<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________
Commission file number 0-21526
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-0675400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 West Walnut Hill Lane, Irving, Texas 75038-1003
(Address of principal executive offices) (Zip Code)
(214) 580-4000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]. No [ ].
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X]. No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 31, 1995, 34,981,008 shares of the registrant's common stock were
outstanding.
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<PAGE> 2
ZALE CORPORATION AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Part 1. Financial Information: Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Note to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
</TABLE>
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<PAGE> 3
ZALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
----------------------------- -----------------------------
1995 1994 1995 1994
------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
Net Sales $192,083 $167,078 $ 824,749 $ 720,422
Cost of Sales 97,212 81,470 413,318 359,520
Selling, General and
Administrative Expenses 93,618 85,887 336,891 303,978
Depreciation and Amortization Expense
(Credit) 344 (1,031) (206) (3,607)
-------- -------- --------- ---------
Operating Earnings 909 752 74,746 60,531
Interest Expense, Net 6,653 7,108 22,594 20,595
-------- -------- --------- ---------
Earnings (Loss) Before Income Tax
Expense (Benefit) (5,744) (6,356) 52,152 39,936
Income Tax Expense (Benefit) (1,750) (1,898) 17,550 12,999
-------- -------- --------- ---------
Net Earnings (Loss) $ (3,994) $ (4,458) $ 34,602 $ 26,937
======== ======== ========= =========
Net Earnings (Loss) Per Common Share $ (0.11) $ (0.13) $ 0.99 $ 0.77
======== ======== ========= =========
Average Common Shares Outstanding 34,964 34,972 34,964 34,972
======== ======== ========= =========
</TABLE>
See Note to the Condensed Consolidated Financial Statements.
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<PAGE> 4
ZALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1995 1994
--------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 121,210 $ 153,700
Customer Receivables, Net 412,843 397,886
Merchandise Inventories 422,329 401,034
Other Current Assets 26,237 21,474
----------- ----------
Total Current Assets 982,619 974,094
Property and Equipment, Net 61,523 37,211
Other Assets 41,176 39,342
Deferred Tax Asset, Net 62,000 62,000
----------- ----------
Total Assets $ 1,147,318 $1,112,647
=========== ==========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 3,895 $ 3,897
Accounts Payable and Accrued Liabilities 133,713 144,981
Deferred Tax Liability, Net 62,000 62,000
----------- ----------
Total Current Liabilities 199,608 210,878
Non-current Liabilities 33,660 32,873
Long-term Debt 440,732 443,581
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 78,151 82,575
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- ---
Common Stock 350 350
Additional Paid-In Capital (Includes
Stock Warrants) 338,639 321,159
Unrealized Gains (Losses) on Securities 19 (326)
Accumulated Earnings 56,159 21,557
----------- ----------
Total Stockholders' Investment 395,167 342,740
----------- ----------
Total Liabilities and Stockholders' Investment $ 1,147,318 $1,112,647
=========== ==========
</TABLE>
See Note to the Condensed Consolidated Financial Statements.
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<PAGE> 5
ZALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
APRIL 30, APRIL 30,
1995 1994
----------------- ----------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 34,602 $ 26,937
Non cash expenses, gains and losses:
Depreciation and amortization expense (credit) 635 (3,492)
Utilization of pre-emergence net operating loss 17,480 12,909
Other adjustments to reconcile net earnings
to net cash used in operating activities:
(Increase) decrease in:
Customer receivables, net (14,957) 14,245
Merchandise inventories (21,295) (11,968)
Other current assets (4,763) 5,356
Other assets (2,175) 7,543
Increase (decrease) in:
Accounts payable and accrued liabilities (11,422) (59,720)
Non-current liabilities 787 3,665
---------- ---------
Net Cash Used in Operating Activities (1,108) (4,525)
---------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (29,867) (19,761)
Dispositions of property and equipment 1,340 (78)
Other 28 (10)
---------- ---------
Net Cash Used in Investing Activities (28,499) (19,849)
---------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (2,883) (2,718)
Other --- 22
---------- ---------
Net Cash Used in Financing Activities (2,883) (2,696)
---------- ---------
Net Decrease in Cash and Cash Equivalents (32,490) (27,070)
---------- ---------
Cash and Cash Equivalents at Beginning of Period 153,700 83,265
---------- ---------
Cash and Cash Equivalents at End of Period $ 121,210 $ 56,195
========== =========
Supplemental cash flow information:
Interest paid $ 28,993 $ 20,715
Interest received $ 4,442 $ 1,095
Income taxes paid (net of refunds received) $ 302 $ 506
Restricted cash - at period end date $ 36,567 $ 23,883
</TABLE>
See Note to the Condensed Consolidated Financial Statements.
