department store chains including Marshall Field's, Dillard's,
Mercantile and Parisian, had net sales and EBITDA of $125.3 million and
approximately $6.0 million after certain corporate allocations, respectively, in
fiscal 1997. At July 31, 1997, inventory and net property and equipment of the
Diamond Park Division were $54.5 million and $4.0 million, respectively. In
connection with the Diamond Park Asset Sale, the Company will receive cash
consideration totaling approximately $63 million. The Company will continue to
operate in Dillard's stores through January 1998, the end of the current license
period, at which time the remaining inventory of such operations will be sold to
the purchaser. Net proceeds from the Diamond Park Asset Sale were reinvested
into the Company's operations. The closing of the Diamond Park Asset Sale
occurred on October 6, 1997.
8
<PAGE> 12
THE EXCHANGE OFFER
The Exchange Offer......... Up to $100,000,000 aggregate principal amount of
Exchange Notes are being offered in exchange for a
like principal amount of Original Notes. The terms
of the Exchange Notes and the Original Notes are
substantially identical. Original Notes may be
tendered for exchange in whole or in part in any
integral multiple of $1,000. The Company and the
Guarantor are making the Exchange Offer in order to
satisfy their obligations under the Registration
Rights Agreement relating to the Original Notes.
For a description of the procedures for tendering
the Original Notes, see "The Exchange
Offer -- Procedures for Tendering Notes."
Expiration Date............ 5:00 p.m., New York City time, February , 1998,
unless the Exchange Offer is extended by the
Company (in which case the Expiration Date will be
the latest date and time to which the Exchange
Offer is extended). See "The Exchange
Offer -- Terms of the Exchange Offer."
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, certain of which may be waived by the
Company in its sole discretion. The Exchange Offer
is not conditioned upon any minimum principal
amount of Original Notes being tendered. See "The
Exchange Offer -- Conditions to Exchange Offer."
The Company reserves the right in its sole and
absolute discretion, subject to applicable law, at
any time and from time to time, (i) to delay the
acceptance of the Original Notes for exchange, (ii)
to terminate the Exchange Offer if certain
specified conditions have not been satisfied, (iii)
to extend the Expiration Date of the Exchange Offer
and retain all Original Notes tendered pursuant to
the Exchange Offer, subject, however, to the right
of holders of Original Notes to withdraw their
tendered Original Notes, or (iv) to waive any
condition or otherwise amend the terms of the
Exchange Offer in any respect. See "The Exchange
Offer -- Terms of the Exchange Offer."
Withdrawal Rights.......... Tenders of Original Notes may be withdrawn at any
time on or prior to the Expiration Date by
delivering a written notice of such withdrawal to
the Exchange Agent in conformity with certain
procedures set forth below under "The Exchange
Offer -- Withdrawal Rights."
Procedures for Tendering
Original Notes........... Tendering holders of Original Notes must complete
and sign a Letter of Transmittal in accordance with
the instructions contained therein and forward the
same by mail, facsimile or hand delivery, together
with any other required documents, to the Exchange
Agent, either with the Original Notes to be
tendered or in compliance with the specified
procedures for guaranteed delivery of Original
Notes. Certain brokers, dealers, commercial banks,
trust companies and other nominees may also effect
tenders by book-entry transfer. Holders of Original
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee are
urged to contact such person promptly if they wish
to tender Original Notes pursuant to the Exchange
Offer. See "The Exchange Offer -- Procedures for
Tendering Original Notes."
Letters of Transmittal and certificates
representing Original Notes should not be sent to
the Company or the Guarantor. Such documents should
only be sent to the Exchange Agent.
9
<PAGE> 13
Resales of Exchange
Notes...................... The Company is making the Exchange Offer in
reliance on the position of the staff of the
Division of Corporation Finance of the Commission
as set forth in certain interpretive letters
addressed to third parties in other transactions.
However, neither the Company nor the Guarantor has
sought its own interpretive letter and there can be
no assurance that the staff of the Division of
Corporation Finance of the Commission would make a
similar determination with respect to the Exchange
Offer as it has in such interpretive letters to
third parties. Based on these interpretations by
the staff of the Division of Corporation Finance of
the Commission, and subject to the two immediately
following sentences, the Company and the Guarantor
believe that Exchange Notes issued pursuant to this
Exchange Offer in exchange for Original Notes may
be offered for resale, resold and otherwise
transferred by a holder thereof (other than a
holder who is a broker-dealer) without further
compliance with the registration and prospectus
delivery requirements of the Securities Act,
provided that such Exchange Notes are acquired in
the ordinary course of such holder's business and
that such holder is not participating, and has no
arrangement or understanding with any person to
participate, in a distribution (within the meaning
of the Securities Act) of such Exchange Notes.
However, any holder of Original Notes who is an
"affiliate" of the Company or the Guarantor or who
intends to participate in the Exchange Offer for
the purpose of distributing the Exchange Notes, or
any broker-dealer who purchased the Original Notes
from the Company to resell pursuant to Rule 144A or
any other available exemption under the Securities
Act, (a) will not be able to rely on the
interpretations of the staff of the Division of
Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such
Original Notes in the Exchange Offer and (c) must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any sale or other transfer of such
Original Notes unless such sale is made pursuant to
an exemption from such requirements. In addition,
as described below, if any broker-dealer holds
Original Notes acquired for its own account as a
result of market-making or other trading activities
and exchanges such Original Notes for Exchange
Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resales of
such Exchange Notes. See "Plan of Distribution."
Each holder of Original Notes who wishes to
exchange Original Notes for Exchange Notes in the
Exchange Offer will be required to represent that
(i) it is not an "affiliate" of the Company or the
Guarantor, (ii) any Exchange Notes to be received
by it are being acquired in the ordinary course of
its business, (iii) it has no arrangement or
understanding with any person to participate in a
distribution (within the meaning of the Securities
Act) of such Exchange Notes, and (iv) if such
holder is not a broker-dealer, such holder is not
engaged in, and does not intend to engage in, a
distribution (within the meaning of the Securities
Act) of such Exchange Notes. Each broker-dealer
that receives Exchange Notes for its own account in
exchange for Original Notes must acknowledge that
such Original Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities and must
agree that it will deliver a prospectus in
connection with any resale of such
10
<PAGE> 14
Exchange Notes. See "Plan of Distribution." The
Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the
staff of the Division of Corporation Finance of the
Commission in the interpretive letters referred to
above, the Company and the Guarantor believe that
Participating Broker-Dealers who acquired Original
Notes for their own accounts as a result of
market-making activities or other trading
activities may fulfill their prospectus delivery
requirements with respect to the Exchange Notes
received upon exchange of such Original Notes
(other than Original Notes which represent an
unsold allotment from the initial sale of the
Original Notes) with a prospectus meeting the
requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so
long as it contains a description of the plan of
distribution with respect to the resale of such
Exchange Notes. Accordingly, this Prospectus, as it
may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes received
in exchange for Original Notes where such Original
Notes were acquired by such Participating
Broker-Dealer for its own account as a result of
market-making or other trading activities, subject
to certain provisions set forth in the Registration
Rights Agreement and to the limitations described
below under "The Exchange Offer -- Resales of
Exchange Notes." Any Participating Broker-Dealer
who is an "affiliate" of the Company or the
Guarantor may not rely on such interpretive letters
and must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any resale transaction. See
"The Exchange Offer -- Resales of Exchange Notes."
Exchange Agent............. The exchange agent with respect to the Exchange
Offer is Bank One, N.A. (the "Exchange Agent"). The
addresses, and telephone and facsimile numbers, of
the Exchange Agent are set forth in "The Exchange
Offer -- The Exchange Agent" and in the Letter of
Transmittal.
Use of Proceeds............ Neither the Company nor the Guarantor will receive
any cash proceeds from the issuance of the Exchange
Notes offered hereby. See "Use of Proceeds."
Certain Federal Income Tax
Considerations........... Holders of Original Notes should review the
information set forth under "Certain Federal Income
Tax Considerations" prior to tendering Original
Notes in the Exchange Offer.
11
<PAGE> 15
TERMS OF EXCHANGE NOTES
Securities Offered......... $100 million aggregate principal amount of 8 1/2%
Series B Senior Notes due 2007.
Maturity................... October 1, 2007.
Interest Payment Dates..... Interest on the Exchange Notes will be payable
semi-annually in arrears on April 1 and October 1
of each year, commencing April 1, 1998.
Ranking.................... The Exchange Notes will be unsecured obligations of
the Company and, as such, will rank pari passu in
right of payment with all other existing and future
senior indebtedness of the Company. The Exchange
Notes will be guaranteed on a senior basis by the
Guarantor. The Exchange Notes Guarantee will be an
unsecured senior obligation of the Guarantor and
will rank pari passu with all existing and future
senior indebtedness of the Company and the
Guarantor. The Exchange Notes and the Exchange
Notes Guarantee will also be effectively
subordinated to secured indebtedness of the Company
and the Guarantor. As of July 31, 1997, on a pro
forma basis after giving effect to the Offering and
the application of the estimated net proceeds
therefrom, the Company and the Guarantor would have
had $381.1 million in aggregate principal amount of
Indebtedness outstanding which ranked pari passu in
right of payment with the Exchange Notes and the
Exchange Notes Guarantee (all of which would have
been secured) and no Indebtedness outstanding which
ranked subordinate in right of payment to the
Exchange Notes and the Exchange Notes Guarantee.
Optional Redemption........ The Exchange Notes are redeemable for cash at any
time on or after October 1, 2002, at the option of
the Company, in whole or in part, at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption.
In addition, at any time on or prior to October 1,
2000, the Company may, at its option, use the net
proceeds of one or more Public Equity Offerings to
redeem up to an aggregate of 30% of the aggregate
principal amount of Exchange Notes originally
issued under the Indenture at a redemption price
equal to 108.5% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon,
if any, to the redemption date; provided that at
least 70% of the aggregate principal amount of
Exchange Notes originally issued under the
Indenture remains outstanding immediately after the
occurrence of such redemption. See "Description of
the Notes -- Optional Redemption."
Change of Control
Triggering Event........... Upon the occurrence of a Change of Control
Triggering Event, each holder of the Exchange Notes
may require the Company to purchase all or a
portion of such holder's Exchange Notes at a cash
purchase price equal to 101% of the principal
amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See
"Description of the Notes -- Change of Control
Triggering Event."
Certain Covenants.......... The indenture relating to the Exchange Notes (the
"Indenture") will contain certain restrictive
covenants, including, but not limited to, covenants
with respect to the following matters: (i)
limitation on indebtedness; (ii) limitation on
restricted payments; (iii) limitation on
transactions with affiliates; (iv) limitation on
issuances of guarantees by
12
<PAGE> 16
subsidiaries; (viii) limitation on designations of
unrestricted subsidiaries; (ix) limitation on the
issuance of preferred stock of subsidiaries; and
(x) restrictions on mergers, consolidations and the
transfer of all or substantially all of the assets
of the Company. These covenants are subject to
important exceptions and qualifications. The
Indenture will provide that after the Exchange
Notes achieve an investment grade rating from both
the Standard and Poor's Ratings Group and Moody's
Investors Service, Inc., the Company's and the
Guarantor's obligation to comply with certain of
the restrictive covenants described herein will be
terminated, regardless of whether the Company
maintains such investment grade rating. See
"Description of the Notes -- Certain Covenants."
13
<PAGE> 17
SUMMARY FINANCIAL AND OPERATING DATA
The following information for the years ended July 31, 1997, 1996, 1995 and
1994 should be read in conjunction with "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's audited Consolidated Financial Statements and the
Notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................. $1,253,818 $1,137,377 $1,036,149 $920,307
Cost of sales............................................. 643,318 576,764 524,010 460,060
---------- ---------- ---------- ----------
Gross margin.............................................. 610,500 560,613 512,139 460,247
Selling, general and administrative expenses.............. 480,522 457,371 434,101 401,744
Depreciation and amortization expense (credit)............ 14,022 7,538 381 (4,385)
Operating earnings........................................ 115,956 100,190 77,657 62,888
Interest expense, net..................................... 36,098 30,102 29,837 28,142
Earnings before income taxes & extraordinary items........ 79,858 70,088 47,820 34,746
Net earnings.............................................. 50,553 43,898 31,470 21,557
BALANCE SHEET DATA:
Cash and cash equivalents................................. $41,636 $50,046 $154,905 $153,700
Customer receivables, net................................. 454,270 419,877 396,380 397,886
Merchandise inventories................................... 511,702 457,862 375,413 401,034
Property and equipment, net............................... 138,011 108,254 71,487 37,211
Total assets.............................................. 1,281,206 1,163,811 1,110,708 1,112,647
Total debt................................................ 451,787 404,354 443,624 447,478
Stockholders' investment.................................. 541,574 476,258 391,890 342,740
OTHER FINANCIAL DATA:
EBITDAR(a)................................................ $231,324 $196,086 $165,434 $139,391
Rental expense............................................ 101,346 92,844 87,396 80,888
---------- ---------- ---------- ----------
EBITDA(a)................................................. $129,978 $103,242 $78,038 $58,503
========== ========== ========== ==========
Capital expenditures...................................... $54,025 $48,790 $42,295 $27,838
Ratio of EBITDA to interest expense....................... 3.5x 3.1x 2.1x 1.9x
Ratio of total debt to EBITDA............................. 3.5x 3.9x 5.7x 7.6x
Gross margin %............................................ 48.7% 49.3% 49.4% 50.0%
S,G&A as % of net sales................................... 38.3% 40.2% 41.9% 43.7%
EBITDA as % of net sales.................................. 10.4% 9.1% 7.5% 6.3%
SELECTED STORE DATA:
Average Sales per Store
Zales................................................... $1,013 $974 $850 $719
Gordon's................................................ 888 803 711 629
Bailey, Banks & Biddle.................................. 1,990 1,755 1,556 1,408
Total(b)................................................ 1,073 1,010 886 773
Stores
Beginning of period..................................... 1,195 1,181 1,231 1,265
Opened.................................................. 117 137 35 29
Closed.................................................. 61 123 85 63
---------- ---------- ---------- ----------
End of period....................................... 1,251 1,195 1,181 1,231
</TABLE>
- ---------------
(a) "EBITDA" represents, for any period, income (loss) before interest expense,
income taxes, depreciation and amortization and unusual items. "EBITDAR"
represents, for any period, income (loss) before interest expense, income
taxes, depreciation and amortization, rent expense and unusual items.
EBITDA and EBITDAR are presented because they are accepted financial
indicators of a company's ability to service and/or incur indebtedness and
management believes that their presentation is helpful to investors.
However, these measures should not be considered as alternatives to net
income as a measure of the Company's operating results or to cash flows as
a measure of liquidity. In addition, although the EBITDA and EBITDAR
measures of performance are not recognized under generally accepted
accounting principles, they are widely used by companies as a general
measure of a company's operating performance because they assist in
comparing performance on a relatively consistent basis across companies
without regard to depreciation and amortization, which can vary
significantly depending on accounting methods or non-operating factors such
as historical cost bases. Because EBITDA and EBITDAR are not calculated
identically by all companies, the presentation herein may not be comparable
to other similarly titled measures of other companies.
(b) Based on sales per store open a full twelve months during the respective
fiscal year. Data for the Diamond Park Division is excluded in all years.
14
<PAGE> 18
RISK FACTORS
Prospective investors should carefully consider the factors set forth
below, as well as the other information contained in this Prospectus, in
evaluating an investment in the Exchange Notes offered hereby. In addition to
the historical and pro forma information contained herein, the discussion in
this Prospectus contains forward-looking statements with respect to the Company
that involve risks and uncertainties. The actual performance and results of the
Company could differ materially from those discussed in this Prospectus. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Risk Factors" below, as well as those discussed
elsewhere in this Prospectus.
INDEBTEDNESS OF THE COMPANY; RANKING
As of July 31, 1997, after giving effect to the Offering and the
application of the estimated net proceeds therefrom, the Company would have had
approximately $481.1 million of long-term debt (which would have represented
approximately 47.0% of its total capitalization) and would have had $225.0
million available for borrowing under its Revolving Credit Agreement. The
Company also has significant operating lease obligations related to its stores.
In addition, the Indenture and the Company's other debt instruments will allow
the Company to incur certain additional indebtedness, including secured
indebtedness. See "Capitalization," "Description of Certain Indebtedness,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Lease Commitments" in Notes to Consolidated Financial
Statements.
The Indenture and the instruments governing the Company's other
indebtedness, including the Revolving Credit Agreement, contain certain
covenants limiting, among other things, the incurrence of additional
indebtedness, the payment of dividends, the making of certain investments, the
creation of liens and asset sales and certain mergers and consolidations. The
degree of the Company's indebtedness and the restrictions included in the
Company's debt instruments could impair the Company's ability to obtain
additional financing, reduce the funds available to the Company for its
operations, expose the Company to the risk of greater interest rates, place the
Company at a relative competitive disadvantage and make the Company more
vulnerable to changing economic conditions. See "Description of the
Notes -- Certain Covenants" and "Description of Certain Indebtedness."
The Exchange Notes are senior obligations of the Company. As of the date
hereof, virtually all of the consolidated assets of the Company are held by the
Guarantor. Therefore, the Company's ability to service its debt is dependent
upon the receipt of funds from the Guarantor. The Guarantor is a co-obligor
under the Revolving Credit Agreement and will provide a full and unconditional
senior guarantee of the Company's obligations under the Exchange Notes. The
Exchange Notes Guarantee may be subject to review under relevant federal and
state fraudulent conveyance law or otherwise. In addition, the Notes Exchange
and the Exchange Notes Guarantee will be effectively subordinated to all
indebtedness of subsidiaries of the Company and the Guarantor and to all secured
indebtedness of the Company and the Guarantor to the extent of the value of the
assets securing such indebtedness. After any realization upon the collateral or
a dissolution, liquidation, reorganization or similar proceeding involving the
Company or the Guarantor, there can be no assurance that there will be
sufficient available proceeds or other assets for holders of the Exchange Notes
to recover all or any portion of their claims under the Exchange Notes and the
Indenture.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture governing the terms of the Exchange Notes will contain
certain covenants limiting, subject to certain exceptions, the incurrence of
additional indebtedness, the payment of dividends, the redemption of capital
stock, the making of certain investments, the issuance of stock of subsidiaries,
the creation of liens and other restrictions affecting the Company's
subsidiaries, the issuance of guarantees, transactions with affiliates, asset
sales and certain mergers and consolidations. A breach of any of these covenants
could result in an event of default under the Indenture. In addition, the
Revolving Credit Agreement and the instruments governing the Company's other
indebtedness (the "Other Indebtedness") contain other restrictive covenants
which require the Company to satisfy certain financial tests and which could
result in an event of default under the Indenture. The Company's ability to
comply with such covenants and to satisfy such financial tests may be
15
<PAGE> 19
affected by events beyond its control. A breach of any of these covenants could
result in an event of default under the Revolving Credit Agreement or Other
Indebtedness. In the event of a default under the Revolving Credit Agreement or
Other Indebtedness, the lenders thereunder could elect to declare all amounts
borrowed, together with accrued interest, to be immediately due and payable, and
the lenders under the Revolving Credit Agreement could terminate all commitments
thereunder. In addition, a default under the Revolving Credit Agreement or Other
Indebtedness could constitute a cross-default under the Indenture and any
instruments governing the Other Indebtedness, and a default under the Indenture
could constitute a cross-default under the Revolving Credit Agreement and any
Other Indebtedness. See "Description of the Notes -- Certain Covenants" and
"Description of Certain Indebtedness."
IMPACT OF GENERAL ECONOMIC CONDITIONS
Jewelry purchases are discretionary for consumers and may be particularly
affected by adverse trends in the general economy. The success of the Company's
operations depends to a significant extent upon a number of factors relating to
discretionary consumer spending, including economic conditions (and perceptions
of such conditions by consumers) affecting disposable consumer income such as
employment, wages and salaries, business conditions, interest rates,
availability of credit and taxation, for the economy as a whole and in regional
and local markets where the Company operates. In addition, the Company is
dependent upon the continued popularity of malls as a shopping destination and
the ability of malls, their tenants and other mall attractions to generate
customer traffic for its stores. There can be no assurance that consumer
spending will not be adversely affected by general economic conditions or that
mall traffic will not decrease, either of which could negatively impact the
Company's results of operations or financial condition.
Any significant deterioration in general economic conditions or increases
in interest rates may inhibit consumers' use of credit and cause a material
adverse effect on the Company's net sales and profitability. In addition,
approximately 50% of the Company's net sales (excluding the Diamond Park
Division) are made on private label credit cards. Furthermore, any downturn in
general or local economic conditions in the markets in which it operates could
materially adversely affect its collection of outstanding customer accounts
receivables.
COMPETITION
The retail jewelry industry is highly competitive and fragmented. The
Company competes with a large number of independent regional and local jewelry
retailers, as well as with nationally recognized jewelry chains. The Company
also competes with other types of retailers who sell jewelry and gift items,
such as department stores, catalog showrooms, discounters, direct mail suppliers
and television home shopping networks. Certain of the Company's competitors are
non-specialty jewelry retailers, which are larger and have greater financial
resources than the Company. Competition may increase in the future as various
additional forms of direct access shopping (with lower built-in costs) become
available through developments in technology. Management believes that the
primary competitive factors affecting its operations are reputation and
branding, breadth and depth of merchandise offered, store location and
atmosphere, marketing, pricing, quality of sales personnel and customer service,
and ability to offer private label credit. The Company also believes that it
competes for consumers' discretionary spending dollars with retailers that offer
merchandise other than jewelry. In addition, the Company competes with jewelry
and other retailers for desirable locations and qualified personnel. If the
Company falls behind competitors with respect to one or more of these factors,
the Company's results of operations or financial condition could be materially
adversely affected. See "Business -- Competition."
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
The Company's business is highly seasonal, with a significant portion of
its net sales and the majority of its operating earnings generated during the
second fiscal quarter ending January 31, which includes the Christmas season.
Net sales in the second quarters of fiscal 1997 and 1996 accounted for 40.3% and
39.7%, respectively, of annual net sales for such fiscal years. Operating
earnings for the second quarters of fiscal 1997 and 1996 accounted for 78.3% and
79.6%, respectively, of annual operating earnings for such fiscal years. The
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Company has historically experienced net losses or nominal net earnings and
lower net sales in each of its first, third and fourth fiscal quarters. The
Company expects to continue to experience this seasonal fluctuation in its net
sales and net earnings. Because a significant percentage of the Company's net
sales and net earnings for a fiscal year results from operations in the second
quarter, the Company has limited ability to compensate for shortfalls in second
quarter sales or earnings by changes in its operations or strategies in other
quarters. A significant shortfall in results for the second quarter of any
fiscal year can thus be expected to have a material adverse effect on the
Company's annual results of operations. The Company's quarterly results of
operations also may fluctuate significantly as a result of a variety of factors,
including the timing of new store openings, net sales contributed by new stores,
increases or decreases in comparable store sales, timing of certain holidays,
negative publicity regarding litigation or other matters, changes in the
Company's merchandise, general economic, industry and weather conditions that
affect consumer spending and actions of competitors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MERCHANDISE SUPPLY AND INVENTORY
During fiscal 1997 and fiscal 1996, the Company purchased approximately 27%
and 29%, respectively, of its merchandise from its top five vendors, including
more than 10% from its top vendor. Although the Company believes that alternate
sources of supply are available, the abrupt loss of any significant supplier
during the three month period leading up to the Christmas season could result in
a material adverse effect on the Company's business. The retail jewelry industry
generally is affected by fluctuations in the prices of gold and diamonds and, to
a lesser extent, other precious and semi-precious metals and stones. The Company
does not hedge against fluctuations in the cost of diamonds or gold. A
significant increase in prices or decrease in the availability of gold or
diamonds could have a material adverse effect on the Company's business. The
supply and price of diamonds in the principal world markets are significantly
influenced by a single entity, the Central Selling Organization (the "CSO"), a
marketing arm of DeBeers Consolidated Mines Ltd. of South Africa. The CSO has
traditionally controlled the marketing of a substantial majority of the world's
supply of diamonds and sells rough diamonds to worldwide diamond cutters from
its London office in quantities and at prices determined in its sole discretion.
The availability of diamonds to the CSO and the Company's suppliers is to some
extent dependent on the political situation in diamond producing countries, such
as South Africa, Botswana, Zaire, the former Soviet republics and Australia, and
on the continuation of the prevailing supply and marketing arrangements for raw
diamonds. Until alternate sources could be developed, any sustained interruption
in the supply of diamonds from the significant producing countries could
adversely affect the Company and the retail jewelry industry as a whole. See
"Business -- Purchasing and Inventory."
A portion of the Company's inventory represents slow moving merchandise.
The Company has a methodology that it believes results in timely identification
and valuation of this merchandise. In addition, it believes that the disposition
of this merchandise can continue to be carried out without materially affecting
the Company's merchandising and pricing strategies. However, there can be no
assurance that slow moving inventory or other merchandising difficulties will
not adversely affect the Company's business or financial results.
DEPENDENCE ON KEY PERSONNEL
Since 1994, the Company has hired Robert J. DiNicola, its Chairman,
President and Chief Executive Officer, and has retained or recruited a number of
other senior executives and other key employees. The Company is dependent on
these personnel, who have been instrumental in designing and implementing the
Company's recent initiatives and are involved in the strategies for the
Company's future growth and profitability. The loss of services of Mr. DiNicola
or other key members of management could have a material adverse effect on the
Company's results of operations and financial condition. Mr. DiNicola and the
Company have entered into an employment agreement that will expire on August 1,
2001, unless terminated earlier. See "Management." There can be no assurance
that the Company will be able to attract and retain additional qualified
personnel as needed in the future. The Company does not maintain key-man life
insurance on its senior executives or other key employees.
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<PAGE> 21
REGULATION
The Company's operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts and limitations on the maximum amount of
finance charges that may be charged by a credit provider. In addition to the
Company's private label credit cards, credit to the Company's customers is
provided primarily through bank cards such as Visa, MasterCard, and Discover,
without recourse to the Company based upon a customer's failure to pay. Any
change in the regulation of credit which would materially limit the availability
of credit to the Company's traditional customer base could adversely affect the
Company's results of operations or financial condition.
The sale of insurance products by the Company is also highly regulated.
State laws currently impose disclosure obligations with respect to the Company's
sale of credit and other insurance. The Company's and its competitors' practices
are also subject to review in the ordinary course of business by the Federal
Trade Commission, and the Company's and other retail company credit card banks
will be subject to regulation by the Office of the Comptroller of the Currency
(the "OCC"). The Company believes that it is currently in material compliance
with all applicable state and federal regulations. However, there can be no
assurance that a failure to comply with applicable regulations will not have a
material adverse effect on the Company.
A substantial amount of merchandise in the retail jewelry industry is
commonly sold at a discount to the "regular" or "original" price. A number of
states in which the Company operates have regulations which require that the
retailers offering merchandise at discounted prices must offer the merchandise
at the regular or original prices for stated periods of time. The Company
believes that it is in compliance with all applicable federal and state laws
with respect to such practices.
EXPANSION PROGRAM
The growth of the Company's net sales and net earnings will depend, to some
extent, on the Company's ability to expand its operations through the opening of
new stores in existing and new markets and to operate those stores profitably.
The Company operated 1,065 stores (excluding the Diamond Park Division) in all
50 states, Puerto Rico and Guam at July 31, 1997 and plans to open approximately
220 new stores during the combined fiscal years 1998 and 1999. Achieving the
Company's expansion goals will depend on a number of factors, including the
Company's ability to identify and secure suitable locations on acceptable terms,
open new stores in a timely manner, hire and train additional store and
supervisory personnel, integrate new stores into its operations on a profitable
basis and modify its management information systems. Furthermore, the Company
will continually need to evaluate the adequacy of its store management and
systems to manage its planned expansion. The Company anticipates that there will
continue to be significant competition among specialty retailers for desirable
store sites and qualified personnel. There can be no assurance that the Company
will be able to achieve its expansion goals on a timely or profitable basis. See
"Business -- Business Strategy."
Management believes that cash flow from operating activities, borrowings
under the Company's Revolving Credit Agreement and Receivables Securitization
Facility (as defined herein) and proceeds from the Offering and the Diamond Park
Asset Sale will provide adequate funds to finance the Company's expansion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." However, if these sources of
funds are inadequate to finance the Company's expansion, it may require capital
from additional sources. There can be no assurance as to the future availability
of additional financing or the terms thereof, and failure to obtain such
financing on acceptable terms could require the Company to alter its expansion
plans or otherwise adversely affect the Company.
RISK FACTORS RELATED TO EXCHANGE OFFER
CONSEQUENCES OF A FAILURE TO EXCHANGE ORIGINAL NOTES
The Original Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption
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<PAGE> 22
therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Original Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Original Notes which remain
outstanding will not be entitled to any rights to have such Original Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions). The
Company does not intend to register under the Securities Act any Original Notes
which remain outstanding after consummation of the Exchange Offer (subject to
such limited exceptions, if applicable). To the extent that Original Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Original Notes could be adversely affected. The Original Notes
provide, among other things, that, if a registration statement relating to the
Exchange Offer has not been filed and declared effective within certain
specified periods, the interest rate borne by the Original Notes will increase
by 0.25% each 90-day period that such additional interest rate continues to
accrue under any such circumstance, up to an aggregate maximum increase equal to
1% per annum, until such registration statement has been filed or declared
effective, as the case may be. Upon consummation of the Exchange Offer, holders
of Original Notes will not be entitled to any increase in the interest rate
thereon or any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Description of the Notes."
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Original Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Exchange
Agent of such Original Notes, a properly completed and duly executed Letter of
Transmittal or Agent's Message in lieu thereof and all other required documents.
Therefore, holders of the Original Notes desiring to tender such Original Notes
in exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Original Notes for exchange.
LACK OF ESTABLISHED TRADING MARKET FOR EXCHANGE NOTES
The Original Notes were issued to, and the Company believes such securities
are currently owned by, a relatively small number of beneficial owners. The
Original Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability if they are not exchanged for the
Exchange Notes. Although the Exchange Notes may be resold or otherwise
transferred by the holders (who are not affiliates of the Company) without
compliance with the registration requirements under the Securities Act, they
will constitute a new issue of securities with no established trading market.
The Company has been advised by the Initial Purchasers that the Initial
Purchasers presently intend to make a market in the Exchange Notes. However, the
Initial Purchasers are not obligated to do so and any market-making activity
with respect to the Exchange Notes may be discontinued at any time without
notice. In addition, such market-making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act and may be limited during the
Exchange Offer. Accordingly, no assurance can be given that an active public or
other market will develop for the Exchange Notes or the Original Notes, or as to
the liquidity of or the trading market for the Exchange Notes or the Original
Notes. If an active public market does not develop, the market price and
liquidity of the Exchange Notes may be adversely affected. If a public trading
market develops for the Exchange Notes, future trading prices will depend on
many factors, including, among other things, prevailing interest rates, the
financial condition of the Company and the market for similar securities.
Depending on these and other factors, the Exchange Notes may trade at a
discount. Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" (as defined under Rule 405 of the Securities
Act) of the Company may publicly offer for sale or resell the Exchange Notes
only in compliance with the provisions of Rule 144 under the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
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<PAGE> 23
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Original Notes, the Company and the
Guarantor entered into the Registration Rights Agreement with the Initial
Purchasers, pursuant to which the Company and the Guarantor agreed to use their
reasonable best efforts to file and to cause to become effective with the
Commission a registration statement with respect to the exchange of the Original
Notes for Notes with terms identical in all material respects to the terms of
the Original Notes except as described herein. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Exchange Offer is being made to satisfy the
contractual obligations of the Company under the Registration Rights Agreement.
The form and terms of the Exchange Notes are the same as the form and terms of
the Original Notes except that the Exchange Notes have been registered under the
Securities Act and will not be subject to certain restrictions on transfer
applicable to the Original Notes. In that regard, the Original Notes provide,
among other things, that, if a registration statement relating to the Exchange
Offer has not been filed and declared effective within certain specified
periods, the interest rate borne by the Original Notes will increase by 0.25%
per annum each 90-day period that such additional interest rate continues to
accrue under any such circumstance, up to an aggregate maximum increase equal to
1% per annum, until such registration statement is filed or declared effective,
as the case may be. Upon consummation of the Exchange Offer, holders of Original
Notes will not be entitled to any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See "Risk
Factors -- Consequences of a Failure to Exchange Original Notes" and
"Description of the Notes." The Exchange Offer is not being made to holders of
Original Notes in any jurisdiction in which the Exchange Offer or the acceptance
thereof would not be in compliance with the securities or blue sky laws of such
jurisdiction. Unless the context requires otherwise, the term "holder" with
respect to the Exchange Offer means any person who has obtained a properly
completed bond power from the registered holder, or any person whose Original
Notes are held of record by DTC who desires to deliver such Original Notes by
book-entry transfer at DTC. Pursuant to the Exchange Offer, the Company will
exchange as soon as practicable after the Expiration Date the Original Notes for
a like aggregate principal amount of the Exchange Notes and the Guarantor will
exchange as soon as practicable after the date hereof the Original Notes
Guarantee for the Exchange Notes Guarantee, which have also been registered
under the Securities Act.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $100,000,000 aggregate principal amount of Exchange Notes for a
like aggregate principal amount of Original Notes properly tendered on or prior
to the Expiration Date and not properly withdrawn in accordance with the
procedures described below. The Company will issue, promptly after the
Expiration Date, an aggregate principal amount of up to $100,000,000 of Exchange
Notes in exchange for a like principal amount of outstanding Original Notes
tendered and accepted in connection with the Exchange Offer. Holders may tender
their Original Notes in whole or in part in any integral multiple of $1,000
principal amount. The Exchange Offer is not conditioned upon any minimum
principal amount of Original Notes being tendered. As of the date of this
Prospectus, $100,000,000 aggregate principal amount of the Original Notes is
outstanding. Holders of Original Notes do not have any appraisal or dissenters'
rights in connection with the Exchange Offer. Original Notes which are not
tendered for or are tendered but not accepted in connection with the Exchange
Offer will remain outstanding and be entitled to the benefits of the Indenture,
but will not be entitled to any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See "Risk
Factors -- Consequences of a Failure to Exchange Original Notes" and
"Description of the Original Notes." If any tendered Original Notes are not
accepted for exchange because of an invalid tender, the occurrence of certain
other events set forth herein or otherwise, appropriate book-entry transfer will
be made, without expense, to the tendering holder thereof promptly after the
Expiration Date. Holders who tender Original Notes in connection with the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Original Notes in connection with the
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<PAGE> 24
Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the Exchange Offer.
See "-- Fees and Expenses."
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF ORIGINAL NOTES AS TO WHETHER TO TENDER OR REFRAIN
FROM TENDERING ALL OR ANY PORTION OF THEIR ORIGINAL NOTES PURSUANT TO THE
EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF ORIGINAL NOTES MUST MAKE THEIR OWN DECISIONS WHETHER
TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF
ORIGINAL NOTES TO TENDER BASED ON SUCH HOLDERS' OWN FINANCIAL POSITIONS AND
REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on February
, 1998, unless the Exchange Offer is extended by the Company (in which case
the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended). The Company expressly reserves the right in its
sole and absolute discretion, subject to applicable law, at any time and from
time to time, (i) to delay the acceptance of the Original Notes for exchange,
(ii) to terminate the Exchange Offer (whether or not any Original Notes have
theretofore been accepted for exchange) if the Company determines, in its sole
and absolute discretion, that any of the events or conditions referred to under
"-- Conditions to the Exchange Offer" have occurred or exist or have not been
satisfied, (iii) to extend the Expiration Date of the Exchange Offer and retain
all Original Notes tendered pursuant to the Exchange Offer, subject, however, to
the right of holders of Original Notes to withdraw their tendered Original Notes
as described under "-- Withdrawal Rights," and (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer in any respect. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, or if the Company waives a material condition of the Exchange Offer, the
Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Original
Notes, and the Company will extend the Exchange Offer to the extent required by
Rule 14e-1 under the Exchange Act. Any such delay in acceptance, extension,
termination or amendment will be followed promptly by oral or written notice
thereof to the Exchange Agent and by making a public announcement thereof, and
such announcement in the case of an extension will be made no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Without limiting the manner in which the Company may
choose to make any public announcement and, subject to applicable law, the
Company shall have no obligation to publish, advertise or otherwise communicate
any such public announcement other than by issuing a release to an appropriate
news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes for
Original Notes validly tendered and not withdrawn promptly after the Expiration
Date. In all cases, delivery of Exchange Notes in exchange for Original Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) Original Notes or a
book-entry confirmation of a book-entry transfer of Original Notes into the
Exchange Agent's account at DTC, including an Agent's Message (as defined below)
if the tendering holder has not delivered a Letter of Transmittal, (ii) the
Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees or (in the case of a book-entry
transfer) an Agent's Message in lieu of the Letter of Transmittal, and (iii) any
other documents required by the Letter of Transmittal. The term "book-entry
confirmation" means a timely confirmation of a book-entry transfer of Original
Notes into the Exchange Agent's account at DTC. The term "Agent's Message" means
a message, transmitted by DTC to and received by the Exchange Agent and forming
a part of a book-entry confirmation, which states that DTC has received an
express acknowledgment from the tendering DTC participant, which acknowledgment
states that such participant has received and agrees to be bound by the Letter
of Transmittal and that the Company may enforce such Letter of Transmittal
against
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<PAGE> 25
such participant. Subject to the terms and conditions of the Exchange Offer, the
Company will be deemed to have accepted for exchange, and thereby exchanged,
Original Notes validly tendered and not withdrawn as, if and when the Company
gives oral or written notice to the Exchange Agent of the Company's acceptance
of such Original Notes for exchange pursuant to the Exchange Offer. The Exchange
Agent will act as agent for the Company for the purpose of receiving tenders of
Original Notes, Letters of Transmittal and related documents, and as agent for
tendering holders for the purpose of receiving Original Notes, Letters of
Transmittal and related documents and transmitting Exchange Notes to validly
tendering holders. Such exchange will be made promptly after the Expiration
Date. If for any reason whatsoever, acceptance for exchange or the exchange of
any Original Notes tendered pursuant to the Exchange Offer is delayed (whether
before or after the Company's acceptance for exchange of Original Notes) or the
Company extends the Exchange Offer or is unable to accept for exchange or
exchange Original Notes tendered pursuant to the Exchange Offer, then, without
prejudice to the Company's rights set forth herein, the Exchange Agent may,
nevertheless, on behalf of the Company and subject to Rule 14e-1(c) under the
Exchange Act, retain tendered Original Notes and such Original Notes may not be
withdrawn except to the extent tendering holders are entitled to withdrawal
rights as described under "-- Withdrawal Rights." Pursuant to the Letter of
Transmittal or Agent's Message in lieu thereof, a holder of Original Notes will
warrant and agree in the Letter of Transmittal that it has full power and
authority to tender, exchange, sell, assign and transfer Original Notes, that
the Company will acquire good, marketable and unencumbered title to the tendered
Original Notes, free and clear of all liens, restrictions, charges and
encumbrances, and the Original Notes tendered for exchange are not subject to
any adverse claims or proxies. The holder also will warrant and agree that it
will, upon request, execute and deliver any additional documents deemed by the
Company or the Exchange Agent to be necessary or desirable to complete the
exchange, sale, assignment, and transfer of the Original Notes tendered pursuant
to the Exchange Offer.
