-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AL0iPQoGf7aOmPmrY7MVMi2XYV8omarSCAu8Ah5/iGeVyENKYqpSEby9lD+S6LrC xPZRJoVbZW71/8/q9/5qWA== 0001104659-09-037434.txt : 20090609 0001104659-09-037434.hdr.sgml : 20090609 20090609162551 ACCESSION NUMBER: 0001104659-09-037434 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20090430 FILED AS OF DATE: 20090609 DATE AS OF CHANGE: 20090609 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZALE CORP CENTRAL INDEX KEY: 0000109156 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-JEWELRY STORES [5944] IRS NUMBER: 750675400 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04129 FILM NUMBER: 09882327 BUSINESS ADDRESS: STREET 1: 901 W WALNUT HILL LN STREET 2: MS 6B-3 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 9725804000 MAIL ADDRESS: STREET 1: 901 WEST WALNUT HILL LANE STREET 2: MAIL STOP 6B-3 CITY: IRVING STATE: TX ZIP: 75038-1003 FORMER COMPANY: FORMER CONFORMED NAME: ZALE JEWELRY CO INC DATE OF NAME CHANGE: 19710510 10-Q 1 a09-14859_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2009

Commission File Number 1-04129

Zale Corporation

A Delaware Corporation

IRS Employer Identification No. 75-0675400

901 W. Walnut Hill Lane

Irving, Texas 75038-1003

(972) 580-4000

Zale Corporation (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Zale Corporation was not required to submit electronically and post on the Company’s website Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months due to the Rule not being applicable to the Company for the current and previous periods.

Zale Corporation is a large accelerated filer.

Zale Corporation is not a shell company.

As of June 1, 2009, 31,983,913 shares of Zale Corporation’s Common Stock, par value $.01 per share, were outstanding.

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ZALE CORPORATION AND SUBSIDIARIES

Index

		Page
Part I.	Financial Information	1

Item 1.	Financial Statements (Unaudited):	1

	Consolidated Statements of Operations	1

	Consolidated Balance Sheets	2

	Consolidated Statements of Cash Flows	3

	Notes to Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15

Item 4.	Controls and Procedures	16

Part II.	Other Information	16

Item 1.	Legal Proceedings	16

Item 1A.	Risk Factors	16

Item 5.	Other Information	19

Item 6.	Exhibits	20

Principal Financial Officer’s Signature		21

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2009			2008			2009			2008

Revenues	$	379,110		$	476,736		$	1,422,630		$	1,681,819
Cost and expenses:
Cost of sales	189,075			250,196			757,209			849,082
Selling, general and administrative	209,509			231,660			713,003			752,777
Cost of insurance operations	1,804			1,875			4,960			5,087
Depreciation and amortization	14,453			14,887			44,498			45,117
Impairment charges	—			—			13,221			1,632
Operating (loss) earnings	(35,731		)	(21,882		)	(110,261		)	28,124
Interest expense	1,929			1,769			8,633			9,590
(Loss) earnings before income taxes	(37,660		)	(23,651		)	(118,894		)	18,534
Income tax (benefit) expense	(14,465		)	(6,254		)	(26,776		)	9,934
(Loss) earnings from continuing operations	(23,195		)	(17,397		)	(92,118		)	8,600
Earnings from discontinued operations, net of taxes	—			604			—			7,084
Net (loss) earnings	$	(23,195	)	$	(16,793	)	$	(92,118	)	$	15,684

Basic net (loss) earnings per common share:
(Loss) earnings from continuing operations	$	(0.73	)	$	(0.42	)	$	(2.89	)	$	0.19
Earnings from discontinued operations	$	—		$	0.02		$	—		$	0.16
Net (loss) earnings per share	$	(0.73	)	$	(0.40	)	$	(2.89	)	$	0.35

Diluted net (loss) earnings per common share:
(Loss) earnings from continuing operations	$	(0.73	)	$	(0.42	)	$	(2.89	)	$	0.19
Earnings from discontinued operations	$	—		$	0.02		$	—		$	0.16
Net (loss) earnings per share	$	(0.73	)	$	(0.40	)	$	(2.89	)	$	0.35

Weighted average number of common shares outstanding:
Basic	31,972			41,568			31,879			45,319
Diluted	31,972			41,568			31,879			45,414

See notes to consolidated financial statements.

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ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	April 30, 2009			July 31, 2008			April 30, 2008
ASSETS
Current Assets:
Cash and cash equivalents	$	23,950		$	65,579		$	67,648
Merchandise inventories	758,994			779,565			866,961
Other current assets	83,260			125,446			91,917
Total current assets	866,204			970,590			1,026,526

Property and equipment	708,632			734,760			713,513
Less accumulated depreciation and amortization	(447,894		)	(436,873		)	(427,445		)
Net property and equipment	260,738			297,887			286,068

Goodwill	87,454			103,685			105,011
Other assets	28,289			35,946			35,953
Deferred tax asset	54,642			14,514			3,963
Total assets	$	1,297,327		$	1,422,622		$	1,457,521

LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities	$	220,228		$	262,275		$	287,236
Deferred tax liability	71,915			65,956			56,521
Total current liabilities	292,143			328,231			343,757

Long-term debt	332,800			326,306			269,106
Other liabilities	188,916			169,285			159,962

Contingencies (see Note 10)

Stockholders’ Investment:
Common stock	488			488			488
Additional paid-in capital	147,271			144,456			143,376
Accumulated other comprehensive income	18,217			51,036			53,356
Accumulated earnings	787,395			879,514			883,795
	953,371			1,075,494			1,081,015
Treasury stock	(469,903		)	(476,694		)	(396,319		)
Total stockholders’ investment	483,468			598,800			684,696
Total liabilities and stockholders’ investment	$	1,297,327		$	1,422,622		$	1,457,521

See notes to consolidated financial statements.

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ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	April 30,
	2009			2008
Cash Flows From Operating Activities:
Net (loss) earnings	$	(92,118	)	$	15,684
Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:
Depreciation and amortization	45,015			45,625
Deferred taxes	(34,783		)	(19,254		)
Loss on disposition of property and equipment	2,965			2,346
Impairment charges	13,221			1,632
Stock-based compensation	4,546			3,249
Earnings from discontinued operations	—			(7,084		)
Changes in assets and liabilities:
Merchandise inventories	5,212			(14,421		)
Other current assets	41,049			26,482
Other assets	2,894			1,628
Accounts payable and accrued liabilities	(39,037		)	(20,285		)
Other liabilities	22,929			50,873
Net cash (used in) provided by operating activities	(28,107		)	86,475

Cash Flows From Investing Activities:
Payments for property and equipment	(25,136		)	(56,234		)
Purchase of available-for-sale investments	(19,112		)	(7,483		)
Proceeds from sales of available-for-sale investments	23,286			6,037
Net cash used in investing activities	(20,962		)	(57,680		)

Cash Flows From Financing Activities:
Borrowings under revolving credit agreement	4,058,600			2,680,950
Payments on revolving credit agreement	(4,052,105		)	(2,639,150		)
Proceeds from exercise of stock options	6,211			1,984
Excess tax benefit on stock options exercised	158			53
Purchases of treasury stock	—			(246,319		)
Net cash provided by (used in) financing activities	12,864			(202,482		)

Cash Flows from Discontinued Operations:
Net cash used in operating activities of discontinued operations	—			(21,593		)
Net cash provided by investing activities of discontinued operations	—			225,052
Net cash provided by discontinued operations	—			203,459

Effect of exchange rate changes on cash	(5,424		)	233

Net change in cash and cash equivalents	(41,629		)	30,005
Cash and cash equivalents at beginning of period	65,579			37,643
Cash and cash equivalents at end of period	$	23,950		$	67,648

See notes to consolidated financial statements.

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ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

References to the “Company,” “we,” “us,” and “our” in this Form 10-Q are references to Zale Corporation and its subsidiaries. We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry in North America. As of April 30, 2009, we operated 1,356 specialty retail jewelry stores and 694 kiosk locations primarily in shopping malls throughout the United States of America, Canada and Puerto Rico. We report our operations under three segments: Fine Jewelry, Kiosk Jewelry and All Other.

Our Fine Jewelry segment operates under the following names: Zales Jewelers®; Zales Outlet®; Gordon’s Jewelers®; Peoples JewellersÒ and Mappins Jewellers®; and our e-commerce businesses include zales.com and gordonsjewelers.com.

The Kiosk Jewelry segment operates primarily under the names Piercing Pagoda®; Plumb Gold™; and Silver and Gold Connection®.

The All Other segment includes insurance and reinsurance operations.

We consolidate substantially all of our U.S. operations into Zale Delaware, Inc. (“ZDel”), a wholly owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries, including three that are engaged primarily in providing credit insurance to our credit customers. We consolidate our Canadian retail operations into Zale International, Inc., which is a wholly owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated. The consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’s opinion, all material adjustments (consisting of normal recurring accruals and adjustments) and disclosures necessary for a fair presentation have been made. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Form 10-K for the fiscal year ended July 31, 2008.

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform with fiscal year 2009 classifications.

2. FAIR VALUE MEASUREMENTS

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements, but does not change existing guidance as to whether or not an instrument is carried at fair value. For financial assets and liabilities, SFAS 157 is effective for fiscal years beginning after November 15, 2007 and for non-financial assets and liabilities, SFAS 157 is effective for fiscal years beginning after November 15, 2008. The Company adopted SFAS 157 on August 1, 2008, as required. The adoption of SFAS 157 did not have a material impact on our consolidated financial statements.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair values. These tiers include:

Level 1	-	Quoted prices for identical instruments in active markets;
Level 2	-	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
Level 3	-	Instruments whose significant inputs are unobservable.

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As of April 30, 2009, our insurance subsidiaries held investments of $23.6 million in debt and equity securities that are required to be measured at fair value on a recurring basis. The fair values of these investments are based on quoted market prices in an active market, a Level 1 measurement in the fair value hierarchy.

3. GOODWILL

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we test goodwill for impairment annually, at the end of our second quarter, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting unit’s net assets below its carrying value. We calculate estimated fair value using the present value of future cash flows expected to be generated using weighted average cost of capital, terminal values and updated financial projections. As a result of the decline in the overall retail environment and the significant decline in our market capitalization through the Holiday season, we concluded that an interim impairment test was necessary and performed the test as of December 31, 2008. Based on the test results, we fully impaired goodwill totaling $5.0 million related to a reporting unit in the Fine Jewelry segment. The charge is included in impairment charges in the consolidated statements of operations. No impairments were recorded for the $68.1 million of goodwill related to the Peoples Jewellers acquisition and the $19.4 million of goodwill related to the Piercing Pagoda acquisition. The fair value of Peoples Jewellers and Piercing Pagoda would have to decline by more than 51 percent and 27 percent, respectively, to be considered for potential impairment. The key assumptions used to determine the fair value of our reporting units include (1) cash flow projections for five years, (2) terminal year growth rates of two percent, and (3) discount rates of 15 percent to 20 percent based on our weighted average cost of capital adjusted for risks associated with the operations of each reporting unit. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with estimates and assumptions used to calculate fair value, we may be required to recognize additional goodwill impairments.

During the second and third quarter of fiscal 2009, our market capitalization was below carrying value. While we considered the market capitalization decline in our evaluation of fair value, we determined it did not impact the overall goodwill impairment analysis as we believe the decline to be primarily attributable to negative market conditions as a result of the credit crisis, indications of a general recession and the deterioration in the retail environment.

The changes in the carrying amount of goodwill are as follows (in thousands):

	Nine Months Ended			Nine Months Ended
	April 30,			April 30,
	2009			2008
Goodwill, beginning of period	$	103,685		$	100,740
Impairment charges	(5,020		)	—
Foreign currency adjustments	(11,211		)	4,271
Goodwill, end of period	$	87,454		$	105,011

4. EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted net earnings per share reflect the dilutive effect of the assumed exercise of stock options and vesting of restricted share awards. For the calculation of diluted net earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted share awards determined using the treasury stock method. We had approximately 2.9 million and 2.7 million stock options outstanding for the nine month periods ended April 30, 2009 and 2008, respectively, which were not included in the diluted net earnings (loss) per share calculation because the effect would have been antidilutive.

During the nine month period ended April 30, 2009, we incurred a net loss of $92.1 million. A net loss causes all outstanding stock options and restricted share awards to be antidilutive (that is, the potential dilution would decrease the loss per share). As a result, the basic and dilutive losses per common share are the same.

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5. COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income represents the change in equity during a period from transactions and other events, except those resulting from investments by and distributions to stockholders. Comprehensive loss was $18.7 million and $124.9 million for the three months and nine months ended April 30, 2009, respectively. Comprehensive loss was $19.5 million and comprehensive income was $23.1 million for the three months and nine months ended April 30, 2008, respectively. The following table gives further detail regarding changes in the composition of accumulated other comprehensive income (in thousands):

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2009			2008			2009			2008
Beginning of period	$	13,684		$	56,093		$	51,036		$	45,939
Cumulative translation adjustment	4,738			(2,507		)	(32,741		)	6,272
Unrealized gain on securities, net	(205		)	(230		)	(78		)	1,145
End of period	$	18,217		$	53,356		$	18,217		$	53,356

6. DISPOSITION OF BAILEY BANKS & BIDDLE

In September 2007, we entered into a definitive agreement to sell substantially all of the assets and certain liabilities related to the Bailey Banks & Biddle brand. The assets consisted primarily of inventory and property and equipment totaling approximately $190 million and $28 million, respectively. The sale was completed on November 9, 2007 and resulted in a pre-tax gain of approximately $14 million, which includes a $24.7 million reduction in the last-in, first-out provision resulting from the liquidation of the Bailey Banks & Biddle inventory. The decision to sell was a result of our strategy to focus on our moderately priced business and our continued focus on maximizing return on investments. We have reported the results of operations of Bailey Banks & Biddle as discontinued operations, which consist of the following (in thousands):

	Three Months Ended		Nine Months Ended
	April 30,		April 30,
	2008		2008
Revenues	$	—	$	56,585

Loss before income taxes	$	—	$	(2,604	)
Income tax benefit	—		1,016
Loss from discontinued operations	—		(1,588		)
Gain on sale of Bailey Banks & Biddle, net of taxes	604		8,672
Earnings from discontinued operations	$	604	$	7,084

7. DEBT

As of April 30, 2009, our U.S. revolving credit facility provided for borrowings up to $500 million. The borrowings under the U.S. facility are capped at the lesser of (1) 73 percent of the cost of eligible inventory during October through December and approximately 69 percent for the remainder of the fiscal year (minus certain reserves that may be established under the credit facility), plus 85 percent of credit card receivables or (2) 90 percent of the appraised liquidation value of eligible inventory (minus certain reserves that may be established under the credit facility), plus 85 percent of credit card receivables. The U.S. facility also provides for increased seasonal borrowing capabilities of up to $100 million and contains an accordion feature that allows us to permanently increase the facility size in $25 million increments up to another $100 million. As of April 30, 2009, we had approximately $147 million available in borrowing capacity under our $500 million U.S. credit facility. Under the terms of the U.S. credit facility, we are required to maintain $50 million of borrowing capacity or satisfy a minimum fixed charge coverage ratio of 1.1:1.0 for an applicable 12 month reference period. We do not currently meet the minimum fixed charge coverage ratio.

Based on an inventory appraisal performed in January 2009, the available borrowings under the U.S. credit facility are currently determined under item (2) described above and are capped at approximately 63 percent of the cost of eligible inventory during January through September. The amount of available borrowings will continue to be calculated under item (1) described above during October through December. In February 2009, we terminated our $30 million Canadian credit facility and entered into certain Joinder Agreements under which we will utilize our Canadian and Puerto Rican subsidiaries’ inventory, credit card receivables and certain other assets as collateral under the U.S. facility. The increase in collateral under the U.S. facility offset the decline in available borrowings that would have occurred as a result of the decrease in the appraised liquidation value. There were no borrowings outstanding under the Canadian facility at the time of termination.