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<PAGE> 6
ZALE CORPORATION AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements are those
of Zale Corporation and its wholly-owned subsidiaries (the "Company" or "Zale")
as of and for the three and nine months ended April 30, 1995. The Condensed
Consolidated Financial Statements are unaudited and have been prepared by the
Company in accordance with generally accepted accounting principles 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 the opinion of the Company, all material adjustments
and disclosures necessary for a fair presentation have been made. The
accompanying Condensed Consolidated Financial Statements should be read in
conjunction with the January 31, 1995, October 31, 1994 and July 31, 1994
Condensed Consolidated Financial Statements and related notes of Zale included
in Zale's financial statements filed with the Securities and Exchange
Commission in a Form 10-Q on March 10, 1995, December 8, 1994 and September 14,
1994, respectively, and the Consolidated Financial Statements and related notes
included in the 1994 Annual Report to Stockholders filed as an exhibit to the
Company's Form 10-K. The classifications in use at April 30, 1995 have been
applied to the financial statements for July 31, 1994 and April 30, 1994.
The results of operations for the three and nine month periods ended
April 30, 1995 and 1994, are not indicative of the operating results for the
full fiscal year due to the seasonal nature of the Company's business.
Seasonal fluctuations in retail sales historically have resulted in higher
earnings in the quarter of the fiscal year which includes the Christmas selling
season.
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<PAGE> 7
ZALE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements of the Company included
in this report.
GENERAL
The Company has made certain reclassifications of buying and occupancy
costs from Cost of Sales to Selling, General and Administrative Expenses and
has segregated depreciation and amortization expenses to allow users of the
Condensed Consolidated Financial Statements to perform more meaningful analysis
of the Company's operating results. Prior period results have been
reclassified accordingly.
OPERATING RESULTS -- THREE MONTHS ENDED APRIL 30, 1995 COMPARED TO THREE MONTHS
ENDED APRIL 30, 1994
Net Sales
Net Sales for the three months ended April 30, 1995 increased by $25.0
million to $192.1 million, a 15.0 percent increase compared to the previous
year. Sales for stores open for comparable periods increased by 15.1 percent.
The sales increase primarily resulted from improvement in merchandise content,
selling skills and product focused marketing programs. Additionally, the
Company increased efforts to clear discontinued merchandise during the current
quarter.
Costs and Expenses
Cost of Sales as a percentage of sales was 50.6 percent and 48.8
percent for the three month periods ended April 30, 1995 and 1994,
respectively. The increase as a percentage of sales resulted primarily from
higher markdowns for discontinued merchandise.
Selling, General and Administrative Expenses were 48.7 percent and
51.4 percent of sales for the three months ended April 30, 1995 and 1994,
respectively. Store expenses decreased by 3.2 percent of sales as store
occupancy costs and payroll continue to increase at a lower rate than sales.
Promotional expenditures decreased as both a percent of sales and in total
dollars. Corporate expenses decreased by 2.0 percent of sales principally as a
result of lower management information system and insurance expenses. These
improvements were partially offset by a decrease in net credit income
principally from reduced finance charge income on lower customer receivables in
relation to sales because of faster cash collections of customer balances than
the prior year and an increased provision for chargeoffs of customer accounts.
The Depreciation and Amortization Expense increased by $1.4 million.
Amortization of the Excess of Revalued Net Assets Over Stockholders' Investment
was $1.5 million in both periods. However, depreciation and amortization of
property and equipment increased from $0.4 million to $1.8 million as new
assets have been purchased since the fresh start reporting writeoff of
substantially all fixed assets of the Company at July 31, 1993.
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<PAGE> 8
Interest Expense, Net
Interest Expense, Net was $6.7 million and $7.1 million for the three
months ended April 30, 1995 and 1994, respectively. The current year quarter
includes $1.2 million of interest income on funds escrowed for previous
bankruptcy matters which are not expected to continue at this level. Excluding
this interest income, the increase in interest expense for the three months
ended April 30, 1995 was principally due to the refinancing of the Receivables
Securitization Facility in July 1994. The Company issued $380.6 million (net
of discount) of Receivables Backed Notes which replaced the previous facility
under which $284.6 million of Receivables Backed Notes were outstanding.
Income Taxes
The income tax benefit for the three month periods ended April 30,
1995 and 1994 was $1.8 million and $1.9 million, respectively, reflecting an
effective tax rate of 30.5 percent and 29.9 percent, respectively. As a result
of guidelines regarding accounting for income taxes of companies utilizing
Fresh-Start reporting, the Company reports earnings on a fully-taxed basis even
though it does not expect to pay any significant income taxes for the near
future. As of July 31, 1994, the Company had a tax net operating loss ("NOL")
carryforward (after limitations) of approximately $383 million. The Company
will be able to offset taxes that would ordinarily be paid this year and in
future years through utilization of this tax NOL.
OPERATING RESULTS -- NINE MONTHS ENDED APRIL 30, 1995 COMPARED TO NINE MONTHS
ENDED APRIL 30, 1994
Net Sales
Net Sales for the nine months ended April 30, 1995 increased by $104.3
million to $824.7 million, a 14.5 percent increase compared to the previous
year. Sales for stores open for comparable periods increased by 14.4 percent.
Costs and Expenses
Cost of Sales as a percentage of sales was 50.1 percent and 49.9
percent for the nine month periods ended April 30, 1995 and 1994, respectively.