PROCEDURES FOR TENDERING ORIGINAL NOTES
Valid Tender. Except as set forth below, in order for Original Notes to be
validly tendered pursuant to the Exchange Offer, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, or (in the case of a book-entry tender) an Agent's Message
in lieu of the Letter of Transmittal, and any other required documents, must be
received by the Exchange Agent at one of its addresses set forth under
"-- Exchange Agent," and either (i) tendered Original Notes must be received by
the Exchange Agent, or (ii) such Original Notes must be tendered pursuant to the
procedures for book-entry transfer set forth below and a book-entry
confirmation, including an Agent's Message if the tendering holder has not
delivered a Letter of Transmittal, must be received by the Exchange Agent, in
each case on or prior to the Expiration Date, or (iii) the guaranteed delivery
procedures set forth below must be complied with. If less than all of the
Original Notes are tendered, a tendering holder should fill in the amount of
Original Notes being tendered in the appropriate box on the Letter of
Transmittal. The entire amount of Original Notes delivered to the Exchange Agent
will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER,
AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer. The Exchange Agent will establish an account with
respect to the Original Notes at DTC for purposes of the Exchange Offer within
two business days after the date of this Prospectus. Any financial institution
that is a participant in DTC's book-entry transfer facility system may make a
book-entry delivery of the Original Notes by causing DTC to transfer such
Original Notes into the Exchange Agent's account at DTC in accordance with DTC's
procedures for transfers. However, although delivery of Original Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
the Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature
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<PAGE> 26
guarantees, or an Agent's Message in lieu of the Letter of Transmittal, and any
other required documents, must in any case be delivered to and received by the
Exchange Agent at its address set forth under "-- Exchange Agent" on or prior to
the Expiration Date, or the guaranteed delivery procedure set forth below must
be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees. Certificates for the Original Notes need not be
endorsed and signature guarantees on the Letter of Transmittal are unnecessary
unless (a) a certificate for the Original Notes is registered in a name other
than that of the person surrendering the certificate or (b) such holder
completes the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" in the Letter of Transmittal. In the case of (a) or (b) above,
such certificates for Original Notes must be duly endorsed or accompanied by a
properly executed bond power, with the endorsement or signature on the bond
power and on the Letter of Transmittal guaranteed by a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as an "eligible guarantor
institution," including (as such terms are defined therein): (i) a bank; (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association that is a participant in a Securities Transfer Association (an
"Eligible Institution"), unless surrendered on behalf of such Eligible
Institution. See Instruction 1 to the Letter of Transmittal.
Guaranteed Delivery. If a holder desires to tender Original Notes pursuant
to the Exchange Offer and the certificates for such Original Notes are not
immediately available or time will not permit all required documents to reach
the Exchange Agent on or prior to the Expiration Date, or the procedures for
book-entry transfer cannot be completed on a timely basis, such Original Notes
may nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with: (a) such tenders are made by or through
an Eligible Institution; (b) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter of
Transmittal, is received by the Exchange Agent, as provided below, on or prior
to the Expiration Date; and (c) the certificates (or a book-entry confirmation)
representing all tendered Original Notes, in proper form for transfer, together
with a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees, or an Agent's Message in lieu
of the Letter of Transmittal, and any other documents required by the Letter of
Transmittal, are received by the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of such Notice of Guaranteed
Delivery. The Notice of Guaranteed Delivery may be delivered by hand, or
transmitted by facsimile or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of Exchange Notes in
exchange for Original Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Original Notes, or of a book-entry confirmation with respect
to such Original Notes, and a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), together with any required signature
guarantees, or an Agent's Message in lieu of the Letter of Transmittal, and any
other documents required by the Letter of Transmittal. Accordingly, the delivery
of Exchange Notes might not be made to all tendering holders at the same time,
and will depend upon when Original Notes, book-entry confirmations with respect
to Original Notes and other required documents are received by the Exchange
Agent. The Company's acceptance for exchange of Original Notes tendered pursuant
to any of the procedures described above will constitute a binding agreement
between the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Original Notes will be determined by the Company, in its sole
discretion, whose determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by them not to be in proper form or the
acceptance of which, or exchange for, may, in the opinion of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "-- Conditions to the Exchange Offer" or any condition or
23
<PAGE> 27
irregularity in any tender of Original Notes of any particular holder whether or
not similar conditions or irregularities are waived in the case of other
holders. The interpretation by the Company of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Original Notes will be deemed
to have been validly made until all irregularities with respect to such tender
have been cured or waived. Neither the Company, any affiliates or assigns of the
Company, the Exchange Agent nor any other person shall be under any duty to give
any notification of any irregularities in tenders or incur any liability for
failure to give any such notification. If any Letter of Transmittal,
endorsement, bond power, power of attorney, or any other document required by
the Letter of Transmittal is signed by a trustee, executor, administrator,
guardian, attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, such person should so indicate when
signing, and unless waived by the Company, proper evidence satisfactory to the
Company, in its sole discretion, of such person's authority to so act must be
submitted. A beneficial owner of Original Notes that are held by or registered
in the name of a broker, dealer, commercial bank, trust company or other nominee
or custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
RESALES OF EXCHANGE NOTES
The Company is making the Exchange Offer for the Exchange Notes in reliance
on the position of the staff of the Division of Corporation Finance of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company did not seek its own
interpretive letter and there can be no assurance that the staff of the Division
of Corporation Finance of the Commission would make a similar determination with
respect to the Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the staff of the Division of
Corporation Finance of the Commission, and subject to the two immediately
following sentences, the Company believes that Exchange Notes issued pursuant to
this Exchange Offer in exchange for Original Notes may be offered for resale,
resold and otherwise transferred by a holder thereof (other than a holder who is
a broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's business and that such
holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder of Original Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing Exchange Notes, or any broker-dealer who
purchased Original Notes from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act, (a) will not be able to rely
on the interpretations of the staff of the Division of Corporation Finance of
the Commission set forth in the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such Original Notes in the Exchange Offer
and (c) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or other transfer of such
Original Notes unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds
Original Notes acquired for its own account as a result of market-making or
other trading activities and exchanges such Original Notes for Exchange Notes,
then such broker-dealer must deliver a prospectus meeting the requirements of
the Securities Act in connection with any resales of such Exchange Notes. Each
holder of Original Notes who wishes to exchange Original Notes for Exchange
Notes in the Exchange Offer will be required to represent that (i) it is not an
"affiliate" the Company, (ii) any Exchange Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Notes, and (iv) if such holder
is not a broker-dealer, such holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such
Exchange Notes. In addition, the Company may require such holder, as a condition
to such holder's eligibility to participate in the Exchange Offer, to furnish to
the Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Exchange Act) on
behalf of whom such holder holds the Original Notes to be exchanged in the
Exchange Offer. Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it acquired the
Original Notes for its own account as the result of market-making activities or
other trading activities and must agree that it will
24
<PAGE> 28
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. Based on the position taken by the staff of the Division of
Corporation Finance of the Commission in the interpretive letters referred to
above, the Company believes that Participating Broker-Dealers who acquired
Original Notes for their own accounts as a result of market-making activities or
other trading activities may fulfill their prospectus delivery requirements with
respect to the Exchange Notes received upon exchange of such Original Notes
(other than Original Notes which represent an unsold allotment from the initial
sale of the Original Notes) with a prospectus meeting the requirements of the
Securities Act, which may be the prospectus prepared for an exchange offer so
long as it contains a description of the plan of distribution with respect to
the resale of such Exchange Notes. Accordingly, this Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of Exchange Notes received in exchange
for Original Notes where such Original Notes were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other trading
activities. See "Plan of Distribution." However, a Participating Broker-Dealer
who intends to use this Prospectus in connection with the resale of Exchange
Notes received in exchange for Original Notes pursuant to the Exchange Offer
must notify the Company, or cause the Company to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be delivered to the Exchange Agent at one of the addresses set forth herein
under "-- Exchange Agent." Any Participating Broker-Dealer who is an "affiliate"
of the Company may not rely on such interpretive letters and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In that regard, each Participating
Broker-Dealer who surrenders Original Notes pursuant to the Exchange Offer will
be deemed to have agreed, by execution of the Letter of Transmittal or delivery
of an Agent's Message in lieu thereof, that upon receipt of notice from the
Company of the occurrence of any event or the discovery of (i) any fact which
makes any statement contained or incorporated by reference in this Prospectus
untrue in any material respect or (ii) any fact which causes this Prospectus to
omit to state a material fact necessary in order to make the statements
contained or incorporated by reference herein, in light of the circumstances
under which they were made, not misleading, or (iii) of the occurrence of
certain other events specified in the Registration Rights Agreement, such
Participating Broker-Dealer will suspend the sale of Exchange Notes pursuant to
this Prospectus until the Company has amended or supplemented this Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer, or the Company has
given notice that the sale of the Exchange Notes may be resumed, as the case may
be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective a written, telegraphic, telex or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at its address set forth under "-- Exchange Agent" on or prior to
the Expiration Date. Any such notice of withdrawal must specify the name of the
person who tendered the Original Notes to be withdrawn, the aggregate principal
amount of Original Notes to be withdrawn, and (if certificates for such Original
Notes have been tendered) the name of the registered holder of the Original
Notes as set forth on the Original Notes, if different from that of the person
who tendered such Original Notes. If Original Notes have been delivered or
otherwise identified to the Exchange Agent, then prior to the physical release
of such Original Notes, the tendering holder must submit the serial numbers
shown on the particular Original Notes to be withdrawn and the signature on the
notice of withdrawal must be guaranteed by an Eligible Institution, except in
the case of Original Notes tendered for the account of an Eligible Institution.
For Original Notes tendered pursuant to the procedures for book-entry transfer
set forth in "-- Procedures for Tendering Original Notes," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Original Notes, in which case a notice of withdrawal will
be effective if delivered to the Exchange Agent by written, telegraphic, telex
or facsimile transmission. Withdrawals of tenders of Original Notes may not be
rescinded. Original Notes properly withdrawn will not be deemed validly tendered
for purposes of the
25
<PAGE> 29
Exchange Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described above under
"-- Procedures for Tendering Original Notes." All questions as to the validity,
form and eligibility (including time of receipt) of such withdrawal notices will
be determined by the Company, in its sole discretion, whose determination shall
be final and binding on all parties. Neither the Company, any affiliates or
assigns of the Company, the Exchange Agent nor any other person shall be under
any duty to give any notification of any irregularities in any notice of
withdrawal or incur any liability for failure to give any such notification. Any
Original Notes which have been tendered but which are withdrawn will be returned
to the holder thereof promptly after withdrawal.
INTEREST ON EXCHANGE NOTES
Holders of Original Notes whose Original Notes are accepted for exchange
will not receive accrued interest on such Original Notes for any period from and
after the last Interest Payment Date to which interest has been paid or duly
provided for on such Original notes prior to the original issue date of the
Exchange Notes or, if no such interest has been paid or duly provided for, will
not receive any accrued interest on such Original Notes, and the undersigned
waives the right to receive any interest on such Original Notes accrued from and
after such Interest Payment Date or, if no such interest has been paid or duly
provided for, from and after September 30, 1997.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Original Notes for any Exchange Notes, and, as
described below, may terminate the Exchange Offer (whether or not any Original
Notes have theretofore been accepted for exchange) or may waive any conditions
to or amend the Exchange Offer, if any of the following conditions has occurred
or exists or has not been satisfied: (a) there shall occur a change in the
current interpretation by the staff of the Commission which permits the Exchange
Notes issued pursuant to the Exchange Offer in exchange for Original Notes to be
offered for resale, resold and otherwise transferred by holders thereof (other
than broker-dealers and any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement or understanding with any
person to participate in the distribution of such Exchange Notes; or (b) any
law, statute, rule or regulation shall have been adopted or enacted which, in
the reasonable judgment of the Company, would reasonably be expected to impair
its ability to proceed with the Exchange Offer; or (c) a stop order shall have
been issued by the Commission or any state securities authority suspending the
effectiveness of the Registration Statement, or proceedings shall have been
initiated or, to the knowledge of the Company, threatened for that purpose, or
any governmental approval has not been obtained, which approval the Company
shall, in its sole discretion, deem necessary for the consummation of the
Exchange Offer as contemplated hereby; or (d) the Company shall receive an
opinion of counsel experienced in such matters to the effect that there is more
than an insubstantial risk that consummation of the Exchange Offer would result
in interest payable to the Company on the Exchange Notes being not deductible by
the Company for United States income tax purposes. If the Company determines in
its reasonable judgment that any of the foregoing events or conditions has
occurred or exists or has not been satisfied, it may, subject to applicable law,
terminate the Exchange Offer (whether or not any Original Notes have theretofore
been accepted for exchange) or may waive any such condition or otherwise amend
the terms of the Exchange Offer in any respect. If such waiver or amendment
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver or amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Original Notes and will extend
the Exchange Offer to the extent required by Rule 14e-1 under the Exchange Act.
26
<PAGE> 30
EXCHANGE AGENT
Bank One, N.A. has been appointed as Exchange Agent for the Exchange Offer.
Delivery of the Letters of Transmittal and any other required documents,
questions, requests for assistance, and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent as follows:
Bank One, N.A.
<TABLE>
<C> <C>
By Registered or Certified Mail By Overnight or Hand Delivery
Bank One, N.A. Bank One, N.A.
Corporate Trust Operations Corporate Trust Operations
235 West Schrock Road 235 West Schrock Road
Columbus, Ohio 43271-0184 Westerville, Ohio 43081
</TABLE>
By Facsimile Transmission (for Eligible Institutions only)
Fax (614) 248-7234
Attention: Lora Marsch
(For Information by Telephone or Telephone Confirmation)
(800) 346-5153
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Original Notes, and in handling or tendering for
their customers. Holders who tender their Original Notes for exchange will not
be obligated to pay any transfer taxes in connection therewith. If, however,
Exchange Notes are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the Original Notes tendered, or if a
transfer tax is imposed for any reason other than the exchange of Original Notes
in connection with the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder. The Company will not make any payment to brokers, dealers or other
nominees soliciting acceptances of the Exchange Offer.
USE OF PROCEEDS
The Company will not receive any cash proceeds or incur additional
indebtedness from the issuance of the Exchange Notes offered hereby. The
Original Notes surrendered in exchange for the Exchange Notes will be retired
and canceled. All of the proceeds from the sale of the Original Notes were used
by the Company to repay outstanding indebtedness under its Revolving Credit
Agreement and for general corporate purposes.
27
<PAGE> 31
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
31, 1997 (i) on an actual basis and (ii) as adjusted to give effect to the
Offering and the application of the net proceeds therefrom. See "Use of
Proceeds" and the Company's Consolidated Financial Statements and the related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 1997(A)
-----------------------
ACTUAL ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (b):
Revolving Credit Agreement (c)............................ $ 70,700 $ --
Receivables Securitization Facility (d)................... 380,677 380,677
Notes offered hereby...................................... -- 100,000
Other..................................................... 410 410
-------- ----------
Total long-term debt................................... 451,787 481,087
Stockholders' investment.................................... 541,574 541,574
-------- ----------
Total capitalization................................... $993,361 $1,022,661
======== ==========
</TABLE>
- ---------------
(a) The Diamond Park Asset Sale and the estimated net proceeds therefrom
are not reflected herein as the net proceeds from the Diamond Park
Asset Sale is being reinvested into the Company's operations. Any gain
is expected to be immaterial.
(b) Includes current maturities of long-term debt.
(c) The Company has $225.0 million available under the Revolving Credit
Agreement after giving effect to the Offering. See "Description of
Certain Indebtedness."
(d) Indebtedness under the Receivables Securitization Facility is secured
by all of the Company's current and future accounts receivable and is
non-recourse to the Company and the Guarantor.
28
<PAGE> 32
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information is qualified in
its entirety by the Consolidated Financial Statements of the Company (and the
related Notes thereto) contained elsewhere in this Prospectus and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The income statement and balance sheet data for each
of the years ended July 31, 1997, 1996, 1995 and 1994, the four months ended
July 31, 1993 and the year ended March 31, 1993 have been derived from the
Company's audited Consolidated Financial Statements. The information for the
predecessor pro forma year ended July 31, 1993 is derived from the Company's
unaudited Consolidated Financial Statements which, in the opinion of the
Company, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such information. The results of operations
for the four months ended July 31, 1993 are not necessarily indicative of the
results of operations that may be expected for the full year due to the seasonal
nature of the Company's business. Also, as a result of the adoption of
fresh-start financial reporting upon emergence from bankruptcy in July 1993, the
Company's results of operations subsequent to July 31, 1993 are not comparable
to results of operations for the prior periods. Fresh-start reporting resulted
in a revaluation of the Company's assets and liabilities as of July 30, 1993 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.
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------------
PRO FORMA(a)
------------ FOUR MONTHS YEAR
YEAR ENDED JULY 31, YEAR ENDED ENDED ENDED
------------------------------------------------- JULY 31, JULY 31, MARCH 31,
1997 1996 1995 1994 1993 1993 1993
---------- ---------- ---------- ---------- ------------ ----------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $1,253,818 $1,137,377 $1,036,149 $920,307 $956,447 $244,539 $980,832
Cost of sales..................... 643,318 576,764 524,010 460,060 533,080 127,484 534,420
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin...................... 610,500 560,613 512,139 460,247 423,367 117,055 446,412
Selling, general and
administrative expenses......... 480,522 457,371 434,101 401,744 402,116 119,786 418,133
Depreciation and amortization
expense (credit)................ 14,022 7,538 381 (4,385) 26,459 8,973 26,316
Unusual items(b).................. -- (4,486) -- -- 20,200 -- 20,200
Reorganization and restructure
costs........................... -- -- -- -- 143,690 47,879 137,937
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating earnings (loss)......... 115,956 100,190 77,657 62,888 (169,098) (59,583) (156,174)
Interest expense, net............. 36,098 30,102 29,837 28,142 23,508 6,623 24,829
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before fresh-start
revaluation, income taxes,
extraordinary items and
cumulative effect of accounting
charge.......................... 79,858 70,088 47,820 34,746 (192,606) (66,206) (181,003)
Fresh-start revaluation........... -- -- -- -- (246,236) (246,236) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes, extraordinary items and
cumulative effect of accounting
change.......................... 79,858 70,088 47,820 34,746 (438,842) (312,442) (181,003)
Income taxes...................... 29,305 25,094 16,350 11,621 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary items and
cumulative effect of accounting
change.......................... $50,553 $44,994 $31,470 $23,125 $(438,842) $(312,442) $(181,003)
========== ========== ========== ========== ========== ========== ==========
Net earnings (loss)............... $50,553 $43,898 $31,470 $21,557 $664,991 $791,391 $(181,003)
========== ========== ========== ========== ========== ========== ==========
EARNINGS PER COMMON SHARE (c):
Primary:
Earnings before extraordinary
item.......................... $1.38 $1.23 $0.88 $0.66
Net earnings.................... 1.38 1.20 0.88 0.62
Assuming full dilution:
Earnings before extraordinary
item.......................... 1.37 1.23 0.86 0.66
Net earnings.................... 1.37 1.20 0.86 0.62
Weighted average number of common
shares outstanding (c):
Primary......................... 36,632 36,465 35,465 34,965
Assuming full dilution.......... 36,853 36,618 36,565 34,965
BALANCE SHEET DATA:
Working capital................... $877,130 $775,500 $781,802 $763,216 $676,677 $676,677 $961,671
Total assets...................... 1,281,206 1,163,811 1,110,708 1,112,647 1,013,523 1,013,523 1,252,448
Total debt........................ 451,787 404,354 443,624 447,478 355,125 355,125 284,554
Total stockholders' investment
(deficit)....................... 541,574 476,258 391,890 342,740 311,070 311,070 (791,391)
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------------
PRO FORMA(a)
------------ FOUR MONTHS YEAR
YEAR ENDED JULY 31, YEAR ENDED ENDED ENDED
------------------------------------------------- JULY 31, JULY 31, MARCH 31,
1997 1996 1995 1994 1993 1993 1993
---------- ---------- ---------- ---------- ------------ ----------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDAR(d)........................ $231,324 $196,086 $165,434 $139,391
Rental expense.................... 101,346 92,844 87,396 80,888
---------- ---------- ---------- ----------
EBITDA(d)......................... $129,978 $103,242 $78,038 $58,503
========== ========== ========== ==========
Capital expenditures.............. $54,025 $48,790 $42,295 $27,838
Gross margin %.................... 48.7% 49.3% 49.4% 50.0%
S,G&A as % of sales............... 38.3% 40.2% 41.9% 43.7%
EBITDA as % of sales.............. 10.4% 9.1% 7.5% 6.3%
Ratio of EBITDA to interest
expense......................... 3.5x 3.1x 2.1x 1.9x
Ratio of total debt to EBITDA..... 3.5x 3.9x 5.7x 7.6x
Ratio of earnings to fixed
charges(e)...................... 3.2x 3.1x 2.3x 2.1x
SELECTED STORE DATA:
Stores
Beginning of Period............. 1,195 1,181 1,231 1,265
Opened.......................... 117 137 35 29
Closed.......................... 61 123 85 63
---------- ---------- ---------- ----------
End of Period............... 1,251 1,195 1,181 1,231
</TABLE>
- ---------------
(a) 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. On December 13, 1993, the Company changed its fiscal year end to July
31, effective as of April 1, 1994.
(b) Unusual items consist of reorganization recoveries of ($4.5 million) for the
year ended July 31, 1996 and provisions for valuation of assets of $20.2
million as of the pro forma year ended July 31, 1993 and for the year ended
March 31, 1993.
(c) 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").
(d) "EBITDA" represents, for any period, income (loss) before interest expense,
income taxes, depreciation and amortization and unusual items. "EBITDAR"
represents, for any period, income (loss) before interest expense, income
taxes, depreciation and amortization, rent expense and unusual items. EBITDA
and EBITDAR are presented because they are accepted financial indicators of
a company's ability to service and/or incur indebtedness and management
believes that their presentation is helpful to investors. However, these
measures should not be considered as alternatives to net income as a measure
of the Company's operating results or to cash flows as a measure of
liquidity. In addition, although the EBITDA and EBITDAR measures of
performance are not recognized under generally accepted accounting
principles, they are widely used by companies as a general measure of a
company's operating performance because they assist in comparing performance
on a relatively consistent basis across companies without regard to
depreciation and amortization, which can vary significantly depending on
accounting methods or non-operating factors such as historical cost bases.
Because EBITDA and EBITDAR are not calculated identically by all companies,
the presentation herein may not be comparable to other similarly titled
measures of other companies.
(e) For purposes of computing the ratios, earnings represent income before
income taxes, extraordinary items plus fixed charges. Fixed charges include
interest on indebtedness and amortization of deferred financing fees.
30
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Sales............................................... 100.0% 100.0% 100.0%
Cost of Sales........................................... 51.3 50.7 50.6
------ ------ ------
Gross Margin............................................ 48.7 49.3 49.4
Selling, General and Administrative Expenses............ 38.3 40.2 41.9
Depreciation and Amortization Expense................... 1.2 0.7 --
Unusual Items -- Reorganization Recoveries.............. -- (0.4) --
------ ------ ------
Operating Earnings...................................... 9.2 8.8 7.5
Interest Expense, Net................................... 2.9 2.6 2.9
------ ------ ------
Earnings Before Income Taxes and Extraordinary Items.... 6.3 6.2 4.6
Income Taxes............................................ 2.3 2.2 1.6
------ ------ ------
Earnings Before Extraordinary Items..................... 4.0 4.0 3.0
Extraordinary Items:
Loss on Early Extinguishment of Debt, Net of Income
Taxes.............................................. -- (0.1) --
------ ------ ------
Net Earnings............................................ 4.0% 3.9% 3.0%
====== ====== ======
</TABLE>
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
Net Sales. Net Sales for the year ended July 31, 1997 increased by $116.4
million to $1,253.8 million, a 10.2% increase compared to the previous year. The
sales increase primarily resulted from a 5.5% increase in stores open for
comparable periods as well as sales from 117 new stores added during the year,
which was partially offset by 61 stores closed during the year. The Company
believes that the sales growth was influenced by enhanced merchandise
assortments, successful product promotions and strong store level execution.
Gross Margin. Gross Margin as a percentage of net sales was 48.7% for the
year ended July 31, 1997 compared to 49.3% for the year ended July 31, 1996, a
decrease of 0.6%. This decrease was primarily due to the Company's more
competitive stance with regard to pricing as well as the ongoing transition to a
higher priced, lower margin product mix at the Gordon's Division in connection
with its repositioning as a more upscale and contemporary retailer. The LIFO
provision was $3.7 million and $2.4 million for the years ended July 31, 1997
and 1996, respectively, having the effect of reducing gross margin by 0.1%.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses decreased to 38.3% of sales for the year ended July 31,
1997 from 40.2% for the year ended July 31, 1996, or 1.9% as a percentage of net
sales. Store expenses as a percentage of sales decreased by 0.6% principally due
to productivity improvement as a result of store payroll increasing at a lower
rate than sales. Corporate expenses decreased by 0.7% of net sales principally
as a result of lower costs for payroll. The current year demonstrated the
Company's ability to leverage its fixed store and corporate operating expenses
while increasing sales in the stores.
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
$130.0 million and $103.2 million for the years ended July 31, 1997 and 1996,
respectively, an increase of 26.0%.
31
<PAGE> 35
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $6.5 million, primarily as a result of the purchase of new
assets, principally for new store openings, renovation and refurbishment, since
the fresh start reporting write-off of substantially all fixed assets of the
Company effective July 31, 1993.
Interest Expense, Net. Interest Expense, Net was $36.1 million and $30.1
million for the years ended July 31, 1997 and 1996, respectively. The increase
in interest expense was primarily due to higher borrowings under the Revolving
Credit Agreement to fund new store growth, inventory, and remodels and
renovations and a reduction in interest income resulting from lower average
balances in short term investments.
Income Taxes. The income tax expense for the years ended July 31, 1997 and
1996 was $29.3 million and $24.5 million, respectively, reflecting an effective
tax rate of 36.7% and 35.8%, 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 a cash benefit from utilization of tax net operating loss carryforwards
("NOL") (after limitations) against current and future tax liabilities. As of
July 31, 1997, the Company had a remaining NOL (after limitations) of
approximately $254.2 million.
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% increase compared to the previous year.
Sales for stores open for comparable periods increased by 9.9%. 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 was 49.3% for the
year ended July 31, 1996 compared to 49.4% for the year ended July 31, 1995, a
decrease of 0.1%. 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 slow moving 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 to 40.2% of sales for the year ended July 31,
1996 from 41.9% for the year ended July 31, 1995, or 1.7% as a percentage of net
sales. Store payroll expense as a percentage of net sales decreased 1.0% as a
result of focused productivity measures. Other store expenses decreased by 0.9%
of net sales principally related to store occupancy costs, which increased at a
lower rate than net sales. Corporate expenses decreased by 0.9% of net sales
principally as a result of lower costs for payroll, outside services and
insurance. 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%.
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $7.2 million, primarily as a result of the purchase of new
assets in connection with the Company's store expansion and remodeling plan.
Unusual Items -- Reorganization Recoveries. Unusual Items -- Reorganization
Recoveries were $4.5 million for the year ended July 31, 1996. See "Unusual
Items -- Reorganization Recoveries" in Notes to the Consolidated Financial
Statements.
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% 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
32
<PAGE> 36
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% and 34.2%, 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 a cash benefit from utilization of NOLs (after limitations) against
current and future tax liabilities.
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% Second Priority Senior
Secured Notes. See "Long-Term Debt" in Notes to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory
and receivables growth, capital expenditures primarily for new store growth and
renovations, upgrading its management information systems and debt service. As
of July 31, 1997, the Company had cash and cash equivalents of $41.6 million,
including $9.0 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 40.3% and
39.7% of the Company's annual sales were made during the three months ended
January 31, 1997 and 1996, 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.
Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------------------------------ ------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31, JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1997 1997 1997 1996 1996 1996 1996 1995
-------- --------- ----------- ----------- -------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $273,580 $244,376 $505,083 $230,779 $248,858 $222,283 $451,962 $214,274
Gross margin................ 132,271 119,182 248,312 110,735 122,760 107,797 225,952 104,104
Operating earnings.......... 11,613 7,381 90,756 6,206 7,851 3,823 79,770 8,746
Net earnings (loss)......... 1,620 (1,444) 51,515 (1,138) 12 (2,439) 46,234 91
</TABLE>
Net cash used in operating activities was $6.0 million in fiscal 1997 and
$1.4 million in fiscal 1996. In fiscal 1997 and 1996, net earnings, depreciation
and amortization charges and the non-cash charge in lieu of tax expense were
offset by additional working capital needs, principally for accounts receivable
and inventory growth. In fiscal 1995, net cash provided by operations was $45.9
million principally from the non-cash charge in lieu of tax expense and a
reduction in working capital needs.
Net cash used in investing activities was $49.1 million in fiscal 1997,
$50.8 million in fiscal 1996 and $40.5 million in 1995 principally related to
capital expenditures for new store growth and existing store remodeling and
refurbishment.
Net cash provided from financing activities was $46.8 million in fiscal
1997, principally for borrowings under the Company's Revolving Credit Agreement.
Net cash used for financing activities for fiscal 1996 was $52.6 million,
principally related to payments of long term debt retired during that year. Net
cash used in financing activities for fiscal 1995 was $4.2 million, principally
related to scheduled payments of long-term debt.
The Company, through Zale Funding Trust ("ZFT"), a limited purpose Delaware
business trust wholly owned by ZDel and formed to finance customer accounts
receivable, has approximately $380.6 million, net of discount, aggregate
principal amount of Receivables Backed Notes ("ZFT Receivables Notes") issued
and outstanding at July 31, 1997 pursuant to the Receivables Securitization
Facility. The ZFT Receivables Notes
33
<PAGE> 37
are secured by a lien on all customer accounts receivable and may be optionally
redeemed by ZFT in July 1999.
In order to support the Company's growth plans, the Company and ZDel (the
"Borrowers") entered into a new three year unsecured revolving credit agreement
(the "Revolving Credit Agreement") with a group of banks on March 31, 1997. The
Revolving Credit Agreement provides for revolving credit loans in an aggregate
amount of up to $225.0 million, including a $30.0 million sublimit for letters
of credit. The Revolving Credit Agreement replaced a prior secured commitment
totaling $150.0 million.
The revolving credit loans bear interest at floating rates, currently (i)
LIBOR plus 1.5% or (ii) the agent bank's adjusted base rate or the Federal Funds
Rate plus 0.5%, at the Borrowers' option. The interest rate based on LIBOR and
letter of credit commission rates can be reduced or increased based on certain
future performance levels attained by the Borrowers. The Company pays a
commitment fee of 0.375% per annum (subject to reduction based on future
performance) on the preceding month's unused Revolving Credit Agreement
commitment. The Borrowers may repay the revolving credit loans at any time
without penalty prior to the maturity date. The interest rates and commitment
fee will also be reduced if the Company obtains an investment grade rating. The
Revolving Credit Agreement may be extended by the Borrowers for one year upon
obtaining appropriate consent. At July 31, 1997, there were $70.7 million in
loans outstanding under the Revolving Credit Agreement at a weighted-average
interest rate of 7.20%. In addition, letters of credit in the amount of
approximately $0.6 million were outstanding at July 31, 1997. The Company is
currently in compliance with all of its covenant obligations under the Revolving
Credit Agreement and the instruments governing its other indebtedness. Prior to
the consummation of the Offering, the Company expects to amend the Revolving
Credit Agreement in order to incorporate certain of the covenants in the
Indenture governing the Notes into the Revolving Credit Agreement. In addition,
prior to selling any Additional Notes, the Company must amend the Revolving
Credit Agreement in order to permit the incurrence of such indebtedness. There
can be no assurance the Company could obtain such amendment. See "Description of
Certain Indebtedness."
During the year ended July 31, 1997, the Company made approximately $54.0
million in capital expenditures, a significant portion of which was used to open
117 new stores. Under its continued growth strategy, the Company plans to open
approximately 220 new stores for which it will incur approximately $50 million
in capital expenditures during the combined fiscal years 1998 and 1999. These
stores are expected to solidify the Company's core mall business by further
penetrating markets where the Company is underrepresented. Since fiscal 1994,
the Company remodeled or refurbished nearly 50% of its store base. During the
combined fiscal years 1998 and 1999, the Company anticipates spending
approximately $50 million to remodel and refurbish approximately 300 additional
stores. The Company also estimates it will make capital expenditures of
approximately $25 million to $30 million during the combined fiscal years 1998
and 1999 for enhancements to its management information systems. In total, the
Company anticipates spending approximately $160.0 million on capital
expenditures during the combined fiscal years 1998 and 1999. The Revolving
Credit Agreement limits the Company's capital expenditures to $80.0 million in
each of fiscal years 1998 and 1999.
There has been an increase of approximately $53.8 million, or 11.8%, in
owned merchandise inventories at July 31, 1997 compared to the balance at July
31, 1996. The increase in inventory levels is principally the result of new
store growth as well as improvements in the depth and breadth of merchandise
available in the stores to accommodate increasing sales. As a result of the
inventory position and increased capital expenditures, the Company had
outstanding borrowings of $70.7 million under the Revolving Credit Agreement at
July 31, 1997, compared to $23.6 million at July 31, 1996. The Offering is part
of a plan to improve the Company's capital structure by (i) allowing more
flexibility for seasonal financing needs and (ii) extending the average maturity
of the Company's indebtedness. The Company will apply the net proceeds from the
issuance of the Notes to repay outstanding borrowings under the Revolving Credit
Agreement, which amounts may be reborrowed from time to time.
On September 3, 1997, the Company signed a purchase agreement relating to
the Diamond Park Asset Sale. The Diamond Park Division, which manages leased
fine jewelry departments in major department store chains including Marshall
Field's, Dillard's, Mercantile and Parisian, had annual sales and EBITDA of
34
<PAGE> 38
$125.3 million and approximately $6.0 million after certain corporate
allocations, respectively, in fiscal 1997. At July 31, 1997, inventories and net
property and equipment of the Diamond Park Division were $54.5 million and $4.0
million, respectively. In connection with Diamond Park Asset Sale, the Company
received consideration totaling approximately $63 million in cash. The Company
will continue to operate in the Dillard's stores through January 1998, the end
of the current license period, at which time the remaining inventory of such
operations will be sold to the purchaser. Net proceeds from the Diamond Park
Asset Sale were reinvested into the Company's operations. The closing of the
Diamond Park Asset Sale occurred on October 6, 1997.
Future liquidity will 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 year 1997 was approximately
$28 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 current year. As of July 31, 1997, the Company had a NOL (after
limitations) of approximately $254 million, which represents up to $99 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.
Management believes that operating cash flow, amounts available under the
Revolving Credit Agreement, the Receivables Securitization Facility, net
proceeds from the Offering and the sale of the Additional Notes, if any, and net
proceeds from the Diamond Park Asset Sale should be sufficient to fund the
Company's current operations, debt service and currently anticipated capital
expenditure requirements for the foreseeable future.
INFLATION
In management's opinion, changes in net sales and net earnings that have
resulted from inflation and changing prices have not been material during the
periods presented. There is no assurance, however, that inflation will not
materially affect the Company in the future.
NEW ACCOUNTING PRONOUNCEMENTS
Effective March 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share" ("EPS"). In accordance with the
provisions of SFAS No. 128, basic earnings per common share will be computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share will be
computed by dividing net income by the weighted average of common stock and
common stock equivalents outstanding during the period. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997 with footnote disclosure of pro forma EPS amounts
permitted prior to that date. The Company will adopt SFAS No. 128 in the quarter
ended January 31, 1998, and in accordance with SFAS No. 128, will restate all
prior-period EPS data.
Effective July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires the Company to report comprehensive
income in the financial statements. SFAS No. 131 requires the Company to
disclose revenues, profits and loss, and assets for certain business segments.
These statements are effective for fiscal years beginning after December 15,
1997, with earlier adoption permitted. The Company has not yet determined the
impact of these statements on its financial disclosures.
35
<PAGE> 39
BUSINESS
The Company is the largest specialty retailer of fine jewelry in the United
States. At July 31, 1997, the Company operated 1,065 retail jewelry stores
(excluding 186 Diamond Park stores) located primarily in shopping malls
throughout the United States, Guam and Puerto Rico. The Company operates three
well-differentiated operating divisions: Zales(R) (638 stores), Gordon's(SM)
(310 stores) and Bailey, Banks and Biddle(R) (113 stores). The Zales Division is
a nationally recognized chain which provides more traditional, moderately priced
jewelry to a broad range of customers. The Gordon's Division is a regional
jeweler which offers contemporary merchandise targeted to regional preferences
at somewhat higher price points than Zales. The Bailey, Banks and Biddle
Division operates upscale jewelry stores which are considered among the pre-
eminent jewelry stores in their markets. In addition, the Company operates four
outlet stores in three states. During the fiscal year ended July 31, 1997, the
Company generated $1.3 billion and $130.0 million of net sales and EBITDA,
respectively.