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8. INCOME TAXES

During the second quarter of fiscal 2009, we revoked our election under Accounting Principles Board No. 23, “Accounting for Income Taxes-Special Areas” (“APB 23”) to indefinitely reinvest certain foreign earnings outside the U.S. The decision to revoke our APB 23 election was made as a result of our decision to include our Canadian subsidiaries’ inventory, credit card receivables and certain other assets as collateral under our U.S. credit facility. The revocation of APB 23 resulted in additional tax expense totaling $11.7 million for the nine months ended April 30, 2009. The additional expense consists of federal and state income taxes totaling $35.1 million related to the distribution of Canadian earnings, partially offset by $23.4 million in foreign tax credits. The foreign tax credits are net of a $29.0 million valuation allowance established due to uncertainties surrounding their utilization.

In addition, a $5.0 million goodwill impairment charge was recognized during the second quarter of fiscal 2009 and a $2.7 million income tax charge was recorded during the third quarter of fiscal 2009 related to the expiration of certain net operating loss carryforwards. The impairment charge is not tax deductible and therefore had no effect on tax expense, however, the tax rate was favorably impacted.

9. SEGMENTS

We report our business under three operating segments: Fine Jewelry, Kiosk Jewelry and All Other. We group our brands into segments based on the similarities in commodity characteristics of the merchandise and the product mix. The All Other segment includes insurance and reinsurance operations.

Operating earnings for segments in continuing operations are calculated before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate segment profitability. Unallocated costs are before income taxes and include corporate employee-related costs, administrative costs, information technology costs, corporate facilities costs and depreciation and amortization.

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		Three Months Ended							Nine Months Ended
		April 30,							April 30,
Selected Financial Data by Segment	2009				2008				2009			2008
		(amounts in thousands)							(amounts in thousands)
Revenues:
Fine Jewelry (a)		$	321,390			$	417,365		$	1,228,526		$	1,478,116
Kiosk		54,449				56,135			184,526			194,447
All Other		3,271				3,236			9,578			9,256
Total revenues		$	379,110			$	476,736		$	1,422,630		$	1,681,819

Depreciation and amortization:
Fine Jewelry		$	10,446			$	10,630		$	32,108		$	32,083
Kiosk		1,183				1,304			3,686			4,022
All Other		—				—			—			—
Unallocated		2,824				2,953			8,704			9,012
Total depreciation and amortization		$	14,453			$	14,887		$	44,498		$	45,117

Operating (loss) earnings:
Fine Jewelry (b)		$	(28,503	)		$	(17,069	)	$	(84,862	)	$	42,915
Kiosk		494				(122		)	4,242			7,863
All Other		1,467				1,361			4,618			4,302
Unallocated (c)		(9,189		)		(6,052		)	(34,259		)	(26,956		)
Total operating (loss) earnings		$	(35,731	)		$	(21,882	)	$	(110,261	)	$	28,124

(a) Includes $47.0 and $65.5 million for the three month periods ended April 30, 2009 and 2008, respectively, and $201.0 and $249.6 million for the nine month periods ended April 30, 2009 and 2008, respectively, related to foreign operations.

(b) Includes impairments related to long-lived assets associated with underperforming stores totaling $8.2 million and $1.6 million for the nine month periods ended April 30, 2009 and 2008, respectively. Also includes $5.0 million related to a goodwill impairment charge recorded in the second quarter of fiscal 2009.

(c) Includes $15.3 million and $16.3 million for the three month periods ended April 30, 2009 and 2008, and $46.9 and $52.1 million for the nine month periods ended April 30, 2009 and 2008, respectively, to offset internal carrying costs charged to the segments.

Income tax information by segment has not been included as taxes are calculated on a consolidated basis and not allocated to each segment.

10. CONTINGENCIES

In connection with the sale of the Bailey Banks & Biddle brand on November 9, 2007, the buyer, Finlay Fine Jewelry Corporation (“Finlay”), assumed the obligations for the store operating leases. As a condition of this assignment, we remained contingently liable for the leases for the remainder of the respective current lease terms, which generally ranged from fiscal 2009 through fiscal 2017. The maximum potential liability for base rent payments under the leases totaled approximately $67 million as of April 30, 2009. We may also be obligated for common area charges and other payments. In May 2009, we began negotiations with the landlords to release us as the guarantor of the leases for specified payments. These payments would eliminate any future contingent liability associated with the Bailey Banks & Biddle leases. It is uncertain at this time if these negotiations will be successful and, if not, whether any payments would be required in the future as a result of default by Finlay. The possible loss or range of loss related to the leases cannot be reasonably estimated at this time. As a result, we have not recorded a liability as of April 30, 2009.

Under an arrangement with Citibank, N.A (“CITI”), CITI provides financing for our customers to purchase merchandise through private label credit cards. The arrangement also enables us to write credit insurance. Customers use our CITI arrangements to pay for approximately 40 percent of purchases in the U.S. and approximately 25 percent of purchases in Canada. Under the agreements governing our arrangement, our Canadian and U.S. subsidiaries must satisfy various financial and other covenants. As of April 30, 2009, our Canadian subsidiary did not satisfy a fixed charge coverage covenant which could allow CITI to terminate the agreement upon 30 days written notice and our U.S. subsidiary did not satisfy a minimum sales threshold which could allow CITI to terminate the agreement upon 180 days written notice if certain cure provisions are not met by us. In June 2009, we amended the agreements with CITI as follows: (1) CITI waived its right to terminate both agreements for the covenant violations described above prior to March 2010, (2) we will provide CITI a $5 million letter of credit and, for the period November 15 through February 14 of each year, an additional $10 million seasonal letter of credit in connection with our U.S. agreement, (3) the minimum sales threshold was lowered related to our U.S. subsidiary and (4) CITI released its right to require us to purchase the U.S. receivable portfolio upon termination of the agreement as a result of our failure to meet the minimum sales threshold.

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In September 2008, one of our vendors filed for bankruptcy protection. As of April 30, 2009, an affiliate of the vendor held approximately 5,000 ounces of gold, or $4.0 million, belonging to the Company. Although we believe we are entitled to the return of the gold, it appears likely that not all of the gold will be returned. We estimate that the maximum amount we will receive from the vendor is approximately $1.8 million and, as a result, recorded a $2.2 million charge in selling, general and administrative expenses during fiscal 2009.

We settled our California wage and hour and Salvato v. Zale Corporation, et al disputes during the quarter ended October 31, 2008. The settlements were subject to fairness hearings that took place on November 21, 2008. Both settlements were approved and the cases are now concluded. See Note 15 to the consolidated financial statements in Item 8 of our Form 10-K for additional information related to these cases and certain other litigation matters.

We are involved in a number of other legal and governmental proceedings as part of the normal course of our business. Reserves have been established based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

11. DEFERRED REVENUE

We offer our customers lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period. The revenue from the lifetime warranties is recognized on a straight-line basis over a five year period. The change in deferred revenue from continuing operations associated with the sale of warranties is as follows (in thousands):

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2009			2008			2009			2008
Deferred revenue, beginning of period	$	197,172		$	136,646		$	168,811		$	89,574
Warranties sold (a)	20,690			28,044			72,938			94,635
Revenue recognized	(13,619		)	(10,946		)	(37,506		)	(30,465		)
Deferred revenue, end of period	$	204,243		$	153,744		$	204,243		$	153,744

(a) Warranty sales for the nine months ended April 30, 2009 include approximately $3.5 million related primarily to the negative impact of the decline in the Canadian currency rate on the beginning of the period deferred revenue balance. Warranty sales for the three months ended April 30, 2009 include approximately $0.8 million related to the favorable impact of an increase in the Canadian currency rate.

12. SUBSEQUENT EVENT

In May 2009, we closed 42 stores in the Fine Jewelry segment and two stores in the Kiosk Jewelry segment. During the fourth quarter of fiscal 2009, we expect to incur charges totaling approximately $3 million associated with the closings. The charges consist of approximately $2 million of lease termination and severance related costs and approximately $1 million related to store impairments.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of the Company (and the related notes thereto) which preceded this report and the audited consolidated financial statements of the Company (and the related notes thereto) and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Form 10-K for the fiscal year ended July 31, 2008.

Overview

We are a leading specialty retailer of fine jewelry in North America. At April 30, 2009, we operated 1,356 fine jewelry stores and 694 kiosk locations primarily in shopping malls throughout the United States of America, Canada and Puerto Rico. Our operations are divided into three business segments: Fine Jewelry, Kiosk Jewelry and All Other.

The Fine Jewelry segment focuses on diamond product, but differentiates its brands to the consumer through merchandise assortments and marketing. The Kiosk Jewelry segment reaches the opening price point of fine jewelry customers primarily through mall-based kiosks in the United States of America operating primarily under the name Piercing Pagoda®. The All Other segment consists primarily of our insurance operations, which provide insurance and reinsurance facilities for various types of insurance coverage offered primarily to our private label credit card customers.

Our results for the third quarter were in-line with our expectations. The comparable store sales decline of 20.0 percent was the result of a continuing difficult retail environment and the impact of strong positive comparable store sales last year due to aggressive merchandise clearance. The merchandise clearance for the third quarter of fiscal 2009 was approximately 50 percent lower than last year. As a result of the decline in clearance activity, gross margins improved by 610 basis points compared to the second quarter of fiscal 2009 returning margins to over 50 percent without a significant decrease in comparable store sales trends compared to last quarter. We expect to maintain gross margins of approximately 50 percent, however, comparable store sales will continue to be negatively impacted as we anniversary last year’s clearance initiatives through the first quarter of fiscal 2010. We estimate that the clearance activity accounted for approximately 10 percentage points of the 5.8 percent positive comparable store sales during the third quarter of fiscal 2008.

We believe the three initiatives we implemented over the last year remain critical to our long-term success. The initiatives include (1) focusing on our core customer by providing clarity and value through compelling merchandise assortments, cleaner in-store presentation and an improved marketing message, (2) enhancing our operational effectiveness to ensure that our people and processes are aligned and focused on providing outstanding products and customer service, and (3) maintaining financial discipline with a continued focus on free cash flow generation and prudent use of capital. We believe the most important of these initiatives under the current economic environment is maintaining financial discipline. Accordingly, in February 2009 we announced inventory and cost savings initiatives expected to be realized through fiscal 2010 totaling approximately $75 million and $65 million, respectively. This is in addition to the $100 million in permanent inventory reductions and the $65 million plus in cost savings announced in February 2008. The $100 million of permanent inventory reductions associated with the February 2008 initiative was achieved in July 2008. The additional $75 million of inventory reductions is to be achieved through fiscal 2010 by reallocating inventory in closed stores and improved productivity through more efficient store level allocation at existing stores. As of April 30, 2009, the cost savings realized since inception of the February 2009 and 2008 initiatives totaled approximately $9 million and $59 million, respectively. The cost savings under both initiatives consist primarily of selling, general and administrative expenses. We continue to believe that we will achieve our goals under both initiatives.

Our continued focus on financial rigor also includes a review of our lease portfolio during the fourth quarter of fiscal 2009 to identify opportunities to renegotiate rents under existing leases and to accelerate the closure of underperforming locations. The initial review of our lease portfolio resulted in the closure of 42 fine jewelry and two kiosk stores in May 2009. As we continue our review, we may close additional stores beyond the 115 previously announced. As part of the review of our lease portfolio, we also intend to pursue our release from our position as the guarantor on the Bailey Banks & Biddle leases associated with the sale of the brand in November 2007.

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During the nine month period ended April 30, 2009, the average Canadian currency rate decreased by approximately 18 percent relative to the U.S. dollar. Due to our Canadian operations being reported at the average U.S. dollar equivalent, the decline in the currency rate resulted in a $29.1 million decrease in reported revenues, substantially offset by a decrease in reported cost of sales and selling, general and administrative expenses of $14.4 million and $10.3 million, respectively. In addition, as a result of the decline in the Canadian currency rate we recorded losses associated with the settlement of Canadian accounts payable totaling $7.6 million during the nine months ended April 30, 2009 compared to $0.4 million during the same period in the prior year.

Comparable store sales include internet sales and exclude revenue recognized from warranties and insurance premiums related to credit insurance policies sold to customers who purchase merchandise under our proprietary credit program. The sales results of new stores are included beginning their thirteenth full month of operation. The results of stores that have been relocated, renovated or refurbished are included in the calculation of comparable store sales on the same basis as other stores. However, stores closed for more than 90 days due to unforeseen events (hurricanes, etc.) are excluded from the calculation of comparable store sales.

From time to time, we include non-GAAP measurements of financial information in Management’s Discussion and Analysis of Financial Condition and Results of Operations. We use these measurements as part of our evaluation of the performance of the Company. In addition, we believe these measures provide useful information to investors, particularly in evaluating the performance of the Company in the current fiscal year as compared to prior periods.

Results of Operations

The following table sets forth certain financial information from our unaudited consolidated statements of operations expressed as a percentage of total revenues.

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2009		2008		2009		2008
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of sales	49.9		52.5		53.2		50.5
Selling, general and administrative	55.3		48.6		50.1		44.8
Cost of insurance operations	0.5		0.4		0.3		0.3
Depreciation and amortization	3.8		3.1		3.1		2.7
Impairment charges	—		—		0.9		0.1
Operating (loss) earnings	(9.4	)	(4.6	)	(7.8	)	1.7
Interest expense	0.5		0.4		0.6		0.6
(Loss) earnings before income taxes	(9.9	)	(5.0	)	(8.4	)	1.1
Income tax (benefit) expense	(3.8	)	(1.3	)	(1.9	)	0.6
(Loss) earnings from continuing operations	(6.1	)	(3.6	)	(6.5	)	0.5
Earnings from discontinued operations, net of taxes	—		0.1		—		0.4
Net (loss) earnings	(6.1	)%	(3.5	)%	(6.5	)%	0.9	%

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Three Months Ended April 30, 2009 Compared to Three Months Ended April 30, 2008

Revenues. Revenues for the quarter ended April 30, 2009 were $379.1 million, a decrease of 20.5 percent compared to revenues of $476.7 million for the same period in the prior year. Comparable store sales decreased 20.0 percent as compared to the same period in the prior year. The decline in comparable store sales was driven by a 27.4 percent decrease in the number of customer transactions in our fine jewelry stores, partially offset by an increase in the average transaction price. We attribute the decline in customer transactions primarily to the general decline in the overall retail environment and a decrease in merchandise clearance compared to the same period in the prior year. The decline was also due to the $8.5 million impact associated with the decrease in the Canadian currency rate and a decrease in the number of open stores, partially offset by a $2.7 million increase in revenues recognized related to lifetime warranties.

The Fine Jewelry segment contributed $321.4 million of revenues in the quarter ended April 30, 2009, compared to $417.4 million for the same period in the prior year, representing a decrease of 23.0 percent.

Revenues include $54.4 million in the Kiosk Jewelry segment compared to $56.1 million in the prior year, representing a decrease of 3.0 percent. The decline in revenues is due primarily to a decrease in the number of open kiosks to 694 from 748 as of April 30, 2009 and 2008, respectively.

The All Other segment operations provided $3.3 million in revenues for the quarter ended April 30, 2009 as compared to $3.2 million for the same period in the prior year, representing an increase of 1.1 percent.

During the quarter ended April 30, 2009, we opened one store in the Fine Jewelry segment. In addition, we closed 31 stores in the Fine Jewelry segment and 7 locations in the Kiosk Jewelry segment.

Cost of Sales. Cost of sales includes cost of merchandise sold, as well as receiving and distribution costs. Cost of sales as a percentage of revenues was 49.9 percent for the quarter ended April 30, 2009, compared to 52.5 percent for the same period in the prior year. The decrease is primarily due to a decrease in store-wide discounts compared to the same period in the prior year.

Selling, General and Administrative. Included in selling, general and administrative expenses (“SG&A”) are store operating, advertising, buying and general corporate overhead expenses. SG&A was 55.3 percent of revenues for the quarter ended April 30, 2009 compared to 48.6 percent for the same period last year. On a dollar basis, SG&A decreased by $22.2 million to $209.5 million for the quarter ended April 30, 2009. The percentage increase is due to lower total revenues during the quarter compared to the same period in the prior year. The dollar decrease is primarily the result of our expense reduction initiatives totaling $18.6 million for the quarter ended April 30, 2009.

Depreciation and Amortization. Depreciation and amortization as a percentage of revenues for the quarters ended April 30, 2009 and 2008 was 3.8 percent and 3.1 percent, respectively. The increase is due to lower total revenues during the quarter compared to the same period in the prior year.

Interest Expense. Interest expense as a percentage of revenues for the quarters ended April 30, 2009 and 2008 was 0.5 percent and 0.4 percent, respectively. The increase in interest expense was a result of an increase in borrowings and lower total revenues compared to the same period in the prior year, substantially offset by a decrease in the weighted average effective interest rate from 4.1 percent last year to 1.8 percent this year.

Income Tax Benefit. The effective tax rate for the quarters ended April 30, 2009 and 2008 was 38.4 percent and 26.4 percent, respectively. The effective tax rate for the quarter ended April 30, 2009 includes a benefit of $6.9 million related to a decrease in the estimated valuation allowance recorded during the second quarter of fiscal 2009, partially offset by a charge totaling $2.7 million related to the expiration of certain net operating loss carryforwards. The effective tax rate for the quarter ended April 30, 2008 includes a charge related to the cumulative impact of an increase in the estimated annual tax rate on earnings related to the six months ended January 31, 2008.

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Nine Months Ended April 30, 2009 Compared to Nine Months Ended April 30, 2008

Revenues. Revenues for the nine months ended April 30, 2009 were $1,422.6 million, a decrease of 15.4 percent compared to revenues of $1,681.8 million for the same period in the prior year. Comparable store sales decreased 15.4 percent as compared to the same period in the prior year. The decline in comparable store sales was driven by a 17.9 percent decrease in the number of customer transactions in our fine jewelry stores, partially offset by an increase in the average transaction price. We attribute the decline in customer transactions primarily to the general decline in the overall retail environment, partially offset by an increase in merchandise clearance compared to the same period in the prior year. The decline was also due to the $29.1 million impact associated with the decrease in the Canadian currency rate and a decrease in the number of open stores, partially offset by a $7.0 million increase in revenues recognized related to lifetime warranties.

The Fine Jewelry segment contributed $1,228.5 million of revenues in the nine months ended April 30, 2009, compared to $1,478.1 million for the same period in the prior year, representing a decrease of 16.9 percent.

Revenues include $184.5 million in the Kiosk Jewelry segment compared to $194.4 million in the prior year, representing a decrease of 5.1 percent. The decline in revenues is due primarily to a decrease in the number of open kiosks to 694 from 748 as of April 30, 2009 and 2008, respectively.

The All Other segment operations provided $9.6 million in revenues for the nine months ended April 30, 2009 as compared to $9.3 million for the same period in the prior year, representing an increase of 3.5 percent.

During the nine months ended April 30, 2009, we opened 14 stores in the Fine Jewelry segment. In addition, we closed 54 stores in the Fine Jewelry segment and 49 locations in the Kiosk Jewelry segment.

Cost of Sales. Cost of sales includes cost of merchandise sold, as well as receiving and distribution costs. Cost of sales as a percentage of revenues was 53.2 percent for the nine months ended April 30, 2009, compared to 50.5 percent for the same period in the prior year. The increase is primarily due to an increase in store-wide discounts compared to the same period in the prior year.

Selling, General and Administrative. Included in SG&A are store operating, advertising, buying and general corporate overhead expenses. SG&A was 50.1 percent of revenues for the nine months ended April 30, 2009 compared to 44.8 percent for the same period last year. On a dollar basis, SG&A decreased by $39.8 million to $713.0 million for the nine months ended April 30, 2009. The percentage increase is due to lower total revenues during the nine months compared to the same period in the prior year. The dollar decrease is the result of our expense reduction initiatives totaling $47.2 million for the nine months ended April 30, 2009, partially offset by a $5.0 million increase in legal and severance costs and a $7.2 million increase in foreign currency losses.

Depreciation and Amortization. Depreciation and amortization as a percentage of revenues for the nine months ended April 30, 2009 and 2008 was 3.1 percent and 2.7 percent, respectively. The increase is due to lower total revenues during the nine months compared to the same period in the prior year.

Impairment Charges. Impairment charges for the nine months ended April 30, 2009 and 2008 includes $8.2 million and $1.6 million, respectively, related to long-lived assets associated with underperforming stores. In addition, during the nine months ended April 30, 2009, a $5.0 million goodwill impairment charge was recorded related to a reporting unit in the Fine Jewelry segment.

Interest Expense. Interest expense as a percentage of revenues for the nine months ended April 30, 2009 and 2008 was flat at 0.6 percent. The weighted average effective interest rate decreased from 5.7 percent last year to 2.9 percent this year. The decrease in the weighted average effective interest rate was offset by an increase in borrowings and lower total revenues during the nine months compared to the same period in the prior year.

Income Tax (Benefit) Expense. The effective tax rate for the nine months ended April 30, 2009 and 2008 was 22.5 percent and 53.6 percent, respectively. The effective tax rate for the nine months ended April 30, 2009 includes a net charge totaling $11.7 million associated with our decision during the second quarter of fiscal 2009 to revoke our election under APB 23 to indefinitely reinvest certain foreign earnings outside the U.S. and a $2.7 million charge related to the expiration of certain net operating loss carryforwards. The effective tax rate for the nine months ended April 30, 2008 includes certain tax benefits that were larger in proportion to estimated earnings in fiscal 2008.

Liquidity and Capital Resources

Our cash requirements consist primarily of funding ongoing operations, including inventory requirements, capital expenditures for new stores, renovation of existing stores, upgrades to our information technology systems and distribution facilities and debt service. In addition, from time to time we have repurchased shares of our common stock.

Net cash from operating activities decreased from $86.5 million for the nine months ended April 30, 2008 to a deficit of $28.1 million for the nine months ended April 30, 2009. The decrease is primarily the result of operating losses generated during the nine months ended April 30, 2009 compared to operating earnings in the same period in the prior year. The operating losses in the current year were primarily due to the general decline in the overall retail environment and our highly promotional pricing during the Holiday season. The decrease is also the result of a decrease in net cash received related to deferred revenues for lifetime warranties of approximately $29 million. The decrease was partially offset by an approximately $18 million decrease in amounts due from vendors for returned merchandise and vendor deposits.

Our business is highly seasonal, with a disproportionate amount of sales (approximately 40 percent) occurring in November and December of each year, the Holiday season. Other important periods include Valentine’s Day and Mother’s Day. We purchase inventory in anticipation of these periods and, as a result, have higher inventory and inventory financing needs immediately prior to these periods. Owned inventory at April 30, 2009 was $759.0 million, a decrease of $108.0 million compared to inventory levels at April 30, 2008. The decrease in inventory was primarily the result of aggressive merchandise clearance programs during the last half of fiscal 2008, partially offset by lower than expected sales during fiscal 2009.

Our cash requirements are funded through cash flows from operations, funds available under our U.S. revolving credit facility and vendor payment terms. As of April 30, 2009, our U.S. revolving credit facility provided for borrowings up to $500 million. The borrowings under the U.S. facility are capped at the lesser of (1) 73 percent of the cost of eligible inventory during October through December and 69 percent for the remainder of the year (minus certain reserves that may be established under the credit facility), plus 85 percent of credit card receivables or (2) 90 percent of the appraised liquidation value of eligible inventory (minus certain reserves that may be established under the credit facility), plus 85 percent of credit card receivables. The U.S. facility also provides for increased seasonal borrowing capabilities of up to $100 million and contains an accordion feature that allows us to permanently increase the facility size in $25 million increments up to another $100 million. Under the terms of the U.S. credit facility, we are required to maintain $50 million of borrowing availability or satisfy a minimum fixed charge coverage ratio of 1.1:1.0 for an applicable 12 month reference period. We do not currently meet the minimum fixed charge coverage ratio. Vendor purchase order terms typically require payment within 60 days.

As of April 30, 2009, we had cash and cash equivalents totaling $24.0 million. We also had approximately $147 million available in borrowing capacity under our U.S. revolving credit facility. We believe that we have sufficient capacity under our U.S revolving credit facility to meet our foreseeable financing needs.

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During fiscal 2008, the Board of Directors authorized share repurchases of $350 million. As part of the stock repurchase program, we repurchased a total of 17.6 million shares of our common stock, or $326.7 million, in fiscal 2008. As of April 30, 2009, we have approximately $23.3 million in remaining authorization under our repurchase program.

Capital Growth

During the nine months ended April 30, 2009, we invested approximately $6.7 million in capital expenditures to open 14 new stores in the Fine Jewelry segment. We invested approximately $16.1 million to remodel, relocate and refurbish 29 stores in our Fine Jewelry segment, 7 stores in our Kiosk Jewelry segment and to complete store enhancement projects. We also invested $2.3 million in infrastructure, primarily related to our information technology and distribution centers. We anticipate investing approximately $4.9 million in capital expenditures for the remainder of fiscal year 2009, including $2.4 million in existing store refurbishments and approximately $2.5 million in capital investments related to information technology infrastructure and support operations.

Off-Balance Sheet Arrangements

Inflation

In management’s opinion, changes in revenues, net earnings, and inventory valuation that have resulted from inflation and changing prices have not been material during the periods presented. The trends in inflation rates pertaining to merchandise inventories, especially as they relate to gold and diamond costs, are primary components in determining our last-in, first-out inventory. There is no assurance that inflation will not materially affect us in the future.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk. We are not subject to substantial currency fluctuations because most of our purchases are U.S. dollar-denominated. However, as a result of our Canadian operations, we are exposed to market risk from currency rate exposures which may adversely affect our financial position, results of operations and cash flows. During the nine months ended April 30, 2009, the average Canadian currency rate decreased by approximately 18 percent relative to the U.S. dollar. Due to our Canadian operations being reported at the average U.S. dollar equivalent, the decline in the currency rate resulted in a $29.1 million decrease in reported revenues, substantially offset by a decrease in reported cost of sales and selling, general and administrative expenses of $14.4 million and $10.3 million, respectively. In addition, as a result of the decline in the Canadian currency rate we recorded losses associated with the settlement of Canadian accounts payable totaling $7.6 million during the nine months ended April 30, 2009 compared to $0.4 million during the same period in the prior year.

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At April 30, 2009, there were no other material changes in any of the market risk information disclosed by us in our Annual Report on Form 10-K for the fiscal year ended July 31, 2008. More detailed information concerning market risk can be found under the sub-caption “Quantitative and Qualitative Disclosures about Market Risk” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 29 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2008.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer have concluded that these disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in the Company’s periodic SEC filings within the required time period, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the quarter ended April 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Information regarding legal proceedings is incorporated by reference from Note 10 to our consolidated financial statements set forth in Part I of this report.

Item 1A. RISK FACTORS

We make forward-looking statements in the Annual Report on Form 10-K and in other reports we file with the SEC. In addition, members of our senior management make forward-looking statements orally in presentations to analysts, investors, the media and others. Forward-looking statements include statements regarding our objectives and expectations with respect to our financial plan, sales and earnings, merchandising and marketing strategies, acquisitions and dispositions, share repurchases, store opening, renovation, remodeling and expansion, inventory management and performance, liquidity and cash flows, capital structure, capital expenditures, development of our information technology and telecommunications plans and related management information systems, e-commerce initiatives, human resource initiatives and other statements regarding our plans and objectives. In addition, the words “plans to,” “anticipate,” “estimate,” “project,” “intend,” “expect,” “believe,” “forecast,” “can,” “could,” “should,” “will,” “may,” or similar expressions may identify forward-looking statements, but some of these statements may use other phrasing. These forward-looking statements are intended to relay our expectations about the future, and speak only as of the date they are made. We disclaim any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future circumstances.

Forward-looking statements are not guarantees of future performance and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in or suggested by these forward-looking statements.

If the general economy performs poorly, discretionary spending on goods that are, or are perceived to be, “luxuries” may not grow and may even decrease.

Jewelry purchases are discretionary and may be affected by adverse trends in the general economy (and consumer perceptions of those trends). In addition, a number of other factors affecting consumers such as employment, wages and salaries, business conditions, energy costs, credit availability and taxation policies, for the economy as a whole and in regional and local markets where we operate, can impact sales and earnings. Recently the economic downturn has significantly impacted our sales and the continuation of this downturn, and particularly its worsening, would have a material adverse impact on our business and financial condition.

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The concentration of a substantial portion of our sales in three relatively brief selling periods means that our performance is more susceptible to disruptions.

A substantial portion of our sales are derived from three selling periods—Holiday (Christmas), Valentine’s Day and Mother’s Day. Because of the briefness of these three selling periods, the opportunity for sales to recover in the event of a disruption or other difficulty is limited, and the impact of disruptions and difficulties can be significant. For instance, adverse weather (such as a blizzard or hurricane), a significant interruption in the receipt of products (whether because of vendor or other product problems), or a sharp decline in mall traffic occurring during one of these selling periods could materially impact sales for the affected period and, because of the importance of each of these selling periods, commensurately impact overall sales and earnings.

Most of our sales are of products that include diamonds, precious metals and other commodities. Fluctuations in the availability and pricing of commodities could impact our ability to obtain and produce products at favorable prices.

The supply and price of diamonds in the principal world market are significantly influenced by a single entity, which has traditionally controlled the marketing of a substantial majority of the world’s supply of diamonds and sells rough diamonds to worldwide diamond cutters at prices determined in its sole discretion. The availability of diamonds also is somewhat dependent on the political conditions in diamond-producing countries and on the continuing supply of raw diamonds. Any sustained interruption in this supply could have an adverse affect on our business.

We also are affected by fluctuations in the price of diamonds, gold and other commodities. A significant change in prices of key commodities could adversely affect our business by reducing operating margins or decreasing consumer demand if retail prices are increased significantly. In addition, foreign currency exchange rates and fluctuations impact costs and cash flows associated with our Canadian operations and the acquisition of inventory from international vendors.

Our sales are dependent upon mall traffic.

Our stores and kiosks are located primarily in shopping malls throughout the U.S., Canada and Puerto Rico. Our success is in part 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. Accordingly, a significant decline in this popularity, especially if it is sustained, would substantially harm our sales and earnings.

We operate in a highly competitive and fragmented industry.

The retail jewelry business is highly competitive and fragmented, and we compete with nationally recognized jewelry chains as well as a large number of independent regional and local jewelry retailers and other types of retailers who sell jewelry and gift items, such as department stores and mass merchandisers. We also compete with internet sellers of jewelry. Because of the breadth and depth of this competition, we are constantly under competitive pressure that both constrains pricing and requires extensive merchandising efforts in order for us to remain competitive.

Any failure by us to manage our inventory effectively will negatively impact sales and earnings.

We purchase much of our inventory well in advance of each selling period. In the event we misjudge consumer preferences or demand, we will experience lower sales than expected and will have excessive inventory that may need to be written down in value or sold at prices that are less than expected which could have a material adverse impact on our business and financial condition.

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Any failure of our pricing and promotional strategies to be as effective as desired will negatively impact our sales and earnings.

We set the prices for our products and establish product specific and store-wide promotions in order to generate store traffic and sales. While these decisions are intended to maximize our sales and earnings, in some instances they do not. For instance, promotions, which can require substantial lead time, may not be as effective as desired or may prove unnecessary in certain economic circumstances. Where we have implemented a pricing or promotional strategy that does not work as expected, our sales and earnings will be adversely impacted.

Because of our dependence upon a small concentrated number of landlords for a substantial number of our locations, any significant erosion of our relationships with those landlords would negatively impact our ability to obtain and retain store locations.