The Company is well-positioned to compete in the approximately $37 billion,
highly fragmented retail jewelry industry due to its established brand names,
economies of scale and geographic and demographic diversity. The Company enjoys
significant brand name recognition as a result of its long-standing presence in
the industry and its regional and national advertising campaigns. Zales has been
in existence since 1924 and is supported by national television advertising
campaigns while Gordon's and Bailey, Banks and Biddle have been in existence
since 1905 and 1832, respectively, and are supported by regional advertising
campaigns. The Company believes that name recognition is an important advantage
in jewelry retailing as products are generally unbranded and consumers must
trust in a retailer's reliability and credibility. In addition, as the largest
specialty retailer of fine jewelry in the United States, the Company believes it
realizes economies of scale in purchasing and distribution, real estate,
advertising and administrative costs. The Company also believes that the
geographic diversity of its retail distribution network through all 50 states
and the demographic breadth of its target customer groups may serve to mitigate
earnings volatility typically associated with local or regional economic
conditions or poor weather conditions.
The Company is incorporated in Delaware. On January 23, 1992, the Company
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. The Company emerged from bankruptcy on July 30, 1993. 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.
INDUSTRY
The U.S. retail jewelry industry's sales exceeded $37 billion in 1996.
Specialty jewelry stores (such as the Company) account for almost half of the
industry, according to publicly available data. Historically, the retail jewelry
store sales have exhibited only limited effects of cyclicality. According to the
U.S. Bureau of the Census, retail jewelry store sales have increased every year
for the past 13 years with the exception of 1991 which included both the Persian
Gulf War and the introduction of the luxury tax. Other significant segments of
the industry include national chain department stores (such as J.C. Penney
Company, Inc. and Sears, Roebuck and Co.), mass merchant discount stores (such
as Wal-Mart Stores, Inc.), other general merchandise stores and apparel and
accessory stores. The remainder of the retail jewelry industry is composed
primarily of catalog and mail order houses, direct-selling establishments, TV
home shopping (such as QVC, Inc.) and computer on-line shopping.
The U.S. retail jewelry industry is highly fragmented with the 10 largest
companies accounting for less than 25% of the market. The largest jewelry
retailer is believed to be Wal-Mart Stores, Inc., followed by the Company and
Service Merchandise Company, Inc. The Company is the largest specialty jewelry
retail chain in the U.S., with approximately 3.4% of market share based on the
National Jeweler's estimate of 1996 U.S. Retail Jewelry and Watch Sales. Only
one other specialty jewelry retailer had greater than 2% market share.
36
<PAGE> 40
DIVISIONAL OPERATIONS
The Company operates principally under the three divisions. The following
table presents net sales for the Zales, Gordon's and Bailey, Banks & Biddle
Divisions of the Company.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Zales Division................................. $607,677 $525,384 $428,794
Gordon's Division.............................. 282,271 264,298 262,540
Bailey, Banks & Biddle Division................ 226,323 205,418 197,267
Other(a)....................................... 12,232 8,814 9,361
---------- ---------- ----------
Subtotal..................................... 1,128,503 1,003,914 897,962
Diamond Park Division(b)....................... 125,315 133,463 138,187
---------- ---------- ----------
Total Net Sales.............................. $1,253,818 $1,137,377 $1,036,149
========== ========== ==========
</TABLE>
- ---------------
(a) Other net sales (i) 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 and
(ii) in 1997 includes sales from its direct mail operation.
(b) Net sales for the Diamond Park Division have been broken out to
reflect the Diamond Park Asset Sale.
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,
1997, the Zales Division had 638 stores in 49 states and Puerto Rico. Average
store size is approximately 1,400 square feet and the average selling price per
unit sold is $246. Zales accounted for approximately 48% of the Company's net
sales in fiscal 1997.
Zales' merchandise selection is generally standardized across the nation
and targeted at customers representing a cross-section of mainstream America. In
fiscal 1997, bridal merchandise represented 36.1% of the Division's merchandise
sales, while fashion jewelry and watches comprised most of the remaining 63.9%.
The bridal merchandise category consists of solitaire engagement rings, various
bridal sets and diamond and gold anniversary bands. Fashion jewelry consists
generally of cocktail rings, earrings, chains, watches and various other items.
The Company believes that the prominence of diamond jewelry in its 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. The combination of Zales' national presence
and centralized merchandise selection allows it to use television advertising
across the nation as its primary advertising medium, supplemented by newspaper
inserts and direct mail.
Zales has recently entered the direct fulfillment business through its
direct mail catalog operations and Internet web site. These operations currently
account for less than 1% of the Company's sales.
The following table sets forth the number of stores and average sales per
store for the Zales Division for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Average sales per store(a)........................ $1,013,000 $974,000 $850,000
Stores opened during period....................... 65 89(b) 8
Stores closed during period....................... 9 6 30
Total stores...................................... 638 582 499
</TABLE>
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<PAGE> 41
- ---------------
(a) Based on sales per store open a full twelve months during the
respective fiscal year.
(b) Includes 40 stores transferred from the Gordon's Division during fiscal
1996 and 20 Karten's stores acquired in January 1996.
Gordon's Division
Since 1994, the Company has repositioned Gordon's as a major regional brand
with an upgraded product offering. At July 31, 1997, the Gordon's Division had
310 stores in 37 states and Puerto Rico, substantially all of which operate
under the trade name Gordon's Jewelers. Average store size is approximately
1,400 square feet and the average selling price per unit sold is $274, which
represents a 22% increase from the average selling price per unit sold two years
ago. Gordon's accounted for approximately 23% of the Company's net sales in
fiscal 1997.
Gordon's distinguishes itself from Zales by providing a more upscale,
contemporary product mix and tailoring a portion of store inventory to regional
tastes. 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 was introduced for Gordon's in fiscal
1997, complementing the Division's radio campaigns and printed inserts.
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.
The following table sets forth the number of stores and average sales per
store for the Gordon's Division for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Average sales per store(a)......................... $888,000 $803,000 $711,000
Stores opened during period........................ 9 13 5
Stores closed during period........................ 22 57(b) 13
Total stores....................................... 310 323 367
</TABLE>
- ---------------
(a) Based on sales per store open a full twelve months during the
respective fiscal year.
(b) Includes 40 stores transferred to the Zales Division during fiscal
1996.
Bailey, Banks & Biddle Division
Since 1832, the Bailey, Banks & Biddle Division has offered high-end
merchandise, exclusive designs and a prestigious shopping environment for the
upscale customer. The Division operates principally under the trade name Bailey,
Banks & Biddle, but also utilizes other trade names, including Corrigan's(R),
Sweeney's(R), Stifft's(R), Dobbins(R), Linz(R), and Zell Bros.(R) The Division's
stores are among the pre-eminent stores in their markets and carry exclusive
items to appeal to the more affluent customer. The Bailey, Banks & Biddle
merchandise selection emphasizes the classic and traditional look and focuses on
diamond, precious stone and gold jewelry, as well as watches and giftware. At
July 31, 1997, the Bailey, Banks & Biddle Division operated 113 upscale jewelry
stores in 28 states and Guam. The Division has an average selling price per unit
sold of $484, an average store size of approximately 3,000 square feet and
accounted for approximately 18% of the Company's net sales in fiscal 1997.
Bailey, Banks & Biddle Division stores rely heavily on upscale direct-mail
catalogs, enabling the stores to focus on specific products for specific
customers. In fiscal year 1997, the Bailey, Banks & Biddle Division expanded its
customer base in cross-promotional campaigns using upscale customer lists from
such companies as American Express Company, First USA, Inc. and American
Airlines, Inc. This initiative will help the Bailey, Banks & Biddle Division to
more accurately target prospective customers in a cost-efficient manner.
38
<PAGE> 42
The following table sets forth the number of stores and average sales per
store for the Bailey, Banks & Biddle Division for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Average sales per store(a)..................... $1,990,000 $1,755,000 $1,556,000
Stores opened during period.................... 16 1 4
Stores closed during period.................... 15 12 11
Total stores................................... 113 112 123
</TABLE>
- ---------------
(a) Based on sales per store open a full twelve months during the
respective fiscal year.
STORE OPERATIONS
The Company's stores are designed and managed to create an attractive
environment, maximize operating efficiencies and make shopping convenient and
enjoyable. The Company pays careful attention to store layout, particularly in
areas such as lighting, choice of materials and arrangement of display cases.
Promotional displays are changed periodically to provide variety, to reflect
seasonal events or to complement a particular mall's promotions.
Each of the Company's stores is operated under a store manager who is
responsible for certain store-level operations, including sales and personnel
matters. The Company has consolidated most non-sales administrative matters,
including purchasing, credit operations and payroll, at the divisional level in
an effort to maintain low operating costs at the store level. Each of the
Company's divisions also offers standard warranties and return policies as well
as providing extended warranty coverage which may be purchased at the customer's
option.
The Company has implemented inventory control systems, extensive security
systems and loss prevention procedures to maintain low inventory losses. The
Company screens employment applicants and provides all of its store personnel
with training in loss prevention. Despite such precautions, the Company
experiences losses from theft from time to time and maintains insurance to cover
such losses.
The Company believes it is important to provide knowledgeable and
responsive customer service. The Company has implemented employee training
programs, including training in sales techniques for new employees, on-the-job
training and manager training for store managers.
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, and Italy. All purchasing is done through
divisional buying offices at the corporate headquarters. The Company either
purchases merchandise from its vendors or obtains merchandise on consignment.
The Company had approximately $135.0 million and $78.9 million of consignment
inventory on hand at July 31, 1997 and 1996, respectively. The increase in
consignment inventory results principally from further development of certain
watch lines carried on consignment, testing of new products, expansion of higher
risk fashion and solitaire product categories and other opportunities. 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 price fluctuations in the
commodities that are used in the merchandise it sells. The Company is not
subject to substantial currency fluctuations because most purchases are dollar
denominated. During fiscal 1997 and fiscal 1996, the Company purchased
approximately 27% and 29%, respectively, of its merchandise from its top five
vendors, including more than 10% from its top vendor. See "Risk
Factors -- Merchandise Supply and Inventory."
CREDIT OPERATIONS
The Company believes that its 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. The Company offers
and grants credit through its private label credit card program. Approximately
50% of the
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<PAGE> 43
Company's net sales (excluding the Diamond Park Division) were generated by
credit sales on the private label credit cards in fiscal 1997. The Company
believes that opening a credit account allows its sales personnel to build
relationships with customers that generate customer loyalty and facilitate
repeat purchases.
Credit extension, customer service, payment processing and collections for
all the accounts are performed by Jewelers Financial Services, Inc. ("JFS"), a
wholly owned subsidiary of ZDel, at credit centers located in Tempe, Arizona;
Clearwater, Florida; San Marcos, Texas; and San Juan, Puerto Rico. JFS has
credit approval, customer service and collection systems that management
considers to be sophisticated. The Company uses a behavioral point scoring model
to assess risk in extending credit to customers. All credit decisions are made
centrally at the Company's credit centers. The Company has tightened credit
standards, particularly in the Gordon's Division, where standards were increased
in 1995 in connection with its re-positioning as a more upscale regional brand.
The Company has enhanced the approval process for its private label credit
cards, whereby those customers with a satisfactory prior credit history can be
approved rapidly. Flexible payment arrangements are extended to credit
customers. As of July 31, 1997, the Company has 1.9 million promotable customer
names on file. The Company uses many of these customer names in its targeted
marketing programs.
The Company diligently follows up on delinquent accounts. Collectors are
trained with state of the art Computer Based Training programs ("CBT"). These
CBT programs are developed in-house by the credit organization. Collection
accounts are scored on a behavioral model at monthly billing. The statistical
analysis allows for optimum collection follow-up on delinquent accounts starting
at 15 days past due. Based on the behavioral score, the account is put into
priority queuing for letter or personal phone call follow-up. Early stage
delinquencies are handled with an approach which is sensitive to customer
goodwill. If accounts progress in delinquency, more assertive action is taken.
The Company expects that a downturn in general economic conditions may adversely
affect credit accounts receivable performance.
The Company is in the process of establishing a national bank for the
granting of credit under its private label credit cards. Preliminary approval
has been received from the OCC. The creation of a national bank will allow the
Company greater flexibility in establishing rates charged to customers and will
simplify the regulatory requirements under which the Company operates.
The following table presents certain data concerning sales, credit sales
and accounts receivable for the past three fiscal years, excluding the Diamond
Park Division, outlet operations and direct mail operations:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Net sales (thousands)............................. $1,116,271 $995,100 $888,601
Net credit sales (thousands)...................... $ 556,771 $500,215 $458,664
Credit sales as percentage of net sales........... 49.9% 50.3% 51.6%
Average number of active customer accounts........ 715,000 678,000 689,000
Average balance per customer account.............. $719 $687 $668
Customer receivables (thousands).................. $ 508,885 $468,331 $436,336
Average monthly collection percentage............. 9.2% 9.2% 9.1%
Bad debt expense as a percentage of net credit
sales........................................... 10.0% 10.7% 9.1%
Accounts receivable greater than 90 days past
due............................................. 9.1% 9.1% 9.9%
</TABLE>
Credit sales have decreased as a percentage of net 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. Accounts are
automatically charged off when no full scheduled payment is made for a period of
seven consecutive billing cycles. Additionally, accounts are charged off if 12
contracted payments are missed.
INSURANCE AFFILIATES
The Company, through Zale Indemnity Company, Zale Life Insurance Company
and Jewel Re-Insurance Ltd., provides various types of insurance coverage, which
typically are marketed to the
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<PAGE> 44
Company's private label credit card customers. Additionally, the Company
promotes the sale of credit insurance products to customers who use the private
label credit card program. In fiscal 1997, over 50% of the Company's private
label credit card purchasers purchased some form of credit insurance. The three
companies, which are wholly owned subsidiaries of ZDel, 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 business 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.
EMPLOYEES
As of July 31, 1997, the Company had approximately 10,000 employees, less
than 1% of whom were represented by unions. The Company usually hires a limited
number of temporary employees during each Christmas season. The Company
considers its relations with its employees to be good.
PRINCIPAL PROPERTIES
The Company leases a 430,000 square foot corporate headquarters facility,
which lease extends 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 also owns 33 acres of land
surrounding the corporate headquarters facility and a 120,000 square foot
warehouse in Dallas, Texas.
The Company leases three credit centers located in Clearwater, Florida
(30,000 square feet), Tempe, Arizona (24,200 square feet), and San Juan, Puerto
Rico (2,900 square feet) and one national collections center located in San
Marcos, Texas (9,000 square feet).
The Company rents most of its retail spaces 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, 1997:
<TABLE>
<CAPTION>
ZALES GORDON'S BB&B PERCENTAGE
TERM EXPIRES DIVISION DIVISION DIVISION TOTAL OF TOTAL
------------ -------- -------- -------- ----- ----------
<S> <C> <C> <C> <C> <C>
1998 and prior...................... 127 65 19 211 20%
1999................................ 69 39 15 123 12%
2000................................ 46 23 10 79 7%
2001................................ 65 22 16 103 10%
2002 and thereafter................. 331 161 53 545 51%
--- --- --- ----- ----
Total number of leases.............. 638 310 113 1,061 100%
=== === === ===== ====
</TABLE>
Management believes substantially all of the store leases expiring in
fiscal 1998 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.
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 also competes
with other types of retailers who sell jewelry and gift items, such as
department
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<PAGE> 45
stores, catalog showrooms, discounters, direct mail suppliers and television
home shopping programs. Certain of the Company's competitors are non-speciality
retailers which are larger and have greater financial resources than the
Company. The malls where the Company's stores are located typically contain
competing national chains, independent jewelry stores or department store
jewelry departments. The Company believes that it is also competing for
consumers' discretionary spending dollars and, therefore, competes 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 products, brand recognition, store location, distinctive and
value-priced merchandise, personalized customer 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 merchandise categories. See "Risk
Factors -- Competition."
The Company holds no material patents, licenses (other than its licenses to
operate its Diamond Park leased locations, which are being assigned to a third
party in connection with the Diamond Park Asset Sale), franchises or
concessions; however, the established trade names for stores and products in the
Zales, Gordon's and Bailey, Banks & Biddle Divisions are important to the
Company in maintaining its competitive position in the jewelry retailing
industry.
MANAGEMENT INFORMATION SYSTEMS
The Company's information systems provide information necessary for: (i)
management operating decisions; (ii) sales and margin management; (iii)
inventory control; (iv) profitability monitoring by many measures (merchandise
category, buyer, store, division); (v) and cost reduction programs. Data
processing systems include point-of-sale reporting, purchase order management,
receiving, merchandise planning and control, payroll, general ledger, credit
card administration, and accounts payable. Bar code ticketing is used, and
scanning is utilized at all point-of-sale terminals to ensure timely sales and
margin data compilation and to provide for inventory control monitoring.
Information is made available on-line to merchandising staff on a timely basis,
thereby reducing the need for paper reports. The Company uses electronic data
interchange ("EDI") with certain of its vendors to facilitate timely merchandise
replenishment. The Company believes that the further use of EDI with its vendors
will lower the administrative costs associated with invoice processing and
settlement.
The Company's information systems allow management to monitor and control
the Company's credit operations, generating reports on a daily, monthly and
annual basis for each store and transaction. Senior management can therefore
review and analyze credit activity by store, amount of sale, terms of sale or
employees who approved the sale. The entire credit extension and collection
process is automated and the system maintains all customer data to facilitate
future credit transactions.
The information systems also facilitate repeat business by maintaining a
detailed file of all credit transactions with each customer. This enables credit
transactions with existing customers to be completed rapidly and allows sales
personnel to process a greater number of credit transactions. The Company's
customer database also includes historical purchasing patterns and demographic
data, allowing the Company to specifically segment customers receiving direct
marketing promotions.
The Company has entered into a five-year agreement with a third party for
the management of the Company's mainframe processing operations, client server
systems, LAN operations and desktop support. The Company believes that by
outsourcing this portion of its management information systems it will be able
to achieve additional efficiencies and allow the Company to focus its internal
information technology efforts on developing new systems to enhance the
performance of its core business.
The Company has historically upgraded, and expects to continue to upgrade,
its information systems to improve operations and support future growth. The
Company estimates it will make capital expenditures of approximately $25 million
to $30 million over the next two years for enhancements to its management
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<PAGE> 46
information systems. A portion of these expenditures will assist the Company in
maintaining Year 2000-compliant systems.
REGULATION
The Company's operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts and limitations on the maximum amount of
finance charges that may be charged by a credit provider. In addition to the
Company's private label credit cards, credit to the Company's customers is
provided primarily through bank cards such as Visa, MasterCard, and Discover,
without recourse to the Company based upon a customer's failure to pay. Any
change in the regulation of credit which would materially limit the availability
of credit to the Company's traditional customer base could adversely affect the
Company's results of operations or financial condition.
The sale of insurance products by the Company is also highly regulated.
State laws currently impose disclosure obligations with respect to the Company's
sale of credit and other insurance. The Company's and its competitors' practices
are also subject to review in the ordinary course of business by the Federal
Trade Commission, and the Company's and other retail company's credit cards will
be subject to regulation by the OCC. The Company believes that it is currently
in material compliance with all applicable state and federal regulations.
However there can by no assurance that a failure to comply with all of the
applicable regulations will not have a material adverse effect on the Company.
A substantial amount of merchandise in the retail jewelry industry is
commonly sold at a discount to the "regular" or "original" price. A number of
states in which the Company operates have regulations which require that
retailers offering merchandise at discounted prices must offer the merchandise
at regular or original prices for stated periods of time. The Company believes
that it is in compliance with all applicable federal and state laws with respect
to such practices. See "Risk Factors -- Regulation."
LITIGATION
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. The Company believes that such litigation and
claims, both individually and in the aggregate, will be resolved without
material effect on the Company's financial position or results of operations.
See "Unusual Items -- Reorganization Recoveries" in Notes to Consolidated
Financial Statements.
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<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert J. DiNicola................... 50 Chairman of the Board, Chief Executive Officer
and Director
Beryl B. Raff........................ 46 Executive Vice President, Chief Operating
Officer
Alan P. Shor......................... 39 Executive Vice President, Chief Logistics
Officer
Mary L. Forte........................ 46 Executive Vice President, Chief Administrative
Officer
Sue E. Gove.......................... 39 Group Vice President and Chief Financial
Officer
Pamela J. Romano..................... 40 Senior Vice President and President, Zales
Division
Susan H. Davidson.................... 35 Senior Vice President and President, Gordon's
Division
Ray A. Stuart........................ 41 Senior Vice President and President, Bailey,
Banks & Biddle Division
Paul G. Leonard...................... 42 Senior Vice President and President, Corporate
Merchandising
Thomas A. Carroll.................... 49 Senior Vice President, Real Estate
David L. Holmberg.................... 39 Senior Vice President, Store Operations, Zales
Division
Gregory Humenesky.................... 46 Senior Vice President, Human Resources
Paul D. Kanneman..................... 40 Senior Vice President, Chief Information
Officer
Mark R. Lenz......................... 42 Senior Vice President, Controller
Stephen C. Massanelli................ 42 Senior Vice President, Treasurer
Gary W. Melton....................... 52 Senior Vice President, Credit Services
Ervin G. Polze....................... 45 Senior Vice President, Support Operations
Glen Adams........................... 59 Director
A. David Brown....................... 55 Director
Peter P. Copses...................... 39 Director
Andrea Jung.......................... 39 Director
Richard C. Marcus.................... 59 Director
Charles H. Pistor, Jr................ 67 Director
Andrew H. Tisch...................... 48 Director
</TABLE>
The following is a brief description of the business experience of the
directors and executive officers of the Company for at least the past five
years.
Mr. Robert J. 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 17 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 The May Department Stores Company, Inc.
Ms. Beryl B. Raff was appointed Executive Vice President and Chief
Operating Officer on July 23, 1997. From November 21, 1994 to July 1997, she
served 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 12 state region. From April 1988 to March 1991,
Ms. Raff served as Group Vice
44
<PAGE> 48
President of Macy's South/Bullocks. Prior to 1988, Ms. Raff had 17 years of
retailing and merchandising experience with the Emporium and Macy's department
stores.
Mr. Alan P. Shor was appointed Executive Vice President and Chief Logistics
Officer on November 17, 1997 while retaining his position as General Counsel and
Secretary. From May 1997 to November 1997, Mr. Shor served as Executive Vice
President and Chief Administrative Officer, General Counsel and Secretary. From
June 5, 1995 to May 1997, Mr. Shor served as Senior Vice President, General
Counsel and Secretary. 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.
Ms. Mary L. Forte was appointed Executive Vice President and Chief
Administrative Officer on January 13, 1998. From July 1994 to January 13, 1998
Mrs. Forte served 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 of the Federated Department Store.
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 13 years of retailing and merchandising experience with Macy's, The
May Department Stores Company, Inc. and Federated Department Stores.
Ms. Sue E. Gove was appointed Group Vice President and Chief Financial
Officer on December 8, 1997. From January 1996 through December 1997, she served
as Senior Vice President, Corporate Planning and Analysis. From September 1996
through June 1997, Ms. Gove also served as Senior Vice President and Treasurer,
overseeing Investor Relations and the Treasury, Tax and Control functions. Ms.
Gove joined the Company in 1980 and served in numerous assignments until her
appointment to Vice President in 1989.
Ms. Pamela J. Romano joined the Company as Senior Vice President and
President of the Zales Division on September 22, 1997. Ms. Romano spent 15 years
with the Macy's organization, most recently as the Vice President and Divisional
Merchandising Manager with responsibility for fashion, bridge and fine jewelry
for Macy's East.
Ms. Susan H. Davidson was appointed Senior Vice President and President of
the Gordon's Division on January 13, 1998. From April 1997 to January 1998, Ms.
Davidson served as the Senior Director of Merchandising for all diamond
categories in the Zales Division. Since joining the Company in April 1995, she
has served in the positions of gold, men's and diamond accent buyer. Prior to
joining the Company, Ms. Davidson served in merchandising management positions
for Montgomery Ward in Chicago and Macy's South. From the fall of 1994 through
April 1995 Ms. Davidson served as Senior Buyer for Gold, Colored Stones and
Diamond Merchandise at Montgomery Ward. She also served as Buyer of Gold and
Silver from 1992 until the fall of 1994.
Mr. Ray A. Stuart was appointed Senior Vice President and President of the
Bailey, Banks & Biddle Division on January 13, 1998. From April 1997 to January
1998, Mr. Stuart served as Senior Director of the Zales Direct Division, which
sells jewelry and related merchandise principally through direct mail catalogs.
Prior to joining the Company in 1997, he served as Group Buyer for Men's
Fragrances at Macy's West from June 1994 to March 1997. He also served as Group
Buyer for Diamonds and Estate Jewelry from May 1991 until May 1994. Previously
he served in a merchant capacity at Bullocks and Macy's South, managing fine
jewelry, fragrance and cosmetic businesses.
Mr. Paul G. Leonard was appointed Senior Vice President and President of
Corporate Merchandising on January 13, 1998. Mr. Leonard served as President of
the Bailey, Banks & Biddle Division from January 1995 to January 1998. Prior to
joining the Company in 1994 as the President of Corporate Merchandising, 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 Department Stores Company, Inc.
Mr. Leonard has more than 20 years of retailing and merchandising experience
with an emphasis on jewelry.
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<PAGE> 49
Mr. Thomas A. Carroll joined the Company on April 1, 1997 as Senior Vice
President, Real Estate. From August 1992 to March 1997, Mr. Carroll was Vice
President of Real Estate with the Brookstone Company. From 1990 to 1992, he was
associated with Norsouth Corporation, a real estate development company, as
Executive Vice President. From 1978 to 1990, he held various positions with
Federated Department Stores, serving as Vice President, Operations of the
Rich's/Goldsmith's Division from August 1986 until February 1990.
Mr. David L. Holmberg joined the Company on May 2, 1994 as Senior Vice
President of Store Operations for the Zales Division. Prior to joining the
Company, Mr. Holmberg served as Vice President and head of store operations for
Reeds Jewelers from 1989 to 1995. Mr. Holmberg held numerous store operations
positions with Kay Jewelers and J.B. Robinson's Jewelers during the preceding 10
years.
Mr. Gregory 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.
Mr. Paul D. Kanneman joined the Company on November 14, 1994 as Senior Vice
President and 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.
Mr. Mark R. Lenz was appointed Senior Vice President, Controller on
November 19, 1997. He held various management positions in finance for the
Company until his appointment to Vice President, Controller in February 1995.
Prior to joining the Company in 1988, Mr. Lenz served in various positions in
the audit division of Arthur Andersen, LLP, in Dallas, Texas.
Mr. Stephen C. Massanelli joined the Company on June 10, 1997 as Senior
Vice President, Treasurer. From 1993 to 1997, Mr. Massanelli was a principal and
member of the Board of Directors of The Treadstone Group, Inc., a private
merchant banking organization in Dallas. Mr. Massanelli has more than 20 years
of financial and investment experience and has held positions with AMRESCO, Inc.
and NationsBank of Texas.
Mr. Gary W. Melton was appointed to Senior Vice President of Credit
Services on November 19, 1997. Mr. Melton held numerous assignments in the
credit services area since joining the Company in 1982 as Vice President of
Operations, JFS. These assignments include Director of National Credit
Operations, General Credit Manager, Assistant Director, and most recently, Vice
President of Credit Services.
Mr. Ervin G. Polze was appointed Senior Vice President, Support Operations
on January 17, 1996. From February 1995 through January 1996, he served as Vice
President, Support 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.
Mr. Glen Adams has served as a director of the Company since July 21, 1993.
From August 1990 to August 1996, Mr. Adams served as Chairman, President and
Chief Executive Officer of Southmark Corporation in Dallas, Texas. From 1986 to
1989, he served as Chairman, President and Chief Executive Officer of The Great
Western Sugar Company. Mr. Adams is also a director of U.S. Home Corporation,
Marvel Entertainment Group, Inc., Toy Biz, Inc. and Search Financial Services,
Inc.
Mr. A. David Brown joined the board as a director on March 4, 1997. Mr.
Brown became Managing Director for the New York office of Pendleton James
Associates as of May 15, 1997. Prior to joining Pendleton James Associates, Mr.
Brown served as Managing Vice President of the Worldwide Retail/Fashion
Specialty Practice at Korn/Ferry International from June 1, 1994 to May 14,
1997. Prior to joining Korn/Ferry, Mr. Brown held numerous positions with R.H.
Macy & Co., Inc., including Senior Vice President of Human Resources, a position
he held from 1983 to 1994. Mr. Brown is also a director of Selective Insurance
Group, Inc.
46
<PAGE> 50
Mr. Peter P. Copses served from September 9, 1993 to September 9, 1996 as a
director of the Company and returned to serve on the board on February 4, 1997.
Since 1990, Mr. Copses has been a principal of Apollo Advisors, L.P., which,
together with an affiliate, acts as the managing general partner of Apollo
Investment Fund, L.P., AIF II, L.P. and Apollo Investment Fund III, L.P.,
private securities investment funds and of Lion Advisors, L.P., which acts as a
financial advisor to and representative for certain institutional investors with
respect to securities investments. Mr. Copses is a director of Family
Restaurants Inc., Dominick's Finer Foods, Inc. and Food 4 Less Holdings, Inc.
Ms. Andrea Jung joined the board as a director on June 6, 1996. Ms. Jung
was named President of Avon Products, Inc. on December 11, 1997, having
previously served as President of Global Marketing and New Business for Avon
Products, Inc. Prior to that time, Ms. Jung served as an Executive Vice
President at Neiman Marcus from 1991 to 1994. From 1987 to 1991, she served as
Senior Vice President, General Merchandising Manager for I. Magnin. Ms. Jung
served as General Merchandising Manager at J.W. Robinson's from 1985 to 1987 and
was with Bloomingdales from 1979 to 1985, her latest position being Vice
President and Merchandising Manager. Ms. Jung also serves as a director of the
American Management Association, Avon Products, Inc. and as a trustee of the
Fashion Institute of Technology.
Mr. Richard C. Marcus has served as a director of the Company since July
21, 1993. Mr. Marcus is a private investor and cofounder of InterSolve Group, a
management services firm which was established in 1991. Since January 1997, Mr.
Marcus has served as an advisor to Peter J. Solomon Company, a New York
investment banking firm. From December 1994 through December 1995, Mr. Marcus
served as CEO of the Plaid Clothing Group and as a director of that company from
December 1994 through December 1996. In July 1995, Plaid Clothing Group filed a
petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code and was
subsequently sold to Hartmarx in December 1996. From 1988 to 1991, Mr. Marcus
was a consultant for companies serving the retail industry. From 1979 to 1988,
he served as Chairman and Chief Executive Officer of Neiman Marcus in Dallas,
Texas. Mr. Marcus also serves as a director of Edison Brothers Stores and as a
director and member of the Compensation Committee for XcelleNet, Inc.
Mr. Charles H. Pistor, Jr. joined the board as director on June 24, 1997.
Mr. Pistor is the former Vice Chair of Southern Methodist University, and has
served as Chief Executive Officer of Republic Bank of Dallas and president of
the American Bankers Association. Mr. Pistor currently serves as a director on
the boards of Fortune Brands, AMR and American Airlines, Centex Corporation and
ORYX Energy Company.
Mr. Andrew H. Tisch has served as a director of the Company since July 21,
1993. Mr. Tisch has been Chairman of the Management Committee of Loews
Corporation since October 1995 and a member of that committee since October
1994. Mr. Tisch also served as Chairman of the Board and Chief Executive Officer
of Lorillard, Inc. from 1989 to May 1995. Mr. Tisch is Chairman of the Board of
Bulova Corporation and served as its President from 1980 to 1989. From 1985 to
1989, Mr. Tisch served as a director of Gordon Jewelry Corporation prior to its
acquisition by the Company. Mr. Tisch currently serves as a director of Loews
Corporation and Canary Wharf, Ltd.
47
<PAGE> 51
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary of certain agreements and instruments of the Company
does not purport to be complete and is qualified in its entirety by reference to
the various agreements and instruments described, including the definitions of
certain capitalized terms used herein, copies of certain of which have been
included as exhibits to various filings by the Company with the Commission. See
"Available Information."
THE REVOLVING CREDIT AGREEMENT
On March 31, 1997, the Company and ZDel as the Borrowers entered into a
three year unsecured Revolving Credit Agreement with a group of banks which
provides for revolving credit loans in an aggregate amount of up to $225.0
million, including a $30.0 million sublimit for letters of credit. The Revolving
Credit Agreement replaced a prior secured commitment totaling $150.0 million.
The revolving credit loans bear interest at floating rates, currently (i)
LIBOR plus 1.5% or (ii) the agent bank's adjusted base rate or the Federal Funds
Rate plus 0.5%, at the Borrowers' option. The interest rate based on LIBOR and
the letter of credit commission rates can be reduced or increased based on
certain future performance levels attained by the Borrowers. The Borrowers pay a
commitment fee of 0.375% per annum (subject to possible reduction based on
future performance) on the preceding month's unused Revolving Credit Agreement
commitment. Certain fees are also payable with respect to the issuance of
letters of credit. The Borrowers may repay the revolving credit loans at any
time without penalty prior to the maturity date. The interest rates and
commitment fee will also be reduced if the Company obtains an investment grade
rating. The Revolving Credit Agreement may be extended for one year at the
Borrowers' election upon obtaining appropriate consent. At July 31, 1997 there
were loans outstanding in the aggregate amount of $70.7 million under the
Revolving Credit Agreement at a weighted average interest rate of 7.20%. In
addition, letters of credit in the amount of approximately $0.6 million were
outstanding at July 31, 1997.
The Revolving Credit Agreement contains restrictive covenants, subject to
certain exceptions, including covenants with respect to the following matters:
(i) limitations on the Borrowers' ability to pay dividends and make other
payments; (ii) certain limitations on the ability of the Borrowers and certain
subsidiaries to incur additional indebtedness; (iii) limitations on the ability
of the Borrowers and certain subsidiaries to engage in certain transactions with
affiliates, incur liens, make investments and sell assets; and (iv) limitations
on the ability of the Borrowers to enter into any agreements prohibiting them
from granting liens to secure the Borrowers' indebtedness under the Revolving
Credit Agreement. In addition, (i) the Borrowers must maintain in effect at all
times one or more facilities for provision of funds to Borrowers for working
capital, through sales or pledge of receivables, in the amount of at least
$350.0 million; (ii) the Borrowers' ratio of Consolidated Funded Debt to
Consolidated Adjusted EBITDA may not exceed specified levels for four
consecutive quarters; (iii) the Borrowers' Consolidated Tangible Net Worth may
not be less than specified levels; (iv) neither the Borrowers nor their
respective subsidiaries may make capital expenditures in excess of certain
specified amounts; (v) the Borrowers' ratio of Consolidated Total Liabilities to
Consolidated Tangible Net Worth may not exceed 2 to 1; (vi) the Borrowers' ratio
of the difference between (A) Consolidated EBITDA and (B) federal income taxes
paid in cash by the Company and its subsidiaries to Consolidated Total Debt
Service for any period of four consecutive fiscal quarters may not be less than
2.5 to 1.0; and (vii) the Receivables Advance Rate may not be less than 65%.
The Revolving Credit Agreement also includes certain events of default,
including, but not limited to failure to pay principal or interest; certain
covenant defaults for more than five days after their occurrence and certain
other covenant defaults for 30 days after notice of any such default; false or
misleading misrepresentations; events of default on any obligation for borrowed
money or credit received in excess of $10.0 million in the aggregate; final
judgments against either of the Borrowers or any subsidiary of the Company in an
aggregate amount of $2.5 million which remains undischarged, unsatisfied and
unstayed for more than 60 days; certain bankruptcy and similar events involving
the Borrowers or a subsidiary of the Company; cancellation, revocation,
termination or rescission of any of the documents evidencing the Revolving
Credit Agreement without the express written consent of the lenders; the
occurrence of certain events with respect to any Guaranteed Pension Plan; the
enjoining of either Borrower or any of certain of their subsidiaries by court
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or administrative or regulatory order from conducting a significant part of its
domestic business in the continental United States for more than 30 days; the
occurrence of certain events which cause substantial curtailment of revenue
producing activities at a facility if such event is not covered by business
interruption insurance and would have a materially adverse effect on the
Borrowers and certain subsidiaries as a whole; the occurrence of an event which
would allow a receivables securitization or similar facility to cease purchasing
receivables or the occurrence of an early amortization event under such a
facility; distributions to shareholders in excess of those permitted by the
Revolving Credit Agreement; or the Company's ownership of less than all of the
issued and outstanding shares of capital stock of ZDel.
Prior to the consummation of the Offering, the Company amended the
Revolving Credit Agreement in order to, among other things, incorporate therein
certain of the covenants contained in the Indenture governing the Original Notes
and the Exchange Notes.
RECEIVABLES SECURITIZATION FACILITY
In 1994, in connection with the refinancing of certain then outstanding
receivables backed notes, ZFT, a limited purpose Delaware business trust was
formed to finance customer accounts receivable. ZFT established the Receivables
Securitization Facility, pursuant to which it issued approximately $380.7
million, net of discount, aggregate principal amount of 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 the Company and ZDel. JFS, 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 bear interest at the following rates, payable
monthly in arrears (amounts in thousands):
<TABLE>
<CAPTION>
PRINCIPAL RATE
- --------- ----
<C> <S>
$ 37,620 LIBOR + .40%, not to exceed 12.0%
294,100 7.325%
28,600 7.50%
20,440 8.15%
- --------
$380,760
========
</TABLE>
The effective interest rate, based on a current LIBOR rate of 5.625%, including
amortization of debt issuance costs, approximated 7.55% at July 31, 1997.
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 JFS will promptly solicit bids for the purchase of
all or a portion of the receivables. If the JFS 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 Receivables Notes are also subject to partial redemption at
the option of ZFT if one of ZDel's divisions is sold to an unaffiliated
purchaser or if the amount of Excess Funds equals or exceeds $60.0 million.
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The Receivables Securitization Facility 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 Receivables
Securitization Facility is subject to an early amortization whereby the ZFT
Receivables Notes may be declared due and payable immediately. The restricted
cash balance (which includes forthcoming monthly interest payments) shown on the
Consolidated Statements of Cash Flows as of July 31, 1997 and 1996 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, 1997 and 1996.
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DESCRIPTION OF THE NOTES
The Original Notes were and the Exchange Notes will be issued pursuant to
the Indenture. For purposes of this section, references to the "Company" mean
only Zale Corporation and not any of its subsidiaries, and references to the
"Notes" refer collectively to the Original Notes and the Exchange Notes. The
following summary of the material provisions of the Indenture does not purport
to be complete and is subject to, and qualified by, reference to the provisions
of the Indenture, including the definitions of certain terms contained therein
and those terms made part of the Indenture by reference to the Trust Indenture
Act of 1939, as amended, as in effect on the date of the Indenture. The
Indenture has been filed as an exhibit to the Registration Statement. The
definitions of certain terms used in the following summary are set forth below
under "-- Certain Definitions."