We are significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs that allow us to earn a reasonable return on our locations. We depend on the leasing market and our landlords to determine supply, demand, lease cost and operating costs and conditions. We cannot be certain as to when or whether desirable store locations will become or remain available to us at reasonable lease and operating costs. Further, several large landlords dominate the ownership of prime malls, and we are dependent upon maintaining good relations with those landlords in order to obtain and retain store locations on optimal terms. From time to time, we do have disagreements with our landlords and a significant disagreement, if not resolved, could have an adverse impact on our business.

Changes in regulatory requirements relating to the extension of credit may increase the cost of or adversely affect our operations.

Our operations are affected by numerous U.S. and Canadian federal and state or provincial laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum aggregate amount of finance charges that may be charged by a credit provider. Any change in the regulation of credit (including changes in the application of current laws) which would materially limit the availability of credit to our customer base could adversely affect our sales and earnings.

Any disruption in, or changes to, our private label credit card arrangement with Citibank, N.A. may adversely affect our ability to provide consumer credit and write credit insurance.

If the credit markets continue to deteriorate, our ability to obtain the financing needed to operate our business could be adversely impacted.

We utilize a revolving credit facility to finance our working capital requirements, including the purchase of inventory, among other things. If our ability to obtain the financing needed to meet these requirements was adversely impacted as a result of continued deterioration in the credits markets, our business could be significantly impacted. In addition, the amount of available borrowings under our credit facility is based, in part, by the appraised liquidation value of our inventory. Any declines in the appraised value of our inventory could impact our ability to obtain the financing necessary to operate our business.

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Acquisitions and dispositions involve special risk, including the risk that we may not be able to complete proposed acquisitions or dispositions or that such transactions may not be beneficial to us.

We have made significant acquisitions and dispositions in the past and may in the future make additional acquisitions and dispositions. Difficulty integrating an acquisition into our existing infrastructure and operations may cause us to fail to realize expected return on investment through revenue increases, cost savings, increases in geographic or product presence and customer reach, and/or other projected benefits from the acquisition. In addition, we may not achieve anticipated cost savings or may be unable to find attractive investment opportunities for funds received in connection with a disposition. Additionally, attractive acquisition or disposition opportunities may not be available at the time or pursuant to terms acceptable to us and we may be unable to complete acquisitions or dispositions.

We currently are contingently liable for most of the store operating leases associated with the Bailey Banks & Biddle brand that was sold in November 2007 to Finlay Fine Jewelry Corporation. See Note 10 to our financial statements for more information related to our contingent liability. As those leases are extended, or materially amended, we generally will be released from our contingent obligation. If Finlay fails to perform under the leases, we could be liable for some or all of the remaining amounts due under the leases, which could be a significant amount and would negatively impact our earnings and financial condition. The undiscounted future base rent payments for these leases total approximately $67 million as of April 30, 2009. In addition, we may be obligated for common area charges and other payments.

Changes in estimates, assumptions and judgments made by management related to our evaluation of goodwill and store impairments could significantly affect our financial results.

Evaluating the need for goodwill and store impairments is highly complex and involves many subjective estimates, assumptions and judgments by our management. For instance, management makes estimates and assumptions with respect to future cash flow projections, terminal growth rates, discount rates and long-term business plans. If our actual results are not consistent with our estimates, assumptions and judgments by our management, we may be required to recognize additional impairments.

Additional factors that may adversely affect our financial performance.

Increases in expenses that are beyond our control including items such as increases in interest rates, inflation, fluctuations in foreign currency rates, higher tax rates and changes in laws and regulations, may negatively impact our operating results.

Item 5. OTHER INFORMATION

(a) On June 4, 2009, Steve Larkin, Executive Vice President, Chief Marketing and e-Commerce Officer left the Company effective immediately.

(b) On June 4, 2009, the Company entered into an Employment Security Agreement (“ESA”) for the benefit of Matthew W. Appel, Executive Vice President of Finance, on terms generally consistent with existing employment agreements with other senior executives. Among other things, the ESA provides for: (a) severance in the event of a “Qualifying Termination” other than following “Change of Control,” both as defined in the ESA, in the amount of six (6) months salary and average earned bonus, and (b) severance in the event of a “Qualifying Termination” following a “Change of Control,” both as defined in the ESA, in the amount of thirty-six (36) months salary and average earned bonus, subject to a Section 280G conditional cap. A copy of the ESA is attached as Exhibit 10.2 to this Report and this description is qualified in its entirety by reference to that exhibit.

(c) On June 8, 2009, the Company amended its Canadian and U.S. agreements with subsidiaries of Citigroup, under which CITI provides private label credit cards to the Company’s customers as follows: (1) CITI waived its right to terminate both agreements prior to March 2010 as a result of, in the case of the Company’s Canadian agreement, the Company’s Canadian subsidiary’s failure to satisfy a fixed charge coverage covenant and, in the case of the U.S. subsidiary, the Company’s failure to satisfy a minimum sales threshold, (2) the Company agreed to provide CITI a $5 million letter of credit and, for the period November 15 through February 14 of each year, an additional $10 million seasonal letter of credit in connection with the Company’s U.S. agreement, (3) CITI agreed to lower the minimum sales threshold, and (4) CITI agreed to release the Company from its obligation to purchase the U.S. receivables portfolio upon a termination of the U.S. agreement as a result of the Company’s failure to meet the minimum sales threshold. Copies of these amendments are attached as Exhibits 10.3 and 10.4 to this Report and this description is qualified in its entirety by reference to those exhibits.

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Item 6. EXHIBITS

4.1		Joinder Agreement of Zale Canada Co. to Credit Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed February 18, 2009, Exhibit 4.1).
4.2		Joinder Agreement of Zale Canada Co. to Security Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed February 18, 2009, Exhibit 4.2).
4.3		Joinder Agreement of Zale Puerto Rico, Inc. to Credit Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed February 18, 2009, Exhibit 4.3).
4.4		Joinder Agreement of Zale Puerto Rico, Inc. to Security Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed February 18, 2009, Exhibit 4.4).
4.5		Security Agreement of Zale Canada Co. (incorporated by reference to the Company’s Current Report on Form 8-K filed February 18, 2009, Exhibit 4.5).
10.1		Separation and Release Agreement with Rodney Carter (incorporated by reference to the Company’s Current Report on Form 8-K filed February 18, 2009, Exhibit 10.1).
10.2		Employment Security Agreement with Matthew W. Appel.
10.3		Amendment to Merchant Services Agreement with Citibank (South Dakota), N.A.
10.4		Amendment No. One to Private Label Credit Card Program Agreement with Citi Commerce Solutions of Canada Ltd.
31.1		Rule 13a-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a) Certification of Interim Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Interim Chief Financial Officer

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Zale Corporation
	(Registrant)


Date: June 9, 2009	By:	/s/ Cynthia T. Gordon
	Cynthia T. Gordon
	Senior Vice President, Controller
	Interim Chief Financial Officer
	(principal financial officer of the registrant)

EX-10.2 2 a09-14859_1ex10d2.htm EX-10.2

Exhibit 10.2

EMPLOYMENT SECURITY AGREEMENT

This Employment Security Agreement (the “Agreement”), dated as of June , 2009, is between Zale Corporation (“Company”) and the undersigned Executive Vice President of Company (“Executive”).

WHEREAS, in order to achieve its long term objectives, Company recognizes that it is essential to attract and retain qualified executives; and

WHEREAS, in consideration of Executive’s valuable service for, and critical contribution to the success of, Company, Company desires to provide Executive with certain benefits in the event Executive’s employment is terminated, either in connection with or unrelated to a Change of Control of Company, on the terms and subject to the conditions set forth in this Agreement. Capitalized terms that are used in this Agreement but not defined in connection with their use are defined in Article V.

NOW, THEREFORE, in consideration of the promises and of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows:

ARTICLE I
TERMINATION BENEFITS

1.1 General Termination Benefits. If Executive incurs a Qualifying Termination other than during a Protection Period, he or she will receive the following termination benefits:

(a) Severance Pay. Subject to Sections 1.7 and 2.1(a), Executive will receive Severance Pay, which shall be paid in equal installments, in accordance with Company’s regular payroll practices and procedures, over a six (6) month period that commences on the first ordinary payroll payment date that follows the date that is sixty (60) days after the date on which the Qualifying Termination is incurred; provided that all unpaid portions of such Severance Pay shall be distributed to Executive in a lump-sum on the payroll date immediately preceding March 15 of the calendar year following the calendar year in which Executive incurs such Qualifying Termination. In the event that, after such Qualifying Termination is incurred and Severance Pay under this Section 1.1(a) has commenced, it is determined that such Qualifying Termination was incurred during a Protection Period (including as a result of the occurrence of a Change of Control within six months after such Qualifying Termination), then Executive shall cease to receive Severance Pay under this Section 1.1(a) and shall be entitled to additional Severance Pay in accordance with Section 1.2(a).

(b) Accrued Obligations. Executive will be entitled to (i) payment of any earned and unpaid Base Compensation as of Termination of Employment; (ii) payment of any earned but unused vacation as of the Termination of Employment, to the extent such vacation pay is provided under the vacation plan or policy sponsored by Company that is applicable to Executive; and (iii) any other earned and unpaid obligations as of the Termination of Employment, including but not limited to any bonus to which Executive may have become entitled but which has not yet been paid as of Termination of Employment under the bonus plan or policy sponsored by Company that is applicable to Executive (the “Accrued Obligations”). Accrued Obligations

described in clauses (i) and (ii) above will be paid as part of Executive’s final ordinary payroll payment from Company for active employment or contemporaneously with such payment, but in no event later than thirty (30) days after such Termination of Employment, and Accrued Obligations described in clause (iii) above will be paid in accordance with the terms of the plan, policy, agreement or arrangement under which they arose (including with respect to time of payment or distribution).

(c) Continued Welfare Benefits. Executive and/or Executive’s dependents will be entitled to elect to continue their respective health or welfare coverage pursuant to COBRA. Provided that Executive and/or Executive’s dependents elect and maintain such COBRA coverage until the expiration of their eligibility under COBRA, following such expiration, Executive and/or Executive’s dependents also will be entitled to elect to continue such coverage for the remainder, if any, of the Severance Period. Such health and other welfare benefits will be provided monthly and will provide the same coverage as available to others who elect coverage pursuant to COBRA, even though, following the expiration of Executive’s eligibility for COBRA, it would not be pursuant to COBRA, provided that the continued participation of Executive and such dependents is possible under the general terms and provisions of such health or welfare plans. If Executive’s participation in any such plan is barred or would result in adverse tax consequences to Executive or Company, Company will arrange to provide Executive on a monthly basis with benefits substantially similar to those that Executive otherwise would have been entitled to receive under such plan or, alternatively at the option of Company, reimburse Executive on a monthly basis for the reasonable actual costs of purchasing in the marketplace substantially similar benefits; provided, however, that, in either case, Executive will pay to Company, or provide a credit against Company’s reimbursement obligation for, the amount equal to the premiums that Executive would have been required to pay to maintain such benefits hereunder.

During the Severance Period, Executive’s premiums for coverage provided pursuant to COBRA will be equal to the premiums Executive paid prior to Termination of Employment. All premium payments paid by Executive and/or Executive’s dependents for coverage will be paid directly to the appropriate insurer or service provider for such benefit (which may be Company). For the avoidance of doubt, Executive’s continuation of health and welfare benefits during the Severance Period shall count against Executive’s continuation of coverage period required under COBRA.

Any health or welfare benefits received by or available to Executive from or in connection with any other employment of Executive, consultancy arrangement undertaken by Executive or similar source that are reasonably comparable to, but not necessarily as financially or otherwise beneficial to Executive as, the benefits provided to Executive by Company at the time of the Termination of Employment will be deemed the equivalent thereof and will terminate Company’s obligation under this Section 1.1(c) to provide health and welfare coverage during the Severance Period: provided, however, that nothing in this paragraph will limit or terminate Executive’s or Executive’s dependents’ right to continue any Company group health plan coverage at Executive’s or such dependent’s cost for the remainder of the COBRA period. Executive agrees to advise Company of the availability of any such subsequent benefit coverages within 30 days following such availability.

The provisions of this Section 1.1(c) will not prohibit Company from changing the terms of any benefit programs provided that any such changes apply to all executives of Company and its Affiliates (e.g., Company may switch insurance carriers or preferred provider organizations or change coverages).

(d) Outplacement Services. Executive will be entitled to receive outplacement services from an entity selected by Company for a period of three (3) months, provided that such services do not commence later than six (6) months following Termination of Employment. Company will pay the outplacement service provider directly for the cost of such outplacement services.

(e) Equity Compensation Adjustments. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that vested prior to such Termination of Employment will be governed by the terms of such awards and such Equity Plan. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that are unvested on Termination of Employment will expire, unless otherwise provided in such awards or such Equity Plan. Following his or her Termination of Employment, Company will not grant Executive any equity-based compensation awards.

(f) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.2 Termination Benefits in Connection with a Change of Control. If Executive incurs a Qualifying Termination during a Protection Period, he or she will receive the following termination benefits:

(a) Severance Pay. Subject to Sections 1.7 and 2.1(a), Executive will receive Severance Pay in a single lump-sum within sixty (60) days after the date on which the Qualifying Termination is incurred. In the case of a Qualifying Termination that is incurred during the portion of the Protection Period that precedes the Change of Control, (i) the amount of Severance Pay payable to Executive pursuant to this Section 1.2(a) shall be reduced by the amount of any Severance Pay paid to Executive pursuant to Section 1.1(a) prior to the date the Change of Control occurs and (ii) such additional Severance Pay shall be paid to Executive in a single lump-sum within sixty (60) days after the date on which such Change of Control occurred.

(b) Accrued Obligations. Executive will be entitled to payment of any Accrued Obligations in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive and Executive’s dependents will be entitled to receive health and other welfare benefits in accordance with the provisions of Section 1.1(c) for the duration of the Severance Period.

(d) Outplacement Services. Executive will be entitled to receive outplacement services in accordance with the provisions of Section 1.1(d).

(e) Equity Compensation Adjustments. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that vested prior to such Termination of Employment will be governed by the terms of such awards and such Equity Plan. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that are unvested on Termination of Employment will

vest immediately upon Termination of Employment, unless otherwise provided in such awards or such Equity Plan. Following his or her Termination of Employment, Company will not grant Executive any equity-based compensation awards.

(f) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

(g) Conditional Cap on Severance Pay. If the payments to Executive pursuant to this Agreement (when considered with all other payments made to Executive as a result of a Termination of Employment that are subject to Section 280G of the Code) (the amount of all such payments, collectively, the “Parachute Payment”) result in Executive becoming liable for the payment of any excise taxes pursuant to section 4999 of the Code (“280G Excise Tax”). Executive will receive the greater on an after-tax basis of (i) the severance benefits payable pursuant to this Section 1.2 or (ii) the severance benefits payable pursuant to this Section 1.2 as reduced to avoid imposition of the 280G Excise Tax (the “Conditional Capped Amount”).

Not more than fourteen (14) days following the Termination of Employment Company will notify Executive in writing (A) whether the severance benefits payable pursuant to this Section 1.2 when added to any other Parachute Payments payable to Executive exceed an amount equal to 299% (the “299% Amount”) of Executive’s “base amount” as defined in Section 280G(b)(3) of the Code, (B) the amount that is equal to the 299% Amount, (C) whether the severance benefit described in Section 1.2(g)(i) or the Conditional Capped Amount pursuant to section 1.2(g)(ii) is greater on an after-tax basis and (C) if the Conditional Capped Amount is the greater amount, the amount that the severance benefits payable pursuant to this Section 1.2 must be reduced to equal such amount.