GENERAL
The Notes will mature on October 1, 2007 and will be limited in aggregate
principal amount to $100,000,000. Interest on the Notes will accrue at the rate
of 8 1/2% per annum and will be payable semi-annually in arrears on each April 1
and October 1 commencing on April 1, 1998, to the holders of record of Notes at
the close of business on the March 15 and September 15, respectively,
immediately preceding such interest payment dates. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Issue Date. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
The Notes will be general unsecured senior obligations of the Company. The
Notes will rank pari passu in right of payment with all unsubordinated
indebtedness of the Company and will be senior in right of payment to all
subordinated indebtedness of the Company. The Notes will be issued only in fully
registered form without coupons, in denominations of $1,000 and integral
multiples thereof. Principal of, premium, if any, and interest on the Notes are
payable, and the Notes are transferable, at the office or agency of the Company
in the City of New York maintained for such purposes (which initially will be
the corporate trust office of the Trustee); provided, however, that payment of
interest may be made at the option of the Company by check mailed to the Person
entitled thereto as shown on the security register. No service charge will be
made for any registration of transfer, exchange or redemption of the Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
Settlement for the Notes will be made in same day funds. All payments of
principal and interest will be made by the Company in same day funds. The Notes
will trade in the Same-Day Funds Settlement System of The Depository Trust
Company (the "Depositary" or "DTC") until maturity, and secondary market trading
activity for the Notes will therefore settle in same day funds.
SINKING FUND
The Company will not be required to make any sinking fund payments with
respect to the Notes.
OPTIONAL REDEMPTION
The Notes will be subject to redemption at any time on or after October 1,
2002, at the option of the Company, in whole or in part, on not less than 30 nor
more than 60 days' prior notice in amounts of $1,000 or an integral multiple
thereof at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning on October 1
in the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2002........................................................ 104.250%
2003........................................................ 102.833%
2004........................................................ 101.417%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due on
an interest payment date).
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In addition, at any time or from time to time on or prior to October 1,
2000, the Company may, at its option, use all or any portion of the net proceeds
of one or more Public Equity Offerings to redeem up to an aggregate of 30% of
the aggregate principal amount of Notes originally issued under the Indenture at
a redemption price equal to 108.5% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the redemption date;
provided that at least 70% of the aggregate principal amount of Notes originally
issued under the Indenture remains outstanding immediately after the occurrence
of such redemption. In order to effect the foregoing redemption, the Company
must mail a notice of redemption no later than 60 days after the related Public
Equity Offering and must consummate such redemption within 90 days of the
closing of the Public Equity Offering.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable.
CHANGE OF CONTROL TRIGGERING EVENT
The Indenture provides that, following the occurrence of a Change of
Control Triggering Event (the date of such occurrence being the "Change of
Control Date"), the Company will be obligated, within 20 days after the Change
of Control Date, to make an offer to purchase (a "Change of Control Offer") all
of the then outstanding Notes at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the Change of Control Purchase Date.
Within 20 days after the Change of Control Date, the Company shall notify
the Trustee thereof and give written notice of such Change of Control to each
holder of Notes, by first-class mail, postage prepaid, at his address appearing
in the security register, stating, among other things: the purchase price and
the purchase date which shall be fixed by the Company on a business day no
earlier than 30 days nor later than 60 days from the date such notice is mailed,
or such later date as is necessary to comply with requirements under the
Exchange Act; that any Note not tendered will continue to accrue interest; that,
unless the Company defaults in the payment of the purchase price, any Notes
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue interest after the Change of Control Purchase Date; and certain other
procedures that a holder of Notes must follow to accept a Change of Control
Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be tendered by holders of Notes seeking to accept the
Change of Control Offer. If the Company fails to repurchase all of the Notes
tendered for purchase, such failure will constitute an Event of Default under
the Indenture. See "-- Events of Default" below.
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the holders of the Notes elected to exercise their rights under the
Indenture and the Company elected to contest such election, there could be no
assurance as to how a court interpreting New York law would interpret the
phrase.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon the occurrence of a Change of Control Triggering Event may
deter a third party from acquiring the Company in a transaction which
constitutes a Change of Control.
In addition to the obligations of the Company under the Indenture with
respect to the Notes in the event of a "Change of Control," certain of the
Company's long-term indebtedness (including the Credit Facility) may also
contain an event of default upon a "Change of Control" as defined therein which
obligates the Company to repay amounts outstanding under such indebtedness upon
an acceleration of the indebtedness issued thereunder. See "Description of Other
Indebtedness."
The provisions of the Indenture will not afford holders of the Notes the
right to require the Company to repurchase the Notes in the event of a highly
leveraged transaction or certain transactions with the Company's management or
its Affiliates, including a reorganization, restructuring, merger or similar
transaction (including, in certain circumstances, an acquisition of the Company
by management or its Affiliates) involving the
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Company that may adversely affect holders of the Notes, if such transaction is
not a transaction defined as a Change of Control. A transaction involving the
Company's management or its Affiliates, or a transaction involving a
recapitalization of the Company, will result in a Change of Control only if it
is the type of transaction specified by such definition.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act, and any other applicable securities laws
or regulations and any applicable requirements of any securities exchange on
which the Notes are listed, in connection with the repurchase of Notes pursuant
to a Change of Control Offer, and any violation of the provisions of the
Indenture relating to such Change of Control Offer occurring as a result of such
compliance, shall not be deemed a Default or Event of Default under the
Indenture.
GUARANTEES
Zale Delaware, Inc. will fully and unconditionally guarantee the Company's
obligations under the Notes. In addition, if any Restricted Subsidiary of the
Company becomes a guarantor or obligor in respect of any other Indebtedness of
the Company or any of the Restricted Subsidiaries, the Company shall cause such
Restricted Subsidiary to enter into a supplemental indenture pursuant to which
such Restricted Subsidiary shall agree to guarantee the Company's obligations
under the Notes. If the Company defaults in payment of the principal of,
premium, if any, or interest on the Notes, each of the Guarantors will be
unconditionally, jointly and severally obligated to duly and punctually pay the
same.
The obligations of each Guarantor under its Guarantee are limited to the
maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor, and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations of
such Guarantor under its Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under Federal or state law. Each Guarantor that makes a
payment or distribution under its Guarantee shall be entitled to a contribution
from any other Guarantor in a pro rata amount based on the net assets of each
Guarantor determined in accordance with GAAP.
Notwithstanding the foregoing, each Guarantee of a Guarantor may be
released pursuant to the provisions of the second paragraph under "-- Certain
Covenants -- Limitation on Guarantees by Restricted Subsidiaries." The Company
may, at any time, cause a Restricted Subsidiary to become a Guarantor by
executing and delivering a supplemental indenture providing for the guarantee of
payment of the Notes by such Restricted Subsidiary on the basis provided in the
Indenture.
The Indebtedness evidenced by each Guarantee (including the payment of
principal of, premium, if any, and interest on the Notes) will rank pari passu
in right of payment with all other unsubordinated indebtedness of such Guarantor
and will rank senior in right of payment to all subordinated indebtedness of
such Guarantor. As of July 31, 1997, on a pro forma basis after giving effect to
the Offering and the application of the net proceeds therefrom, the Company and
the Guarantor would have had approximately $381.1 million in aggregate principal
amount of indebtedness outstanding which ranked pari passu in right of payment
with the Notes and the Guarantee (all of which would have been secured). The
Company and the Guarantor are co-obligors under the Credit Facility.
CERTAIN COVENANTS
The Indenture provides that the covenants set forth herein are applicable
to the Company; provided, however, that if no Default has occurred and is
continuing, after the ratings assigned to the Notes by both Rating Agencies are
equal to or higher than BBB- and Baa3, or the equivalents thereof, respectively
(the "Investment Grade Ratings"), and notwithstanding that the Notes may later
cease to have an Investment Grade Rating, the Company and the Restricted
Subsidiaries will not be subject to the provisions of the Indenture described
under "Limitation on Indebtedness," "Disposition of Proceeds of Assets Sales,"
"Limitation on Restricted Payments," clause (c) of the first and fourth
paragraphs of "Limitation on Designations of Unrestricted Subsidiaries,"
"Restrictions on Preferred Stock of Restricted Subsidiaries," "Limitation on
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<PAGE> 57
Transactions with Affiliates," "Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries" and clause (iii) of
"Consolidation, Merger, Sale of Assets, Etc."
Limitation on Indebtedness. The Indenture provides that the Company will
not, and will not cause or permit any of the Restricted Subsidiaries to,
directly or indirectly, create, incur, assume, issue, guarantee or in any manner
become liable for or with respect to the payment of, contingently or otherwise
(in each case, to "incur"), any Indebtedness (including any Acquired
Indebtedness but excluding any Permitted Indebtedness); provided, however, that
(i) the Company and any Guarantor may incur Indebtedness (including Acquired
Indebtedness) and (ii) any Restricted Subsidiary may incur Acquired
Indebtedness, if, in either case, immediately after giving pro forma effect
thereto, the Consolidated Fixed Charge Coverage Ratio of the Company is at least
equal to 2.00:1.
Notwithstanding the foregoing, the Company and, to the extent specifically
set forth below, the Restricted Subsidiaries may incur each and all of the
following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company and Zale Delaware, Inc. under the
Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed $325 million;
(ii) Indebtedness of the Company or any Guarantor under the Indenture,
the Notes (including any Additional Notes) and the Guarantees;
(iii) Indebtedness of the Company or any Restricted Subsidiary not
otherwise referred to in this definition of "Permitted Indebtedness" that
is outstanding on the Issue Date and is set forth on a schedule to the
Indenture;
(iv) Indebtedness of the Company or any Restricted Subsidiary in
respect of performance bonds, bankers' acceptances, trade letters of credit
of the Company or any Restricted Subsidiary and surety bonds provided by
the Company or any Restricted Subsidiary in the ordinary course of
business;
(v) Indebtedness of the Company owing to a Restricted Subsidiary;
provided that any Indebtedness for borrowed money of the Company owing to a
Restricted Subsidiary is made pursuant to an intercompany note in the form
attached to the Indenture and is subordinated in accordance with provisions
set forth in the Indenture; provided, further, that any disposition, pledge
or transfer of any such Indebtedness to a Person (other than a disposition,
pledge or transfer to a Restricted Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by the Company not permitted by this clause
(v);
(vi) Indebtedness of a Wholly-Owned Restricted Subsidiary or a
Guarantor owing to the Company or another Wholly-Owned Restricted
Subsidiary; provided that any such Indebtedness for borrowed money is made
pursuant to an intercompany note in the form attached to the Indenture;
provided, further, that (a) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than the Company or a Wholly-Owned
Restricted Subsidiary) shall be deemed to be an incurrence of such
Indebtedness by the obligor not permitted by this clause (vi), and (b) any
transaction pursuant to which any Wholly-Owned Restricted Subsidiary or
Guarantor, as the case may be, which has Indebtedness owing to the Company
or any other Wholly Owned Restricted Subsidiary, ceases to be a
Wholly-Owned Restricted Subsidiary or Guarantor, as the case may be, shall
be deemed to be the incurrence of Indebtedness by such Wholly-Owned
Restricted Subsidiary that is not permitted by this clause (vi);
(vii) Any guarantees of Indebtedness by a Restricted Subsidiary
incurred in compliance with the covenant described under "-- Limitations on
Guarantees by Restricted Subsidiaries;"
(viii) Interest Rate Protection Obligations of the Company or any
Restricted Subsidiary covering Indebtedness of the Company or any
Restricted Subsidiary (which Indebtedness is otherwise permitted to be
incurred under this covenant) to the extent the notional principal amount
of such Interest Rate Protection Obligations does not exceed the principal
amount of the Indebtedness to which such Interest Rate Protection
Obligations relate;
(ix) Indebtedness of the Company or any Restricted Subsidiary under
any Commodity Price Protection Agreements which do not increase the amount
of obligations of the Company or any
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Restricted Subsidiary outstanding other than as a result of fluctuations in
commodity prices or by reason of fees, indemnities and compensation payable
thereunder;
(x) Indebtedness of the Company or any Restricted Subsidiary under
Currency Agreements relating to (a) Indebtedness of the Company or any
Restricted Subsidiary and/or (b) obligations to purchase or sell assets or
properties, in each case, incurred in the ordinary course of business of
the Company or any Restricted Subsidiary; provided, however, that such
Currency Agreements do not increase the Indebtedness or other obligations
of the Company or any Restricted Subsidiary outstanding other than as a
result of fluctuations in foreign currency exchange rates or by reason of
fees, indemnities and compensation payable thereunder;
(xi) Purchase Money Indebtedness (other than Indebtedness incurred in
connection with an Asset Acquisition) and Capitalized Lease Obligations of
the Company or any Restricted Subsidiary, together in an aggregate amount
not exceeding $25 million outstanding at any time;
(xii) (a) Indebtedness of the Company or any Guarantor to the extent
the proceeds thereof are used to Refinance Indebtedness of the Company or
any Guarantor or any Restricted Subsidiary referred to under clause (ii) or
(iii) above and (b) Indebtedness of any Restricted Subsidiary used to
Refinance Indebtedness of such Restricted Subsidiary referred to under
clause (iii) above; provided, however, that, in the case of either clause
(a) or (b), the principal amount of Indebtedness incurred pursuant to this
clause (xii) (or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration of the maturity thereof, the original issue price of such
Indebtedness plus any accreted value attributable thereto since the
original issuance of such Indebtedness) shall not exceed the sum of the
principal amount of Indebtedness so Refinanced (or, if such Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration of the maturity thereof, the
original issue price of such Indebtedness, plus any accreted value
attributable thereto since the original issuance of such Indebtedness),
plus the amount of any premium required to be paid in connection with such
Refinancing pursuant to the terms of such Indebtedness or the amount of any
premium reasonably determined by the Company or a Restricted Subsidiary, as
applicable, as necessary to accomplish such Refinancing by means of a
tender offer or privately negotiated purchase, plus the amount of expenses
in connection with such Refinancing; and
(xiii) in addition to the items referred to in clauses (i) through
(xii) above, additional Indebtedness of the Company and the Restricted
Subsidiaries not to exceed an aggregate principal amount at any time
outstanding of $25 million.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness permitted by this
covenant, the Company in its sole discretion shall classify such item of
Indebtedness and only be required to include the amount of such Indebtedness as
one of such types.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not cause or permit any of the Restricted Subsidiaries to,
directly or indirectly:
(i) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of the Company or any Restricted
Subsidiary or any payment made to the direct or indirect holders (in their
capacities as such) of Capital Stock of the Company or any Restricted
Subsidiary (other than dividends or distributions made to the Company or a
Restricted Subsidiary and dividends and distributions payable solely in
Capital Stock of the Company (other than Redeemable Capital Stock) or in
options, warrants or rights to purchase Capital Stock of the Company (other
than Redeemable Capital Stock) or dividends and distributions made by a
Restricted Subsidiary on a pro rata basis to all stockholders of such
Restricted Subsidiary); or
(ii) purchase, redeem, defease or otherwise acquire or retire for
value any Capital Stock of the Company or any Affiliate of the Company
(other than any such Capital Stock owned by the Company or a Restricted
Subsidiary that is a Guarantor); or
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(iii) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any Subordinated
Indebtedness owed to and held by the Company or a Restricted Subsidiary
that is a Guarantor); or
(iv) make any Investment (other than a Permitted Investment)
(such payments or Investments (other than an exception thereto) described in the
preceding clauses (i), (ii), (iii) and (iv) are collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to the
proposed Restricted Payment (the amount of any such Restricted Payment, if other
than in cash, shall be the Fair Market Value of the asset(s) proposed to be
transferred by the Company or such Restricted Subsidiary, as the case may be,
pursuant to such Restricted Payment as determined by the board of directors of
the Company, whose determination shall be conclusive and evidenced by a board
resolution):
(A) no Default or Event of Default shall have occurred and be
continuing and such Restricted Payment shall not be an event which is, or
after notice or lapse of time or both, would be, an "event of default"
under the terms of any Indebtedness of the Company or its Restricted
Subsidiaries;
(B) the aggregate amount of all Restricted Payments declared or made
from and after the Issue Date and all Designation Amounts would not exceed
the sum of (1) 50% of cumulative Consolidated Net Income of the Company
during the period (treated as one accounting period) beginning on the first
day of the fiscal quarter beginning after the Issue Date and ending on the
last day of the fiscal quarter of the Company immediately preceding the
date of such proposed Restricted Payment for which consolidated financial
information of the Company is available (or, if such cumulative
Consolidated Net Income of the Company for such period shall be a loss,
minus 100% of such loss), plus (2) the aggregate net cash proceeds received
by the Company either (x) as capital contributions to the Company
increasing its common equity after the Issue Date or (y) from the issuance
or sale of Capital Stock (excluding Redeemable Capital Stock but including
Capital Stock issued upon the conversion of convertible Indebtedness in
exchange for outstanding Indebtedness of the Company issued after the Issue
Date or from the exercise of options, warrants or rights to purchase
Capital Stock (other than Redeemable Capital Stock)) of the Company to any
Person (other than to a Subsidiary of the Company) after the Issue Date
(excluding the net cash proceeds from any issuance and sale of Capital
Stock financed, directly or indirectly, using funds borrowed from the
Company or any Restricted Subsidiary until and to the extent such borrowing
is repaid), plus (3) without duplication of any amounts included in clause
(1) above, in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the Issue Date, an amount (to
the extent not included in Consolidated Net Income) equal to the lesser of
the return of capital with respect to such Investment and the initial
amount of such Investment which was treated as a Restricted Payment, in
either case, less the cost of the disposition of such Investment and net of
taxes, plus (4) without duplication of any amounts included in clause (1)
above so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after the
Issue Date in accordance with "Limitation on Designations of Unrestricted
Subsidiaries" below, the Fair Market Value of the Company's interest in
such Restricted Subsidiary; provided, however, that such amount shall not
in any case exceed the Designation Amount with respect to such Restricted
Subsidiary at the time of its Designation; and
(C) the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the "Limitation on Indebtedness"
covenant described above.
None of the foregoing provisions of this covenant will prohibit or restrict
(i) the payment of any dividend within 60 days after the date of its
declaration, if at the date of declaration such payment would be permitted by
the provisions of the Indenture; (ii) so long as no Default shall have occurred
and be continuing or would arise therefrom, the redemption, repurchase or other
acquisition or retirement of any shares of any class of Capital Stock of the
Company in exchange for, or out of the net cash proceeds of, a substantially
concurrent issue and sale of other shares of Capital Stock (other than
Redeemable Capital Stock) of the Company to any
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Person (other than to a Subsidiary); provided, however,that any such net cash
proceeds and the value of any Capital Stock issued in exchange for such retired
Capital Stock are excluded from clause (B)(2) of the preceding paragraph; (iii)
so long as no Default shall have occurred and be continuing or would arise
therefrom, any redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness made by exchange for, or out of the net cash proceeds
of, a substantially concurrent issue and sale of (A) Capital Stock (other than
Redeemable Capital Stock) of the Company to any Person (other than to a
Subsidiary); provided, however, that any such net cash proceeds and the value of
any Capital Stock issued in exchange for Subordinated Indebtedness are excluded
from clause (B)(2) of the preceding paragraph or (B) Indebtedness of the Company
or any Guarantor so long as such Indebtedness (1) is subordinated to the Notes
or the Guarantee of such Guarantor, as the case may be, at least to the same
extent as the Subordinated Indebtedness so purchased, exchanged, redeemed,
repurchased, acquired or retired and (2) does not have a Stated Maturity earlier
than the Stated Maturity for the Subordinated Indebtedness being redeemed,
repurchased or otherwise acquired or retired; (iv) so long as no Default shall
have occurred and be continuing, any purchase, redemption or other acquisition
or retirement for value of any Capital Stock (including any option, warrant or
right to purchase Capital Stock) (other than Redeemable Capital Stock) of the
Company for purposes of making contributions of such Capital Stock of the
Company to employees or directors of the Company or its Subsidiaries pursuant to
any employee benefit, stock purchase or similar plan; (v) a Restricted Payment
to pay for the repurchase, retirement or other acquisition or retirement for
value of Capital Stock (or warrants or options convertible into or exchangeable
for such Capital Stock) of the Company held by any future, present or former
employee, director or consultant of the Company or any Subsidiary pursuant to
any management equity plan or stock option plan or any other management or
employee benefit plan or agreement; provided, however, that the aggregate amount
of Restricted Payments made pursuant to this clause (v) does not exceed in any
calendar year $5 million (with the unused amount in any calendar year being
carried over to succeeding calendar years subject to a maximum of $10 million in
any calendar year); (vi) payments or distributions to dissenting stockholders
pursuant to applicable law, pursuant to or in connection with an Asset Sale or
Asset Acquisition that complies with the provisions of the Indenture; (vii)
repurchases of Capital Stock (or warrants or options convertible into or
exchangeable for such Capital Stock) deemed to occur upon exercise of stock
options to the extent that shares of such Capital Stock (or warrants or options
convertible into or exchangeable for such Capital Stock) represent a portion of
the exercise price of such options; and (viii) any declaration of a dividend in
connection with implementation of any stockholders' right plan, or the issuance
of rights, stock or other property under any such plan, or the redemption,
repurchase or other acquisition of any such rights pursuant thereto. In
computing the amount of Restricted Payments previously made for purposes of
clause (B) of the preceding paragraph, Restricted Payments (to the extent not
otherwise included therein) under the immediately preceding clauses (i), (iv),
(v), (vi) and (vii) shall be included.
Limitation on Transactions with Affiliates. The Indenture provides that the
Company will not, and will not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, conduct any business or enter into any
transaction or series of related transactions with, or for the benefit of, any
of their respective Affiliates or any officer or director of the Company or any
Subsidiary (each, an "Affiliate Transaction"), unless (i) such Affiliate
Transaction is entered into in good faith and on terms that are no less
favorable to the Company or the Restricted Subsidiary, as the case may be, than
those which could have been obtained in a comparable transaction at such time
from Persons who do not have such a relationship and (ii) with respect to any
Affiliate Transaction or series of Affiliate Transactions involving aggregate
payments or value equal to or greater than $5.0 million, the Company shall have
delivered an officer's certificate to the Trustee certifying that such Affiliate
Transaction or series of related Affiliate Transactions complies with the
preceding clause (i) and, with respect to any Affiliate Transaction or series of
Affiliate Transactions involving aggregate payments or value equal to or greater
than $10.0 million, further certifying that (a) such Affiliate Transaction or
series of Affiliate Transactions has been approved by a majority of the Board of
Directors of the Company, including a majority of the disinterested directors of
the Board of Directors of the Company or (b) the Company has received a written
opinion of an investment banking firm of national standing or other recognized
independent expert with experience appraising the terms and conditions of the
type of transactions
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or series of related transactions for which an opinion is required stating that
the transaction or series of related transactions is fair to the Company or such
Restricted Subsidiary from a financial point of view.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and its
Wholly-Owned Restricted Subsidiaries; (ii) customary directors' fees,
indemnification and similar arrangements, consulting fees, employee salaries,
bonuses or employment agreements, compensation or employee benefit arrangements
and incentive arrangements with any officer, director or employee of the Company
or any Restricted Subsidiary entered into in the ordinary course of business
(including customary benefits thereunder) and payments under any indemnification
arrangements permitted by applicable law; (iii) any dividends made in compliance
with "Limitation on Restricted Payments" above; (iv) loans and advances to
officers, directors, employees and consultants of the Company or any Restricted
Subsidiary for travel, entertainment, moving and other relocation expenses, in
each case made in the ordinary course of business; (v) transactions with or by
any Accounts Receivable Subsidiary made in the ordinary course of business and
transactions related to any proprietary credit card issued by or for the benefit
of the Company or an Affiliate of the Company in the ordinary course of
business; (vi) any agreement or Affiliate Transactions as in effect on the Issue
Date and any transaction contemplated thereby; and (vii) tax sharing agreements
between the Company and any of its Subsidiaries providing for the payment by
such Subsidiary of an amount equal to the hypothetical United States tax
liability of the Subsidiary as if such Subsidiary had filed its own U.S. federal
tax return for any given taxable year.
Disposition of Proceeds of Asset Sales. The Indenture provides that the
Company will not, and will not cause or permit any Restricted Subsidiary to,
directly or indirectly, make any Asset Sale, unless (i) the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the assets sold or
otherwise disposed of and (ii) at least 75% of such consideration consists of
cash or Cash Equivalents. The amount of any (i) Indebtedness of a Restricted
Subsidiary that is not a Guarantor that is actually assumed by the transferee in
such Asset Sale and from which the Company and the Restricted Subsidiaries are
fully released shall be deemed to be cash for purposes of determining the
percentage of cash consideration received by the Company or the Restricted
Subsidiaries (and excluding any liabilities that are incurred in connection with
or in anticipation of such Asset Sale) and (ii) notes or other similar
obligations received by the Company or any Restricted Subsidiary from such
transferee that are immediately converted, sold or exchanged (or are converted,
sold or exchanged within thirty days of the related Asset Sale) by the Company
or the Restricted Subsidiaries into cash shall be deemed to be cash, in an
amount equal to the net cash proceeds realized upon such conversion, sale or
exchange for purposes of determining the percentage of cash consideration
received by the Company or the Restricted Subsidiaries.
If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness (other than
the Notes), Senior Guarantor Indebtedness (other than the Guarantees) or
Indebtedness of a Wholly-Owned Restricted Subsidiary outstanding as required by
the terms thereof, or the Company determines not to apply such Net Cash Proceeds
to the permanent repayment of the Senior Indebtedness (other than the Notes),
Senior Guarantor Indebtedness (other than the Guarantees) or Indebtedness of a
Wholly-Owned Restricted Subsidiary or if no Senior Indebtedness (other than the
Notes), Senior Guarantor Indebtedness (other than the Guarantees) or
Indebtedness of a Wholly-Owned Restricted Subsidiary is outstanding, then the
Company or a Restricted Subsidiary may, within 365 days of such Asset Sale,
invest the Net Cash Proceeds in capital expenditures, properties and other
assets that replace the properties and assets that were the subject of the Asset
Sale or in properties and assets that will be used in the business of the
Company or its Restricted Subsidiaries existing on the date of the Indenture or
in businesses reasonably related thereto.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are
not applied within 365 days of such Asset Sale as described in the immediately
preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash
Proceeds"), the Company will apply the Unutilized Net Cash Proceeds to the
repayment of the Notes and any other Pari Passu Indebtedness outstanding with
similar provisions requiring the Company to make an offer to purchase such
Indebtedness as follows: (A) the Company shall, within 20 days after such 365th
day, make an offer to purchase (the "Asset Sale Offer") all outstanding Notes in
the
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maximum principal amount (expressed as a multiple of $1,000) of Notes that may
be purchased out of an amount (the "Note Amount") equal to the product of such
Unutilized Net Cash Proceeds multiplied by a fraction, the numerator of which is
the outstanding principal amount of the Notes, and the denominator of which is
the sum of the outstanding principal amount of the Notes and such Pari Passu
Indebtedness (subject to proration in the event such amount is less than the
aggregate Offered Price (as defined herein) of all Notes tendered) and (B) to
the extent required by such Pari Passu Indebtedness to permanently reduce the
principal amount of such Pari Passu Indebtedness, the Company will make an offer
to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari
Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess of
the Unutilized Net Cash Proceeds over the Note Amount; provided that in no event
will the Company be required to make a Pari Passu Offer in a Pari Passu Debt
Amount exceeding the principal amount of such Pari Passu Indebtedness plus the
amount of any premium required to be paid to repurchase such Pari Passu
Indebtedness. The offer price (the "Offered Price") for the Notes will be
payable in cash in an amount equal to 100% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the Purchase Date, in accordance
with the procedures set forth in the Indenture. Notwithstanding the above, the
Asset Sale Offer may be deferred until there are aggregate Unutilized Net Cash
Proceeds equal to or in excess of $10.0 million, at which time the entire amount
of such Unutilized Net Cash Proceeds, and not just the amount in excess of $10.0
million, shall be applied as required pursuant to this paragraph.
With respect to any Asset Sale Offer effected pursuant to this covenant,
among the Notes, to the extent the aggregate principal amount of Notes and Pari
Passu Indebtedness tendered pursuant to such Asset Sale Offer exceeds the
Unutilized Net Cash Proceeds to be applied to the repurchase, such Notes shall
be purchased pro rata based on the aggregate principal amount of such Notes and
Pari Passu Indebtedness tendered by each holder. To the extent the aggregate
Offered Price of the Notes tendered pursuant to the Offer is less than the Note
Amount relating thereto or the aggregate principal amount of Pari Passu
Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu
Debt Amount, the Company may retain and utilize any portion of the Unutilized
Net Cash Proceeds not applied to repurchase the Notes and Pari Passu
Indebtedness for any purpose consistent with the other terms of the Indenture.
Upon the completion of the purchase of all the Notes tendered pursuant to an
Offer and the completion of a Pari Passu Offer, the amount of Unutilized Net
Cash Proceeds, if any, shall be reset at zero.
If the Company becomes obligated to make an Offer pursuant to this Section,
the Notes and the Pari Passu Indebtedness shall be purchased by the Company, at
the option of the holders thereof, in whole or in part in integral multiples of
$1,000, on a date that is not earlier than 45 days and not later than 60 days
from the date the notice of the Offer is given to holders, or such later date as
may be necessary for the Company to comply with the requirements of the Exchange
Act.
In the event that the Company makes an Asset Sale Offer, the Company shall
comply, to the extent applicable, with the requirements of Section 14(e) of the
Exchange Act, and any other applicable securities laws or regulations and any
applicable requirements of any securities exchange on which the Notes are
listed, and any violation of the provisions of the Indenture relating to such
Asset Sale Offer occurring as a result of such compliance shall not be deemed a
Default or an Event of Default.
Limitation on Liens. The Indenture provides that the Company will not, and
will not cause or permit any Restricted Subsidiary to, directly or indirectly,
create, incur or assume, any Lien of any kind (other than Permitted Liens), upon
any of its property or assets, whether now owned or acquired after the Issue
Date, or any proceeds therefrom, or assign or convey any right to receive income
therefrom to secure either (i) Subordinated Indebtedness, unless the Notes, in
the case of the Company, and the Guarantees, in the case of a Restricted
Subsidiary that is a Guarantor, are secured by a Lien on such property, assets
or proceeds that is senior in priority to the Liens securing such Subordinated
Indebtedness or (ii) any other Indebtedness, unless the Notes and the
Guarantees, in the case of a Restricted Subsidiary that is a Guarantor, are
equally and ratably secured thereby.
Limitation on Guarantees by Restricted Subsidiaries. The Indenture provides
that the Company will not cause or permit any of the Restricted Subsidiaries,
directly or indirectly, to guarantee the payment of any Indebtedness of the
Company or any Restricted Subsidiary ("Other Indebtedness"), except for
guarantees to
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suppliers, lessors, licensees, contractors, franchisees or customers incurred in
the ordinary course of business, unless such Restricted Subsidiary (A) is a
Guarantor or (B) simultaneously executes and delivers a supplemental indenture
to the Indenture pursuant to which it will become a Guarantor under the
Indenture; provided, however, that if such Other Indebtedness is (i)
Indebtedness that is ranked pari passu in right of payment with the Notes or the
Guarantee of such Restricted Subsidiary, as the case may be, the Guarantee of
such Restricted Subsidiary shall be pari passu in right of payment with the
guarantee of the Other Indebtedness; or (ii) Subordinated Indebtedness, the
Guarantee of such Restricted Subsidiary shall be senior in right of payment to
the guarantee of the Other Indebtedness (which guarantee of such Subordinated
Indebtedness shall provide that such guarantee is subordinated to the Guarantees
of such Restricted Subsidiary to the same extent and in the same manner as the
other Indebtedness is subordinated to the Notes or the Guarantee of such
Restricted Subsidiary, as the case may be).
Notwithstanding the above, any Guarantee by a Restricted Subsidiary of the
Notes shall provide by its terms that it (and all Liens securing the same) shall
be automatically and unconditionally released and discharged upon (i) any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Capital Stock of such Restricted Subsidiary held by the Company, or all or
substantially all the assets of such Restricted Subsidiary, which transaction is
in compliance with the terms of the Indenture and in which such Restricted
Subsidiary is released from all guarantees, if any, by it of Other Indebtedness
of the Company or any Restricted Subsidiaries or (ii) (with respect to any
Guarantees created after the date of the Indenture) the release by the holders
of the Indebtedness of the Company described above of their guarantee by such
Restricted Subsidiary (including any deemed release upon payment in full of all
obligations under such Indebtedness), at a time when (A) no Other Indebtedness
of the Company has been guaranteed by such Restricted Subsidiary or (B) the
holders of all such Other Indebtedness which is guaranteed by such Restricted
Subsidiary also release their guarantee by such Restricted Subsidiary (including
any deemed release upon payment in full of all obligations under such
Indebtedness).
Restrictions on Preferred Stock of Restricted Subsidiaries. The Indenture
provides that (a) the Company will not sell, and will not cause or permit any of
the Restricted Subsidiaries to issue, sell or transfer, any Preferred Stock of
any Restricted Subsidiary (other than (i) to the Company or to a Wholly-Owned
Restricted Subsidiary and (ii) Preferred Stock issued by a Person prior to the
time (A) such Person becomes a Restricted Subsidiary, (B) such Person merges
with or into a Restricted Subsidiary or (C) a Restricted Subsidiary merges with
or into such Person; provided that such Preferred Stock was not issued or
incurred by such Person in anticipation of the type of transaction contemplated
by subclause (A), (B) or (C)) and (b) the Company will not permit any Person
(other than the Company or a Wholly-Owned Restricted Subsidiary) to own any
Preferred Stock of any Restricted Subsidiary except upon the acquisition of all
of the outstanding Capital Stock of such Restricted Subsidiary in accordance
with the terms of the Indenture.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
cause or permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause, or enter into any agreement with any Person that would cause to
become effective, any consensual encumbrance or restriction of any kind, on the
ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise,
or make any other distribution on or in respect of its Capital Stock or any
other interest or participation in, or measured by, its profits, to the Company
or any other Restricted Subsidiary, (b) pay any Indebtedness owed to the Company
or any other Restricted Subsidiary, (c) make loans or advances to, or guarantee
any Indebtedness or other obligations of, the Company or any other Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary, except any encumbrance or restriction (i) with
respect to a Restricted Subsidiary that is not a Restricted Subsidiary on the
Issue Date, in existence at the time such Person becomes a Restricted Subsidiary
(but not created in contemplation thereof); provided, however, that such
encumbrances and restrictions are not applicable to the Company or any
Restricted Subsidiary, or the properties or assets of the Company or any
Restricted Subsidiary, other than such Person; (ii) arising as a result of
customary non-assignment provisions in leases entered into in the ordinary
course of business; (iii) existing under any agreement governing the terms of or
otherwise arising as a result of Purchase Money Indebtedness (other than
Indebtedness incurred to finance an Asset Acquisition) for property acquired in
the ordinary course of business that only imposes
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encumbrances and restrictions on the property so acquired; (iv) contained in any
agreement for the sale or disposition of the Capital Stock or assets of any
Restricted Subsidiary; provided, however, that such encumbrances and
restrictions described in this clause (iv) are only applicable to such
Restricted Subsidiary or assets, as applicable, and any such sale or disposition
is made in compliance with "Disposition of Proceeds of Asset Sales" above to the
extent applicable thereto; (v) existing under any agreement that Refinances the
agreements containing the encumbrance or restrictions in the foregoing clause
(i); provided, however, that the terms and conditions of any such restrictions
permitted under this clause (v) are not materially less favorable to the holders
of the Notes than those under or pursuant to the agreement evidencing the
Indebtedness Refinanced; or (vi) in existence as a result of applicable law.
Limitation on Designations of Unrestricted Subsidiaries. The Indenture
provides that the Company may designate after the Issue Date any Subsidiary
(other than a Guarantor) as an "Unrestricted Subsidiary" under the Indenture (a
"Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of
"Limitation on Restricted Payments" above in an amount (the "Designation
Amount") equal to the greater of (1) the net book value of the Company's
interest in such Subsidiary calculated in accordance with GAAP or (2) the
Fair Market Value of the Company's interest in such Subsidiary as
determined in good faith by the Company's board of directors;
(c) the Company would be permitted under the Indenture to incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "-- Limitation on Indebtedness" at the time of
such Designation (assuming the effectiveness of such Designation); and
(d) such Unrestricted Subsidiary does not own any Capital Stock in any
Restricted Subsidiary of the Company which is not simultaneously being
designated an Unrestricted Subsidiary.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"-- Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount.