The calculation of the 299% Amount, the determination of whether the termination benefits described in Section 1.2(g)(i) or the Conditional Capped Amount described in Section 1.2(g)(ii) is greater on an after-tax basis and, if the Conditional Capped Amount in Section 1.2(g)(ii) is the greater amount, the determination of how much Executive’s termination benefits must be reduced in order to avoid application of the 280G Excise Tax will be made by Company’s public accounting firm in accordance with section 280G of the Code or any successor provision thereto. For purposes of making the reduction of amounts payable under this Agreement, such amounts shall be eliminated in the following order: (1) any cash compensation, (2) any health or welfare benefits, (3) any equity compensation, and (4) any other payments hereunder. Reductions of such amounts shall take place in the chronological order with respect to which such amounts would be paid from the date of the Termination of Employment absent any acceleration of payment. If the reduction of the amounts payable hereunder would not result in a reduction of the Parachute Payments to the Conditional Capped Amount, no amounts payable under this Agreement shall be reduced pursuant to this provision. The costs of obtaining such determination will be borne by Company.

1.3 Termination Benefits in Connection With Disability. If Executive has a Termination of Employment as a result of a Disability, he or she will receive the following termination benefits:

(a) Severance Pay. Subject to Sections 1.7 and 2.1(a), Executive will receive Severance Pay, which shall be paid in equal installments, in accordance with

Company’s regular payroll practices and procedures, over a six (6) month period that commences on the first ordinary payroll payment date that follows the date that is sixty (60) days after the date on which the Executive has a Termination of Employment as a result of a Disability; provided that all unpaid portions of such Severance Pay shall be distributed to Executive in a lump-sum on the payroll date immediately preceding March 15 of the calendar year following the calendar year in which such Termination of Employment occurs.

(b) Accrued Obligations. Executive will be entitled to payment of any Accrued Obligations in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive and Executive’s dependents will be entitled to receive health and other welfare benefits in accordance with the provisions of Section 1.1(c) for the duration of the Severance Period.

(d) Equity Compensation Adjustments. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that vested prior to such Termination of Employment will be governed by the terms of such awards and such Equity Plan. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that are unvested on Termination of Employment will expire, unless otherwise provided in such awards or such Equity Plan. Following his or her Termination of Employment, Company will not grant Executive any equity-based compensation awards.

(e) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.4 Termination Benefits in Connection With Death. If Executive has a Termination of Employment due to death while employed by Company, his or her estate will receive the following benefits:

(a) Severance Pay. Subject to Section 2.1(a), Executive’s estate will receive Severance Pay, which shall be paid in equal installments, in accordance with Company’s regular payroll practices and procedures, over a six (6) month period that commences on the first ordinary payroll payment date that follows the date that is sixty (60) days after the date on which the Executive has a Termination of Employment due to death; provided that all unpaid portions of such Severance Pay shall be distributed to Executive’s estate in a lump-sum on the payroll date immediately preceding March 15 of the calendar year following the calendar year in which such Termination of Employment occurs.

(b) Accrued Obligations. Executive’s estate will be entitled to payment of any Accrued Obligations in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive’s dependants will be entitled to continue their health and welfare benefits, if any, pursuant to COBRA.

(d) Equity Compensation Adjustments. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that vested prior to such Termination of Employment will be governed by the terms of such awards and such Equity Plan. Any equity-based compensation awards granted to Executive by

Company under an Equity Plan that are unvested on Termination of Employment will expire, unless otherwise provided in such awards or such Equity Plan.

(e) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.5 Distributions on Account of Death of Executive During the Severance Period. If Executive becomes entitled to Severance Pay pursuant to Section 1.1, 1.2 or 1.3 and dies during the Severance Period, the following benefits will be payable:

(a) Severance Pay. Any remaining Severance Pay payable to Executive as of the date of his or her death will continue to be paid to Executive’s estate pursuant to Section 1.1, 1.2 or 1.3, as applicable.

(b) Accrued Obligations. Executive’s estate will be entitled to payment of any Accrued Obligations unpaid as of the date of Executive’s death in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive’s dependents will be entitled to continue to receive any health or other welfare benefits that they received immediately prior to the date of Executive’s death for the remainder of the applicable period, subject to the limitations contained in Section 1.1(c).

(d) Outplacement Services. Any outplacement service benefits available to Executive pursuant to Section 1.1(d) or 1.2(d) will cease as of the date of Executive’s death.

(e) Equity Compensation Adjustments. Upon death of Executive, any equity-based compensation awards granted to Executive by Company under an Equity Plan that vested prior to Executive’s death will be governed by the terms of such awards and such Equity Plan. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that are unvested on Executive’s death will expire, unless otherwise provided in such awards and such Equity Plan.

(f) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.6 Termination Benefits in Connection With a Termination Other Than a Qualifying Termination. If Executive has a Termination of Employment that is not described in Section 1.1, 1.2, 1.3 or 1.4, he or she will receive the following termination benefits:

(a) Severance Pay. Executive will not receive any Severance Pay.

(b) Accrued Obligations. Executive will be entitled to payment of any Accrued Obligations in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive and Executive’s dependants will be entitled to continue their health and welfare benefits, if any, pursuant to COBRA.

(d) Equity Compensation Adjustments. Any equity-based compensation awards granted to Executive by Company under an Equity Plan that vested prior to such Termination of Employment will be governed by the terms of such awards and such Equity Plan. Any equity-based compensation awards granted to Executive by

Company under an Equity Plan that are unvested on Termination of Employment will expire, unless otherwise provided in such awards or such Equity Plan. Following his or her Termination of Employment, Company will not grant Executive any equity-based compensation awards.

(e) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.7 Code Section 409A.

(a) It is the intention of Company and Executive that the provisions of this Agreement comply with Section 409A of the Code and the rules, regulations and other authorities promulgated thereunder (including the transition rules thereof) (collectively, “409A”), and all provisions of this Agreement will be construed and interpreted in a manner consistent with 409A.

(b) To the extent Executive is a “specified employee,” as defined in Section 409A(a)(2)(B)(i) of the Code and as determined in good faith by Company, notwithstanding the timing of payment provided in any other Section of this Agreement, no payment, distribution or benefit under this Agreement that constitutes a distribution of deferred compensation (within the meaning of Treasury Regulation Section 1.409A-1(b)) upon separation from service (within the meaning of Treasury Regulation Section 1.409A-1(h)), after taking into account all available exemptions that would otherwise be payable during the six-month period after separation from service will be made during such six-month period, and any such payment, distribution or benefit will instead be paid on the first business day after such six-month period.

(c) In the event that Company determines that any provision of this Agreement does not comply with 409A, Company will be entitled (but will have no obligation) without Executive’s consent, to amend or modify such provision to comply with 409A; provided, however, that such amendment or modification will, to the greatest extent commercially practicable, maintain the economic value to Executive of such provision.

(d) For purposes of 409A, each installment of Severance Pay under Sections 1.1(a), 1.3(a) and 1.4(a) will be deemed to be a separate payment as permitted under Treasury Regulation Section 1.409A-2(b)(2)(iii).

(e) Except as permitted by Section 409A, the continued benefits provided to Executive pursuant to this Agreement during any calendar year will not affect the continued benefits provided to Executive in any other calendar year, and the amount of any costs of purchasing benefits reimbursed pursuant to this Agreement shall be paid to Executive no later than the last day of the calendar year following the calendar year in which such costs are incurred by Executive.

(f) Neither Executive nor any creditor or beneficiary of Executive will have the right to subject any deferred compensation (within the meaning of Section 409A) payable under this Agreement or under any other plan, policy, arrangement or agreement of or with Company or any affiliate thereof (this Agreement and such other plans, policies, arrangements and agreements, the “Company Plans”) to any anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment. Except as permitted by Section 409A, any deferred compensation

(within the meaning of Section 409A) payable to or for the benefit of Executive under any Company Plan may not be reduced by, or offset against, any amount owing by Executive to the Company or any affiliate thereof.

ARTICLE II
EXECUTIVE COVENANTS

2.1 Release; Covenants. As a condition of obtaining benefits under this Agreement, Executive will be required to (a) within forty-five (45) days following Termination of Employment execute and deliver to Company a general release of claims against Company in such form as may be required by Company and (b) comply with the covenants set forth in this Article II. In the event that Executive fails to execute and deliver such general release within such forty-five-day period or revokes such general release (but only to the extent revocation is permitted under the terms of such general release), then Executive will forfeit all entitlement to any payment, benefit or other amount hereunder. Executive’s failure to comply with the covenants of this Article II will be governed by Section 2.7 and Article III.

2.2 Confidential Information. Company promises to disclose to Executive and Executive acknowledges that in and as a result of his or her employment with Company, he or she will receive, make use of, acquire, have access to and/or become familiar with various trade secrets and proprietary and confidential information of Company and its Affiliates, including, but not limited to, processes, computer programs, compilations of information, records, financial information, sales reports, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business, identities, locations, performance and compensation levels of employees and other confidential information which are owned by Company and/or its Affiliates and regularly used in the operation of its business, and as to which Company and/or its Affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees (collectively, “Trade Secrets”). Executive acknowledges and agrees that the Trade Secrets:

(a) are secret and not known in the industry;

(b) give Company or its Affiliates an advantage over competitors who do not know or use the Trade Secrets;

(c) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and

(d) are valuable, special and unique assets of Company or its Affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to Company or its Affiliates.

Executive promises not to use in any way or disclose any of the Trade Secrets, directly or indirectly, either during or after his or her employment by Company, except as required in the course of his or her employment, if required in connection with a judicial or administrative proceeding, or if the information becomes public knowledge other than as a result of an unauthorized disclosure by Executive. All files, records, documents, information, data compilations and similar items containing non-public and confidential information relating to the business of Company, whether prepared by Executive or otherwise coming into his or her possession, will remain the exclusive property of Company and may not be removed from the premises of Company under any circumstances without the prior written consent of Company (except in the ordinary course of business during Executive’s employment by

Company), and in any event must be promptly delivered to Company upon termination of Executive’s employment with Company. Executive agrees that upon receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, whether received during or after the term of Executive’s employment with Company, Executive will timely notify and promptly provide a copy of the subpoena, process or other request to Company. For this purpose, Executive irrevocably nominates and appoints Company (including any attorney retained by Company), as his or her true and lawful attorney-in-fact, to act in Executive’s name, place and stead to perform any reasonable and prudent act that Executive might perform to defend and protect against any disclosure of any Trade Secrets.

The parties agree that the above restrictions on confidentiality and disclosure are completely severable and independent agreements supported by good and valuable consideration and, as such, will survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on confidentiality and disclosure will not render invalid or unenforceable any remaining restrictions on confidentiality and disclosure. Additionally, should an arbitrator or court of competent jurisdiction determine that the scope of any provision of this Section 2.2 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

2.3 Non-Competition. As a material inducement for Company’s promise to provide the trade secrets and proprietary and confidential information described in Section 2.2, Executive agrees that during the term of his or her employment with Company and during the applicable Severance Period specified in Section 5.14, he or she will not, directly or indirectly, as an employee, consultant or otherwise, compete with Company by providing services relating to retail or non-retail sales of jewelry to any other person, partnership, association, corporation, or other entity that is in a “Competing Business.” As used herein, a “Competing Business” is any business that, in whole or in material part, in the United States, Canada and/or Puerto Rico, (a) engages in the retail sale of jewelry, including, but not limited to, specialty jewelry retailers and other retailers having jewelry divisions or departments, or (b) operates as a vendor of jewelry, including, but not limited to, as a wholesaler, manufacturer or direct importer of jewelry. The restrictions contained in this Section 2.3 will be tolled on a day-for-day basis for each day during which Executive participates in any activity in violation of such restrictions.

The parties agree that, subject to the terms of Section 2.1, the above restrictions on competition are completely severable and independent agreements supported by good and valuable consideration and, as such, will survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on competition will not render invalid or unenforceable any remaining restrictions on competition. Additionally, should an arbitrator or a court of competent jurisdiction determine that the scope of any provision of this Section 2.3 is too broad to be enforced as written, the parties intend that the arbitrator or court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

2.4 Agreement Not to Solicit Employees. Executive covenants and agrees that during Executive’s employment with Company and thereafter during the applicable Severance Period specified in Section 5.14, Executive will not, on his or her own behalf or on behalf of any other person, partnership, association, corporation, or other entity, (a) directly, indirectly, or through a third party hire, cause to be hired or solicit any employee of Company or its

Affiliates or (b) in any manner attempt to influence or induce any employee of Company or its Affiliates to leave the employment of Company or its Affiliates, nor will he or she use or disclose to any person, partnership, association, corporation or other entity any information concerning the names and addresses of any employees of Company or its Affiliates. The restrictions contained in this Section 2.4 will be tolled on a day-for-day basis for each day during which Executive participates in any activity in violation of such restriction.

The parties agree that, subject to the terms of Section 2.1, the above restrictions on the solicitation of employees are completely severable and independent agreements supported by good and valuable consideration and, as such, will survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on the solicitation of employees will not render invalid or unenforceable any remaining restrictions on the solicitation of employees. Additionally, should an arbitrator or court of competent jurisdiction determine that the scope of any provision of this Section 2.4 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

2.5 Nondisparagement. Executive covenants and agrees that he or she will not make any public or private statements, comments, or communications in any form, oral, written, or electronic (all of the foregoing, for purposes of this paragraph, “Communications”), which in any way could constitute libel, slander, or disparagement of Company, its Affiliates, its and/or their employees, officers, and/or directors, or which may be considered to be derogatory or detrimental to its or their good name or business; provided, however, that the terms of this paragraph will not (a) apply to Communications between Executive and his or her spouse, clergy, or attorneys, which are subject to a claim of privilege existing under common law, statute, or rule of procedure; (b) apply to Communications required by law or made in response to a valid subpoena or other lawful order compelling Executive to provide testimony or information (subject to the provisions of Section 2.2); or (c) be construed to inhibit or limit Executive’s ability to initiate or cooperate with any investigation by a governmental or regulatory agency or official or other judicial or legal actions (subject to the provisions of Section 2.2). Executive specifically agrees not to issue any public statement concerning his or her employment by Company and/or the cessation of such employment.

2.6 Reasonableness of Restrictions. Executive agrees that Executive and Company are engaged in a highly competitive business and, due to Executive’s position with Company and the nature of Executive’s work, Executive’s engaging in any business that is competitive with that of Company will cause Company great and irreparable harm. Executive represents and warrants that the time, scope and geographic area restricted by the foregoing Sections 2.2, 2.3, 2.4 and 2.5 pertaining to confidential information, non-competition, non-solicitation, and non-disparagement are reasonable, that the enforcement of the restrictions contained in such Sections would not be unduly burdensome to Executive, and that Executive will be able to earn a reasonable living while abiding by the terms included herein. Executive agrees that the restraints created by the covenants in Sections 2.2, 2.3, 2.4 and 2.5 pertaining to confidential information, non-competition, non-solicitation, and non-disparagement are not outweighed by either the hardship to Executive or any injury likely to the public. If any arbitrator or court determines that any portion of this Article II is invalid or unenforceable, the remainder of this Article II will not thereby be affected and will be given full effect without regard to the invalid provisions. If any court construes any of the provisions of this Article II, or any part thereof, to be unreasonable because of the duration or scope of such provision,

such court will have the power to reduce the duration or scope of such provision and to enforce such provision as so reduced.

2.7 Enforcement. Upon Executive’s employment with an entity that is not an Affiliate of Company (a “Successor Employer”) during the period that the provisions of this Article II remain in effect, Executive will provide such Successor Employer with a copy of this Agreement and will notify Company of such employment within thirty (30) days thereof. Executive agrees that in the event of a breach of the terms and conditions of this Article II by Executive, Company will be entitled, if it so elects, to institute and prosecute proceedings pursuant to Article III, either in law or in equity, against Executive, to obtain damages for any such breach, or to enjoin Executive from any conduct in violation of this Article II. In the event Company seeks an injunction or restraining order against Executive for breach of this Article II, Executive waives any requirement that Company post bond in connection with such request for relief.