The Indenture further provides that (i) the Company shall not and shall not
cause or permit any Restricted Subsidiary to at any time (x) provide credit
support for, or subject any of its property or assets (other than the Capital
Stock of any Unrestricted Subsidiary) to the satisfaction of, any Indebtedness
of any Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) (other than Permitted Investments in
Unrestricted Subsidiaries) or (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary and (ii) no Unrestricted Subsidiary
shall at any time guarantee or otherwise provide credit support for any
obligation of the Company or any Restricted Subsidiary. For purposes of the
foregoing, the Designation of a Subsidiary of the Company as an Unrestricted
Subsidiary shall be deemed to be the Designation of all of the Subsidiaries of
such Subsidiary.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation;
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture;
(c) unless such redesignated Subsidiary shall not have any
Indebtedness outstanding (other than Indebtedness that would be Permitted
Indebtedness), immediately after giving effect to such proposed Revocation,
and after giving pro forma effect to the incurrence of any such
Indebtedness of such
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redesignated Subsidiary as if such Indebtedness was incurred on the date of
the Revocation, the Company could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the covenant described
under "-- Limitation on Indebtedness;" and
(d) any transaction (or series of related transactions) between such
Subsidiary and any of its Affiliates that occurred while such Subsidiary
was an Unrestricted Subsidiary would be permitted by "-- Limitation on
Transactions with Affiliates" above as if such transaction (or series of
related transactions) had occurred at the time of such Revocation.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Reporting Requirements. The Indenture provides that the Company and each
Guarantor will file with the Commission, the Trustee and the Initial Purchasers,
the annual reports, quarterly reports and other documents required to be filed
with the Commission pursuant to Sections 13 and 15 of the Exchange Act, whether
or not the Company or such Guarantor has a class of securities registered under
the Exchange Act, such documents to be filed with the Commission on or prior to
the date (the "Required Filing Date") by which the Company and each Guarantor
would have been required so to file such document if the Company and such
Guarantor were so subject. The Company and each Guarantor will also in any event
(x) within 15 days of each Required Filing Date file with the Trustee copies of
the annual reports, quarterly reports and other documents which the Company and
each Guarantor would have been required to file with the Commission pursuant to
Sections 13 or 15 of the Exchange Act if the Company and such Guarantor were
subject to either of such Sections and (y) if filing such documents by the
Company and such Guarantor with the Commission is not permitted under the
Exchange Act, (i) within 15 days of each Required Filing Date, transmit by mail
to all holders, as their names and addresses appear in the security register,
without cost to such holders, copies of the annual reports, quarterly reports
and other documents which the Company and each Guarantor would have been
required to file with the Commission pursuant to Sections 13 or 15 of the
Exchange Act if the Company and such Guarantor were subject to either of such
Sections and (ii) promptly upon written request and payment of the reasonable
cost of duplication and delivery, supply copies of such documents to any holder
or prospective holder at the Company's cost. If any Guarantor's or other
Subsidiaries' financial statements would be required to be included in the
financial statements filed or delivered pursuant hereto if the Company were
subject to Sections 13 or 15 of the Exchange Act, the Company shall include such
Guarantor's or other Subsidiaries' financial statements in any filing or
delivery pursuant hereto.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company will not, in any transaction or
series of related transactions, merge or consolidate with or into, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets as an entirety to, any Person or Persons, and that
the Company will not permit any of the Restricted Subsidiaries to enter into any
such transaction or series of related transactions if such transaction or series
of related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries), to any other Person or Persons, unless at the time and after
giving effect thereto (i) either (A)(1) if the transaction or transactions is a
merger or consolidation involving the Company, the Company shall be the
surviving Person of such merger or consolidation or (2) if the transaction or
transactions is a merger or consolidation involving a Restricted Subsidiary,
such Restricted Subsidiary shall be the surviving Person of such merger or
consolidation, or (B)(1) the Person formed by such consolidation or into which
the Company or such Restricted Subsidiary is merged or to which the properties
and assets of the Company or such Restricted Subsidiary, as the case may be,
substantially as an entirety, are transferred (any such surviving Person or
transferee Person being the "Surviving Entity") shall be a corporation organized
and existing under the laws of the United States of America, any State thereof
or the District of Columbia and (2)(x) in the case of a transaction involving
the Company, the Surviving Entity shall expressly assume by a supplemental
indenture executed and delivered to the Trustee, in form reasonably satisfactory
to the Trustee,
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all the obligations of the Company under the Notes and the Indenture and, in
each case, the Notes and the Indenture shall remain in full force and effect, or
(y) in the case of a transaction involving a Restricted Subsidiary that is a
Guarantor, the Surviving Entity shall expressly assume by a supplemental
indenture executed and delivered to the Trustee, in form reasonably satisfactory
to the Trustee, all the obligations of such Restricted Subsidiary under its
Guarantee and the Indenture and, in each case, such Guarantee and Indenture
shall remain in full force and effect; (ii) immediately after giving effect to
such transaction or series of related transactions on a pro forma basis, no
Default shall have occurred and be continuing; and (iii) the Company, or the
Surviving Entity, as the case may be, immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
under the "Limitation on Indebtedness" covenant described above.
No Guarantor (other than a Guarantor whose Guarantee is to be released in
accordance with the terms of its Guarantee and the Indenture as provided in the
second sentence under "Limitation on Guarantees by Restricted Subsidiaries"
above) shall, in any transaction or series of related transactions, consolidate
with or merge with or into another Person, whether or not such Person is
affiliated with such Guarantor and whether or not such Guarantor is the
Surviving Entity, unless (i) the Surviving Entity (if other than such Guarantor)
is a corporation organized and validly existing under the laws of the United
States, any State thereof or the District of Columbia; (ii) the Surviving Entity
(if other than such Guarantor) expressly assumes by a supplemental indenture all
the obligations of such Guarantor under its Guarantee and the performance and
observance of every covenant of the Indenture and the Registration Rights
Agreement to be performed or observed by such Guarantor and (iii) immediately
after giving effect to such transaction or series of related transactions on a
pro forma basis, no Default shall have occurred and be continuing.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an officers' certificate and an opinion of counsel, each stating that
such consolidation, merger, transfer, lease or other disposition and the
supplemental indenture in respect thereof comply with the requirements under the
Indenture. In addition, each Guarantor, unless it is the other party to the
transaction or unless its Guarantee will be released and discharged in
accordance with its terms as a result of the transaction, will be required to
confirm, by supplemental indenture, that its Guarantee will continue to apply to
the obligations of the Company or the Surviving Entity under the Indenture.
Upon any consolidation or merger of the Company or any Guarantor or any
transfer of all or substantially all of the assets of the Company in accordance
with the foregoing, in which the Company or a Guarantor is not the continuing
corporation, the successor corporation formed by such a consolidation or into
which the Company or such Guarantor is merged or to which such transfer is made,
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company under the Indenture and the Notes, as the case may be, or such
Guarantor, as the case may be, under the Indenture and the Guarantee of such
Guarantor, as the case may be, with the same effect as if such successor
corporation had been named as the Company or Guarantor, as the case may be,
therein; and thereafter, except in the case of (a) a lease or (b) any sale,
assignment, conveyance, transfer, lease or other disposition to a Restricted
Subsidiary of the Company or such Guarantor, the Company or such Guarantor, as
the case may be, shall be discharged from all obligations and covenants under
the Indenture and the Notes and/or the Guarantee of such Guarantor, as the case
may be.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any,
when due and payable, on any of the Notes (at its Stated Maturity, upon
optional redemption, required purchase, scheduled principal payment or
otherwise); or
(ii) default in the payment of an installment of interest on any of
the Notes, when due and payable, continued for 30 days or more; or
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(iii) the Company or any Guarantor fails to comply with any of its
obligations described under "-- Consolidation, Merger, Sale of Assets,
Etc.," "Certain Covenants -- Change of Control" or "--Certain
Covenants -- Disposition of Proceeds of Asset Sales;" or
(iv) the Company or any Guarantor fails to perform or observe any
other term, covenant or agreement contained in the Notes, the Guarantees or
the Indenture (other than a default specified in (i), (ii) or (iii) above)
for a period of 45 days after written notice of such failure requiring the
Company to remedy the same shall have been given (x) to the Company by the
Trustee or (y) to the Company and the Trustee by the holders of 25% in
aggregate principal amount of the Notes then outstanding; or
(v) default or defaults under one or more agreements, indentures or
instruments under which the Company or any Restricted Subsidiary then has
outstanding Indebtedness in excess of $20 million individually or in the
aggregate and either (a) such Indebtedness is already due and payable in
full or (b) such default or defaults results in the acceleration of the
maturity of such Indebtedness; or
(vi) any Guarantee ceases to be in full force and effect or is
declared null and void or any Guarantor denies that it has any further
liability under any Guarantee, or gives notice to such effect (other than
by reason of the termination of the Indenture or the release of any such
Guarantee in accordance with the terms of the Indenture); or
(vii) one or more judgments, orders or decrees of any court or
regulatory or administrative agency for the payment of money in excess of
$20 million either individually or in the aggregate shall have been
rendered against the Company or any Restricted Subsidiary or any of their
respective properties and shall not have been discharged and either (a) any
creditor shall have commenced an enforcement proceeding upon such judgment,
order or decree or (b) there shall have been a period of 60 consecutive
days during which a stay of enforcement of such judgment, order or decree,
by reason of a pending appeal or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, insolvency or reorganization with
respect to the Company, any Guarantor or any Material Subsidiary shall have
occurred.
If an Event of Default (other than as specified in clause (viii)), shall
occur and be continuing, the Trustee, by notice to the Company, or the holders
of at least 25% in aggregate principal amount of the Notes then outstanding, by
notice to the Trustee and the Company, may declare the principal of, premium, if
any, and accrued interest on all of the outstanding Notes due and payable
immediately, upon which declaration, all such amounts payable in respect of the
Notes will become and be immediately due and payable. If an Event of Default
specified in clause (viii) above occurs and is continuing, then the principal
of, premium, if any, and accrued interest on all of the outstanding Notes will
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of Notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of the outstanding Notes, by written
notice to the Company and the Trustee, may rescind such declaration if (a) the
Company has paid or deposited with the Trustee a sum sufficient to pay (i) all
sums paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, (ii) all overdue interest on all Notes, (iii) the principal of and
premium, if any, on any Notes which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the Notes,
and (iv) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the Notes; and (b) all Events of Default,
other than the non-payment of principal of, premium, if any, and interest on the
Notes that has become due solely by such declaration of acceleration, have been
cured or waived.
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may on behalf of the holders of all the Notes waive any
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision
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which under the Indenture cannot be modified or amended without the consent of
the holder of each Note outstanding.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 15 days after receipt of such notice
and the Trustee, within such 15-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations do not apply,
however, to a suit instituted by a holder of a Note for the enforcement of the
payment of the principal of, premium, if any, or interest on such Note on or
after the respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
under the Indenture is not under any obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any of the holders
unless such holders shall have offered to the Trustee reasonable security or
indemnity. Subject to certain provisions concerning the rights of the Trustee,
the holders of a majority in aggregate principal amount of the outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee under the Indenture.
The Company is required to furnish to the Trustee, on or before a date not
more than 60 days after the end of each fiscal quarter and not more than 120
days after the end of each fiscal year, annual and quarterly statements as to
the performance by the Company and the Guarantors of their respective
obligations under the Indenture and as to any default in such performance. The
Company is also required to notify the Trustee within five business days of any
event which is, or after notice or lapse of time or both would become, an Event
of Default.
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions, provided that if it acquires any conflicting
interest it must eliminate such conflict upon the occurrence of an Event of
Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company and the Guarantors with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company will be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payment in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations to issue
temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes and maintain an office or agency for
payments in respect of the Notes, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and (iv) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to terminate
the obligations of the Company and any Guarantor with respect to certain
covenants that are set forth in the Indenture, some of which are described under
"-- Certain Covenants" above, and any omission to comply with such obligations
will not constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the
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principal of, premium, if any, and interest on the outstanding Notes at maturity
(or on a date after October 1, 2002 (such date being referred to as the
"Defeasance Redemption Date"), if at or prior to electing defeasance or covenant
defeasance, the Company has delivered to the Trustee an irrevocable notice to
redeem all of the outstanding Notes on the Defeasance Redemption Date); (ii) the
Company shall have delivered to the Trustee an opinion of independent counsel to
the effect that the holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such defeasance or
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such defeasance or covenant defeasance had not occurred (in the case of
defeasance, such opinion must refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable federal income tax laws);
(iii) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit or insofar as clause (viii) under the first paragraph
under "-- Events of Default" is concerned, at any time during the period ending
on the 91st day after the date of deposit; (iv) such defeasance or covenant
defeasance shall not cause the Trustee to have a conflicting interest with
respect to any securities of the Company or any Guarantor; (v) such defeasance
or covenant defeasance shall not result in a breach or violation of, or
constitute a default under, any material agreement or instrument to which the
Company or any Guarantor is a party or by which it is bound; (vi) such
defeasance or covenant defeasance shall not result in the trust arising from
such deposit constituting an investment company within the meaning of the
Investment Company Act of 1940, as amended, unless such trust shall be
registered under such Act or exempt from registration thereunder; (vii) the
Company shall have delivered to the Trustee an opinion of independent counsel to
the effect that after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (viii) the
Company shall have delivered to the Trustee an officers' certificate stating
that the deposit was not made by the Company with the intent of preferring the
holders of the Notes or any Guarantee over the other creditors of the Company or
any Guarantor with the intent of defeating, hindering, delaying or defrauding
creditors of the Company, any Guarantor or others; and (ix) the Company shall
have delivered to the Trustee an officers' certificate and an opinion of
independent counsel, each stating that all conditions precedent under the
Indenture to either defeasance or covenant defeasance, as the case may be, have
been complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration or transfer of the Notes, as
expressly provided for in the Indenture) as to all outstanding Notes when (i)
either (a) all the Notes theretofore authenticated and delivered (except lost,
stolen or destroyed Notes which have been replaced or paid and Notes for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust) have been delivered to the Trustee for cancellation or (b) all Notes
not theretofore delivered to the Trustee for cancellation (x) have become due
and payable, (y) will become due and payable at their Stated Maturity within one
year or (z) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company; and the Company or any
Guarantor has irrevocably deposited or caused to be deposited with the Trustee
funds in an amount sufficient to pay and discharge the entire Indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation, for
principal of, premium, if any, and interest on the Notes to the date of deposit
together with irrevocable instructions from the Company directing the Trustee to
apply such funds to the payment thereof at maturity or redemption, as the case
may be; (ii) the Company or any Guarantor has paid all other sums payable under
the Indenture by the Company and the Guarantors; and (iii) the Company and each
of the Guarantors have delivered to the Trustee an officers' certificate and an
opinion of counsel each stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have been
complied with and that such satisfaction and discharge will not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company, any Guarantor or
any Subsidiary is a party or by which the Company, any Guarantor or any
Subsidiary is bound.
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AMENDMENTS AND WAIVERS
From time to time, the Company and each Guarantor, when authorized by
resolutions of their boards of directors, and the Trustee may, without the
consent of the holders of any outstanding Notes, amend, waive or supplement the
Indenture or the Notes for certain specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, qualifying, or
maintaining the qualification of, the Indenture under the Trust Indenture Act of
1939, as amended, or making any change that does not materially adversely affect
the legal rights of any holder; provided, however, that the Company has
delivered to the Trustee an Opinion of Counsel (as such term is defined in the
Indenture) stating that such change does not materially adversely affect the
legal rights of any holder. Other amendments and modifications of the Indenture
or the Notes may be made by the Company, each Guarantor and the Trustee with the
consent of the holders of not less than a majority of the aggregate principal
amount of the outstanding Notes; provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Note
affected thereby, (i) reduce the principal of or change the Stated Maturity of
any Note, or alter the provisions with respect to the redemption or repurchase
of the Notes in any manner adverse to the holders of the Notes; (ii) reduce the
rate of or change the time for payment of interest on any such Note; (iii)
change the place or currency of payment of principal of (or premium) or interest
on any such Note; (iv) modify any provisions of the Indenture relating to the
waiver of past defaults (other than to add sections of the Indenture or the
Notes subject thereto) or the right of the holders of Notes to institute suit
for the enforcement of any payment on or with respect to any such Note or any
Guarantee in respect thereof or the modification and amendment provisions of the
Indenture and the Notes (other than to add sections of the Indenture or the
Notes which may not be amended, supplemented or waived without the consent of
each holder therein affected); (v) reduce the percentage of the principal amount
of outstanding Notes necessary for amendment to or waiver of compliance with any
provision of the Indenture or the Notes or for waiver of any Default in respect
thereof; (vi) waive a default in the payment of principal of, interest on, or
redemption payment with respect to, the Notes (except a rescission of
acceleration of the Notes by the holders thereof as provided in the Indenture
and a waiver of the payment default that resulted from such acceleration); (vii)
modify the ranking or priority of any Note or the Guarantee in respect thereof
of any Guarantor in any manner adverse to the holders of the Notes; (viii)
modify the provisions of any covenant (or the related definitions) in the
Indenture requiring the Company to make and consummate a Change of Control Offer
upon a Change of Control Triggering Event or an Asset Sale Offer in respect of
an Asset Sale or modify any of the provisions or definitions with respect
thereto in a manner materially adverse to the holders of Notes affected thereby
otherwise than in accordance with the Indenture; or (ix) release any Guarantor
from any of its obligations under its Guarantee or the Indenture otherwise than
in accordance with the Indenture.
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
and the Guarantors with certain restrictive provisions of the Indenture. Subject
to certain rights of the Trustee, as provided in the Indenture, the holders of a
majority in aggregate principal amount of the Notes, on behalf of all holders of
the Notes, may waive any past default under the Indenture (including any such
waiver obtained in connection with a tender offer or exchange offer for the
Notes), except a default in the payment of principal, premium or interest or a
default arising from failure to purchase any Notes tendered pursuant to an Offer
to Purchase pursuant thereto, or a default in respect of a provision that under
the Indenture cannot be modified or amended without the consent of the holder of
each Note that is affected.
GOVERNING LAW
The Indenture, the Notes and the Guarantees are governed by the laws of the
State of New York, without regard to the principles of conflicts of law.
CERTAIN DEFINITIONS
"Accounts Receivable Subsidiary" means Zale Funding Trust, Jewelers
National Bank, Jewelers Credit Corporation, Jewelers Financial Services, Inc.,
Diamond Funding Corp. and any other present or future Subsidiary (including any
credit card bank) of the Company that is, directly or indirectly, wholly owned
by
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the Company (other than director qualifying shares) and organized for the
purpose of and engaged in (i) purchasing, financing, and collecting accounts
receivable obligations of customers of the Company or its Subsidiaries, (ii)
issuing credit cards and financing accounts receivable obligations of customers
of the Company and its Subsidiaries, (iii) the sale or financing of such
accounts receivable or interests therein and (iv) other activities incident
thereto.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person (i) assumed in connection with an Asset
Acquisition from such Person or (ii) existing at the time such Person becomes a
Restricted Subsidiary of any other Person (other than any Indebtedness incurred
in connection with, or in contemplation of, such Asset Acquisition or such
Person becoming such a Restricted Subsidiary). Acquired Indebtedness shall be
deemed to be incurred on the date of the related acquisition of assets from any
Person or the date the acquired Person becomes a Restricted Subsidiary, as the
case may be.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or any officer or director of any such specified Person or other Person
or, with respect to any natural Person, any person having a relationship with
such Person by blood, marriage or adoption not more remote than first cousin; or
(iii) any other Person 10% or more of the Voting Stock of which is beneficially
owned or held directly or indirectly by such specified Person. For the purposes
of this definition, "control" when used with respect to any specified Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of Voting Stock, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Affiliate Transaction" has the meaning set forth under "-- Limitation on
Transactions with Affiliates."
"Asset Acquisition" means (i) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person will
become a Restricted Subsidiary or will be merged or consolidated with or into
the Company or any Restricted Subsidiary or (ii) the acquisition by the Company
or any Restricted Subsidiary of the assets of any Person which constitute
substantially all of the assets of such Person, or any division or line of
business of such Person, or which is otherwise outside of the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance or
transfer or other disposition (including, without limitation, any merger,
consolidation or sale-leaseback transaction) to any Person other than the
Company or a Wholly-Owned Restricted Subsidiary, in one or a series of related
transactions, of (i) any Capital Stock of any Restricted Subsidiary; (ii) all or
substantially all of the assets of any division or line of business of the
Company or any Restricted Subsidiary; or (iii) any other properties or assets of
the Company or any Restricted Subsidiary other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" will not
include (a) any sale, issuance, conveyance, transfer, lease or other disposition
of properties or assets that is governed by the provisions described under the
first paragraph of "Consolidation, Merger, Sale of Assets, Etc.;" (b) sales of
surplus and other property or equipment that has become worn out, obsolete or
damaged or otherwise unsuitable for use in connection with the business of the
Company or any Restricted Subsidiary, as the case may be; or (c) any transaction
consummated in compliance with "-- Certain Covenants -- Limitation on Restricted
Payments." For purposes of the covenant described under "Disposition of Proceeds
of Asset Sales," the term "Asset Sale" shall not include any sale, conveyance,
transfer, lease or other disposition of (A) any property or asset, whether in
one transaction or a series of related transactions (1) constituting a
Capitalized Lease Obligation or a transfer consisting solely of a grant of a
security interest permitted by the Indenture or (2) involving assets with a Fair
Market Value not in excess of $1.0 million, (B) accounts receivable to an
Accounts Receivable Subsidiary or to third parties that are not Affiliates of
the Company or any Subsidiary of the Company in the ordinary course of business,
(C) any property or assets pursuant to the Asset Purchase Agreement, dated as of
September 3, 1997, among Finlay Enterprises, Inc., Finlay Fine Jewelry
Corporation, Zale Corporation and Zale Delaware, Inc., as such agreement may be
amended from time to time or (D) the Excluded Assets.
"Asset Sale Offer" has the meaning set forth under "-- Disposition of
Proceeds of Asset Sales."
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"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such Person's capital stock, any other interest or participation that confers
on a Person the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person and any rights (other than debt
securities convertible into capital stock), warrants or options exchangeable for
or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP, and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP consistently applied.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness
with a maturity of not more than one year issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (ii) certificates of deposit,
Eurodollar time deposits or bankers' acceptances with a maturity of not more
than one year of any financial institution that is a member of the Federal
Reserve System having combined capital and surplus and undivided profits of not
less than $500.0 million, whose debt has a rating, at the time as of which any
investment therein is made, of A-1 (or higher) according to Standard & Poor's
Ratings Group ("S&P") or any successor rating agency or P-1 (or higher)
according to Moody's Investors Service, Inc. ("Moody's") or any successor rating
agency; (iii) commercial paper with a maturity of not more than one year issued
by a corporation that is not an Affiliate or a Subsidiary of the Company
organized under the laws of any state of the United States or the District of
Columbia and rated A-1 (or higher) by S&P, P-1 (or higher) by Moody's or the
equivalent of any such category used by another nationally recognized Rating
Agency; (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (i) and (ii) above; and
(v) transaction deposit accounts and money market deposit accounts with a
domestic commercial bank having capital and surplus in excess of $500 million;
provided that the short term debt of such commercial bank has a rating at the
time of Investment of A-1 (or higher) according to S&P or P-1 (or higher)
according to Moody's.
"Change of Control" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company): (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a Person will be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 35% of the total voting power of
the then outstanding Voting Stock of the Company; (ii) the Company consolidates
with, or merges with or into, another Person or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any Person, other than any such transaction where the holders of the
Voting Stock of the Company immediately prior to such transaction own, directly
or indirectly, not less than a majority of the total voting power of the then
outstanding Voting Stock of the surviving or transferee corporation immediately
after such transaction and the preceding clause (i) is not applicable; (iii)
during any consecutive two-year period, individuals who at the beginning of such
period constituted the Board of Directors of the Company (together with any new
directors whose election by such board or whose nomination for election by the
stockholders of the Company was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the Company
then in office; or (iv) any order, judgment or decree shall be entered against
the Company decreeing
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the dissolution or liquidation of the Company and such order shall remain
undischarged or unstayed for a period in excess of sixty days.
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control Triggering Event."
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value of which is dependent upon, fluctuations
in commodity prices.
"Consolidated Cash Flow Available for Fixed Charges" means, for any period,
(i) the sum of, without duplication, the amounts for such period, taken as a
single accounting period, of (a) Consolidated Net Income, (b) to the extent
reducing Consolidated Net Income, Consolidated Non-cash Charges, (c) to the
extent reducing Consolidated Net Income, Consolidated Interest Expense, and (d)
to the extent reducing Consolidated Net Income, Consolidated Income Tax Expense
less all cash payments during such period relating to non-cash charges that were
added back in determining Consolidated Cash Flow Available for Fixed Charges in
any prior period.
"Consolidated Fixed Charge Coverage Ratio" means the ratio of the aggregate
amount of Consolidated Cash Flow Available for Fixed Charges of the Company for
the four full fiscal quarters immediately preceding the date of the transaction
for which consolidated financial information of the Company is available (the
"Transaction Date") giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (such four full fiscal quarter period being referred to
herein as the "Four Quarter Period") to the aggregate amount of Consolidated
Fixed Charges of the Company for such Four Quarter Period. For purposes of this
definition, "Consolidated Cash Flow Available for Fixed Charges" and
"Consolidated Fixed Charges" will be calculated, without duplication, after
giving effect on a pro forma basis for the period of such calculation to (i) the
incurrence of any Indebtedness of the Company or any of the Restricted
Subsidiaries during the period commencing on the first day of the Four Quarter
Period to and including the Transaction Date (the "Reference Period"),
including, without limitation, the incurrence of the Indebtedness giving rise to
the need to make such calculation, as if such incurrence occurred on the first
day of the Reference Period, (ii) an adjustment to eliminate or include, as
applicable, the Consolidated Cash Flow Available for Fixed Charges and
Consolidated Fixed Charges of the Company directly attributable to assets which
are the subject of any Asset Sale or Asset Acquisition (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of the Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness) occurring during the Reference Period, as if such Asset Sale or
Asset Acquisition occurred on the first day of the Reference Period, and (iii)
the retirement of Indebtedness during the Reference Period which cannot
thereafter be reborrowed occurring as if retired on the first day of the
Reference Period. For purposes of calculating "Consolidated Fixed Charges" for
this "Consolidated Fixed Charge Coverage Ratio," interest on Indebtedness
incurred during the Reference Period under any revolving credit facility which
may be borrowed and repaid without reducing the commitments thereunder shall be
the actual interest during the Reference Period. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on Indebtedness determined on a fluctuating basis as of the Transaction
Date and which will continue to be so determined thereafter will be deemed to
accrue at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined on a fluctuating basis like prime or a similar rate or a factor
thereof, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date shall be deemed to have been in
effect during the Reference Period; and (3) notwithstanding clause (1) above,
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by agreements relating to Interest Rate Protection
Obligations, will be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements. If the Company or any
Restricted Subsidiary directly or indirectly guarantees Indebtedness of a third
Person, the
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above definition will give effect to the incurrence of such guaranteed
Indebtedness as if the Company or any Restricted Subsidiary had directly
incurred or otherwise assumed such guaranteed Indebtedness and incurred the
related interest expense.
"Consolidated Fixed Charges" means, for any period, the sum of, without
duplication, the amounts for such period of (i) Consolidated Interest Expense;
and (ii) the product of (x) the aggregate amount of cash dividends and other
distributions paid, accrued or scheduled to be paid or accrued during such
period in respect of Redeemable Capital Stock of the Company or Preferred Stock
of a Restricted Subsidiary times (y) a fraction, the numerator of which is one
and the denominator of which is one minus the then-current effective
consolidated federal, state and local tax rate of such Person expressed as a
decimal.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes payable by the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (a) the interest expense of the Company and the Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP, including, without limitation, (i) any amortization of debt discount
attributable to such period, (ii) the net costs under Interest Rate Protection
Obligations, Currency Agreements and Commodity Price Protection Agreements
(including any amortization of discounts), (iii) the interest portion of any
deferred payment obligation, (iv) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance financing
and (v) all capitalized interest and all accrued interest, and (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and the Restricted Subsidiaries during such
period and as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, the consolidated net
income (or net loss) of the Company and the Restricted Subsidiaries for such
period as determined in accordance with GAAP, adjusted, to the extent included
in calculating such net income (or net loss), by excluding, without duplication,
(i) all extraordinary gains or losses net of taxes (net of fees and expenses
relating to the transaction giving rise thereto), (ii) net income of the Company
and the Restricted Subsidiaries derived from or in respect of Investments in
Unrestricted Subsidiaries, except to the extent that cash dividends or
distributions are actually received by the Company or a Restricted Subsidiary,
(iii) the portion of net income (or net loss) of the Company and the Restricted
Subsidiaries allocable to minority interests in unconsolidated Persons, except
to the extent that cash dividends or distributions are actually received by the
Company or one of the Restricted Subsidiaries, (iv) net income (or net loss) of
any Person combined with the Company or one of the Restricted Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (v) gains or losses in respect of any Asset Sales by the Company or
any of the Restricted Subsidiaries (on an after-tax basis and net of fees and
expenses relating to the transaction giving rise thereto), and (vi) the net
income of any Restricted Subsidiary to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
is not at the time permitted, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, amortization and other noncash expenses of the Company and the
Restricted Subsidiaries reducing Consolidated Net Income for such period (other
than any non-cash item requiring an accrual or reserve for cash disbursements in
any future period), determined on a consolidated basis in accordance with GAAP.
"covenant defeasance" has the meaning set forth under "-- Defeasance or
Covenant Defeasance of Indenture."
"Credit Facility" means the Revolving Credit Agreement dated as of March
31, 1997, among the Company, Zale Delaware, Inc., The First National Bank of
Boston, as Agent, and the other financial institutions signatory thereto, as in
effect on the Issue Date, and as such agreement may be amended, renewed,
extended, substituted, refinanced, replaced, supplemented or otherwise modified
from time to time, and includes related notes, guarantees and other agreements
executed in connection therewith.
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"Currency Agreement" means the obligations of any Person pursuant to any
foreign exchange contract, currency swap agreement or other similar agreement or
arrangement designed to protect the Company or any Restricted Subsidiary against
fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"defeasance" has the meaning set forth under "-- Defeasance or Covenant
Defeasance of Indenture."
"Designation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Event of Default" has the meaning set forth under "-- Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder, or any
successor statute.
"Excluded Assets" means certain surplus assets of the Company which are set
forth on a schedule to the Indenture.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between an
informed and willing seller and an informed and willing buyer, neither of which
is under pressure or compulsion to complete the transaction. Fair Market Value
shall be determined by the Board of Directors of the Company acting in good
faith conclusively evidenced by a board resolution thereof delivered to the
Trustee or, with respect to any asset valued at up to $1.0 million, such
determination may be made by a duly authorized officer of the Company evidenced
by an officer's certificate delivered to the Trustee.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means generally accepted accounting principles in effect in the
United States as in effect from time to time and which are consistently applied
for all applicable periods.
"Guarantee" means the guarantee by each of the Guarantors of the Notes and
the Company's obligations under the Indenture.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee shall include,
without limitation, any agreement to maintain or preserve any other Person's
financial condition or to cause any other Person to achieve certain levels of
operating results.
"Guarantor" means (i) Zale Delaware, Inc. and (ii) each other Subsidiary
formed, created or acquired before or after the Issue Date required to become a
Guarantor after the Issue Date pursuant to "-- Certain Covenants -- Limitation
on Guarantees by Restricted Subsidiaries," or which becomes a Guarantor after
the Issue Date in accordance with the terms of the Indenture.
"incur" has the meaning set forth in "-- Certain Covenants -- Limitation on
Indebtedness."
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payable and other accrued
current liabilities incurred in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit (but
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excluding obligations with respect to trade letters of credit to the extent such
trade letters of credit are not drawn upon or, if drawn upon, to the extent such
drawing is reimbursed not later than the third business day following receipt by
such Person of a demand for reimbursement), bankers' acceptances or other
similar credit transaction, (ii) all obligations of such Person evidenced by
bonds, notes, debentures or other similar instruments, (iii) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even if the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), but excluding trade
accounts payable arising in the ordinary course of business, (iv) all
Capitalized Lease Obligations of such Person, (v) all Indebtedness referred to
in the preceding clauses of other Persons and all dividends of other Persons,
the payment of which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien upon
property (including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligation being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured), (vi) all guarantees by such Person of Indebtedness of
another Person (other than guarantees of operating leases of a Restricted
Subsidiary of such Person), (vii) all Redeemable Capital Stock valued at its
involuntary maximum fixed repurchase price plus accrued and unpaid dividends,
(viii) Preferred Stock of any Restricted Subsidiary of the Company; (ix) all net
payment obligations under or in respect of Currency Agreements, Interest Rate
Protection Obligations and Commodity Price Protection Agreements of such Person,
and (x) any amendment, supplement, modification, deferral, renewal, extension or
refunding of any liability of the types referred to in clauses (i) through (ix)
above. For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price will be
calculated in accordance with the terms of such Redeemable Capital Stock as if
such Redeemable Capital Stock were purchased on any date on which Indebtedness
will be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value to be determined in good faith by the Board of
Directors of the issuer of such Redeemable Capital Stock. Sales (on a
"true-sale" non-recourse basis) and the servicing of receivables transferred
from the Company or a Restricted Subsidiary, or transfers of cash, to an
Accounts Receivable Subsidiary as a capital contribution or in exchange for
Indebtedness of such Accounts Receivable Subsidiary or cash shall not be deemed
Indebtedness hereunder.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount or any other arrangement involving payments by or to such Person
based upon fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit (including by means of a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others or otherwise), or any purchase or acquisition by such Person of any
Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by any other Person. Investments shall exclude extensions of
trade credit in accordance with normal trade practices. In addition to the
foregoing, any foreign exchange contract, Currency Agreement, Interest Rate
Protection Obligation, Commodity Price Protection Agreement or similar agreement
shall constitute an Investment.
"Issue Date" means the original issue date of the Notes under the
Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
privilege, security interest, hypothecation, cessation and transfer, assignment
for security, claim, deposit arrangement or other encumbrance upon or with
respect to any property of any kind, whether real, personal or mixed, movable or
immovable, now owned or hereafter acquired. A Person will be deemed to own
subject to a Lien any property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, Capitalized
Lease Obligation or other title retention agreement.
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"Material Subsidiary" means each Restricted Subsidiary of the Company that
is a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X under
the Securities Act and the Exchange Act (as such regulation is in effect on the
Issue Date).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage
commissions and other reasonable fees and expenses (including fees and expenses
of legal counsel and investment bankers) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale, (iii) amounts
required to be paid to any Person (other than the Company or any Restricted
Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale
and (iv) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve required in accordance with GAAP
consistently applied against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary, as the case may be, after
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale (provided that the amount of any such reserves shall be deemed
to constitute Net Cash Proceeds at the time such reserves shall have been
released or are not otherwise required to be retained as a reserve).
"Other Indebtedness" has the meaning set forth under "-- Certain
Covenants -- Limitation on Guarantees of Restricted Subsidiaries."
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company which
ranks pari passu in right of payment with the Notes and (b) with respect to any
Guarantee, Indebtedness which ranks pari passu in right of payment with such
Guarantee.
"Permitted Indebtedness" has the meaning set forth under "-- Certain
Covenants -- Limitation on Indebtedness."
"Permitted Investment" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) loans,
extensions of credit and advances to officers, directors and employees which are
outstanding on the Issue Date or which do not exceed $5 million in the aggregate
at any one time outstanding and payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (d) Interest Rate Protection Obligations,
Commodity Price Protection Agreements and Currency Agreements permitted under
clause (viii), (ix) or (x) of the second paragraph under "-- Limitation on
Indebtedness;" (e) Investments by any Restricted Subsidiary in the Company; (f)
Investments by the Company or any Restricted Subsidiary in a Restricted
Subsidiary that is a Guarantor or another Person, if as a result of or in
connection with such Investment such other Person becomes a Wholly Owned
Restricted Subsidiary; (g) Investments represented by accounts receivable
created or acquired in the ordinary course of business; (h) Investments in the
form of the sale (on a "true-sale" non-recourse basis) or the servicing of
receivables transferred from the Company or any Restricted Subsidiary, or
transfers of cash, to an Accounts Receivable Subsidiary as a capital
contribution or in exchange for Indebtedness of such Accounts Receivable
Subsidiary or cash in the ordinary course of business; (i) loans or other
advances to vendors in connection with in store merchandising to be repaid
either on a lump sum basis or over a period of time by delivery of merchandise;
(j) Investments representing capital stock or obligations issued to the Company
or any Restricted Subsidiary in settlement of claims against any other Person by
reason of a composition or readjustment of debt or a reorganization of any
debtor of the Company or such Restricted Subsidiary; (k) Investments in credit
card receivables arising from any proprietary credit card issued by or for the
benefit of the Company or an Affiliate of the Company; (l) Investments acquired
by the Company or any Restricted Subsidiary in connection with an Asset Sale
permitted under "-- Disposition of Proceeds of Asset Sales" (other than pursuant
to the second sentence of the first paragraph thereof); (m) Investments in any
of the Notes; and (n) Investments, other than those enumerated in (a) through
(m) above, in an aggregate amount of $20 million.
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"Permitted Liens" means (a) Liens on property of (or on shares of Capital
Stock or debt securities of) a Person existing at the time such Person (i) is
merged into or consolidated with the Company or any Restricted Subsidiary or
(ii) becomes a Restricted Subsidiary; provided, however, that such Liens were in
existence prior to the contemplation of such merger, consolidation or
acquisition and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger, consolidation or acquisition; (b) Liens imposed by law
such as landlords', carriers', warehousemen's and mechanics' Liens and other
similar Liens arising in the ordinary course of business which secure payment of
obligations not more than 60 days past due or which are being contested in good
faith and by appropriate proceedings; (c) Liens existing on the Issue Date; (d)
Liens securing only the Notes; (e) Liens in favor of the Company or Liens on any
property or assets of a Restricted Subsidiary (or on shares of Capital Stock or
debt securities of a Restricted Subsidiary) in favor of the Company or any
Restricted Subsidiary; (f) Liens for taxes, assessments or governmental charges
or claims that are not yet delinquent for more than 90 days or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; provided, however, that any reserve or other appropriate
provision as shall be required in conformity with GAAP shall have been made
therefor; (g) easements, reservation of rights of way, restrictions and other
similar easements, licenses, restrictions on the use of properties, or
imperfections of title that in the aggregate are not material in amount and do
not in any case materially detract from the properties subject thereto or
interfere with the ordinary conduct of the business of the Company and the
Restricted Subsidiaries; (h) Liens resulting from the deposit of cash or notes
in connection with contracts, tenders or expropriation proceedings, or to secure
workers' compensation, surety or appeal bonds, costs of litigation when required
by law, public and statutory obligations, obligations under franchise
arrangements entered into in the ordinary course of business and other
obligations of a similar nature arising in the ordinary course of business; (i)
Liens securing Indebtedness consisting of Capitalized Lease Obligations,
Purchase Money Indebtedness (other than Indebtedness incurred to finance an
Asset Acquisition), mortgage financings, industrial revenue bonds or other
monetary obligations, in each case incurred solely for the purpose of financing
all or any part of the purchase price or cost of construction or installation of
assets used in the business of the Company or the Restricted Subsidiaries, or
repairs, additions or improvements to such assets; provided, however, that (I)
such Liens secure Indebtedness in an amount not in excess of the original
purchase price or the original cost of any such assets or repair, addition or
improvement thereto (plus an amount equal to the reasonable fees and expenses in
connection with the incurrence of such Indebtedness), (II) such Liens do not
extend to any other assets of the Company or the Restricted Subsidiaries (and,
in the case of repair, addition or improvements to any such assets, such Lien
extends only to the assets (and improvements thereto or thereon) repaired, added
to or improved), (III) the incurrence of such Indebtedness is permitted by
"-- Certain Covenants -- Limitation on Indebtedness" above and (IV) such Liens
attach prior to 90 days after such purchase, construction, installation, repair,
addition or improvement; (j) Liens to secure any Refinancings (or successive
Refinancings), in whole or in part, of any Indebtedness secured by Liens
referred to in the clauses above so long as such Lien does not extend to any
other property (other than improvements thereto); (k) Liens securing trade
letters of credit entered into in the ordinary course of business; (l) Liens on
and pledges of the capital stock of (A) any Unrestricted Subsidiary securing any
Indebtedness of such Unrestricted Subsidiary and (B) an Accounts Receivable
Subsidiary; (m) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and the Restricted
Subsidiaries, taken as a whole; (n) any interest or title of a lessor in any
property that is (i) subject to any lease or (ii) located on the real property
subject to any lease; (o) Liens arising from the rendering of a final judgment
or order against the Company or any Restricted Subsidiary that does not give
rise to an Event of Default; (p) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any Restricted Subsidiary in the ordinary course of
business; and (q) Liens on the property or assets or Capital Stock of Accounts
Receivable Subsidiaries and Liens arising out of any sale of accounts receivable
in the ordinary course to or by an Accounts Receivable Subsidiary.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
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"Preferred Stock" means, with respect to any Person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Capital
Stock of any other class of such Person.