2.8 Recoupment. Executive acknowledges and agrees that Company’s remedies at law for a breach or threatened breach of any of the provisions of this Article II of the Agreement would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, Executive shall forfeit all payments otherwise due under the Agreement and shall return to Company any Severance Pay made to Executive prior to such forfeiture.

ARTICLE III
DISPUTE RESOLUTION

3.1 Arbitration. Company and Executive agree that any controversy or claim (including all claims pursuant to common and statutory law) relating to this Agreement or arising out of or relating to the subject matter of this Agreement or Executive’s employment by Company will be resolved exclusively through binding arbitration. Subject to the terms and any exceptions provided in this Agreement, the parties each waive the right to a jury trial and waive the right to adjudicate their disputes under this Agreement outside the arbitration forum provided for in this Agreement. The arbitration will be administered by a single neutral arbitrator admitted to practice law in Texas for a minimum of ten years. Any such arbitration proceeding will take place in Dallas County, Texas and will be administered by the American Arbitration Association (“AAA”) Dallas office in accordance with its then-current applicable rules and procedures. The arbitrator will have the authority to award the same remedies, damages and costs that a court could award. The arbitrator will issue a reasoned award explaining the decision, the reasons for the decision and any damages awarded. The arbitrator’s decision will be final and binding. This provision can be enforced under the Federal Arbitration Act.

3.2 Entitlement to Injunctive Relief. As the sole exception to the exclusive and binding nature of the arbitration commitment set forth above, Executive and Company agree that Company will have the right to initiate an action in any state or federal court of competent jurisdiction in Dallas County, Texas in order to request temporary, preliminary and permanent injunctive or other equitable relief, including, without limitation, specific performance, to enforce the terms of Sections 2.2, 2.3, 2.4, or 2.5 above, without the necessity of proving inadequacy of legal remedies or irreparable harm or posting bond; provided, however, that if Executive is engaging in activities prohibited by Section 2.2, 2.3, 2.4 or 2.5 above, outside of Dallas County, Texas, the parties hereby agree that the Company may, at its sole option, bring an action in any court of competent jurisdiction. Nothing herein shall prevent the Company from pursuing the same injunctive or equitable relief in the arbitration proceedings. Moreover,

nothing in this section should be construed to constitute a waiver of the parties’ rights and obligations to arbitrate regarding matters other than those specifically addressed in this paragraph.

3.3 Limitation of Scope. Should a court of competent jurisdiction determine that the scope of the arbitration and related provisions of this Agreement are too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

3.4 Payments Pending Litigation and/or Arbitration. In the case of a Qualifying Termination other than during a Protection Period, upon the material violation of any of the provisions of this Agreement or a dispute regarding the subject matter of this Agreement, Company shall cease payment of all Severance Pay and severance benefits pending the outcome of litigation and/or arbitration on such issues pursuant to this Article III. In the case of a Qualifying Termination during a Protection Period, upon the material violation of any of the provisions of this Agreement or a dispute regarding the subject matter of this Agreement, Company shall continue payment of all Severance Pay and severance benefits pending the outcome of litigation and/or arbitration pursuant to this Article Ill subject to being reimbursed if so ordered in any such litigation or arbitration.

3.5 Fees and Expenses. If Company or Executive sues in court or brings an arbitration action against the other for a breach of any provision of this Agreement or regarding any dispute arising from the subject matter of this Agreement, the prevailing party will be entitled to recover its attorneys’ fees, court costs, arbitration expenses, and its portion of the fees charged by AAA and/or the individual arbitrator, as applicable, regardless of which party initiated the proceedings. If there is no prevailing party, the fees charged by AAA and/or the individual arbitrator will be borne equally by Company and Executive, and Company and Executive will each bear their own costs and attorneys’ fees incurred in arbitration. In the event that Executive prevails on at least one material issue, Executive will be deemed to be the prevailing party; provided, however, that if Executive does not prevail on at least one material issue, the Company shall be deemed to be the prevailing party.

3.6 Right of Offset. If Executive is at any time indebted to Company, or otherwise obligated to pay money to Company for any reason, Company, at its election, may offset amounts otherwise payable to Executive under this Agreement against any such indebtedness or amounts due from Executive to Company, to the extent permitted by law.

3.7 Other Matters and Acknowledgement. All proceedings conducted pursuant to this agreement to arbitrate, including any order, decision or award of the arbitrator, will be kept confidential by all parties except to the extent necessary to enforce the award. EXECUTIVE ACKNOWLEDGES THAT, BY SIGNING THIS AGREEMENT, EXECUTIVE IS WAIVING ANY RIGHT THAT EXECUTIVE MAY HAVE TO A JURY TRIAL OR A COURT TRIAL OF ANY EMPLOYMENT-RELATED CLAIM ALLEGED BY EXECUTIVE.

ARTICLE IV
MISCELLANEOUS PROVISIONS

4.1 Executive Acknowledgement. Executive is entering into this Agreement of his or her own free will. Executive acknowledges that he or she has had adequate opportunity to review this Agreement and consult with counsel of his or her own choosing. Executive represents that he or she has read and understands this Agreement, he or she is fully aware of this

Agreement’s legal effect and has not acted in reliance upon any statements made by Company other than those set forth in writing in the Agreement.

4.2 At Will Employment. Notwithstanding any provision in this Agreement to the contrary, Executive hereby acknowledges and agrees that Executive’s employment with Company is for an unspecified duration and constitutes “at-will” employment, and Executive further acknowledges and agrees that this employment relationship may be terminated at any time, with or without Cause or for any or no Cause, at the option either of Company or Executive.

4.3 Successors and Assigns. The rights and obligations of Company under this Agreement will inure to the benefit of and will be binding upon the successors and assigns of Company. Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, sale of assets or otherwise) to all or substantially all of the business and/or assets of Company, by a written agreement in form and substance reasonably satisfactory to Executive, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that Company would be required to perform it if no such succession had taken place. This Agreement is personal to Executive and without the prior written consent of Company is not assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable by Executive’s personal and legal representatives, executors, administrators, heirs, distributes, devisees and legatees.

4.4 Amendment. This agreement may be amended or terminated at any time by Company, by a resolution of the Board of Directors of Company or the Compensation Committee thereof, the substance of which is promptly communicated to Executive; provided that, without the written consent of Executive, no such termination of this Agreement or amendment reducing any benefits provided hereunder shall be effective prior to the expiration of the one-year anniversary of the adoption of such resolution; and provided, further, that without the written consent of Executive, no amendment or termination shall become effective during a Protection Period. No amendment or termination shall affect any vested rights or benefits to which Executive is entitled at the effective time of such amendment or termination. Otherwise, the Agreement may be amended or terminated only as provided in Section 1.7 or by an instrument in writing signed by Company and Executive.

4.5 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision will be fully severable; this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a portion of this Agreement; and the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.

4.6 Integration. The provisions of this Agreement constitute the entire and complete understanding and agreement between the parties with respect to the subject matter hereof, and supersede all prior and contemporaneous oral and written agreements, representations and understandings of the parties, including without limitation The Executive Severance Plan for Zale Corporation and its Affiliates and any Change of Control Agreement or employment agreement (including any offer letter) between Executive and Company, which are hereby terminated with respect to Executive.

4.7 Choice of Law; Forum Selection. THIS AGREEMENT WILL BE EXCLUSIVELY GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAWS OF TEXAS OR ANY OTHER JURISDICTION, AND, WHERE APPLICABLE, THE LAWS OF THE UNITED STATES.

The parties hereby agree that any action to enforce the arbitrator’s award shall be filed exclusively in a state or federal court of competent jurisdiction in Dallas County, Texas and the parties hereby consent to the exclusive jurisdiction of such court; provided, however, that nothing herein shall preclude the parties’ rights to conduct collection activities in the courts of any jurisdiction with respect to the order or judgment entered upon the arbitrator’s award by the Texas court.

4.8 Survival. The provisions of Article II, Article III, this Article IV and Article V will survive the termination of this Agreement. The existence of any claim or cause of action of Executive against the Company, whether predicated on this Agreement or otherwise, will not constitute a defense to the enforcement by the Company of the covenants of Executive contained in this Agreement, including but not limited to those contained in Article II.

4.9 No Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party will be deemed a waiver of similar or dissimilar provisions or conditions at any time.

4.10 Notice. For all purposes of this Agreement, all communications required or permitted to be given under this Agreement will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or two business days after having been sent by a nationally recognized overnight courier service, addressed to Company at its principal executive office, to Company’s General Counsel, and to Executive at Executive’s principal residence, or to such other address as any party may have furnished to the other in writing, except that notices of change of address will be effective only upon receipt.

4.11 Counterparts. This Agreement may be executed in several counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same Agreement.

4.12 Construction. This Agreement is deemed to be drafted equally by both Executive and Company and will be construed as a whole and according to its fair meaning. Any presumption or principle that the language of this Agreement is to be construed against any party will not apply. The headings in this Agreement are only for convenience and are not intended to affect construction or interpretation. Any references to paragraphs, subparagraphs, sections, subsections or clauses are to those parts of this Agreement, unless the context clearly indicates to the contrary. Also, unless the context clearly indicates to the contrary, (a) the plural includes the singular and the singular includes the plural; (b) “and” and “or” are each used both conjunctively and disjunctively; (c) “any,” “all,” “each,” or “every” means “any and all”, and “each and every”; (d) “includes” and “including” are each used without limitation; (e) “herein,” “hereof,” “hereunder” and other similar compounds of the word “here” refer to the entire Agreement and not to any particular paragraph, subparagraph, section or subsection; and (f) all pronouns and any variations thereof will be deemed to refer

to the masculine, feminine, neuter; singular or plural as the identity of the entities or persons referred to may require.

4.13 No Mitigation. Except as provided in Sections 1.1(c), 1.2(c) or 1.3(c) (regarding continued welfare benefits), in no event will Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts will not be reduced whether or not Executive obtains other employment.

4.14 Withholding. Company may deduct and withhold from any amounts payable under this Agreement such Federal, state, local, foreign or other taxes as are required to be withheld pursuant to any applicable law or regulation.

ARTICLE V
DEFINITIONS

5.1 “Affiliate” means a corporation that is a member of a controlled group of corporations (as defined in section 414(b) of the Code) that includes Company, any trade or business (whether or not incorporated) that is in common control (as defined in section 414(c) of the Code) with Company, or any entity that is a member of the same affiliated service group (as defined in section 414(m) of the Code) as Company.

5.2 “Base Compensation” means Executive’s gross base salary at the time of his or her Termination of Employment before reduction by any pre-tax contributions to the 401(k) Plan or any other benefit plan maintained by the Company or its Affiliates or any other deductions of any nature.

5.3 “Bonus” means the average of the annual incentive bonus amount earned by Executive under the applicable Bonus Plan as established by Company’s Board of Directors with respect to the three fiscal years preceding the fiscal year in which the Termination of Employment occurs (or such lesser period of Executive’s employment with the Company and its Affiliates).

5.4 “Cause” means (a) Executive’s indictment for a felony or a crime involving moral turpitude; (b) Executive’s commission of an act constituting fraud, deceit or material misrepresentation with respect to Company; (c) Executive’s recurrent use of alcohol or prescribed medications at work or otherwise such that, in Company’s sole discretion; Executive’s job performance is impaired or the use of any illegal substances or drug such that, in Company’s sole discretion. Executive’s job performance is impaired; (d) Executive’s embezzlement of Company’s or its Affiliates’ assets or funds; and (e) Executive’s commission of any negligent or willful act or omission that, in the cases of clauses (b), (d) and (e) of this Section 5.4, causes material detriment (by reason, without limitation, of financial exposure or loss, damage to reputation or goodwill, or exposure to civil damages or criminal penalties or other prosecutorial action by any governmental authority) to Company or any Affiliate.

5.5 “Change of Control” means any of the following occurrences:

(a) any “person,” as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (“Person”), becomes a “beneficial owner,” as such term is used in Rule 13d-3 promulgated under that Act, of 50% or more of the voting stock of Company; provided, however, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 50% of the

voting stock of the Company as a result of the acquisition of voting stock by the Company which reduces the amount of Company voting stock outstanding; provided further, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company voting stock that increases the percentage of outstanding Company voting stock beneficially owned by such person, a Change in Control of the Company shall then occur;

(b) the majority of the Board of Directors of Company consists of individuals other than “incumbent” directors, which term means the members of the Board of Directors on the date hereof; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the incumbent directors will be considered to be an incumbent director;

(c) Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets;

(d) all or substantially all of the assets or business of Company is disposed of pursuant to a merger, consolidation or other transaction (unless the stockholders of Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the voting stock of Company immediately prior to such merger, consolidation or other transaction, all of the voting stock or other ownership interests of the entity or entities, if any, that succeed to the business of Company); or

(e) Company combines with another company and is the surviving corporation but, immediately after the combination, the stockholders of Company immediately prior to the combination hold, directly or indirectly, 50% or less of the voting stock of the combined company (there being excluded from the number of shares held by such stockholders, but not from the voting stock of the combined company, any shares received by affiliates of such, other company in exchange for stock of such other company).

For purposes of the Change of Control definition, “Company” will include any entity that succeeds to all or substantially all, of the business of Company and “voting stock” will mean securities of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation.

5.6 “COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

5.7 “Code” means the Internal Revenue Code of 1986, as amended.

5.8 “Disability” means, in Company’s sole discretion, Executive becomes mentally or physically impaired or disabled such that he or she is unable to perform his or her duties and responsibilities hereunder for a period of at least one hundred twenty (120) days in the aggregate during any one hundred fifty (150) consecutive day period.

5.9 “Equity Plan” means any equity plan, agreement or arrangement maintained or sponsored by Company in which Executive is a participant.

5.10 “401(k) Plan” means the Zale Corporation Savings and Investment Plan or any other qualified retirement plan with a cash or deferred arrangement that is maintained or sponsored by Company or any Affiliate in which Executive is a participant.

5.11 “Protection Period” means the period beginning on the date that is six months prior to the occurrence of a Change of Control and ending twenty-four (24) months following the occurrence of a Change of Control.

5.12 “Qualifying Termination”

(a) In the case of any Termination of Employment other than during a Protection Period, ‘‘Qualifying Termination” shall mean:

(i) the Termination of Employment of Executive by Company for any reason other than Cause, Disability, or death; or

(ii) the Termination of Employment of Executive by Executive for any of the following reasons:

(A) a material reduction by Company in Executive’s base salary or bonus eligibility unless similar reductions apply to senior executives of Company and its subsidiaries generally;

(B) relocation of Company’s principal executive offices outside the Dallas/Fort Worth, Texas Metroplex; or

(C) the assignment to Executive by Company of duties materially inconsistent with, or the material reduction of the powers and functions associated with, Executive’s positions, duties, responsibilities and status with Company or a material adverse change in Executive’s titles or offices, unless such action is in lieu of termination by Company of Executive’s employment due to Disability.

If Executive believes that an event specified in this Section 5.12(a)(ii) has occurred. Executive must notify Company of that belief within ninety (90) days following the occurrence of such event. Company will have thirty (30) days following receipt of such notice (such period, the “Designated Period”) in which to either rectify such event, determine that such an event exists, or determine that such an event does not exist. If Company does not take any of the foregoing actions within the Designated Period, Executive may terminate his or her employment with Company during the fourteen-day period following the expiration of the Designated Period. If, during the Designated Period, Company determines that such an event exists Company shall either (A) undertake to cure such event during the Designated Period and provide Executive with written notice during the Designated Period of Company’s determination that such event has been cured, or (B) provide written notice to Executive during the Designated Period that it does not wish to cure such event, in which case, Executive may terminate his or her employment during the fourteen-day period following receipt of the notice specified in this clause (B). If, during the Designated Period, Company determines that (1) such event does not exist or (2) Company has cured such event pursuant to clause (A) of the preceding sentence, then (x) Executive will not be entitled to rely on

or assert such event as a basis for a Qualifying Termination; and (y) if Executive disagrees with Company’s determination, Executive may file a claim pursuant to Article III within thirty (30) days after Executive’s receipt of written notice of Company’s determination.