"Public Equity Offering" means an underwritten primary offering of Common
Stock of the Company with gross cash proceeds to the Company of at least $50
million pursuant to a registration statement under the Securities Act that has
been declared effective by the Commission (other than a registration statement
on Form S-8 or any successor form or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any real or
personal property; provided, however, that the aggregate principal amount of
such Indebtedness does not exceed the lesser of the Fair Market Value of such
property or the original purchase price or the original cost of any such assets
or repair, addition or improvement thereto (plus an amount equal to the
reasonable fees and expenses in connection with the incurrence of such
Indebtedness).
"Rating Agencies" means (i) Standard & Poor's Ratings Group and (ii)
Moody's Investors Service, Inc. or (iii) if Standard & Poor's Ratings Group or
Moody's Investors Service, Inc. or both shall not make a rating of the Notes
publicly available, a nationally recognized securities rating agency or
agencies, as the case may be, selected by the Company, which shall be
substituted for Standard & Poor's Ratings Group, Moody's Investors Service, Inc.
or both, as the case may be.
"Rating Category" means (i) with respect to Standard & Poor's Ratings
Group, any of the following categories: BB, B, CCC, CC, C and D (or equivalent
successor categories); (ii) with respect to Moody's Investors Service, Inc., any
of the following categories: Ba, B, Caa, Ca, C and D (or equivalent successor
categories); and (iii) the equivalent of any such category of Standard & Poor's
Ratings Group or Moody's Investors Service, Inc. used by another Rating Agency.
In determining whether the rating of the Notes has decreased by one or more
gradations, gradations within Rating Categories (+ and - for Standard & Poor's
Ratings Group; 1, 2 and 3 for Moody's Investors Service, Inc.; or the equivalent
gradations for another Rating Agency) shall be taken into account (e.g., with
respect to Standard & Poor's Ratings Group, a decline in a rating from BB+ to
BB, as well as from BB- to B+, will constitute a decrease of one gradation).
"Rating Date" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) public notice of the occurrence of a Change of
Control or of the intention by the Company to effect a Change of Control.
"Rating Decline" means the occurrence of the following on, or within 90
days after, the earlier of (i) the occurrence of a Change of Control and (ii)
the date of public notice of the occurrence of a Change of Control or of the
public notice of the intention of the Company to effect a Change of Control
(which period shall be extended so long as the rating of the Notes is under
publicly announced consideration for possible downgrading by any of the Rating
Agencies): (a) in the event that the Notes have an Investment Grade Rating, the
rating of the Notes by both such Rating Agencies shall be reduced below
Investment Grade, or (b) in the event the Notes are rated below Investment Grade
by both such Rating Agencies on the Rating Date, the rating of the Notes by
either Rating Agency shall be decreased by one or more gradations (including
gradations within Rating Categories as well as between Rating Categories).
"Redeemable Capital Stock" means any class or series of Capital Stock to
the extent that, either by its terms, by the terms of any security into which it
is convertible or exchangeable, or by contract or otherwise, it is or upon the
happening of an event or passage of time would be, required to be redeemed prior
to the final stated maturity of the Notes or is redeemable at the option of the
holder thereof at any time prior to such maturity, or is convertible into or
exchangeable at the option of the holder thereof for debt securities at any time
prior to such maturity.
"Reference Period" has the meaning set forth under the definition of
"Consolidated Fixed Charge Coverage Ratio."
76
<PAGE> 80
"Refinance" means, with respect to any Indebtedness, any refinancing,
redemption, retirement, renewal, replacement, extension or refunding of such
Indebtedness.
"Restricted Payment" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary (other than an Accounts
Receivable Subsidiary) of the Company that has not been designated by the Board
of Directors of the Company, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with the covenant
described under "-- Certain Covenants -- Limitation on Designations of
Unrestricted Subsidiaries." Any such designation may be revoked by a Board
Resolution of the Company delivered to the Trustee, subject to the provisions of
such covenant.
"Revocation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the Commission thereunder, or any successor
statute.
"Senior Guarantor Indebtedness" means any Indebtedness of a Guarantor which
is not expressly subordinated in right of payment to any other Indebtedness of
such Guarantor.
"Senior Indebtedness" means any Indebtedness of the Company which is not
expressly subordinated in right of payment to any other Indebtedness of the
Company.
"Stated Maturity" means, with respect to any Note or any installment of
interest thereon, the dates specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable,
and when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or any installment of interest is due and
payable.
"Subsidiary" means, with respect to any Person, (a) any corporation of
which the outstanding shares of Voting Stock having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of which
at least a majority of the shares of Voting Stock are at the time, directly or
indirectly, owned by such first named Person.
"Subordinated Indebtedness" means, with respect to the Company,
Indebtedness of the Company which is expressly subordinated in right of payment
to any other Indebtedness of the Company or, with respect to any Guarantor,
Indebtedness of such Guarantor which is expressly subordinated in right of
payment to any other Indebtedness of such Guarantor.
"Surviving Entity" has the meaning set forth under "Consolidation, Merger,
Sale of Assets, Etc."
"Transaction Date" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"Unrestricted Subsidiary" means each Accounts Receivable Subsidiary and
each Subsidiary of the Company (other than a Guarantor) designated as such
pursuant to and in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries." Any such
Designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Unutilized Net Cash Proceeds" has the meaning set forth under "-- Certain
Covenants -- Disposition of Proceeds of Asset Sales."
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
77
<PAGE> 81
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company and/or
another Wholly-Owned Restricted Subsidiary. For purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
BOOK-ENTRY, DELIVERY AND FORM
Original Notes offered and sold to Qualified Institutional Buyers ("QIBs")
in reliance on Rule 144A under the Securities Act are represented by a single,
permanent Global Note in definitive, fully registered book-entry form (the "Rule
144A Global Note") and are registered in the name of Cede & Co. as nominee of
DTC on behalf of purchasers of the Notes represented thereby for credit to the
respective accounts of such purchasers (or to such other accounts as they may
direct) at DTC.
Original Notes originally offered and sold in reliance on Regulation S
under the Securities Act, if any, are initially represented by a single,
permanent Global Note in definitive, fully registered book-entry form (the
"Regulation S Global Note") registered in the name of Cede & Co., as nominee of
DTC and deposited on behalf of the purchasers of the Notes represented thereby
with a custodian for DTC for credit to the respective accounts of such
purchasers (or to such other accounts as they directed) at the Euroclear System
("Euroclear") or Cedel Bank, societe anonyme ("Cedel"). Prior to the 40th day
after the later of the commencement of the issuance of the Original Notes and
the Issue Date, interests in the Regulation S Global Note may only be held
through Euroclear or Cedel.
Original Notes held by QIBs who elected to take physical delivery of their
certificates instead of holding their interest through the Rule 144A Global Note
(and which are thus ineligible to trade through DTC) (the "Series A Non-Global
Purchasers") are issued in fully registered form ("Certificated Notes"). Upon
the transfer of such Certificated Notes to a QIB or in an offshore transaction
under Rule 903 or 904 of Regulation S under the Securities Act, such
Certificated Notes will, unless such Rule 144A Global Note has previously been
exchanged in whole for Certificated Notes, be exchanged for an interest in the
Rule 144A Global Note and/or the Regulation S Global Note upon delivery of
appropriate certifications to the Trustee. Transfers of Certificated Notes, any
interest in the Rule 144A Global Note and any interest in the Regulation S
Global Note are subject to certain restrictions.
Exchange Notes
Exchange Notes issued in exchange for Notes originally offered and sold (i)
to QIBs in reliance on Rule 144A under the Securities Act or (ii) in reliance on
Regulation S under the Securities Act will be represented by a single, permanent
Global Note in definitive, fully registered book-entry form (the "Exchange
Global Note" and together with the Rule 144A Global Note and the Regulation S
Global Note, the "Global Notes"), which will be registered in the name of Cede &
Co., as nominee of DTC on behalf of persons who receive Exchange Notes
represented thereby for credit to the respective accounts of such persons (or to
such other accounts as they may direct) at DTC.
Exchange Notes issued in exchange for Notes will be issued, upon request,
in fully registered form (together with the Certificated Notes, the
"Certificated Notes"), but otherwise such holders will only be entitled to
registration of their respective Exchange Notes in book-entry form under the
Exchange Global Note.
The Global Notes
The Company expects that pursuant to procedures established by DTC (a) upon
deposit of the Global Notes, DTC or its custodian will credit on its internal
system portions of the Global Notes, which shall be comprised of the
corresponding respective amount of the Global Notes to the respective accounts
of persons who have accounts with such depositary and (b) ownership of the Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
Participants (as defined below) and the records of Participants (with respect to
interests of persons other than Participants)). Ownership of beneficial
interests in the Global Notes will be limited to persons who
78
<PAGE> 82
have accounts with DTC ("Participants") or persons who hold interests through
Participants. Holders may hold their interests in the Global Notes directly
through DTC if they are Participants in such system, or indirectly through
organizations which are Participants in such system.
So long as DTC or its nominee is the registered owner or holder of any of
the Notes, DTC or such nominee will be considered the sole owner or holder of
such Notes represented by the Global Notes for all purposes under the Indenture
and under the Notes represented thereby. No beneficial owner of an interest in
the Global Notes will be able to transfer such interest except in accordance
with the applicable procedures of DTC in addition to those provided for under
the Indenture.
Payments of the principal of, premium, if any, and interest on the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any Paying Agent under the
Indenture will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium, if any, and interest on the Global Notes will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Notes as
shown on the records of DTC or its nominee. The Company also expects that
payments by Participants to owners of beneficial interests in the Global Notes
held through such Participants will be governed by standing instructions and
customary practice as is now the case with Notes held for the accounts of
customers registered in the names of nominees for such customers. Such payment
will be the responsibility of such Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Note for any reason, including to
sell Notes to persons in states which require physical delivery of such Notes or
to pledge such Notes, such holder must transfer its interest in the Global Notes
in accordance with the normal procedures of DTC and in accordance with the
procedures set forth in the Indenture.
Before the 40th day after the later of the commencement of the issuance of
the Notes and the Issue Date, transfers by an owner of a beneficial interest in
the Regulation S Global Note to a transferee who takes delivery of such interest
through the Rule 144A Global Note will be made only in accordance with the
applicable procedures and upon receipt by the Trustee and the Company of a
written certification from the transferor of the beneficial interest in the form
provided in the Indenture to the effect that such transfer is being made to a
person whom the transferor reasonably believes is a QIB within the meaning of
Rule 144A in a transaction meeting the requirements of Rule 144A and as
permitted consistent with Regulation S.
Transfers by an owner of a beneficial interest in the Rule 144A Global Note
to a transferee who takes delivery of such interest through the Regulation S
Global Note, whether before, on or after the 40th day after the later of the
commencement of the issuance of the Notes and the Issue Date, will be made only
upon receipt by the Trustee and the Company of a certification to the effect
that such transfer is being made in accordance with Regulation S. Transfers of
Certificated Notes held by institutional Accredited Investors to persons who
will hold beneficial interests in the Rule 144A Global Note or the Regulation S
Global Note will be subject to certifications provided by the Trustee.
Any beneficial interest in one of the Global Notes that is transferred to a
person who takes delivery in the form of an interest in the other Global Note
will, upon transfer, cease to be an interest in such Global Note and become an
interest in the other Global Note and, accordingly, will thereafter be subject
to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other Global Note for as long as it remains such an
interest.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more Participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of the aggregate principal amount as to which such Participant or Participants
has or have given such direction.
79
<PAGE> 83
However, if there is an Event of Default under the Indenture, DTC will exchange
the Global Notes for Certificated Notes, which it will distribute to its
Participants and which, in the case of Certificated Notes, will be legended.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Although DTC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global Notes
among Participants of DTC, Euroclear and Cedel, as applicable, they are under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. None of the Company, the Trustee, Registrar or the Paying Agent
will have any responsibility for the performance by DTC, Euroclear or Cedel or
their respective direct or indirect Participants of their respective obligations
under the rules and procedures governing their operations.
Certificated Notes
Interests in Global Notes will be exchanged for Certificated Notes if (i)
DTC notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes, or DTC ceases to be a "Clearing Agency"
registered under the Exchange Act, and a successor depositary is not appointed
by the Company within 90 days, or (ii) an Event of Default has occurred and is
continuing with respect to the Notes. Upon the occurrence of any of the events
described in the preceding sentence, the Company will cause the appropriate
Certificated Notes to be delivered.
DESCRIPTION OF THE ORIGINAL NOTES
The terms of the Original Notes are identical in all material respects to
the Exchange Notes, except that (i) the Original Notes have not been registered
under the Securities Act, are subject to certain restrictions on transfer and
are entitled to certain rights under the Registration Rights Agreement (which
rights will terminate upon consummation of the Exchange Offer, except under
limited circumstances) and (ii) the Exchange Notes will not provide for any
increase in the interest rate thereon. The Original Securities provide that, in
the event that a registration statement relating to the Exchange Offer has not
been filed and been declared effective within certain specified periods, or, in
certain limited circumstances, in the event a shelf registration statement (the
"Shelf Registration Statement") with respect to the resale of the Original Notes
is not declared effective by the time required by the Registration Rights
Agreement, then the interest rate borne by the Original Notes will increase by
0.25% per annum each 90-day period that such additional interest rate continues
to accrue under any such circumstance, up to an aggregate maximum increase equal
to 1% per annum, for the period from the occurrence of such event until such
time as such registration statement has been filed or declared effective, as the
case may be. The Exchange Notes are not, and upon consummation of the Exchange
Offer, the Original Notes will not be, entitled to any such additional interest
or distributions. Accordingly, holders of Original Notes should review the
information set forth under "Risk Factors -- Consequences of a Failure to
Exchange Original Notes" and "Description of the Notes."
80
<PAGE> 84
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of Original Notes for Exchange Notes,
but does not purport to be a complete analysis of all potential tax effects. The
discussion is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, Internal Revenue Service rulings and pronouncements, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the Exchange
Notes. The description does not consider the effect of any applicable foreign,
state, local or other tax laws or estate or gift tax considerations.
EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING ORIGINAL NOTES FOR EXCHANGE NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF ORIGINAL NOTES FOR EXCHANGE NOTES
The exchange of Original Notes for Exchange Notes pursuant to the Exchange
Offer should not constitute a significant modification of the terms of the
Original Notes and, therefore, such exchange should not constitute an exchange
for federal income tax purposes. Accordingly, such exchange should have no
federal income tax consequences to holders of Original Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired as a result
of market-making activities or other trading activities.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the holders of the Notes) other than commissions or concessions of any
brokers or dealers and will indemnify holders of the Original Notes (including
any broker-dealers) against certain liabilities, including certain liabilities
under the Securities Act.
81
<PAGE> 85
LEGAL MATTERS
The validity of the issuance of the Exchange Notes offered hereby will be
passed upon for the Company by Troutman Sanders LLP, Atlanta, Georgia.
EXPERTS
The Consolidated Financial Statements of Zale Corporation and its
subsidiaries included or incorporated by reference in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
82
<PAGE> 86
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Operations....................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Cash Flows....................... F-5
Consolidated Statements of Stockholders' Investment......... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 87
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, 1997 and
1996, and the related consolidated statements of operations, cash flows, and
stockholders' investment for each of the three years in the period ended July
31, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended July 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
September 3, 1997
F-2
<PAGE> 88
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales.............................................. $1,253,818 $1,137,377 $1,036,149
Cost of Sales.......................................... 643,318 576,764 524,010
---------- ---------- ----------
Gross Margin........................................... 610,500 560,613 512,139
Selling, General and Administrative Expenses........... 480,522 457,371 434,101
Depreciation and Amortization Expense.................. 14,022 7,538 381
Unusual Items -- Reorganization Recoveries............. -- (4,486) --
---------- ---------- ----------
Operating Earnings..................................... 115,956 100,190 77,657
Interest Expense, Net.................................. 36,098 30,102 29,837
---------- ---------- ----------
Earnings Before Income Taxes and Extraordinary Item.... 79,858 70,088 47,820
Income Taxes........................................... 29,305 25,094 16,350
---------- ---------- ----------
Earnings Before Extraordinary Item..................... 50,553 44,994 31,470
Extraordinary Item:
Loss on Early Extinguishment of Debt, Net of Income
Taxes of $(603)................................... -- (1,096) --
---------- ---------- ----------
Net Earnings........................................... $ 50,553 $ 43,898 $ 31,470
========== ========== ==========
Earnings Per Common Share:
Primary:
Earnings Before Extraordinary Item................ $ 1.38 $ 1.23 $ 0.88
Extraordinary Items............................... -- (0.03) --
---------- ---------- ----------
Net Earnings...................................... $ 1.38 $ 1.20 $ 0.88
========== ========== ==========
Assuming full dilution:
Earnings Before Extraordinary Item................ $ 1.37 $ 1.23 $ 0.86
Extraordinary Items............................... -- (0.03) --
---------- ---------- ----------
Net Earnings...................................... $ 1.37 $ 1.20 $ 0.86
========== ========== ==========
Weighted Average Number of Common Shares Outstanding:
Primary.............................................. 36,632 36,465 35,849
Assuming full dilution............................... 36,853 36,618 36,565
</TABLE>
See Notes to the Consolidated Financial Statements.
F-3
<PAGE> 89
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996
---------- ----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents................................. $ 41,636 $ 50,046
Customer Receivables, Net................................. 454,270 419,877
Merchandise Inventories................................... 511,702 457,862
Other Current Assets...................................... 39,271 25,535
---------- ----------
Total Current Assets........................................ 1,046,879 953,320
Property and Equipment, Net................................. 138,011 108,254
Other Assets................................................ 43,616 45,737
Deferred Tax Asset, Net..................................... 52,700 56,500
---------- ----------
Total Assets................................................ $1,281,206 $1,163,811
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt......................... $ 328 $ 26
Accounts Payable and Accrued Liabilities.................. 145,721 145,794
Deferred Tax Liability, Net............................... 23,700 32,000
---------- ----------
Total Current Liabilities................................... 169,749 177,820
Non-current Liabilities..................................... 53,544 34,627
Long-term Debt.............................................. 451,459 404,328
Excess of Revalued Net Assets Over Stockholders' Investment,
Net....................................................... 64,880 70,778
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock........................................... -- --
Common Stock.............................................. 350 352
Additional Paid-In Capital (Includes Stock Warrants)...... 401,121 383,042
Unrealized Gains on Securities............................ 2,182 1,013
Accumulated Earnings...................................... 142,404 91,851
---------- ----------
546,057 476,258
Treasury Stock............................................ (4,483) --
---------- ----------
Total Stockholders' Investment.............................. 541,574 476,258
---------- ----------
Total Liabilities and Stockholders' Investment.............. $1,281,206 $1,163,811
========== ==========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-4
<PAGE> 90
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 50,553 $ 43,898 $ 31,470
Non-cash items:
Depreciation and amortization expense.................. 16,290 8,904 1,498
Non-cash charge in lieu of tax expense................. 28,280 23,208 16,204
Other adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt....... -- 1,699 --
Changes in:
Customer receivables, net.............................. (34,393) (22,323) 1,506
Merchandise inventories................................ (53,840) (74,739) 25,621
Other current assets................................... (13,736) (1,253) (2,385)
Other assets........................................... 1,467 (768) (55)
Accounts payable and accrued liabilities............... (73) 18,014 (27,752)
Non-current liabilities................................ (580) 1,957 (203)
-------- --------- --------
Net Cash Provided by (Used in) Operating Activities...... (6,032) (1,403) 45,904
-------- --------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment...................... (54,025) (48,790) (42,295)
Dispositions of property and equipment................... 4,887 829 1,987
Acquisition, net of cash acquired........................ -- (2,547) --
Other.................................................... -- (340) (205)
-------- --------- --------
Net Cash Used in Investing Activities.................... (49,138) (50,848) (40,513)
-------- --------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................. 291 (66,608) (3,896)
Net borrowings under revolving credit agreement.......... 47,100 23,600 --
Payment for redemption of Series B Warrants.............. -- (9,264) --
Payment of prepayment penalty and other related costs on
early extinguishment of debt........................... -- (1,699) --
Debt issue and capitalized financing costs............... (945) (629) (461)
Proceeds from exercise of stock options.................. 1,073 1,992 171
Purchase of treasury stock............................... (759) -- --
-------- --------- --------
Net Cash Provided by (Used in) Financing Activities...... 46,760 (52,608) (4,186)
-------- --------- --------
Net Increase (Decrease) in Cash and Cash Equivalents..... (8,410) (104,859) 1,205
Cash and Cash Equivalents at Beginning of Period......... 50,046 154,905 153,700
-------- --------- --------
Cash and Cash Equivalents at End of Period............... $ 41,636 $ 50,046 $154,905
======== ========= ========
Supplemental cash flow information:
Interest paid.......................................... $ 34,914 $ 35,020 $ 36,443
Interest received...................................... $ 936 $ 3,233 $ 7,641
Income taxes paid (net of refunds received)............ $ 3,431 $ 1,653 $ 568
Restricted cash -- at period end date.................. $ 9,013 $ 31,510 $ 51,422
</TABLE>
See Notes to the Consolidated Financial Statements.
F-5
<PAGE> 91
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL UNREALIZED
COMMON SHARES PAID-IN GAINS(LOSSES) ACCUMULATED TREASURY
OUTSTANDING COMMON STOCK CAPITAL ON SECURITIES EARNINGS STOCK TOTAL
------------- ------------ ---------- ------------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1994............ 34,965 $350 $321,159 $ (326) $ 21,557 $ 0 $342,740
Net Earnings...................... -- -- -- -- 31,470 -- 31,470
Reduction of Tax Valuation
Allowance....................... -- -- 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 0 391,890
Net Earnings...................... -- -- -- -- 43,898 -- 43,898
Purchase of B Warrants............ -- -- (4,190) -- (5,074) -- (9,264)
Reduction of Tax Valuation
Allowance....................... -- -- 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 0 476,258
Net Earnings...................... -- -- -- -- 50,553 -- 50,553
Reduction of Tax Valuation
Allowance....................... -- -- 13,280 -- -- -- 13,280
Exercise of Stock Options......... 113 1 1,072 -- -- -- 1,073
Unrealized Gain on Securities..... -- -- -- 1,169 -- -- 1,169
Recoveries and purchase of Common
Stock........................... (290) (3) 3,727 -- -- (4,483) (759)
------ ---- -------- ------ -------- ------- --------
Balance, July 31, 1997............ 35,022 $350 $401,121 $2,182 $142,404 $(4,483) $541,574
====== ==== ======== ====== ======== ======= ========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-6
<PAGE> 92
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 consolidates substantially all its retail operations into Zale
Delaware, Inc. ("ZDel"). 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, 1997, $9.0 million was
restricted of which $5.4 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 $57.8 million and $51.4 million at July 31,
1997 and 1996, respectively. Finance charge income and net earnings from credit
insurance subsidiaries of $101.0 million, $90.8 million and $89.6 million for
the years ended July 31, 1997, 1996 and 1995, 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.
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 are 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 each of the
years ended July 31, 1997, 1996 and 1995. Accumulated amortization was $23.6
million and $17.7 million at July 31, 1997 and 1996, 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.
F-7
<PAGE> 93
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING EXPENSES are charged against operations when incurred. Amounts
charged against operations were $46.1 million, $37.6 million and $35.2 million
for the years ended July 31, 1997, 1996 and 1995, respectively. The amounts of
prepaid advertising at July 31, 1997 and 1996 are $3.4 million and $2.4 million,
respectively.
RECLASSIFICATIONS. The classifications in use at July 31, 1997 have been
applied to the financial statements for July 31, 1996 and 1995.
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
$16.0 million and $12.2 million at July 31, 1997 and 1996, respectively.
Inventories on a first-in, first-out ("FIFO") basis were $527.7 million and
$470.1 million at July 31, 1997 and 1996, respectively. The Company also
maintained consigned inventory at its retail locations of approximately $135.0
million and $78.9 million at July 31, 1997 and 1996, 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:
<TABLE>
<CAPTION>
JULY 31, 1997 JULY 31, 1996
------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Buildings and Leasehold Improvements............... $ 59,932 $ 39,439
Furniture and Fixtures............................. 101,767 64,569
Construction in Progress........................... 9,409 14,835
Property Held for Sale............................. 6,345 9,557
-------- --------
177,453 128,400
Less: Accumulated Amortization and Depreciation.... (39,442) (20,146)
-------- --------
Total Net Property and Equipment................... $138,011 $108,254
======== ========
</TABLE>
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 consist of the
following:
<TABLE>
<CAPTION>
JULY 31, 1997 JULY 31, 1996
------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts Payable................................... $ 59,321 $ 67,492
Accrued Payroll.................................... 18,280 19,759
Accrued Taxes...................................... 13,248 14,833
Extended Warranty.................................. 12,420 6,493
Other Accruals..................................... 42,452 37,217
-------- --------
Total Accounts Payable and Accrued Liabilities..... $145,721 $145,794
======== ========
</TABLE>
F-8
<PAGE> 94
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's non-current liabilities consist 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," loss reserves for insurance subsidiaries and
reserves for tax contingencies.
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 two plans. 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. The
costs of the postretirement benefits are recognized in the financial statements
over an employee's active working career on an accrual basis.
The accumulated postretirement benefits obligation ("APBO"), which
represents the actuarial present value of benefits attributed to employee
service rendered as of July 31, 1997 and 1996, for the unfunded plan, include
the following components:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Active Employees Under Retirement Age.................... $ 3,453 $ 4,260
Active Employees Eligible to Retire...................... 1,884 2,161
Current Retirees......................................... 7,315 7,641
------- -------
Accumulated Benefit Obligation........................... 12,652 14,062
Unrecognized Prior Service Credit (Cost)................. 38 (348)
Unrecognized Net Gain.................................... 8,230 7,019
------- -------
Total Accrued Postretirement Benefit Liability........... $20,920 $20,733
======= =======
</TABLE>
The unrecognized gain of $8.2 million at July 31, 1997, results 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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Service Cost..................................... $ 613 $1,130 $1,035
Interest Cost.................................... 1,112 1,557 1,465
Amortization..................................... (582) 58 16
------ ------ ------
Total Postretirement Benefit Cost................ $1,143 $2,745 $2,516
====== ====== ======
</TABLE>
The weighted-average discount rate used in determining the APBO at July 31,
1997 and 1996 was 7.5 and 7.75 percent, respectively. At July 31, 1997 and 1996,
the initial medical and dental trend rates were 12.0 percent and 8.25 percent,
respectively, and are assumed to gradually decrease to 6.0 percent in the year
2004. 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 $1.5
million and $0.2 million, respectively.
F-9
<PAGE> 95
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, 1997 JULY 31, 1996
------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Revolving Credit Agreement................. $ 70,700 $ 23,600
Receivables Securitization Facility........ 380,677 380,635
Other (primarily mortgages)................ 410 119
-------- --------
451,787 404,354
Less Current Portion....................... (328) (26)
-------- --------
Total Long-Term Debt....................... $451,459 $404,328
======== ========
</TABLE>
Fiscal year scheduled maturities of long-term debt at July 31, 1997 were as
follows: 1998 -- $0.3 million; 1999 -- $380.8 million; 2000 -- $70.7 million;
2001 -- $0 million; 2002 -- $0 million; thereafter -- $0 million; for a total of
$451.8 million.
REVOLVING CREDIT AGREEMENT. On March 31,1997, the Company and ZDel (the
"Borrowers") entered into a three year unsecured revolving credit agreement (the
"Revolving Credit Agreement") with a group of banks which provides for revolving
credit loans in an aggregate amount of up to $225.0 million, including a $30.0
million sublimit for letters of credit. The Revolving Credit Agreement replaces
a prior secured commitment totaling $150.0 million.
The revolving credit loans bear interest at floating rates, currently LIBOR
plus 1.5% or the agent bank's adjusted base rate percent or the Federal Funds
Rate plus 0.5%, at the Borrowers' option. The interest rate based on LIBOR can
be reduced based on certain future performance levels attained by the Borrowers.
The Company pays a commitment fee of .375 percent per annum (subject to
reduction based on future performance) on the preceding month's unused Revolving
Credit Agreement commitment. The Borrowers may repay the revolving credit loans
at any time without penalty prior to the maturity date. At the Borrowers'
election, the Revolving Credit Agreement provides for a one year extension upon
obtaining appropriate consent. At July 31, 1997, there were $70.7 million in
loans outstanding under the Revolving Credit Agreement at a weighted average
interest rate of 7.20%. In addition, letters of credit in the amount of
approximately $0.6 million were outstanding at July 31, 1997.
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, restricts within certain limits the Borrowers'
ability to pay dividends and make other payments, incur additional indebtedness,
make capital expenditures, 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.
RECEIVABLES SECURITIZATION FACILITY. The Company formed Zale Funding Trust
("ZFT"), a limited purpose Delaware business trust, in 1994 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.
F-10
<PAGE> 96
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ZFT Receivables Notes bear interest at the following rates, payable
monthly in arrears (amounts in thousands):
<TABLE>
<CAPTION>
PRINCIPAL RATE
- --------- ----
<C> <S>
$ 37,620 LIBOR + .40%, not to exceed 12.0%
294,100 7.325%
28,600 7.50%
20,440 8.15%
- --------
$380,760
========
</TABLE>
The effective interest rate, based on a current LIBOR rate of 5.625
percent, including amortization of debt issuance costs, approximated 7.55
percent at July 31, 1997.
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, 1997 and 1996 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, 1997 and 1996.
LEASE COMMITMENTS
The Company rents most of its retail space under leases that generally
range from five to ten years and may contain base rent escalations. The Company
amended and extended its corporate headquarters lease for five years effective
at the expiration of the current lease, which will continue to 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 noncancelable leases is not material.
F-11
<PAGE> 97
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Retail Space:
Minimum Rentals................................ $ 70,344 $61,724 $55,645
Rentals Based on Sales......................... 27,762 27,752 28,365
-------- ------- -------
98,106 89,476 84,010
Equipment and Corporate Headquarters............. 3,240 3,368 3,386
-------- ------- -------
Total Rent Expense............................... $101,346 $92,844 $87,396
======== ======= =======
</TABLE>
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, 1997, for all noncancellable
leases of ongoing operations were as follows: 1998 -- $65.3 million;
1999 -- $63.4 million; 2000 -- $58.5 million; 2001 -- $53.2 million;
2002 -- $47.6 million; thereafter -- $162.8 million; for a total of $450.8
million.
INTEREST
Interest expense for the years ended July 31, 1997, 1996 and 1995 was
approximately $36.9 million, $33.2 million and $37.5 million, respectively.
Interest income for the years ended July 31, 1997, 1996 and 1995 was $0.8
million, $3.1 million and $7.7 million, respectively.
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
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities 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.
F-12
<PAGE> 98
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Currently, the Company files a consolidated income tax return. The
effective income tax rate varies from the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Federal Income Tax Expense at Statutory Rate..... $27,950 $24,531 $16,737
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........................................ 3,243 2,520 1,677
Other............................................ 176 107 --
------- ------- -------
Total Income Tax Expense......................... 29,305 25,094 16,350
Tax Benefit on Extraordinary Item................ -- (603) --
------- ------- -------
Total Income Tax Expense......................... $29,305 $24,491 $16,350
======= ======= =======
Effective Income Tax Rate........................ 36.7% 35.8% 34.2%
======= ======= =======
</TABLE>
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 its tax net operating loss ("NOL") against current and future tax
liabilities. The cash benefit realized was approximately $28 million, $23
million and $16 million for the years ended July 31, 1997, 1996 and 1995,
respectively.
As of July 31, 1997, the Company has a NOL carryforward (after limitations)
of approximately $254 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, 1997, 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.
F-13
<PAGE> 99
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at July 31,
1997 and 1996 are presented below.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current Deferred Taxes:
Assets --
Customer receivables........................ $ 22,549 $ 20,046
Accrued liabilities......................... 17,374 13,919
State and local taxes....................... 1,950 1,950
Net operating loss carryforward............. 29,000 24,500
Other....................................... 120 --
-------- --------
Total Assets................................ 70,993 60,415
Less -- Valuation Allowance................. (32,353) (33,071)
-------- --------
38,640 27,344
Liabilities --
Merchandise inventories, principally due to
LIFO reserve.............................. (62,133) (59,326)
Other....................................... (207) (18)
-------- --------
Deferred Current Tax Liability, Net......... $(23,700) $(32,000)
======== ========
Non-Current Deferred Taxes:
Assets --
Property and equipment,..................... $ 16,031 $ 6,287
Net operating loss carryforward............. 70,143 101,878
Postretirement benefits..................... 9,960 9,886
Other....................................... 2,168 7,497
-------- --------
Total Assets................................ 98,302 125,548
Less -- Valuation Allowance................. (44,798) (68,586)
-------- --------
53,504 56,962
Liabilities --
Other....................................... (804) (462)
-------- --------
Deferred Non-Current Tax Asset, Net.............. $ 52,700 $ 56,500
======== ========
</TABLE>
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 $77.2 million and
$101.6 million as of July 31, 1997 and 1996, respectively. The Company believes
that, as of July 31, 1997, a sufficient history of earnings has been established
to make realization of a $29.0 million deferred income tax asset more likely
than not. The change in valuation allowance from July 31, 1996 to July 31, 1997
was $24.5 million.
CAPITAL STOCK
COMMON STOCK. At July 31, 1997 and 1996, 70,000,000 shares of Common Stock,
par value of $0.01 per share, were authorized and 35,021,900 shares and
35,199,383 shares, respectively, were outstanding. The Company held 326,250 and
35,942 treasury shares at July 31, 1997 and 1996, respectively.
PREFERRED STOCK. At July 31, 1997 and 1996, 5,000,000 shares of Preferred
Stock, par value of $0.01, were authorized. None are issued or outstanding.
F-14
<PAGE> 100
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and 1996, 1,972,750 Series
A Warrants 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.
TREASURY STOCK. In November 1996, the Company received approximately
191,000 shares of common stock valued on the date of receipt at $19.50 per share
which was approved for distribution to pre-confirmation creditors of the Company
but not claimed by such pre-confirmation creditors. This resulted in a $3.7
million increase to additional paid-in capital offset by an equal increase in
treasury stock. The Company also received approximately 99,000 shares of common
stock as part of its settlement of remaining pre-bankruptcy litigation for which
the Company paid $0.8 million. The Company expects no additional significant
recoveries of stock in the future.
STOCK OPTION PLANS. As of July 31, 1997 the Company had two stock option
plans. 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 3,555,000 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. The 1995
Outside Director Stock Option Plan, (the "Director Plan") authorizes the Company
to grant common stock to non-employee directors at fair market value of the
Company common stock on the date of grant. The options vest over a four year
period and expire ten years from the date of grant. The maximum number of shares
which may be granted under the Director Plan is 150,000 shares.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES GRANT PRICE EXERCISE PRICE
------------------------- --------------------------- -------------------------
FISCAL 1997 FISCAL 1996 FISCAL 1997 FISCAL 1996 FISCAL 1997 FISCAL 1996
----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............ 2,722,075 2,212,925 $ 8.68-19.00 $ 8.68-14.00 $13.60 $10.65
Granted................................... 615,700 1,103,100 17.56-21.81 13.75-19.00 21.37 17.71
Exercised................................. (112,825) (189,325) 8.73-17.69 8.77-11.81 11.67 8.92
Canceled.................................. (136,525) (404,625) 9.00-17.69 8.73-14.00 13.07 10.68
--------- --------- ------------ ------------ ------ ------
Outstanding, end of year.................. 3,088,425 2,722,075 $ 8.68-21.81 $ 8.68-19.00 $15.16 $13.60
========= ========= ============ ============ ====== ======
</TABLE>
F-15
<PAGE> 101
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of July 31, 1997 and 1996, 1,195,875 and 654,875, respectively, of
options outstanding were exercisable.
In fiscal 1997, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company accounts for the stock option plans under
APB Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plan been determined pursuant to the provisions of
SFAS No. 123, the Company's pro-forma net earnings for fiscal 1997 and 1996
would have been $48,587 and $43,627, respectively, resulting in earnings per
share of $1.33 and $1.20, respectively. The fair value of each option grant is
estimated on the date of grant using the Black Scholes option pricing model with
the following weighted-average assumptions used for options granted in fiscal
1997 and 1996, respectively: risk-free interest rate of 6.0% and 6.5%, expected
dividend yield of zero, expected lives of 5 years, and expected volatility of
35.8% and 37.0%.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to August 1, 1996, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
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 began in December 1996
requires fixed payments totaling $34.4 million over a 60 month term and a
variable amount based on usage.
F-16
<PAGE> 102
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BENEFIT PLANS
PROFIT SHARING PLAN
At July 31, 1997, 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, 1997, 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.
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 including matching contributions was $3.5 million, $3.9
million and $3.6 million for fiscal years 1997, 1996 and 1995, 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 $380.7 million, net of discount, Receivables Securitization Facility also
approximates fair value.
The investments of the Company's insurance subsidiaries, primarily stocks
and bonds in the amount of $25.9 million, approximate market value at July 31,
1997 and are reflected in Other Assets on the Consolidated Balance Sheets.
Investments are classified as available for sale and are carried at fair value.
Changes in unrealized gains and losses are recorded directly to stockholders'
investment.
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.