(b) In the case of any Termination of Employment during a Protection Period, “Qualifying Termination” shall mean:

(i) the Termination of Employment of Executive by Company for any reason other than Cause, Disability, or death; or

(ii) the Termination of Employment of Executive by Executive for any of the following reasons:

(A) the assignment to Executive by Company of duties inconsistent with, or the reduction, other than due solely to the fact that Company no longer is a publicly traded company of the powers and functions associated with Executive’s position, duties, responsibilities and status with the Company immediately prior to a Change of Control, or a material adverse change in Executive’s titles or offices as in effect immediately prior to a Change of Control, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except, in each of the foregoing cases, in connection with Termination of Employment by Company due to Cause, Disability, or death;

(B) a reduction by Company in Executive’s base salary or bonus eligibility as in effect on the date of a Change of Control;

(D) Company’s requirement that Executive be based anywhere other than at Company’s principal executive offices in the Dallas/Fort Worth, Texas Metroplex area, or if Executive agrees to a relocation outside the area, Company’s failure to reimburse Executive for moving and all other expenses incurred with such move;

(E) Company’s failure to continue in effect any Company-sponsored plan that is in effect on the date of a Change of Control (or replacement plans therefore that in the aggregate provide substantially the same or more favorable benefits) that is either a 401(k) Plan or provides incentive or bonus compensation or reimbursement for reasonable expenses incurred by Executive in connection with the performance of duties with Company;

(F) any material breach by Company of any provision of this Agreement; or

(G) any failure by Company to obtain the assumption of this Agreement by any successor or assign of Company.

If Executive believes that an event specified in this Section 5.12(b)(ii) has occurred, Executive must notify Company of that belief within ninety (90) days following the occurrence of such event. Company will have thirty (30) days following receipt of such notice (such period, the “Designated Period”) in which to either rectify such event determine that such an event exists, or determine that such an event does not exist. If Company does not take any of the foregoing actions within the Designated Period, Executive may terminate his or her employment with Company during the fourteen-day period following the expiration of the Designated Period. If, during the Designated Period, Company determines that such an event exists Company shall either (A) undertake to cure such event during the Designated Period and provide Executive with written notice during the Designated Period of Company’s determination that such event has been cured, or (B) provide written notice to Executive during the Designated Period that it does not wish to cure such event, in which case, Executive may terminate his or her employment during the fourteen-day period following receipt of the notice specified in this clause (B). If, during the Designated Period, Company determines that (1) such event does not exist or (2) Company has cured such event pursuant to clause (A) of the preceding sentence, then (x) Executive will not be entitled to rely on or assert such event as a basis for a Qualifying Termination, and (y) if Executive disagrees with Company’s determination, Executive may file a claim pursuant to Article III within thirty (30) days after Executive’s receipt of written notice of Company’s determination.

(c) Notwithstanding anything to the contrary contained herein, for purposes of Section 1.2, a Qualifying Termination shall occur only to the extent that Executive incurs a “separation from service” with Company within the meaning of Treasury Regulation Section 1.409A-1(h).

(d) In the event that Executive is employed by a subsidiary of Company, including Zale Delaware, Inc., and not Company, for purposes of the term “Qualifying Termination,” “Company” will include such subsidiary.

5.13 “Severance Pay” means cash severance payments in an amount equal to the product of (a) the sum of Executive’s Base Compensation as of Termination of Employment and, in the cases of Sections 1.1 and 1.2, Bonus (as specified in Section 5.3), and (b) the applicable Severance Period specified in Section 5.14 provided, however, that in the event of payment under Sections 1.3 or 1.4, the amount of any payment received by Executive pursuant to any death or disability plan or insurance maintained by Company on Executive’s behalf shall be deducted from any amounts payable pursuant to this Agreement.

5.14 “Severance Period” means the following period, based on whether Executive’s Qualifying Termination is during a Protection Period or due to Disability or death:

QUALIFYING TERMINATION OTHER THAN DURING A PROTECTION PERIOD - SECTION 1.1		QUALIFYING TERMINATION DURING A PROTECTION PERIOD - SECTION 1.2		TERMINATION OF EMPLOYMENT DUE TO DISABILITY OR DEATH - SECTIONS 1.3 AND 1.4
6 months		3 years		6 months

5.15 “Termination of Employment” means the date on which Executive ceases to perform duties for Company or its Affiliate(s).

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

ZALE CORPORATION

By:
Name:
Title:

EXECUTIVE

EX-10.3 3 a09-14859_1ex10d3.htm EX-10.3

Exhibit 10.3

AMENDMENT TO

MERCHANT SERVICES AGREEMENT

THIS AMENDMENT dated as of June 8, 2009 (this “Amendment”), amends that certain Merchant Services Agreement (the “Original Agreement”) dated as of July 10, 2000, as previously amended (the Amendment and the Original Agreement as previously amended, collectively referred to as the “Amended Agreement”), by and among, CITIBANK (SOUTH DAKOTA), N.A., a national banking association as successor to HURLEY STATE BANK, ZALE DELAWARE, INC., a corporation organized and existing under the laws of the State of Delaware, and ZALE PUERTO RICO, INC., a corporation organized and existing under the laws of Puerto Rico (each a “Party” and collectively the “Parties”).

WITNESSETH

WHEREAS, the Parties entered into the Original Agreement in order for Bank to provide certain credit services to customers of Zale;

WHEREAS, the Parties have determined that the Original Agreement should be amended as set forth in this Amendment;

WHEREAS, Bank has requested greater latitude in changing the Account Issuance Criteria and in exchange therefore Zale has requested a restructuring of the Minimum Volume Amount:

WHEREAS, the Bank has requested collateral for certain obligations of Zale in order to induce Bank not to give notice of termination of the Original Agreement before March 1, 2010; and

WHEREAS, each of the Parties believe it is in their best interest and desire to amend the Original Agreement as set forth below.

NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

Section I Defined Terms.

Unless otherwise defined herein, capitalized terms used herein shall have the meaning given to such terms in the Original Agreement.

Section II Amendments to Original Agreement.

(1) The definition of “Merchant Fee Differential” contained in Section 1.1 of the Original Agreement is hereby deleted in its entirety and replaced with the following:

“Merchant Fee Differential” means, (i) with respect to a Decrease Period for which no payment of a Merchant Fee Differential has occurred, an amount equal to the product of (a) the Average Merchant Fee with respect to such Decrease Period and (b) the difference between the Minimum Volume Amount and Net Card Sales with respect to such Decrease Period; or (ii) with respect to a Decrease Period for which the payment of one or more Merchant Fee Differential amounts has already occurred, an amount equal to the product of (a) the Average Merchant Fee with respect to such Decrease Period and (b) the difference between the Net Card Sales for all of the months following the end of the last Decrease Period for which a Merchant Fee Differential was paid and the aggregate number for that same period of time as determined by reference to the monthly chart set forth immediately below.

Jan		Feb		Mar		Apr		May		Jun		Jul		Aug		Sep		Oct		Nov		Dec
28,570		54,119		35,201		39,445		48,773		38,220		39,077		40,412		38,932		39,566		67,286		130,399

(All numbers in the chart are in thousands of dollars.)

(2) The definition of “Minimum Volume Amount” contained in Section 1.1 of the Original Agreement is amended:

(a) by deleting the reference therein to $750,000,000.00 and replacing it with $600,000,000.00; provided however, that Bank and Zale expressly agree that Net Card Sales for purposes of this definition shall not include any amount of credit sales for the Bailey, Banks & Biddle division that was sold by Zale to Finlay Fine Jewelry Corporation;

(b) by deleting the reference therein to adjustment from time to time as provided in Section 3.2(c); and

(b) by adding at the end thereof the following:

In the event that Bank provides Zale with a notice of Material Changes to the Bank’s Account Issuance Criteria as permitted by Section 3.2(a), beginning on the date that the changes are implemented the Minimum Volume Amount will be adjusted up or down, as the case may be, in an amount equal to the estimated impact on Net Card Sales as provided by Bank to Zale. Upon receipt of the notice, Zale shall have the right to review and discuss with Bank the information detailing the estimated impact of the change on Net Card Sales.

(3) Section 3.2(a) of the Original Agreement is hereby deleted in its entirety and replaced with the following:

(a) Bank’s Account Issuance Criteria. Subject to the terms and conditions of this Agreement, Bank shall receive Applications for Accounts and approve or decline such Applications solely in accordance with Bank’s Account issuance criteria (“Bank’s Account Issuance Criteria”). Bank’s Account Issuance Criteria as of the date of this Agreement are attached hereto as Schedule 3.2(a) and are incorporated herein as fully as though set forth herein. Thereafter, Bank may make changes to Bank’s Account Issuance Criteria from time to time as Bank reasonably deems necessary, and such changes will not require the approval of the Client

Relationship Team or Zale, provided, however, that (i) Bank shall give Zale at least sixty (60) days’ notice of any such change which is a material change, which notice shall include a reasonable estimate of the impact of the change on approval rates, initial credit limits, Net Card Sales and the number of Credit Applicants, and (ii) Bank will not make any changes between November 15 of each year and January 15 of the following year. Bank shall decision each Application in accordance with the terms hereof and, if such Application is approved, promptly issue a Card to such Accountholder.

(4) Section 3.2(c) of the Original Agreement is hereby deleted in its entirety and shall have no further legal force or effect.

(5) Section 3.2 of the Original Agreement is amended by adding at the end thereof:

(l) As soon after the end of each calendar quarter during the Term of the Agreement as practical, Bank shall provide to Zale a risk management report detailing the delinquency and charge-off levels consistent with the information that has been provided by Bank to Zale in Program Committee meetings prior to the effective date of the Amendment.

(6) The Original Agreement is hereby amended by adding the following Section 3.23:

3.23 Zale Letters of Credit.

(a) Zale hereby covenants and agrees that it shall obtain and maintain in full force and effect at all times during the time period commencing within ten days following the date of execution of this Amendment an irrevocable stand-by letter of credit in an amount equal to $5,000,000.00 subject to and in accordance with the terms and conditions set forth below and in a form acceptable to Bank consistent with the standard form utilized by Bank of America or another issuer acceptable to Bank (the “Permanent Letter of Credit”). Zale shall replenish the Permanent Letter of Credit within thirty (30) days to eliminate any deficit of $250,000.00 or more that is created as a result of a draw by Bank.

(b) Zale hereby covenants and agrees that it shall obtain and maintain in full force and effect at all times during the time period commencing on November 15 of each year and continuing until February 14 of the following year (the “Security Period”) an additional irrevocable stand-by letter of credit in an amount equal to $10,000,000.00 subject to and in accordance with the terms and conditions set forth below and in a form acceptable to Bank consistent with the standard form utilized by Bank of America or another issuer acceptable to Bank (the “Seasonal Letter of Credit,” and together with the Permanent Letter of Credit, the “Letters of Credit”).

(c) Zale acknowledges and agrees that Bank shall have the right in its sole and absolute discretion (without prior notice to or consent by Zale): (i) to make full or partial draws on the Letters of Credit at any time in an amount equal to any amounts to which Bank is entitled to receive from Zale and that have not been paid pursuant to the terms of the Agreement, including without limitation, Chargebacks, Returns, the non-delivery of merchandise, amounts owed under the terms of any recourse programs, and In-Store Payments;

(ii) to make full or partial draws on the Permanent Letter of Credit upon the receipt of notice of non-renewal of the Permanent Letter of Credit; (iii) to make full or partial draws on the Permanent Letter of Credit upon the failure of Zale to replenish the Permanent Letter of Credit as required by this Agreement to eliminate any deficit created as a result of a draw by Bank; or (iv) to make full or partial draws on the Permanent Letter of Credit upon the failure of Zale to deliver the Seasonal Letter of Credit prior to the beginning of any Security Period. Notwithstanding the foregoing, in the event Bank makes a partial draw on the Letters of Credit at any time in an amount less than two hundred fifty thousand dollars ($250,000.00), the draw shall be considered a final draw and Bank shall not have the right to make any further draws on the Letters of Credit. Zale shall take whatever action is required for the Letters of Credit to remain available for full or partial draws by Bank as set forth above during the Term of the Agreement, during any period following termination or expiration of the Agreement where the parties continue to comply with the terms and conditions of the Agreement pursuant to Section 5.5, and for a period of ninety (90) days following the final Card Sale under the terms of the Card Program. Under no circumstances shall Bank’s decision to draw down any amount under the Letters of Credit constitute a waiver of any of Bank’s other rights under the Agreement, including without limitation Bank’s right to terminate this Agreement in accordance with Section 5.4. The provisions of this Section will survive the termination of the Agreement.

(d) The failure by Zale to obtain and maintain the Permanent Letter of Credit in full force and effect at all times and the Seasonal Letter of Credit at all times during the Security Period shall constitute a material breach of an obligation to pay an amount under the Agreement as set forth in Section 5.4(b)(iii) of the Agreement.

(7) The Original Agreement is hereby amended by adding the following Section 3.24:

3.24 Warranty Reinsurance.

(i) On or before June 30, 2009, Zale agrees to enter into an arrangement with a regulated insurance company to insure or reinsure all jewelry protection plan agreements entered into with respect to Authorized Goods and Services purchased on the Card during the Term of the Agreement, and Bank shall be named as the beneficiary of such arrangement (the “Warranty Reinsurance”). The identity of the provider, the amount of the Warranty Reinsurance coverage, and the terms of the Warranty Reinsurance arrangement shall be subject to the approval of Bank in its sole discretion, with such approval not to be unreasonably withheld. Zale shall provide to Bank all information and evidence of the Warranty Reinsurance arrangement as reasonably requested by Bank. The provision of this Section will survive termination of this Agreement.

(ii) Bank may terminate the Agreement effective October 31, 2009, upon the provision of written notice to Zale, in the event Zale fails to deliver the Warranty Reinsurance in accordance with the terms set forth above. Following the delivery of the Warranty Reinsurance, the failure by Zale to maintain the Warranty Reinsurance in full force and effect at all times shall constitute a material breach of an obligation to pay an amount under the Agreement as set forth in Section 5.4(b)(iii) of the Agreement.

(8) Section 5.4(b)(v) of the Original Agreement is hereby deleted in its entirety and replaced with the following:

(v) by Bank upon not less than one hundred eighty (180) days prior written notice to Zale in the event the aggregate amount of Net Card Sales of Zale during any twelve (12) consecutive calendar month period (the “Decrease Period”) decrease below the Minimum Volume Amount; provided, however, that there is a Merchant Fee Differential for such Decrease Period in an amount greater than zero, Bank has first given Zale notice of its intent to terminate pursuant to this Section 5.4(b)(v), and Zale has not advised Bank by delivery of written notice to Bank within thirty (30) days of such notice that Zale will pay Bank the Merchant Fee Differential with respect to such Decrease Period. Notwithstanding anything to the contrary in the Agreement and for the avoidance of doubt, Bank shall have the right to terminate the Agreement in accordance with the terms and conditions of this Section 5.4(b)(v) at any time regardless of when or whether Bank has previously given notice hereunder, including without limitation, after either party has provided notice of termination pursuant to Section 5.4(a) of the Agreement;

(9) Section 5.4(e) of the Original Agreement is hereby amended by deleting the reference therein to “Section 5.4(b)(i), (ii), (iii) or (v)” and replacing it with “Section 5.4(b)(i), (ii) or (iii).”

(10) Sections V. and VI. of Exhibit C of the Original Agreement are hereby deleted in their entirety and will have no further legal force or effect.

Section III Recourse Programs.

As of the date of this Amendment, Bank and Zale agree that the program terms for the Big Ticket Recourse Program and the 60/40 Program as set forth in that certain Letter Agreement dated effective October 26, 2006 between Bank and Zale (the “Recourse Letter Agreement”) are hereby amended to give Bank the right to determine the eligibility of Accounts for either program in its sole discretion. Further, the terms of the Letter Agreement are hereby amended to allow either party to terminate the Big Ticket Recourse Program or the 60/40 Program upon the provision of sixty (60) days prior written notice to the other party without the requirement of a wind down period; provided however, that Bank will not terminate the Big Ticket Recourse Program or the 60/40 Program between November 15 of each year and January 15 of the following year. Except as expressly modified herein, all terms and conditions of the Recourse Letter Agreement shall remain in full force and effect, including without limitation, the amount of the recourse liability and the recourse reserve requirements.

Section IV Minimum Volume Amount.

Provided that Zale obtains and maintains the Letters of Credit and the Warranty Reinsurance in accordance with the terms and conditions of the Amended Agreement, Bank agrees not to give notice of termination pursuant to Section 5.4(b)(v) of the Amended Agreement prior to March 1, 2010. In the event Zale fails to obtain and maintain the Letters of Credit and the Warranty Reinsurance in accordance with the terms and conditions of the Amended

Agreement, Bank shall have the right to exercise a right of termination pursuant to Section 5.4(b)(v) of the Amended Agreement at any time.

Section V Miscellaneous.

The provisions set forth in Sections 5.15 to 5.25 of the Original Agreement are hereby incorporated by reference as if set forth herein. Except as amended hereby and by prior amendments executed by the Parties, the Original Agreement shall continue in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their duly authorized representatives as of the date first written above.

	CITIBANK (SOUTH DAKOTA) N.A.

	By:
Witness:	Name:
Name:	Its:

	ZALE DELAWARE, INC.

	By:
Witness:	Name:
Name:	Its:

	ZALE PUERTO RICO, INC.

	By:
Witness:	Name:
Name:	Its:

EX-10.4 4 a09-14859_1ex10d4.htm EX-10.4

Exhibit 10.4

AMENDMENT NUMBER ONE

This Amendment (“Amendment No. 1”) is made and entered into as of June 8, 2009

BETWEEN:	CITI CARDS CANADA INC.,
	a corporation organized and existing under the laws of Ontario, having its head office at the City of Mississauga, in the Province of Ontario,
	(“Citi Cards”)
	OF THE FIRST PART

AND:	ZALE CANADA CO.,
	a corporation organized and existing under the laws of Nova Scotia, having its principal place of business for North America at 901 W. Walnut Hill Lane, Irving, Texas, U.S.A. 75038,
	(“Zale”)
	OF THE SECOND PART

AND:	TXDC, L.P.,
	a limited partnership organized and existing under the laws of the State of Texas, in theUnited States of America, having a place of business at 901 W. Walnut Hill Lane, Irving, Texas, U.S.A. 75038,
	(“TXDC”)
	OF THE THIRD PART

WHEREAS Citi Cards (as successor in interest to Citi Commerce Solutions of Canada Ltd. by amalgamation, effective July 2, 2007), Zale and TXDC entered into a Private Label Credit Card Program Agreement dated March 1, 2007 (“Agreement”);

WHEREAS Citi Cards, Zale and TXDC wish to make certain amendments to the Agreement;

AND WHEREAS Citi Cards, Zale and TXDC intend that, except as expressly set forth below, the terms and conditions of the Agreement shall remain unmodified and shall continue in full force and effect;

NOW, THEREFORE, in consideration of the terms and conditions herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the Parties, Citi Cards, Zale and TXDC agree together as follows:

AMENDMENTS: Effective as of June 8, 2009, the Agreement shall be amended as follows:

1. Amendments to Section 2.: Section 2. of the Agreement is revised as follows:

(a) The second paragraph of Section 2.(b)(i) of the Agreement is deleted and replaced by the following provision:

“Citi Commerce will at all times solely control all aspects of the operation of the Private Label Program, including Account Issuance Criteria standards and credit policy, (e.g., the decision whether or not to extend credit for any Applicant for a Credit Card, and if so, the amount of credit to be extended, and whether or not to continue or terminate any individual Account), customer service operations, collections policy and operations, marketing fulfillment operations, and accounting operations. Notwithstanding the foregoing, Citi Commerce shall give Zale at least sixty (60) days’ notice of any change to its standards and policies that is a material change. Except as otherwise provided in this Agreement, Citi Commerce will be the sole and exclusive owner of all materials used in connection with the operation of the Private Label Program.”

(b) Section 2.(b)(ii)(1) of the Agreement is revised by deleting the text “(as solely determined by Citi Commerce, acting reasonably)” in the fifth and sixth lines.

(c) Section 2.(b)(ii)(2) of the Agreement is revised by deleting the text “(as solely determined by Citi Commerce, acting reasonably)” in the seventh and eighth lines.

2. Amendments to Section 14.: Section 14. of the Agreement is revised as follows:

(a) Section 14.(a)(ii) is revised by deleting the word “or” at the end of the sentence and inserting a semi-colon in its place.

(b) Section 14.(a)(iii) is revised by deleting the period at the end of the sentence and inserting a semi-colon in its place.

“(iv) Zale provides written notice to Citi Commerce on or before June 30, 2009 that this Agreement is terminated, with such termination to be effective on or before October 31, 2009.

(d) Section 14.(b)(i) is revised by adding the following new paragraph at the end:

(e) “Without prejudice to any of Citi Commerce’s other rights and remedies under this Agreement, Citi Commerce shall not invoke Section 13.(a)(xii) of the Agreement as an Event of Default during the period commencing on June 8, 2009 and ending on March 31, 2010, and thereafter shall invoke Section 13.(a)(xii) only upon ninety (90) days’ written notice to Zale.”

3. Amendment to Section 15.: Section 15. of the Agreement is revised by deleting the first paragraph of Section 15.(a) (including the heading) and inserting the following provision in its place:

“Purchase Option: In the event of the termination, non-renewal or expiration of this Agreement pursuant to any of the provisions of this Agreement other than pursuant to Section 14.(a)(iv) of this Agreement resulting from a Zale notice of termination or Section 14.(b)(i) of this Agreement resulting from a Zale Event of Default, Zale has the option (the “Purchase Option”) to purchase, or to arrange for an Affiliate of Zale or for a third party to purchase, the Purchase Assets (as defined in Section 16.(a)) at an aggregate purchase price determined in accordance with Section 15.(b) (the “Purchase Price”).”

4. Amendment to Attachment B: Attachment B to the Agreement is deleted in its entirety and replaced with the Attachment B annexed hereto.

5. General:

(a) On and after the date hereof, each reference in the Agreement to “this Agreement” and each reference to “the Agreement” in any and all other agreements, documents and instruments delivered by Citi Cards, Zale or TXDC in accordance with the Agreement will mean and be a reference to the Agreement, as amended by this Amendment No. 1.

(b) Except as specifically amended by this Amendment No. 1, the Agreement will remain in full force and effect and is hereby ratified and confirmed by the Parties.

(c) In the event of any inconsistency or conflict between the Agreement and this Amendment No. 1, the terms and conditions and provisions of this Amendment No. 1 will govern and control.

(d) Capitalized terms used and not otherwise defined in this Amendment No. 1 will have the meanings assigned to such terms in the Agreement.

6. Governing Law: This Amendment No. 1 will be governed by the laws of the jurisdiction set forth as the governing law jurisdiction in the Agreement.

7. Counterparts: This Amendment No. 1 may be executed in one or more counterparts and by different Parties in separate counterparts. All of such

counterparts will constitute one and the same instrument and will become effective when one or more counterparts of this Amendment No. 1 have been signed by a Party and delivered to the other Party. Any Party may deliver an executed copy of this Amendment No. 1 by facsimile transmission to another Party, and such delivery will have the same force and effect as any other delivery of a manually signed copy of this Amendment No. 1.

IN WITNESS WHEREOF Citi Cards, Zale and TXDC have caused this Amendment No. 1 to be executed as of June 8, 2009 by their proper officers or other representatives duly authorized in that behalf.

CITI CARDS CANADA INC.			ZALE CANADA CO.
(as successor in interest to Citi Commerce Solutions of Canada Ltd. by amalgamation, effective July 2, 2007)


By:
	Name:	Robert A. Fleig	Name:
	Title:	General Counsel	Title:


TXDC, L.P.
By: Zale Delaware, Inc., its general partner


By:
	Name:
	Title:

(With respect to Section 9., and as expressly granted in

Section 18., of the Agreement)

Attachment B

Merchant Fees and Revenue Sharing

1. Merchant Fees: Zale agrees to pay a Merchant Fee for each net Card Sale transaction type described in the Discount Rate Schedule set out hereinbelow equal to the product obtained by multiplying the total dollar amount of the net Card Sale by the applicable net Card Sale transaction type discount rate, as shown in the Discount Rate Schedule set out hereinbelow.

Citi agrees to refund a Merchant Fee to Zale for each Return of a net Card Sale of a transaction type described in the Discount Rate Schedule set out hereinbelow equal to the product obtained by multiplying the total dollar amount of the Return for the net Card Sale by the applicable net Card Sale transaction type discount rate, as shown in the Discount Rate Schedule set out hereinbelow.

Citi Commerce will provide Zale with written notice of any change to any Merchant Fee hereunder at least thirty (30) days prior to the implementation of any such change by Citi Commerce.

DISCOUNT RATE SCHEDULE

Card Sale Transaction Type	Discount Rate

Three (3) Month Same as Cash	—	%
Six (6) Month Same as Cash	—	%
Twelve (12) Month Same as Cash	—	%
Revolve	—	%

2. Revenue Sharing Payments: Citi Commerce will pay to Zale, by not later than ten (10) Business Days following the end of each calendar month, the applicable amount of the Late Fee Revenue Rebate that has accrued in respect of Accounts under the Private Label Program during such calendar month (hereinafter called “Revenue Sharing Payments”).

EX-31.1 5 a09-14859_1ex31d1.htm EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Neal L. Goldberg, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Zale Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and 15d—15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 9, 2009	By:	/s/ Neal L. Goldberg
	Neal L. Goldberg
	Chief Executive Officer
	(principal executive officer of the registrant)

EX-31.2 6 a09-14859_1ex31d2.htm EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Cynthia T. Gordon, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Zale Corporation;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 9, 2009	By:	/s/ Cynthia T. Gordon
	Cynthia T. Gordon
	Senior Vice President, Controller
	Interim Chief Financial Officer
	(principal financial officer of the registrant)

EX-32.1 7 a09-14859_1ex32d1.htm EX-32.1

EXHIBIT 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

The undersigned, as the Chief Executive Officer of Zale Corporation, certifies, to the best of his knowledge, that the Quarterly Report on Form 10-Q for the quarter ended April 30, 2009, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Zale Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.


This 9th day of June, 2009	By:	/s/ Neal L. Goldberg
	Neal L. Goldberg
	Chief Executive Officer
	(principal executive officer of the registrant)

EX-32.2 8 a09-14859_1ex32d2.htm EX-32.2

EXHIBIT 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

The undersigned, as the Interim Chief Financial Officer of Zale Corporation, certifies, to the best of her knowledge, that the Quarterly Report on Form 10-Q for the quarter ended April 30, 2009, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Zale Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.


This 9th day of June, 2009	By:	/s/ Cynthia T. Gordon
	Cynthia T. Gordon
	Senior Vice President, Controller Interim Chief Financial Officer
	(principal financial officer of the registrant)

-----END PRIVACY-ENHANCED MESSAGE-----

Zale Corporation

See notes to consolidated financial statements.

3. GOODWILL

4. EARNINGS (LOSS) PER COMMON SHARE

10. CONTINGENCIES

Overview

Table of Contents

Liquidity and Capital Resources

ARTICLE I TERMINATION BENEFITS

1.1 General Termination Benefits. If Executive incurs a Qualifying Termination other than during a Protection Period, he or she will receive the following termination benefits:

(f) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.2 Termination Benefits in Connection with a Change of Control. If Executive incurs a Qualifying Termination during a Protection Period, he or she will receive the following termination benefits:

(b) Accrued Obligations. Executive will be entitled to payment of any Accrued Obligations in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive and Executive’s dependents will be entitled to receive health and other welfare benefits in accordance with the provisions of Section 1.1(c) for the duration of the Severance Period.

(d) Outplacement Services. Executive will be entitled to receive outplacement services in accordance with the provisions of Section 1.1(d).

vest immediately upon Termination of Employment, unless otherwise provided in such awards or such Equity Plan. Following his or her Termination of Employment, Company will not grant Executive any equity-based compensation awards.

(f) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.3 Termination Benefits in Connection With Disability. If Executive has a Termination of Employment as a result of a Disability, he or she will receive the following termination benefits:

(a) Severance Pay. Subject to Sections 1.7 and 2.1(a), Executive will receive Severance Pay, which shall be paid in equal installments, in accordance with

(b) Accrued Obligations. Executive will be entitled to payment of any Accrued Obligations in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive and Executive’s dependents will be entitled to receive health and other welfare benefits in accordance with the provisions of Section 1.1(c) for the duration of the Severance Period.

(e) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.4 Termination Benefits in Connection With Death. If Executive has a Termination of Employment due to death while employed by Company, his or her estate will receive the following benefits:

(b) Accrued Obligations. Executive’s estate will be entitled to payment of any Accrued Obligations in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive’s dependants will be entitled to continue their health and welfare benefits, if any, pursuant to COBRA.

Company under an Equity Plan that are unvested on Termination of Employment will expire, unless otherwise provided in such awards or such Equity Plan.

(e) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.5 Distributions on Account of Death of Executive During the Severance Period. If Executive becomes entitled to Severance Pay pursuant to Section 1.1, 1.2 or 1.3 and dies during the Severance Period, the following benefits will be payable:

(a) Severance Pay. Any remaining Severance Pay payable to Executive as of the date of his or her death will continue to be paid to Executive’s estate pursuant to Section 1.1, 1.2 or 1.3, as applicable.

(b) Accrued Obligations. Executive’s estate will be entitled to payment of any Accrued Obligations unpaid as of the date of Executive’s death in accordance with the provisions of Section 1.1(b).

(d) Outplacement Services. Any outplacement service benefits available to Executive pursuant to Section 1.1(d) or 1.2(d) will cease as of the date of Executive’s death.

(f) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.6 Termination Benefits in Connection With a Termination Other Than a Qualifying Termination. If Executive has a Termination of Employment that is not described in Section 1.1, 1.2, 1.3 or 1.4, he or she will receive the following termination benefits:

(a) Severance Pay. Executive will not receive any Severance Pay.

(b) Accrued Obligations. Executive will be entitled to payment of any Accrued Obligations in accordance with the provisions of Section 1.1(b).

(c) Continued Welfare Benefits. Executive and Executive’s dependants will be entitled to continue their health and welfare benefits, if any, pursuant to COBRA.

Company under an Equity Plan that are unvested on Termination of Employment will expire, unless otherwise provided in such awards or such Equity Plan. Following his or her Termination of Employment, Company will not grant Executive any equity-based compensation awards.

(e) 401(k) Plan. The terms of the 401(k) Plan will govern Executive’s account balance, if any, under such 401(k) Plan.

1.7 Code Section 409A.

(d) For purposes of 409A, each installment of Severance Pay under Sections 1.1(a), 1.3(a) and 1.4(a) will be deemed to be a separate payment as permitted under Treasury Regulation Section 1.409A-2(b)(2)(iii).

(within the meaning of Section 409A) payable to or for the benefit of Executive under any Company Plan may not be reduced by, or offset against, any amount owing by Executive to the Company or any affiliate thereof.

ARTICLE II EXECUTIVE COVENANTS

(a) are secret and not known in the industry;

(b) give Company or its Affiliates an advantage over competitors who do not know or use the Trade Secrets;

(c) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and

(d) are valuable, special and unique assets of Company or its Affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to Company or its Affiliates.

such court will have the power to reduce the duration or scope of such provision and to enforce such provision as so reduced.

ARTICLE III DISPUTE RESOLUTION

ARTICLE I
TERMINATION BENEFITS

ARTICLE II
EXECUTIVE COVENANTS

ARTICLE III
DISPUTE RESOLUTION