F-17
<PAGE> 103
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and 1996, 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 $3.4 million and $0.5 million of jewelry
merchandise during fiscal year 1997 and 1996, respectively. The Company believes
the terms were equivalent to those of unrelated parties.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which establishes accounting standards for the impairment of long-lived assets
and goodwill. The adoption of SFAS No. 121 did not have a material impact on the
consolidated financial statement of the Company in fiscal 1997.
In the second quarter of fiscal 1998, the Company will adopt SFAS No. 128,
"Earnings per Share." As a result, the Company's reported earnings per share for
fiscal 1997 and each of the quarter in fiscal 1997 will be restated. Upon the
adoption of SFAS No. 128, basic earnings per common share will be computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share will be
computed by dividing net income by the weighted average of common stock and
common stock equivalents outstanding during the period.
Effective July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires the Company to report comprehensive
income in the financial statements. SFAS No. 131 requires the Company to
disclose revenues, profits and loss, and assets for certain business segments.
These statements are effective for fiscal years beginning after December 15,
1997, with earlier adoption permitted. The Company has not yet determined the
impact of this statement on its financial disclosures.
F-18
<PAGE> 104
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's payment obligations under the Notes are guaranteed by ZDel
(the "Guarantor Subsidiary"). Such guarantee is full and unconditional with
respect to ZDel. Zale Funding Trust ("ZFT"), a limited purpose Delaware business
trust wholly owned by ZDel which owns the customer accounts receivable of ZDel,
is not a guarantor of the obligations under the Senior Notes. Separate financial
statements of the Guarantor Subsidiary are not presented because the Company's
management has determined that they would not be material to investors. The
following supplemental financial information sets forth, on an unconsolidated
basis, statements of operations, balance sheets, and statements of cash flow
information for the Company ("Parent Company Only"), for the Guarantor
Subsidiary and for the Company's other subsidiaries (the "Non-Guarantor
Subsidiaries"). The supplemental financial information reflects the investments
of the Company and the Guarantor Subsidiary in the Guarantor and Non-Guarantor
Subsidiaries using the equity method of accounting. Certain reclassifications
have been made to provide for uniform disclosure of all periods presented. These
reclassifications are not material.
F-19
<PAGE> 105
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales......................... $ -- $1,233,438 $ 20,380 $ -- $1,253,818
Cost of Sales..................... -- 633,208 10,110 -- 643,318
------- ---------- -------- -------- ----------
Gross Margin...................... -- 600,230 10,270 -- 610,500
Selling, General, and
Administrative Expenses
(Income)........................ 150 497,636 (17,264) -- 480,522
Depreciation and Amortization
Expense......................... -- 12,295 1,727 -- 14,022
------- ---------- -------- -------- ----------
Operating Earnings (Loss)......... (150) 90,299 25,807 -- 115,956
Interest Expense, Net............. -- 1,739 34,359 -- 36,098
------- ---------- -------- -------- ----------
Earnings (Loss) Before Income
Taxes........................... (150) 88,560 (8,552) -- 79,858
Income Taxes (Benefit)............ (55) 32,498 (3,138) -- 29,305
------- ---------- -------- -------- ----------
Earnings (Loss) Before Equity in
Earnings (Loss) of
Subsidiaries.................... (95) 56,062 (5,414) -- 50,553
Equity in Earnings (Loss) of
Subsidiaries.................... 50,648 (6,040) -- (44,608) --
------- ---------- -------- -------- ----------
Net Earnings (Loss)............... $50,553 $ 50,022 $ (5,414) $(44,608) $ 50,553
======= ========== ======== ======== ==========
</TABLE>
F-20
<PAGE> 106
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT NON-
COMPANY GUARANTOR GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales........................... $ -- $1,119,047 $ 18,330 $ -- $1,137,377
Cost of Sales....................... -- 567,856 8,908 -- 576,764
------- ---------- -------- -------- ----------
Gross Margin........................ -- 551,191 9,422 -- 560,613
Selling, General, and Administrative
Expenses (Income)................. 151 464,237 (7,017) -- 457,371
Depreciation and Amortization
Expense........................... -- 6,479 1,059 -- 7,538
Unusual Items -- Reorganization
Recoveries........................ -- (1,486) (3,000) -- (4,486)
------- ---------- -------- -------- ----------
Operating Earnings (Loss)........... (151) 81,961 18,380 -- 100,190
Interest Expense (Income), Net...... -- (2,457) 32,559 -- 30,102
------- ---------- -------- -------- ----------
Earnings (Loss) Before Income Taxes
and Extraordinary Item............ (151) 84,418 (14,179) -- 70,088
Income Taxes (Benefit).............. (54) 30,225 (5,077) -- 25,094
------- ---------- -------- -------- ----------
Earnings (Loss) Before Extraordinary
Item.............................. (97) 54,193 (9,102) -- 44,994
Extraordinary Item, Net of Income
Taxes of $(603)................... -- (1,096) -- -- (1,096)
------- ---------- -------- -------- ----------
Earnings (Loss) Before Equity in
Earnings (Loss) of Subsidiaries... (97) 53,097 (9,102) -- 43,898
Equity in Earnings (Loss) of
Subsidiaries...................... 43,995 (11,247) -- (32,748) --
------- ---------- -------- -------- ----------
Net Earnings (Loss)................. $43,898 $ 41,850 $ (9,102) $(32,748) $ 43,898
======= ========== ======== ======== ==========
</TABLE>
F-21
<PAGE> 107
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT NON-
COMPANY GUARANTOR GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales.......................... $ -- $1,019,748 $ 16,401 $ -- $1,036,149
Cost of Sales...................... -- 516,202 7,808 -- 524,010
------- ---------- ---------- -------- ----------
Gross Margin....................... -- 503,546 8,593 -- 512,139
Selling, General, and
Administrative Expenses
(Income)......................... 157 451,401 (17,457) -- 434,101
Depreciation and Amortization
Expense (Credit)................. -- (408) 789 -- 381
------- ---------- ---------- -------- ----------
Operating Earnings (Loss).......... (157) 52,553 25,261 -- 77,657
Interest Expense (Income), Net..... -- (2,828) 32,665 -- 29,837
------- ---------- ---------- -------- ----------
Earnings (Loss) Before Income
Taxes............................ (157) 55,381 (7,404) -- 47,820
Income Taxes (Benefit)............. (54) 18,935 (2,531) -- 16,350
------- ---------- ---------- -------- ----------
Earnings (Loss) Before Equity in
Earnings (Loss) of
Subsidiaries..................... (103) 36,446 (4,873) -- 31,470
Equity in Earnings (Loss) of
Subsidiaries..................... 31,573 (5,015) -- (26,558) --
------- ---------- ---------- -------- ----------
Net Earnings (Loss)................ $31,470 $ 31,431 $ (4,873) $(26,558) $ 31,470
======= ========== ========== ======== ==========
</TABLE>
F-22
<PAGE> 108
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1997
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents...... $ -- $ 27,479 $ 14,157 $ -- $ 41,636
Customer Receivables, Net...... -- -- 454,270 -- 454,270
Merchandise Inventories........ -- 503,764 7,938 -- 511,702
Other Current Assets........... -- 38,901 370 -- 39,271
-------- -------- -------- --------- ----------
Total Current Assets... -- 570,144 476,735 -- 1,046,879
Investment in Subsidiaries..... 541,574 54,395 -- (595,969) --
Property and Equipment, Net.... -- 134,175 3,836 -- 138,011
Intercompany Receivable........ 728 48,250 -- (48,978) --
Other Assets................... -- 8,972 34,644 -- 43,616
Deferred Tax Asset, Net........ 59 52,641 -- -- 52,700
-------- -------- -------- --------- ----------
Total Assets........... $542,361 $868,577 $515,215 $(644,947) $1,281,206
======== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term
Debt........................ $ -- $ 328 $ -- $ -- $ 328
Accounts Payable and Accrued
Liabilities................. 141 135,330 10,250 -- 145,721
Deferred Tax Liability, Net.... 646 23,054 -- -- 23,700
-------- -------- -------- --------- ----------
Total Current
Liabilities.......... 787 158,712 10,250 -- 169,749
Non-current Liabilities........ -- 40,614 12,930 -- 53,544
Intercompany Payable........... -- -- 48,978 (48,978) --
Long-term Debt................. -- 70,782 380,677 -- 451,459
Excess of Revalued Net Assets
Over Stockholders'
Investment, Net............. -- 64,880 -- -- 64,880
Total Stockholders'
Investment........... 541,574 533,589 62,380 (595,969) 541,574
-------- -------- -------- --------- ----------
Total Liabilities and
Stockholders'
Investment........... $542,361 $868,577 $515,215 $(644,947) $1,281,206
======== ======== ======== ========= ==========
</TABLE>
F-23
<PAGE> 109
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1996
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents....... $ -- $ 6,603 $ 43,443 $ -- $ 50,046
Customer Receivables, Net....... -- -- 419,877 -- 419,877
Merchandise Inventories......... -- 449,288 8,574 -- 457,862
Other Current Assets............ 54 25,296 185 -- 25,535
-------- -------- -------- --------- ----------
Total Current Assets.... 54 481,187 472,079 -- 953,320
Investment in Subsidiaries...... 476,258 55,754 -- (532,012) --
Property and Equipment, Net..... -- 101,810 6,444 -- 108,254
Intercompany Receivable......... 533 52,264 -- (52,797) --
Other Assets.................... -- 10,046 35,691 -- 45,737
Deferred Tax Asset, Net......... 59 56,441 -- -- 56,500
-------- -------- -------- --------- ----------
Total Assets............ $476,904 $757,502 $514,214 $(584,809) $1,163,811
======== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term
Debt......................... $ -- $ 26 $ -- $ -- $ 26
Accounts Payable and Accrued
Liabilities.................. -- 141,926 3,868 -- 145,794
Deferred Tax Liability, Net..... 646 31,354 -- -- 32,000
-------- -------- -------- --------- ----------
Total Current
Liabilities........... 646 173,306 3,868 -- 177,820
Non-current Liabilities......... -- 20,825 13,802 -- 34,627
Intercompany Payable............ -- -- 52,797 (52,797) --
Long-term Debt.................. -- 23,693 380,635 -- 404,328
Excess of Revalued Net Assets
Over Stockholders'
Investment, Net.............. -- 70,778 -- -- 70,778
Total Stockholders'
Investment............ 476,258 468,900 63,112 (532,012) 476,258
-------- -------- -------- --------- ----------
Total Liabilities and
Stockholders'
Investment............ $476,904 $757,502 $514,214 $(584,809) $1,163,811
======== ======== ======== ========= ==========
</TABLE>
F-24
<PAGE> 110
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
------ --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities........... $ (314) $ 26,178 $(19,001) $(12,895) $ (6,032)
Net Cash Flows from Investing
Activities:
Additions to property and
equipment...................... -- (54,025) -- -- (54,025)
Dispositions of property and
equipment...................... -- 2,277 2,610 -- 4,887
------ -------- -------- -------- --------
Net Cash Provided by (Used in)
Investing Activities........... -- (51,748) 2,610 -- (49,138)
------ -------- -------- -------- --------
Net Cash Flows from Financing
Activities:
Proceeds from long-term debt..... -- 291 -- -- 291
Net borrowings under revolving
credit agreement............... -- 47,100 -- -- 47,100
Debt issue and capitalized
financing costs................ -- (945) -- -- (945)
Proceeds from exercise of stock
options........................ 1,073 -- -- -- 1,073
Purchase of treasury stock....... (759) -- -- -- (759)
Dividends paid................... -- -- (12,895) 12,895 --
------ -------- -------- -------- --------
Net Cash Provided by (Used in)
Financing Activities........... 314 46,446 (12,895) 12,895 46,760
------ -------- -------- -------- --------
Net (Decrease) Increase in Cash
and Cash Equivalents........... -- 20,876 (29,286) -- (8,410)
Cash and Cash Equivalents at
Beginning of Period............ -- 6,603 43,443 -- 50,046
------ -------- -------- -------- --------
Cash and Cash Equivalents at End
of Period...................... $ -- $ 27,479 $ 14,157 $ -- $ 41,636
====== ======== ======== ======== ========
</TABLE>
F-25
<PAGE> 111
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities................ $ 8,937 $ 9,743 $(8,034) $(12,049) $ (1,403)
Net Cash Flows from Investing
Activities:
Additions to property and equipment... -- (48,102) (688) -- (48,790)
Dispositions of property and
equipment........................... -- 829 -- -- 829
Acquisition, net of cash acquired..... -- (2,547) -- -- (2,547)
Other................................. 34 (408) 34 -- (340)
------- --------- ------- -------- ---------
Net Cash Provided by (Used in)
Investing Activities................ 34 (50,228) (654) -- (50,848)
------- --------- ------- -------- ---------
Net Cash Flows from Financing
Activities:
Payments on long-term debt............ -- (66,608) -- -- (66,608)
Net borrowings under revolving credit
agreement........................... -- 23,600 -- -- 23,600
Redemption of Series B Warrants....... (9,264) -- -- -- (9,264)
Prepayment penalty.................... (1,699) -- -- -- (1,699)
Debt issue and capitalized financing
costs............................... -- (629) -- -- (629)
Proceeds from exercise of stock
options and warrants................ 1,992 -- -- -- 1,992
Dividends paid........................ -- -- (12,049) 12,049 --
------- --------- ------- -------- ---------
Net Cash Used In Financing
Activities.......................... (8,971) (43,637) (12,049) 12,049 (52,608)
------- --------- ------- -------- ---------
Net Decrease in Cash and Cash
Equivalents......................... -- (84,122) (20,737) -- (104,859)
Cash and Cash Equivalents at Beginning
of Period........................... -- 90,725 64,180 -- 154,905
------- --------- ------- -------- ---------
Cash and Cash Equivalents at End of
Period.............................. $ -- $ 6,603 $43,443 $ -- $ 50,046
======= ========= ======= ======== =========
</TABLE>
F-26
<PAGE> 112
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
------ --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in) Operating
Activities................................. $(171) $ 45,705 $ 2,260 $(1,890) $ 45,904
Net Cash Flows from Investing Activities:
Additions to property and equipment.......... -- (40,063) (2,232) -- (42,295)
Dispositions of property and equipment....... -- 1,987 -- -- 1,987
Other........................................ -- (205) -- -- (205)
----- -------- ------- ------- --------
Net Cash Used in Investing Activities........ -- (38,281) (2,232) -- (40,513)
----- -------- ------- ------- --------
Net Cash Flows from Financing Activities:
Payments on long-term debt................... -- (3,896) -- -- (3,896)
Debt issue and capitalized financing costs... -- (461) -- -- (461)
Proceeds from exercise of stock options and
warrants................................... 171 -- -- -- 171
Dividends paid............................... -- -- (1,890) 1,890 --
----- -------- ------- ------- --------
Net Cash Provided by (Used in) Financing
Activities................................. 171 (4,357) (1,890) 1,890 (4,186)
----- -------- ------- ------- --------
Net (Decrease) Increase in Cash and Cash
Equivalents................................ -- 3,067 (1,862) -- 1,205
Cash and Cash Equivalents at Beginning of
Period..................................... -- 87,658 66,042 -- 153,700
----- -------- ------- ------- --------
Cash and Cash Equivalents at End of Period... $ -- $ 90,725 $64,180 $ -- $154,905
===== ======== ======= ======= ========
</TABLE>
SUBSEQUENT EVENT
On September 3, 1997, the Company signed a purchase agreement to sell the
majority of the assets of its Diamond Park Division (the "Diamond Park Asset
Sale"). The Diamond Park Division, which manages leased fine jewelry departments
in major department store chains including Marshall Field's, Dillard's,
Mercantile and Parisian, had net sales of $125.3 million in fiscal 1997. At July
31, 1997, inventory and net property and equipment of the Diamond Park Division
were $54.5 million and $4.0 million, respectively. In connection with the
Diamond Park Asset Sale, the Company will receive cash consideration totaling
approximately $63 million. The Company will continue to operate in Dillard's
stores through January 1998, the end of the current license period, at which
time the remaining inventory of such operations will be sold to the purchaser.
The Company intends to reinvest the net proceeds from the Diamond Park Asset
Sale into the Company's operations. The closing of the Diamond Park Asset Sale
is subject to regulatory approval and customary closing conditions and is
expected to occur on or about October 6, 1997.
EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
On September 23, 1997, the Company sold $100 million in aggregate principal
amount of 8 1/2% Senior Notes due 2007. All proceeds from the sale of the Senior
Notes were used by the Company to repay outstanding indebtedness under its
revolving credit agreement and for general corporate purposes.
On October 6, 1997, the Company closed the Diamond Park Asset Sale for
approximately $63 million. The Company received $58 million in October 1997 with
the remaining balance payable in January 1998, at
F-27
<PAGE> 113
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED) -- (CONTINUED)
which time the remaining inventory of the Dillard's stores will be sold to the
purchaser. The net proceeds from the Diamond Park Asset Sale are being
reinvested into the Company's operations.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for the years ended July 31, 1997
and 1996 were as follows (amounts in thousands except per share data):
<TABLE>
<CAPTION>
FISCAL 1997
FOR THE THREE MONTHS ENDED
---------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1997 1997 1997 1996
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.............................. $273,580 $244,376 $505,083 $230,779
Gross margin........................... 132,271 119,182 248,312 110,735
Net earnings (loss).................... 1,620 (1,444) 51,515 (1,138)
Net earnings (loss) per primary common
share................................ 0.04 (0.04) 1.41 (0.03)
</TABLE>
<TABLE>
<CAPTION>
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
</TABLE>
F-28
<PAGE> 114
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE GUARANTOR. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE
GUARANTOR SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 3
Incorporation of Certain Documents by
Reference............................ 3
Cautionary Notice Regarding Forward-
Looking Statements................... 4
Summary................................ 5
Risk Factors........................... 15
The Exchange Offer..................... 20
Use of Proceeds........................ 27
Capitalization......................... 28
Selected Consolidated Financial Data... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 31
Business............................... 36
Management............................. 44
Description of Certain Indebtedness.... 48
Description of the Notes............... 51
Certain Federal Income Tax
Considerations....................... 81
Plan of Distribution................... 81
Legal Matters.......................... 82
Experts................................ 82
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
$100,000,000
LOGO
ZALE CORPORATION
OFFER TO EXCHANGE ALL OUTSTANDING
8 1/2% SERIES A SENIOR NOTES DUE 2007
FOR
8 1/2% SERIES B SENIOR NOTES DUE 2007
---------------------
PROSPECTUS
---------------------
JANUARY , 1998
======================================================
<PAGE> 115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The provisions of the Delaware General Corporation Law (the "DGCL") and the
Registrant's Certificate of Incorporation set forth the extent to which the
Registrant's directors and officers may be indemnified against liabilities they
may incur while serving in such capacities. Section 145 of Title 8 of the DGCL
gives a corporation power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
same Section also gives a corporation power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper. Also, the Section states that, to the
extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any such action, suit or
proceeding, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Article Seven of the Certificate of Incorporation of both the Company and
the Guarantor provides:
(a) A director of the Corporation shall not be personally liable either to
the Corporation or any stockholder for monetary damages for breach of fiduciary
duty as a director, except (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, or (ii) for acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of the
law, or (iii) for any matter in respect of which such director shall be liable
under Section 174 of Title 8 of the General Corporation Law of the State of
Delaware or any amendment thereto or successor provision thereto, or (iv) for
any transaction from which the director shall have derived an improper personal
benefit. Neither amendment nor repeal of this paragraph (a) nor the adoption of
any provision of the Certificate of Incorporation inconsistent with this
paragraph (a) shall eliminate or reduce the effect of this paragraph (a) in any
respect of any matter occurring, or any cause of action, suit or claim that, but
for this paragraph (a) of this Article, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
(b) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to, or testifies in, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative in nature, by reason of (i) the fact that such person is or was a
director, officer, employee or agent of the Corporation at any time after the
Commencement Time (as defined below), or is or was serving at any time after the
Commencement Time at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, employee
benefit plan, trust or other
II-1
<PAGE> 116
enterprise and (ii) any acts or omissions by such person in such capacity that
occurred after the Commencement Time, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding to
the full extent permitted by law, so long as such person acted or omitted to act
in good faith and in a manner that such person (x) reasonably believed to be in
or not opposed to the best interests of the Corporation and (y) with respect to
any criminal action or proceeding, had reasonable cause to believe was lawful;
provided, however, that if a court of competent jurisdiction, after exhaustion
of all appeals therefrom, adjudges such person to be liable to the Corporation
for any amount or if such person pays an amount in settlement to the
Corporation, the Corporation may indemnify such person for such amount only with
the approval of such court. The Corporation may adopt Bylaws or enter into
agreements with any such person for the purpose of providing such
indemnification. "Commencement Time" means 8:00 a.m., C.S.T., on July 21, 1993.
The Company maintains an insurance policy insuring the Company and
directors and officers of the Company against certain liabilities, including
liabilities under the Securities Act of 1933.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits (See exhibit index immediately preceding the exhibits for the
page number where each exhibit can be found)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
**4.1 -- Indenture dated September 30, 1997 by and among the
Company, the Guarantor and Bank One, N.A., as Trustee.
**4.2 -- Purchase Agreement dated September 23, 1997 by and among
the Company, the Guarantor and the Initial Purchasers.
**4.3 -- Form of 8 1/2% Series A Senior Note due 2007 (included in
Exhibit 4.1 hereto).
**4.4 -- Registration Rights Agreement dated September 30, 1997 by
and between the Company, the Guarantor and the Initial
Purchasers.
**4.6 -- Form of 8 1/2% Series B Senior Note due 2007 (included in
Exhibit 4.1 hereto).
**4.7 -- Form of Guarantee (included in Exhibit 4.1 hereto).
*5.1 -- Opinion of Troutman Sanders LLP.
*8.1 -- Opinion of Troutman Sanders LLP as to certain tax
matters.
**12.1 -- Statement regarding Ratio of Earnings to Fixed Charges.
*23.1 -- Consent of Troutman Sanders LLP (Included in Exhibits 5.1
and 8.1).
*23.2 -- Consent of Arthur Andersen LLP.
**24.1 -- Power of Attorney (included on the signature pages in
Part II of this Registration Statement).
*25.1 -- Statement of Eligibility of the Trustee under the
Indenture filed as Exhibit 4.1.
**99.1 -- Form of Letter of Transmittal.
**99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
II-2
<PAGE> 117
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(a) For purposes of determining any liability under the Securities Act of
1933, each filing of the Company's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day after receipt of
such request, and to send the incorporation documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irving,
State of Texas, on the 27th day of January, 1998.
ZALE CORPORATION
By: /s/ ROBERT J. DINICOLA
-----------------------------------
Robert J. DiNicola
Chairman of the Board and
Chief Executive Officer
By: /s/ SUE E. GOVE
-----------------------------------
Sue E. Gove
Group Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT J. DINICOLA Chairman of the Board of January 27, 1998
- ----------------------------------------------------- Directors, Chief
Robert J. DiNicola Executive Officer,
and Director
/s/ SUE E. GOVE Group Vice President and January 27, 1998
- ----------------------------------------------------- Chief Financial
Sue E. Gove Officer
* Senior Vice President,
- ----------------------------------------------------- Controller
Mark R. Lenz
* Director
- -----------------------------------------------------
Glen Adams
* Director
- -----------------------------------------------------
A. David Brown
* Director
- -----------------------------------------------------
Peter P. Copses
* Director
- -----------------------------------------------------
Andrea Jung
* Director
- -----------------------------------------------------
Richard C. Marcus
* Director
- -----------------------------------------------------
Charles H. Pistor, Jr.
* Director
- -----------------------------------------------------
Andrew H. Tisch
/s/ ALAN P. SHOR* January 27, 1998
- -----------------------------------------------------
Alan P. Shor*
Attorney-in-fact
</TABLE>
II-4
<PAGE> 119
Pursuant to the requirements of the Securities Act of 1933, the Guarantor
has duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irving,
State of Texas, on the 27th day of January 1998.
ZALE DELAWARE, INC.
By: /s/ ROBERT J. DINICOLA
-----------------------------------
Robert J. DiNicola
Chairman of the Board and
Chief Executive Officer
By: /s/ SUE E. GOVE
-----------------------------------
Sue E. Gove
Group Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT J. DINICOLA Chairman of the Board of January 27, 1998
- ----------------------------------------------------- Directors, Chief
Robert J. DiNicola Executive Officer,
and Director
/s/ SUE E. GOVE Group Vice President and January 27, 1998
- ----------------------------------------------------- Chief Financial
Sue E. Gove Officer
* Senior Vice President,
- ----------------------------------------------------- Controller
Mark R. Lenz
* Director
- -----------------------------------------------------
Glen Adams
* Director
- -----------------------------------------------------
A. David Brown
* Director
- -----------------------------------------------------
Peter P. Copses
* Director
- -----------------------------------------------------
Andrea Jung
* Director
- -----------------------------------------------------
Richard C. Marcus
* Director
- -----------------------------------------------------
Charles H. Pistor, Jr.
* Director
- -----------------------------------------------------
Andrew H. Tisch
/s/ ALAN P. SHOR* January 27, 1998
- -----------------------------------------------------
Alan P. Shor*
Attorney-in-fact
</TABLE>
II-5
<PAGE> 120
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S> <C>
**4.1 -- Indenture dated September 30, 1997 by and among the
Company, the Guarantor and Bank One, N.A., as Trustee.
**4.2 -- Purchase Agreement dated September 23, 1997 by and among
the Company, the Guarantor and the Initial Purchasers.
**4.3 -- Form of 8 1/2% Series A Senior Note due 2007 (included in
Exhibit 4.1 hereto).
**4.4 -- Registration Rights Agreement dated September 30, 1997 by
and between the Company, the Guarantor and the Initial
Purchasers.
**4.6 -- Form of 8 1/2% Series B Senior Note due 2007 (included in
Exhibit 4.1 hereto).
**4.7 -- Form of Guarantee (included in Exhibit 4.1 hereto).
*5.1 -- Opinion of Troutman Sanders LLP.
*8.1 -- Opinion of Troutman Sanders LLP as to certain tax
matters.
**12.1 -- Statement regarding Ratio of Earnings to Fixed Charges.
*23.1 -- Consent of Troutman Sanders LLP (Included in Exhibits 5.1
and 8.1).
*23.2 -- Consent of Arthur Andersen LLP.
**24.1 -- Power of Attorney (included on the signature pages in
Part II of this Registration Statement).
*25.1 -- Statement of Eligibility of the Trustee under the
Indenture filed as Exhibit 4.1.
**99.1 -- Form of Letter of Transmittal.
**99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed
<PAGE> 1
EXHIBIT 5.1
Troutman Sanders LLP
600 Peachtree Street
Atlanta, GA 30308
404-885-3000
January 27, 1998
Zale Corporation
901 W. Walnut Hill Lane
Irving, Texas 75038-1003
Zale Delaware, Inc.
901 W. Walnut Hill Lane
Irving, Texas 75038-1003
Re: Zale Corporation Exchange Offer
Gentlemen:
We have acted as counsel to Zale Corporation (the "Company") and Zale
Delaware, Inc. ("ZDel" or the "Guarantor") in connection with the preparation
of a Registration Statement on Form S-4 (File No. 333-39473), as amended (the
"Registration Statement"), which has been filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"),
relating to the proposed offer to exchange (the "Exchange Offer") up to
$100,000,000 aggregate principal amount of the Company's 8 1/2 % Series B
Senior Notes due 2007 (the "Exchange Notes") for a like principal amount of its
outstanding 8 1/2 % Series A Senior Notes due 2007 (the "Original Notes"), of
which $100,000,000 aggregate principal amount are issued and outstanding.
Pursuant to the Exchange Offer, ZDel is also offering to exchange its guarantee
of the obligations of the Company under the Original Notes (the "Original Notes
Guarantee") for a like guarantee in respect of the Exchange Notes (the
"Exchange Notes Guarantee"). The Original Notes and the Original Notes
Guarantee are collectively referred to herein as the "Original Securities" and
the Exchange Notes and the Exchange Notes Guarantee are collectively referred
to herein as the "Exchange Securities."
The Original Securities were, and the Exchange Securities are being,
issued pursuant to the Indenture dated as of September 30, 1997 (the
"Indenture") among the Company, ZDel and Bank One, N.A., as trustee.
<PAGE> 2
We have reviewed copies of the Registration Statement and the
Prospectus and such other documents as we have deemed necessary or appropriate
as a basis for the opinion set forth below.
Based on the foregoing, we are of the opinion that:
(i) assuming (a) due authorization, execution and delivery of the
Indenture by the Company, (b) establishment of the terms of the
Exchange Notes in conformity with the Indenture and (c) due
execution, delivery, authentication and issuance of the Exchange
Notes in accordance with the Indenture and exchange for a like
principal amount of validly tendered Original Notes, the Exchange
Notes will constitute valid and binding obligations of the Company
entitled to the benefits of the Indenture and enforceable against
the Company in accordance with their terms, except as enforcement
thereof may be limited by bankruptcy, insolvency (including,
without limitation, all laws relating to fraudulent transfer),
reorganization, moratorium or similar laws affecting creditors'
rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law); and (ii) assuming
due authorization, execution and delivery of the Indenture by the
Guarantor, the Exchange Notes Guarantee will constitute a valid and
binding obligation of the Guarantor enforceable against the
Guarantor in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency (including,
without limitation, all laws relating to fraudulent transfer),
reorganization, moratorium or similar laws affecting creditors'
rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
We consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to Troutman Sanders
LLP under the caption "Legal Matters" in the Prospectus. In giving the
foregoing consent, we do not hereby admit that we come within the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/ TROUTMAN SANDERS LLP
TROUTMAN SANDERS LLP
<PAGE> 1
EXHIBIT 8.1
Troutman Sanders LLP
600 Peachtree Street
Atlanta, GA 30308
404-885-3000
January 27, 1998
Zale Corporation
Zale Delaware, Inc.
901 W. Walnut Hill Lane
Irving, Texas 75038-1003
Re: Zale Corporation
Certain Federal Income Tax Considerations
Gentlemen:
We have acted as special tax counsel to Zale Corporation (the "Company")
and Zale Delaware, Inc. ("ZDel" or the "Guarantor") in connection with the
preparation of a Registration Statement on Form S-4, as amended (the
"Registration Statement"), which has been filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"),
relating to the proposed offer to exchange up to $100,000,000 aggregate
principal amount of the Company's 8 1/2% Exchange Notes due 2007 (the "Exchange
Notes") for a like principal amount of its outstanding 8 1/2% Senior Notes due
2007 (the "Original Notes"), of which $100,000,000 aggregate principal amount
are issued and outstanding. The Exchange Notes will be guaranteed by ZDel with
respect to the payment of distributions and payments upon liquidation,
redemption and otherwise to the extent set forth in the Prospectus (the
"Prospectus") filed as part of the Registration Statement.
We have reviewed copies of the Registration Statement and the
Prospectus and such other documents as we have deemed necessary or appropriate
as a basis for the opinion set forth below.
Based on the foregoing, we are of the opinion that if the offer and
sale of the Exchange Notes are conducted in the manner described in the
Prospectus and if the terms of the Exchange Notes are as contemplated by the
Prospectus, then the exchange of Original Notes for Exchange Notes pursuant to
the Exchange Offer should not constitute a significant modification of the
terms of the Original Notes and, therefore, such exchange should not constitute
an exchange for federal income tax purposes and should have no federal income
tax consequences to holders of the Original Notes.
<PAGE> 2
Zale Corporation
Zale Delaware, Inc.
January 8, 1997
Page 2
We consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving the foregoing consent, we do not hereby admit
that we come within the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Troutman Sanders LLP
TROUTMAN SANDERS LLP
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated September 3, 1997
included in Zale Corporation's Form 10-K for the year ended July 31, 1997 and
to all references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
-------------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas
January 26, 1998
<PAGE> 1
EXHIBIT 25.1
Registration No. 333-39473
-----------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF
1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
BANK ONE, N.A. F/K/A BANK ONE, COLUMBUS, N.A.
Not Applicable 31-4148768
(State of Incorporation (I.R.S. Employer
if not a national bank) Identification No.)
100 East Broad Street, Columbus, Ohio 43271-0181
(Address of trustee's principal (Zip Code) executive offices)
Jon Beacham
c/o Bank One Trust Company, NA
100 East Broad Street
Columbus, Ohio 43271-0181
(614) 248-6229
(Name, address and telephone number of agent for service)
ZALE CORPORATION
ZALE DELAWARE, INC.
(Exact name of obligor as specified in its charter)
Delaware 75-0675400
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
901 W. Walnut Hill Lane 75038-1003
Irving, Texas (Zip Code)
(Address of principal executive office)
8 1/2% Senior Notes due 2007
<PAGE> 2
(Title of the Indenture securities)
GENERAL
1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY
TO WHICH IT IS SUBJECT.
Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Cleveland, Cleveland, Ohio
Federal Deposit Insurance Corporation, Washington, D.C.
The Board of Governors of the Federal Reserve System,
Washington, D.C.
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST
POWERS.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee.
16. LIST OF EXHIBITS
LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF
ELIGIBILITY AND QUALIFICATION. (EXHIBITS IDENTIFIED IN PARENTHESES,
ON FILE WITH THE COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS
EXHIBITS HERETO.)
Exhibit 1 - A copy of the Articles of Association of the trustee as now in
effect.
Exhibit 2 - A copy of the Certificate of Authority of the trustee to commence
business, see Exhibit 2 to Form T-1, filed in connection with Form S-3 relating
to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003, Securities and
Exchange Commission File No. 33-50709.
Exhibit 3 - A copy of the Authorization of the trustee to exercise corporate
trust powers, see Exhibit 3 to Form T-1, filed in connection with Form S-3
relating to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003,
Securities and Exchange Commission File No. 33-50709.
Exhibit 4 - A copy of the Bylaws of the trustee as now in effect.
<PAGE> 3
Exhibit 5 - Not applicable.
Exhibit 6 - The consent of the trustee required by Section 321(b) of the Trust
Indenture Act of 1939, as amended.
Exhibit 7 - Report of Condition of the trustee as of the close of business on
June 30, 1997, see Exhibit 7 to Form T-1, filed in connection with Form S-4
relating to National Energy Group, Inc. 10 3/4% Senior Notes due 2006,
Securities and Exchange Commission No. 333-38075.
Exhibit 8 - Not applicable.
Exhibit 9 - Not applicable.
Items 3 through 15 are not answered pursuant to General Instruction B which
requires responses to Item 1, 2 and 16 only, if the obligor is not in default.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, Bank One, NA, a national banking association organized
under the National Banking Act, has duly caused this statement of eligibility
and qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, all in Columbus, Ohio, on January 27, 1998.
Bank One, NA
By: /s/ JON BEACHAM
---------------
Jon Beacham
Authorized Signer
<PAGE> 4
Exhibit 1
BANK ONE, COLUMBUS, NATIONAL ASSOCIATION
ARTICLES OF ASSOCIATION
For the purpose of organizing an association to carry on the business of
banking under the laws of the United States, the following Articles of
Association are entered into:
FIRST. The title of this Association shall be BANK ONE, COLUMBUS,
NATIONAL ASSOCIATION.
SECOND. The main office of the Association shall be in Columbus,
County of Franklin, State of Ohio. The general business of the Association
shall be conducted at its main office and its branches.
THIRD. The Board of Directors of this Association shall consist of
not less than five nor more than twenty-five Directors, the exact number of
Directors within such minimum and maximum limits to be fixed and determined from
time-to- time by resolution of the shareholders at any annual or special meeting
thereof, provided, however, that the Board of Directors, by resolution of a
majority thereof, shall be authorized to increase the number of its members by
not more than two between regular meetings of the shareholders. Each Director,
during the full term of his directorship, shall own, as qualifying shares, the
minimum number of shares of either this Association or of its parent bank
holding company in accordance with the provisions of applicable law. Unless
otherwise provided by the laws of the United States, any vacancy in the Board of
Directors for any reason, including an increase in the number thereof, may be
filled by action of the Board of Directors.
<PAGE> 5
FOURTH. The annual meeting of the shareholders for the election of
Directors and the transaction of whatever other business may be brought before
said meeting shall be held at the main office of this Association or such other
place as the Board of Directors may designate, on the day of each year specified
therefor in the By-Laws, but if no election is held on that day, it may be held
on any subsequent business day according to the provisions of law; and all
elections shall be held according to such lawful regulations as may be
prescribed by the Board of Directors.
FIFTH. The authorized amount of capital stock of this Association
shall be 2,073,750 shares of common stock of the par value of Ten Dollars
($10) each; but said capital stock may be increased or decreased from time-
to-time, in accordance with the provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the
Association shall have the preemptive or preferential right of subscription to
any share of any class of stock of this Association, whether now or hereafter
authorized or to any obligations convertible into stock of this Association,
issued or sold, nor any right of subscription to any thereof other than such, if
any, as the Board of Directors, in its discretion, may from time-to-time
determine and at such price as the Board of Directors may from time-to-time
fix.
This Association, at any time and from time-to-time, may authorize and
issue debt obligations, whether or not subordinated, without the approval of the
shareholders.
SIXTH. The Board of Directors shall appoint one of its members
President of the Association, who shall be Chairman of the Board, unless the
Board appoints another director to be the Chairman. The Board of Directors
shall have the power to appoint one or more Vice Presidents and to appoint a
Secretary and such other officers and employees as may be required to transact
the business of this Association.
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The Board of Directors shall have the power to define the duties of the
officers and employees of this Association; to fix the salaries to be paid to
them; to dismiss them; to require bonds from them and to fix the penalty
thereof; to regulate the manner in which any increase of the capital of this
Association shall be made; to manage and administer the business and affairs of
this Association; to make all By-Laws that it may be lawful for them to make;
and generally to do and perform all acts that it may be legal for a Board of
Directors to do and perform.
SEVENTH. The Board of Directors shall have the power to change the
location of the main office to any other place within the limits of the
City of Columbus, Ohio, without the approval of the shareholders but subject
to the approval of the Comptroller of the Currency; and shall have the power
to establish or change the location of any branch or branches of this
Association to any other location, without the approval of the shareholders
but subject to the approval of the Comptroller of the Currency.
EIGHTH. The corporate existence of this Association shall continue
until terminated in accordance with the laws of the United States.
NINTH. The Board of Directors of this Association, or any three or more
shareholders owning, in the aggregate, not less than 10 percent of the stock of
this Association, may call a special meeting of shareholders at any time.
Unless otherwise provided by the laws of the United States, a notice of the
time, place and purpose of every annual and special meeting of the shareholders
shall be given by first-class mail, postage prepaid, mailed at least ten days
prior to the date of such meeting to each shareholder of record at his address
as shown upon the books of this Association.
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TENTH. Every person who is or was a Director, officer or employee of
the Association or of any other corporation which he served as a Director,
officer or employee at the request of the Association as part of his regularly
assigned duties may be indemnified by the Association in accordance with the
provisions of this paragraph against all liability (including, without
limitation, judgments, fines, penalties and settlements) and all reasonable
expenses (including, without limitation, attorneys' fees and investigative
expenses) that may be incurred or paid by him in connection with any claim,
action, suit or proceeding, whether civil, criminal or administrative (all
referred to hereafter in this paragraphs as "Claims") or in connection with any
appeal relating thereto in which he may become involved as a party or otherwise
or with which he may be threatened by reason of his being or having been a
Director, officer or employee of the Association or such other corporation, or
by reason of any action taken or omitted by him in his capacity as such
Director, officer or employee, whether or not he continues to be such at the
time such liability or expenses are incurred, provided that nothing contained in
this paragraph shall be construed to permit indemnification of any such person
who is adjudged guilty of, or liable for, willful misconduct, gross neglect of
duty or criminal acts, unless, at the time such indemnification is sought, such
indemnification in such instance is permissible under applicable law and
regulations, including published rulings of the Comptroller of the Currency or
other appropriate supervisory or regulatory authority, and provided further that
there shall be no indemnification of directors, officers, or employees against
expenses, penalties, or other payments incurred in an administrative proceeding
or action instituted by an appropriate regulatory agency which proceeding or
action results in a final order assessing civil money penalties or requiring
affirmative action by an individual or individuals in the form of payments to
the Association. Every person who may be indemnified under the provisions of
this paragraph and who has been wholly successful on the merits with respect to
any Claim shall be entitled to indemnification as of right. Except as provided
in the preceding sentence, any indemnification under this paragraph shall be at
the sole discretion of the Board of Directors and shall be made only if the
Board of Directors or the Executive Committee acting by a quorum consisting of
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Directors who are not parties to such Claim shall find or if independent legal
counsel (who may be the regular counsel of the Association) selected by the
Board of Directors or Executive Committee whether or not a disinterested quorum
exists shall render their opinion that in view of all of the circumstances then
surrounding the Claim, such indemnification is equitable and in the best
interests of the Association. Among the circumstances to be taken into
consideration in arriving at such a finding or opinion is the existence or
non-existence of a contract of insurance or indemnity under which the
Association would be wholly or partially reimbursed for such indemnification,
but the existence or non-existence of such insurance is not the sole
circumstance to be considered nor shall it be wholly determinative of whether
such indemnification shall be made. In addition to such finding or opinion, no
indemnification under this paragraph shall be made unless the Board of
Directors or the Executive Committee acting by a quorum consisting of Directors
who are not parties to such Claim shall find or if independent legal counsel
(who may be the regular counsel of the Association) selected by the Board of
Directors or Executive Committee whether or not a disinterested quorum exists
shall render their opinion that the Director, officer or employee acted in good
faith in what he reasonably believed to be the best interests of the
Association or such other corporation and further in the case of any criminal
action or proceeding, that the Director, officer or employee reasonably
believed his conduct to be lawful. Determination of any Claim by judgment
adverse to a Director, officer or employee by settlement with or without Court
approval or conviction upon a plea of guilty or of nolo contendere or its
equivalent shall not create a presumption that a Director, officer or employee
failed to meet the standards of conduct set forth in this paragraph. Expenses
incurred with respect to any Claim may be advanced by the Association prior to
the final disposition thereof upon receipt of an undertaking satisfactory to
the Association by or on behalf of the recipient to repay such amount unless it
is ultimately determined that he is entitled to indemnification under this
paragraph. The rights of indemnification provided in this paragraph shall be
in addition to any rights to which any Director, officer or employee may
otherwise be entitled by contract or as a matter of law.
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<PAGE> 9
Every person who shall act as a Director, officer or employee of this
Association shall be conclusively presumed to be doing so in reliance upon the
right of indemnification provided for in this paragraph.
ELEVENTH. These Articles of Association may be amended at any regular
or special meeting of the shareholders by the affirmative vote of the holders
of a majority of the stock of this Association, unless the vote of the holders
of a greater amount of stock is required by law, and in that case by the vote
of the holders of such greater amount.
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<PAGE> 10
Exhibit 4
BY-LAWS
OF
BANK ONE, COLUMBUS, NATIONAL ASSOCIATION
ARTICLE I
MEETING OF SHAREHOLDERS
SECTION 1.01. ANNUAL MEETING. The regular annual meeting of the Shareholders
of the Bank for the election of Directors and for the transaction of such
business as may properly come before the meeting shall be held at its main
banking house, or other convenient place duly authorized by the Board of
Directors, on the third Monday of January of each year, or on the next
succeeding banking day, if the day fixed falls on a legal holiday. If from any
cause, an election of directors is not made on the day fixed for the regular
meeting of shareholders or, in the event of a legal holiday, on the next
succeeding banking day, the Board of Directors shall order the election to be
held on some subsequent day, as soon thereafter as practicable, according to
the provisions of law; and notice thereof shall be given in the manner herein
provided for the annual meeting. Notice of such annual meeting shall be given
by or under the direction of the Secretary or such other officer as may be
designated by the Chief Executive Officer by first-class mail, postage prepaid,
to all shareholders of record of the Bank at their respective addresses as
shown upon the books of the Bank mailed not less than ten days prior to the
date fixed for such meeting.
SECTION 1.02. SPECIAL MEETINGS. A special meeting of the shareholders of this
Bank may be called at any time by the Board of Directors or by any three or
more shareholders owning, in the aggregate, not less than ten percent of the
stock of this Bank. The notice of any special meeting of the shareholders
called by the Board of Directors, stating the time, place and purpose of the
meeting, shall be given by or under the direction of the Secretary, or such
other officer as is designated by the Chief Executive Officer, by first-class
mail, postage prepaid, to all shareholders of record of the Bank at their
respective addresses as shown upon the books of the Bank, mailed not less than
ten days prior to the date fixed for such meeting.
Any special meeting of shareholders shall be conducted and its
proceedings recorded in the manner prescribed in these By-Laws for annual
meetings of shareholders.
<PAGE> 11
SECTION 1.03. SECRETARY OF SHAREHOLDERS' MEETING. The Board of Directors may
designate a person to be the Secretary of the meetings of shareholders. In the
absence of a presiding officer, as designated in these By-Laws, the Board of
Directors may designate a person to act as the presiding officer. In the event
the Board of Directors fails to designate a person to preside at a meeting of
shareholders and a Secretary of such meeting, the shareholders present or
represented shall elect a person to preside and a person to serve as Secretary
of the meeting.
The Secretary of the meetings of shareholders shall cause the returns
made by the judges and election and other proceedings to be recorded in the
minute book of the Bank. The presiding officer shall notify the
directors-elect of their election and to meet forthwith for the organization of
the new board.
The minutes of the meeting shall be signed by the presiding officer and
the Secretary designated for the meeting.
SECTION 1.04. JUDGES OF ELECTION. The Board of Directors may appoint as many
as three shareholders to be judges of the election, who shall hold and conduct
the same, and who shall, after the election has been held, notify, in writing
over their signatures, the secretary of the shareholders' meeting of the result
thereof and the names of the Directors elected; provided, however, that upon
failure for any reason of any judge or judges of election, so appointed by the
directors, to serve, the presiding officer of the meeting shall appoint other
shareholders or their proxies to fill the vacancies. The judges of election at
the request of the chairman of the meeting, shall act as tellers of any other
vote by ballot taken at such meeting, and shall notify, in writing over their
signatures, the secretary of the Board of Directors of the result thereof.
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<PAGE> 12
SECTION 1.05. PROXIES. In all elections of Directors, each shareholder of
record, who is qualified to vote under the provisions of Federal Law, shall
have the right to vote the number of shares of record in his name for as many
persons as there are Directors to be elected, or to cumulate such shares as
provided by Federal Law. In deciding all other questions at meetings of
shareholders, each shareholder shall be entitled to one vote on each share of
stock of record in his name. Shareholders may vote by proxy duly authorized in
writing. All proxies used at the annual meeting shall be secured for that
meeting only, or any adjournment thereof, and shall be dated, and if not dated
by the shareholder, shall be dated as of the date of receipt thereof. No
officer or employee of this Bank may act as proxy.
SECTION 1.06. QUORUM. Holders of record of a majority of the shares of the
capital stock of the Bank, eligible to be voted, present either in person or by
proxy, shall constitute a quorum for the transaction of business at any meeting
of shareholders, but shareholders present at any meeting and constituting less
than a quorum may, without further notice, adjourn the meeting from time to
time until a quorum is obtained. A majority of the votes cast shall decide
every question or matter submitted to the shareholders at any meeting, unless
otherwise provided by law or by the Articles of Association.
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ARTICLE II
DIRECTORS
SECTION 2.01. MANAGEMENT OF THE BANK. The business of the Bank shall be
managed by the Board of Directors. Each director of the Bank shall be the
beneficial owner of a substantial number of shares of BANC ONE CORPORATION and
shall be employed either in the position of Chief Executive Officer or active
leadership within his or her business, professional or community interest which
shall be located within the geographic area in which the Bank operates, or as
an executive officer of the Bank. A director shall not be eligible for
nomination and re-election as a director of the Bank if such person's executive
or leadership position within his or her business, professional or community
interests which qualifies such person as a director of Bank terminates. The
age of 70 is the mandatory retirement age as a director of the Bank. When a
person's eligibility as director of the Bank terminates, whether because of
change in share ownership, position, residency or age, within 30 days after
such termination, such person shall submit his resignation as a director to be
effective at the pleasure of the Board provided, however, that in no event
shall such person be nominated or elected as a director. Provided, however,
following a person's retirement or resignation as a director because of the age
limitations herein set forth with respect to election or re-election as a
director, such person may, in special or unusual circumstances, and at the
discretion of the Board, be elected by the directors as a Director Emeritus of
the Bank for a limited period of time. A Director Emeritus shall have the
right to participate in board meetings but shall be without the power to vote
and shall be subject to re-election by the Board at its organizational meeting
following the Bank's annual meeting of shareholders.
SECTION 2.02. QUALIFICATIONS. Each director shall have the qualification
prescribed by law. No person elected a director may exercise any of the powers
of his office until he has taken the oath of such office.
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SECTION 2.03. TERM OF OFFICE/VACANCIES. A director shall hold office until
the annual meeting for the year in which his term expires and until his
successor shall be elected and shall qualify, subject, however, to his prior
death, resignation, or removal from office. Whenever any vacancy shall occur
among the directors, the remaining directors shall constitute the directors of
the Bank until such vacancy is filled by the remaining directors, and any
director so appointed shall hold office for the unexpired term of his or her
successor. Notwithstanding the foregoing, each director shall hold office and
serve at the pleasure of the Board.
SECTION 2.04. ORGANIZATION MEETING. The directors elected by the share-
holders shall meet for organization of the new board at the time fixed by the
presiding officer of the annual meeting. If at the time fixed for such meeting
there is no quorum present, the Directors in attendance may adjourn from time
to time until a quorum is obtained. A majority of the number of Directors
elected by the shareholders shall constitute a quorum for the transaction of
business.
SECTION 2.05. REGULAR MEETINGS. The regular meetings of the Board of
Directors shall be held on the third Monday of each calendar month excluding
March and July, which meeting will be held at 4:00 p.m. When any regular
meeting of the Board falls on a holiday, the meeting shall be held on such
other day as the Board may previously designate or should the Board fail to so
designate, on such day as the Chairman of the Board of President may fix.
Whenever a quorum is not present, the directors in attendance shall adjourn the
meeting to a time not later than the date fixed by the Bylaws for the next
succeeding regular meeting of the Board.
SECTION 2.06. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held at the call of the Chairman of the Board or President, or at the
request of two or more Directors. Any special meeting may be held at such
place in Franklin County, Ohio, and at such time as may be fixed in the call.
Written or oral notice shall be given to each Director not later than the day
next preceding the day on which special meeting is to be held, which notice may
be waived in writing.
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<PAGE> 15
The presence of a Director at any meeting of the Board shall be deemed a waiver
of notice thereof by him. Whenever a quorum is not present the Directors in
attendance shall adjourn the special meeting from day to day until a quorum is
obtained.
SECTION 2.07. QUORUM. A majority of the Directors shall constitute a quorum
at any meeting, except when otherwise provided by law; but a lesser number may
adjourn any meeting, from time-to-time, and the meeting may be held, as
adjourned, without further notice. When, however, less than a quorum as herein
defined, but at least one-third and not less than two of the authorized number
of Directors are present at a meeting of the Directors, business of the Bank
may be transacted and matters before the Board approved or disapproved by the
unanimous vote of the Directors present.
SECTION 2.08. COMPENSATION. Each member of the Board of Directors shall
receive such fees for, and transportation expenses incident to, attendance at
Board and Board Committee Meetings and such fees for service as a Director
irrespective of meeting attendance as from time to time are fixed by resolution
of the Board; provided, however, that payment hereunder shall not be made to a
Director for meetings attended and/or Board service which are not for the
Bank's sole benefit and which are concurrent and duplicative with meetings
attended or board service for an affiliate of the Bank for which the Director
receives payment; and provided further, that payment hereunder shall not be
made in the case of any Director in the regular employment of the Bank or of
one of its affiliates.
SECTION 2.09. EXECUTIVE COMMITTEE. There shall be a standing committee of the
Board of Directors known as the Executive Committee which shall possess and
exercise, when the Board is not in session, all powers of the Board that may
lawfully be delegated. The Executive Committee shall also exercise the powers
of the Board of Directors in accordance with the Provisions of the "Employees
Retirement Plan" and the "Agreement and Declaration of Trust" as the same now
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exist or may be amended hereafter. The Executive Committee shall consist of
not fewer than four board members, including the Chairman of the Board and
President of the Bank, one of whom, as hereinafter required by these By-laws,
shall be the Chief Executive Officer. The other members of the Committee shall
be appointed by the Chairman of the Board or by the President, with the
approval of the Board and shall continue as members of the Executive Committee
until their successors are appointed, provided, however, that any member of the
Executive Committee may be removed by the Board upon a majority vote thereof at
any regular or special meeting of the Board. The Chairman or President shall
fill any vacancy in the Committee by the appointment of another Director,
subject to the approval of the Board of Directors. The regular meetings of the
Executive Committee shall be held on a regular basis as scheduled by the Board
of Directors. Special meetings of the Executive Committee shall be held at the
call of the Chairman or President or any two members thereof at such time or
times as may be designated. In the event of the absence of any member or
members of the Committee, the presiding member may appoint a member or members
of the Board to fill the place or places of such absent member or members to
serve during such absence. Not fewer than three members of the Committee must
be present at any meeting of the Executive Committee to constitute a quorum,
provided, however that with regard to any matters on which the Executive
Committee shall vote, a majority of the Committee members present at the
meeting at which a vote is to be taken shall not be officers of the Bank and,
provided further, that if, at any meeting at which the Chairman of the Board
and President are both present, Committee members who are not officers are not
in the majority, then the Chairman of the Board or President, which ever of
such officers is not also the Chief Executive Officer, shall not be eligible to
vote at such meeting and shall not be recognized for purposes of determining if
a quorum is present at such meeting. When neither the Chairman of the Board
nor President are present, the Committee shall appoint a presiding officer.
The Executive Committee shall keep a record of its proceedings and report its
proceedings and the action taken by it to the Board of Directors.
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SECTION 2.10 COMMUNITY REINVESTMENT ACT AND COMPLIANCE POLICY COMMITTEE.
There shall be a standing committee of the Board of Directors known as the
Community Reinvestment Act and Compliance Policy Committee the duties of which
shall be, at least once in each calendar year, to review, develop and recommend
policies and programs related to the Bank's Community Reinvestment Act
Compliance and regulatory compliance with all existing statutes, rules and
regulations affecting the Bank under state and federal law. Such Committee
shall provide and promptly make a full report of such review of current Bank
policies with regard to Community Reinvestment Act and regulatory compliance in
writing to the Board, with recommendations, if any, which may be necessary to
correct any unsatisfactory conditions. Such Committee may, in its discretion,
in fulfilling its duties, utilize the Community Reinvestment Act officers of
the Bank, Banc One Ohio Corporation and Banc One Corporation and may engage
outside Community Reinvestment Act experts, as approved by the Board, to
review, develop and recommend policies and programs as herein required. The
Community Reinvestment Act and regulatory compliance policies and procedures
established and the recommendations made shall be consistent with, and shall
supplement, the Community Reinvestment Act and regulatory compliance programs,
policies and procedures of Banc One Corporation and Banc One Ohio Corporation.
The Community Reinvestment Act and Compliance Policy Committee shall consist of
not fewer than four board members, one of whom shall be the Chief Executive
Officer and a majority of whom are not officers of the Bank. Not fewer than
three members of the Committee, a majority of whom are not officers of the
Bank, must be present to constitute a quorum. The Chairman of the Board or
President of the Bank, whichever is not the Chief Executive Officer, shall be
an ex officio member of the Community Reinvestment Act and Compliance Policy
Committee. The Community Reinvestment Act and Compliance Policy Committee,
whose chairman shall be appointed by the Board, shall keep a record of its
proceedings and report its proceedings and the action taken by it to the Board
of Directors.
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SECTION 2.11. TRUST COMMITTEES. There shall be two standing Committees known
as the Trust Management Committee and the Trust Examination Committee appointed
as hereinafter provided.
SECTION 2.12. OTHER COMMITTEES. The Board of Directors may appoint such
special committees from time to time as are in its judgment necessary in the
interest of the Bank.
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ARTICLE III
OFFICERS, MANAGEMENT STAFF AND EMPLOYEES
SECTION 3.01. OFFICERS AND MANAGEMENT STAFF.
(a) The officers of the Bank shall include a President, Secretary and
Security Officer and may include a Chairman of the Board, one or
more Vice Chairmen, one or more Vice Presidents (which may include
one or more Executive Vice Presidents and/or Senior Vice
Presidents) and one or more Assistant Secretaries, all of whom
shall be elected by the Board. All other officers may be elected
by the Board or appointed in writing by the Chief Executive
Officer. The salaries of all officers elected by the Board shall
be fixed by the Board. The Board from time-to-time shall
designate the President or Chairman of the Board to serve as the
Bank's Chief Executive Officer.
(b) The Chairman of the Board, if any, and the President shall be
elected by the Board from their own number. The President and
Chairman of the Board shall be re-elected by the Board annually at
the organizational meeting of the Board of Directors following the
Annual Meeting of Shareholders. Such officers as the Board shall
elect from their own number shall hold office from the date of
their election as officers until the organization meeting of the
Board of Directors following the next Annual Meeting of
Shareholders, provided, however, that such officers may be
relieved of their duties at any time by action of the Board in
which event all the powers incident to their office shall
immediately terminate.
(c) Except as provided in the case of the elected officers who are
members of the Board, all officers, whether elected or appointed,
shall hold office at the pleasure of the Board. Except as
otherwise limited by law or these By-laws, the Board assigns to
Chief Executive Officer and/or his
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<PAGE> 20
designees the authority to appoint and dismiss any elected or
appointed officer or other member of the Bank's management staff
and other employees of the Bank, as the person in charge of and
responsible for any branch office, department, section, operation,
function, assignment or duty in the Bank.
(d) The management staff of the Bank shall include officers elected by
the Board, officers appointed by the Chief Executive Officer, and
such other persons in the employment of the Bank who, pursuant to
written appointment and authorization by a duly authorized officer
of the Bank, perform management functions and have management
responsibilities. Any two or more offices may be held by the same
person except that no person shall hold the office of Chairman of
the Board and/or President and at the same time also hold the
office of Secretary.
(e) The Chief Executive Officer of the Bank and any other officer of
the Bank, to the extent that such officer is authorized in writing
by the Chief Executive Officer, may appoint persons other than
officers who are in the employment of the Bank to serve in
management positions and in connection therewith, the appointing
officer may assign such title, salary, responsibilities and
functions as are deemed appropriate by him, provided, however,
that nothing contained herein shall be construed as placing any
limitation on the authority of the Chief Executive Officer as
provided in this and other sections of these By-Laws.
SECTION 3.02. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the
Bank shall have general and active management of the business of the Bank and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. Except as otherwise prescribed or limited by these By-Laws, the
Chief Executive Officer shall have full right, authority and power to control
all personnel, including elected and appointed officers, of the Bank, to employ
or direct the
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<PAGE> 21
employment of such personnel and officers as he may deem necessary, including
the fixing of salaries and the dismissal of them at pleasure, and to define and
prescribe the duties and responsibility of all Officers of the Bank, subject to
such further limitations and directions as he may from time-to-time deem
proper. The Chief Executive Officer shall perform all duties incident to his
office and such other and further duties, as may, from time-to-time, be
required of him by the Board of Directors or the shareholders. The
specification of authority in these By-Laws wherever and to whomever granted
shall not be construed to limit in any manner the general powers of delegation
granted to the Chief Executive Officer in conducting the business of the Bank.
The Chief Executive Officer or, in his absence, the Chairman of the Board or
President of the Bank, as designated by the Chief Executive Officer, shall
preside at all meetings of shareholders and meetings of the Board. In the
absence of the Chief Executive Officer, such officer as is designated by the
Chief Executive Officer shall be vested with all the powers and perform all the
duties of the Chief Executive Officer as defined by these By-Laws. When
designating an officer to serve in his absence, the Chief Executive Officer
shall select an officer who is a member of the Board of Directors whenever such
officer is available.
SECTION 3.03. POWERS OF OFFICERS AND MANAGEMENT STAFF. The Chief Executive
Officer, the Chairman of the Board, the President, and those officers so
designated and authorized by the Chief Executive Officer are authorized for an
on behalf of the Bank, and to the extent permitted by law, to make loans and
discounts; to purchase or acquire drafts, notes, stock, bonds, and other
securities for investment of funds held by the Bank; to execute and purchase
acceptances; to appoint, empower and direct all necessary agents and attorneys;
to sign and give any notice required to be given; to demand payment and/or to
declare due for any default any debt or obligation due or payable to the Bank
upon demand or authorized to be declared due; to foreclose any mortgages, to
exercise any option, privilege or election to forfeit, terminate, extend or
renew any lease; to authorize and direct any proceedings for the collection of
any money or for the enforcement
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of any right or obligation; to adjust, settle and compromise all claims of
every kind and description in favor of or against the Bank, and to give
receipts, releases and discharges therefor; to borrow money and in connection
therewith to make, execute and deliver notes, bonds or other evidences of
indebtedness; to pledge or hypothe- cate any securities or any stocks, bonds,
notes or any property real or personal held or owned by the Bank, or to
rediscount any notes or other obligations held or owned by the Bank, to employ
or direct the employment of all personnel, including elected and appointed
officers, and the dismissal of them at pleasure, and in furtherance of and in
addition to the powers hereinabove set forth to do all such acts and to take
all such proceedings as in his judgment are necessary and incidental to the
operation of the Bank.
Other persons in the employment of the Bank, including but not limited to
officers and other members of the management staff, may be authorized by the
Chief Executive Officer, or by an officer so designated and authorized by the
chief Executive Officer, to perform the powers set forth above, subject,
however, to such limitations and conditions as are set forth in the
authorization given to such persons.
SECTION 3.04. SECRETARY. The Secretary or such other officers as may be
designated by the Chief Executive Officer shall have supervision and control of
the records of the Bank and, subject to the direction of the Chief Executive
Officer, shall undertake other duties and functions usually performed by a
corporate secretary. Other officers may be designated by the Chief Executive
Officer or the Board of Directors as Assistant Secretary to perform the duties
of the Secretary.
SECTION 3.05. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman
of the Board, President, any officer being a member of the Bank's management
staff who is also a person in charge of and responsible for any department
within the Bank and any other officer to the extent such officer is so
designated and authorized by the Chief Executive Officer, the Chairman of the
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Board, the President, or any other officer who is a member of the Bank's
management staff who is in charge of and responsible for any department within
the Bank, are hereby authorized on behalf of the Bank to sell, assign, lease,
mortgage, transfer, deliver and convey any real or personal property now or
hereafter owned by or standing in the name of the Bank or its nominee, or held
by this Bank as collateral security, and to execute and deliver such deeds,
contracts, leases, assignments, bills of sale, transfers or other papers or
documents as may be appropriate in the circumstances; to execute any loan
agreement, security agreement, commitment letters and financing statements and
other documents on behalf of the Bank as a lender; to execute purchase orders,
documents and agreements entered into by the Bank in the ordinary course of
business, relating to purchase, sale, exchange or lease of services, tangible
personal property, materials and equipment for the use of the Bank; to execute
powers of attorney to perform specific or general functions in the name of or
on behalf of the Bank; to execute promissory notes or other instruments
evidencing debt of the Bank; to execute instruments pledging or releasing
securities for public funds, documents submitting public fund bids on behalf of
the Bank and public fund contracts; to purchase and acquire any real or
personal property including loan portfolios and to execute and deliver such
agreements, contracts or other papers or documents as may be appropriate in the
circumstances; to execute any indemnity and fidelity bonds, proxies or other
papers or documents of like or different character necessary, desirable or
incidental to the conduct of its banking business; to execute and deliver
settlement agreements or other papers or documents as may be appropriate in
connection with a dismissal authorized by Section 3.01(c) of these By-laws; to
execute agreements, instruments, documents, contracts or other papers of like
or difference character necessary, desirable or incidental to the conduct of
its banking business; and to execute and deliver partial releases from and
discharges or assignments of mortgages, financing statements and assignments or
surrender of insurance policies, now or hereafter held by this Bank.
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The Chief Executive Officer, Chairman of the Board, President, any
officer being a member of the Bank's management staff who is also a person in
charge of and responsible for any department within the Bank, and any other
officer of the Bank so designated and authorized by the Chief Executive
Officer, Chairman of the Board, President or any officer who is a member of the
Bank's management staff who is in charge of and responsible for any department
within the Bank are authorized for and on behalf of the Bank to sign and issue
checks, drafts, and certificates of deposit; to sign and endorse bills of
exchange, to sign and countersign foreign and domestic letters of credit, to
receive and receipt for payments of principal, interest, dividends, rents, fees
and payments of every kind and description paid to the Bank, to sign receipts
for property acquired by or entrusted to the Bank, to guarantee the genuineness
of signatures on assignments of stocks, bonds or other securities, to sign
certifications of checks, to endorse and deliver checks, drafts, warrants,
bills, notes, certificates of deposit and acceptances in all business
transactions of the Bank.
Other persons in the employment of the Bank and of its subsidiaries,
including but not limited to officers and other members of the management
staff, may be authorized by the Chief Executive Officer, Chairman of the Board,
President or by an officer so designated by the Chief Executive Officer,
Chairman of the Board, or President to perform the acts and to execute the
documents set forth above, subject, however, to such limitations and conditions
as are contained in the authorization given to such person.
SECTION 3.06. PERFORMANCE BOND. All officers and employees of the Bank shall
be bonded for the honest and faithful performance of their duties for such
amount as may be prescribed by the Board of Directors.
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ARTICLE IV
TRUST DEPARTMENT
SECTION 4.01. TRUST DEPARTMENT. Pursuant to the fiduciary powers granted to
this Bank under the provisions of Federal Law and Regulations of the
Comptroller of the Currency, there shall be maintained a separate Trust
Department of the Bank, which shall be operated in the manner specified herein.
SECTION 4.02. TRUST MANAGEMENT COMMITTEE. There shall be a standing Committee
known as the Trust Management Committee, consisting of at least five members, a
majority of whom shall not be officers of the Bank. The Committee shall
consist of the Chairman of the Board who shall be Chairman of the Com- mittee,
the President, and at least three other Directors appointed by the Board of
Directors and who shall continue as members of the Committee until their
successors are appointed. Any vacancy in the Trust Management Committee may be
filled by the Board at any regular or special meeting. In the event of the
absence of any member or members, such Committee may, in its discretion,
appoint members of the Board to fill the place of such absent members to serve
during such absence. Three members of the Committee shall constitute a quorum.
Any member of the Committee may be removed by the Board by a majority vote at
any regular or special meeting of the Board. The Committee shall meet at such
times as it may determine or at the call of the Chairman, or President or any
two members thereof.
The Trust Management Committee, under the general direction of the Board
of Directors, shall supervise the policy of the Trust Department which shall be
formulated and executed in accordance with Law, Regulations of the Comptroller
of the Currency, and sound fiduciary principles.
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SECTION 4.03. TRUST EXAMINATION COMMITTEE. There shall be a standing
Committee known as the Trust Examination Committee, consisting of three
directors appointed by the Board of Directors and who shall continue as members
of the committee until their successors are appointed. Such members shall not
be active officers of the Bank. Two members of the Committee shall constitute
a quorum. Any member of the Committee may be removed by the Board by a
majority vote at any regular or special meeting of the Board. The Committee
shall meet at such times as it may determine or at the call of two members
thereof.
This Committee shall, at least once during each calendar year and within
fifteen months of the last such audit, or at such other time(s) as may be
required by Regulations of the Comptroller of the Currency, make suitable
audits of the Trust Department or cause suitable audits to be made by auditors
responsible only to the Board of Directors, and at such time shall ascertain
whether the Department has been administered in accordance with Law,
Regulations of the Comptroller of the Currency and sound fiduciary principles.
The Committee shall promptly make a full report of such audits in writing to
the Board of Directors of the Bank, together with a recommendation as to what
action, if any, may be necessary to correct any unsatisfactory condition. A
report of the audits together with the action taken thereon shall be noted in
the Minutes of the Board of Directors and such report shall be a part of the
records of this Bank.
SECTION 4.04. MANAGEMENT. The Trust Department shall be under the management
and supervision of an officer of the Bank or of the trust affiliate of the Bank
designated by and subject to the advice and direction of the Chief Executive
Officer. Such officer having supervisory responsibility over the Trust
Department shall do or cause to be done all things necessary or proper in
carrying on the business of the Trust Department in accordance with provisions
of law and applicable regulations.
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SECTION 4.05. HOLDING OF PROPERTY. Property held by the Trust Department may
be carried in the name of the Bank in its fiduciary capacity, in the name of
Bank, or in the name of a nominee or nominees.
SECTION 4.06. TRUST INVESTMENTS. Funds held by the Bank in a fiduciary
capacity awaiting investment or distribution shall not be held uninvested or
undistributed any longer than is reasonable for the proper management of the
account and shall be invested in accordance with the instrument establishing a
fiduciary relationship and local law. Where such instrument does not specify
the character or class of investments to be made and does not vest in the Bank
any discretion in the matter, funds held pursuant to such instrument shall be
invested in any investment which corporate fiduciaries may invest under local
law.
The investments of each account in the Trust Department shall be kept
separate from the assets of the Bank, and shall be placed in the joint custody
or control of not less than two of the officers or employees of the Bank or of
the trust affiliate of the Bank designated for the purpose by the Trust
Management Committee.
SECTION 4.07. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman
of the Board, President, any officer of the Trust Department, and such other
officers of the trust affiliate of the Bank as are specifically designated and
authorized by the Chief Executive Officer, the President, or the officer in
charge of the Trust Department, are hereby authorized, on behalf of this Bank,
to sell, assign, lease, mortgage, transfer, deliver and convey any real
property or personal property and to purchase and acquire any real or personal
property and to execute and deliver such agreements, contracts, or other papers
and documents as may be appropriate in the circumstances for property now or
hereafter owned by or standing in the name of this Bank, or its nominee, in any
fiduciary capacity, or in the name of any principal for whom this Bank may now
or hereafter be acting under a power of attorney, or as agent and to execute
and deliver partial releases from
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any discharges or assignments or mortgages and assignments or surrender of
insurance policies, to execute and deliver deeds, contracts, leases,
assignments, bills of sale, transfers or such other papers or documents as may
be appropriate in the circumstances for property now or hereafter held by this
Bank in any fiduciary capacity or owned by any principal for whom this Bank may
now or hereafter be acting under a power of attorney or as agent; to execute
and deliver settlement agreements or other papers or documents as may be
appropriate in connection with a dismissal authorized by Section 3.01(c) of
these By-laws; provided that the signature of any such person shall be attested
in each case by any officer of the Trust Department or by any other person who
is specifically authorized by the Chief Executive Officer, the President or the
officer in charge of the Trust Department.
The Chief Executive Officer, Chairman of the Board, President, any
officer of the Trust Department and such other officers of the trust affiliate
of the Bank as are specifically designated and authorized by the Chief
Executive Officer, the President, or the officer in charge of the Trust
Department, or any other person or corporation as is specifically authorized by
the Chief Executive Officer, the President or the officer in charge of the
Trust Department, are hereby authorized on behalf of this Bank, to sign any and
all pleadings and papers in probate and other court proceedings, to execute any
indemnity and fidelity bonds, trust agreements, proxies or other papers or
documents of like or different character necessary, desirable or incidental to
the appointment of the Bank in any fiduciary capacity and the conduct of its
business in any fiduciary capacity; also to foreclose any mortgage, to execute
and deliver receipts for payments of principal, interest, dividends, rents,
fees and payments of every kind and description paid to the Bank; to sign
receipts for property acquired or entrusted to the Bank; also to sign stock or
bond certificates on behalf of this Bank in any fiduciary capacity and on
behalf of this Bank as transfer agent or registrar; to guarantee the
genuineness of signatures on assignments of stocks, bonds or other securities,
and to authenticate bonds,
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debentures, land or lease trust certificates or other forms of security issued
pursuant to any indenture under which this Bank now or hereafter is acting as
Trustee. Any such person, as well as such other persons as are specifically
authorized by the Chief Executive Officer or the officer in charge of the Trust
Department, may sign checks, drafts and orders for the payment of money
executed by the Trust Department in the course of its business.
SECTION 4.08. VOTING OF STOCK. The Chairman of the Board, President, any
officer of the Trust Department, any officer of the trust affiliate of the Bank
and such other persons as may be specifically authorized by Resolution of the
Trust Management Committee or the Board of Directors, may vote shares of stock
of a corporation of record on the books of the issuing company in the name of
the Bank or in the name of the Bank as fiduciary, or may grant proxies for the
voting of such stock of the granting if same is permitted by the instrument
under which the Bank is acting in a fiduciary capacity, or by the law
applicable to such fiduciary account. In the case of shares of stock which are
held by a nominee of the Bank, such shares may be voted by such person(s)
authorized by such nominee.
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ARTICLE V
STOCKS AND STOCK CERTIFICATES
SECTION 5.01. STOCK CERTIFICATES. The shares of stock of the Bank shall be
evidenced by certificates which shall bear the signature of the Chairman of the
Board, the President, or a Vice President (which signature may be engraved,
printed or impressed), and shall be signed manually by the Secretary, or any
other officer appointed by the Chief Executive Officer for that purpose.
In case any such officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such before such
certificate is issued, it may be issued by the Bank with the same effect as if
such officer had not ceased to be such at the time of its issue. Each such
certificate shall bear the corporate seal of the Bank, shall recite on its fact
that the stock represented thereby is transferable only upon the books of the
Bank properly endorsed and shall recite such other information as is required
by law and deemed appropriate by the Board. The corporate seal may be
facsimile engraved or printed.
SECTION 5.02. STOCK ISSUE AND TRANSFER. The shares of stock of the Bank shall
be transferable only upon the stock transfer books of the Bank and except as
hereinafter provided, no transfer shall be made or new certificates issued
except upon the surrender for cancellation of the certificate or certificates
previously issued therefor. In the case of the loss, theft, or destruction of
any certificate, a new certificate may be issued in place of such certificate
upon the furnishing of any affidavit setting forth the circumstances of such
loss, theft, or destruction and indemnity satisfactory to the Chairman of the
Board, the President, or a Vice President. The Board of Directors, or the
Chief Executive Officer, may authorize the issuance of a new certificate
therefor without the furnishing of indemnity. Stock Transfer Books, in which
all transfers of stock shall be recorded, shall be provided.
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The stock transfer books may be closed for a reasonable period and under
such conditions as the Board of Directors may at any time determine for any
meeting of shareholders, the payment of dividends or any other lawful purpose.
In lieu of closing the transfer books, the Board may, in its discretion, fix a
record date and hour constituting a reasonable period prior to the day
designated for the holding of any meeting of the shareholders or the day
appointed for the payment of any dividend or for any other purpose at the time
as of which shareholders entitled to notice of and to vote at any such meeting
or to receive such dividend or to be treated as shareholders for such other
purpose shall be determined, and only shareholders of record at such time shall
be entitled to notice of or to vote at such meeting or to receive such
dividends or to be treated as shareholders for such other purpose.
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ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.01. SEAL. The impression made below is an impression of the seal
adopted by the Board of Directors of BANK ONE, NA f/k/a Bank One, Columbus, NA.
The Seal may be affixed by any officer of the Bank to any document executed by
an authorized officer on behalf of the Bank, and any officer may certify any
act, proceedings, record, instrument or authority of the Bank.
SECTION 6.02. BANKING HOURS. Subject to ratification by the Executive
Committee, the Bank and each of its Branches shall be open for business on such
days and during such hours as the Chief Executive Officer of the Bank shall,
from time to time, prescribe.
SECTION 6.03. MINUTE BOOK. The organization papers of this Bank, the Articles
of Association, the returns of the judges of elections, the By-Laws and any
amendments thereto, the proceedings of all regular and special meetings of the
shareholders and of the Board of Directors, and reports of the committees of
the Board of Directors shall be recorded in the minute book of the Bank. The
minutes of each such meeting shall be signed by the presiding Officer and
attested by the secretary of the meetings.
SECTION 6.04. AMENDMENT OF BY-LAWS. These By-Laws may be amended by vote of a
majority of the Directors.
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EXHIBIT 6
Securities and Exchange Commission
Washington, D.C. 20549
CONSENT
The undersigned, designated to act as Trustee under the Indenture for Zale
Corporation, Zale Delaware, Inc. described in the attached Statement of
Eligibility and Qualification, does hereby consent that reports of examinations
by Federal, State, Territorial, or District Authorities may be furnished by
such authorities to the Commission upon the request of the Commission.
This Consent is given pursuant to the provision of Section 321(b) of the Trust
Indenture Act of 1939, as amended.
Bank One, NA
Dated: January 27, 1998 By: /s/ JON BEACHAM
---------------------------
Jon Beacham
Authorized Signer
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