The increase as a percentage of sales resulted primarily from higher markdowns
for discontinued merchandise in the third quarter.
Selling, General and Administrative Expenses were 40.8 percent and
42.2 percent of sales for the nine months ended April 30, 1995 and 1994,
respectively. Store expenses decreased by 1.7 percent of sales as store
occupancy costs, promotional expenses and payroll increased at a lower rate
than sales. Corporate expenses decreased by 0.9 percent of sales principally
as a result of lower management information system and insurance expenses.
These improvements were offset by a decrease in net credit income principally
from reduced finance charge income on a lower average receivables portfolio in
relation to the prior year and an increased provision for chargeoffs of
customer accounts. The reduction in the average receivables portfolio resulted
from the decrease of accounts from significant store closings in 1992 and 1993,
coupled with faster cash collections of customer balances than the prior year.
The Depreciation and Amortization Credit decreased by $3.4 million.
Amortization of the Excess of Revalued Net Assets Over Stockholders' Investment
was $4.4 million in both periods. However, depreciation and amortization of
property and equipment increased from $0.8 million to $4.2 million as new
assets have been purchased since the fresh start reporting writeoff of
substantially all fixed assets of the Company at July 31, 1993.
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<PAGE> 9
Interest Expense, Net
Interest Expense, Net was $22.6 million and $20.6 million for the nine
months ended April 30, 1995 and 1994, respectively. The increase in the nine
months ended April 30, 1995 was principally due to the refinancing of the
Receivables Securitization Facility in July 1994. The Company issued $380.6
million (net of discount) of Receivables Backed Notes which replaced the
previous facility under which $284.6 million of Receivables Backed Notes were
outstanding.
Income Taxes
Income tax expense for the nine month periods ended April 30, 1995 and
1994 was $17.6 million and $13.0 million, respectively, reflecting an effective
tax rate of 33.7 percent and 32.5 percent, respectively. See "Income Taxes" in
the Three Months Ended April 30, 1995 compared to Three Months Ended April 30,
1994 for discussion regarding net operating loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding
inventory and receivables growth, capital expenditures primarily for
renovations and filling in existing market areas, and debt service. As of
April 30, 1995, the Company had cash and cash equivalents of $121.2 million,
including $36.6 million restricted primarily based on collateral requirements
under the Receivables Securitization Facility. The retail jewelry business is
highly seasonal, with the significant proportion of sales and operating income
being generated in November and December of each year. The Company's working
capital requirements fluctuate during the year, increasing substantially during
the fall season as a result of higher planned seasonal inventory levels.
Upon emergence from bankruptcy, the Company entered into a three year
revolving credit and gold consignment agreement (the "Working Capital
Facility"). The Working Capital Facility provides for (a) revolving credit
loans ("Revolving Loans") in an aggregate amount of up to $100.0 million, with
a $20.0 million sublimit for letters of credit and (b) loans or advances ("Gold
Loans") in an aggregate amount of up to $50.0 million under a gold consignment
facility. At no time may the total amount of Revolving Loans and Gold Loans
outstanding exceed a defined borrowing base (based on a percentage of eligible
inventory). Considering borrowing base limitations, the maximum amount the
Company could borrow at April 30, 1995 was approximately $137.4 million. At
April 30, 1995 there were no loans outstanding under the Working Capital
Facility and no borrowings were made during the quarter under this facility.
There were approximately $0.3 million of letters of credit outstanding at April
30, 1995.
In July 1994, the Company increased liquidity under its accounts
receivable securitization program by $50 million to $90 million dependent on
seasonal balances of customer receivables. A substantial portion of this
increased liquidity will be used in the capital expenditure program over the
next three years. As part of the Company's business strategy, it has embarked
on a store remodeling and refurbishment program. This program will enable the
Company to enhance its stores in certain key markets relative to its
competition. The Company anticipates spending approximately $50.0 million on
capital expenditures in fiscal 1995. Capital expenditures are typically
scheduled for the late spring through early fall in order to have new or
renovated stores ready for the Christmas selling season. During the nine
months ended April 30, 1995, the Company made approximately $29.9 million in
capital expenditures principally to enhance the appearance of 366 stores.
Management believes that operating cash flow, amounts available under
the Working Capital Facility and amounts available under the Receivables
Securitization Facility should be sufficient to fund the Company's operating,
debt service and capital expenditure requirements for the foreseeable future.
INFLATION
In management's opinion, changes in net sales and earnings before
income taxes that have resulted from inflation and changing prices have not
been material.
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<PAGE> 10
PART II. - Other Information:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11 Statement re computation of per share earnings.
27 Financial data schedule.
(b) Form 8-K -
None.
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<PAGE> 11
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 8, 1995 MARK R. LENZ
-----------------------------
Mark R. Lenz
Vice-President and Controller
(Duly authorized to sign on
behalf of the registrant and
principal accounting officer
of the registrant)
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<PAGE> 12
INDEX TO EXHIBITS
Exhibit 11 -- Statement re computation of per share earnings.
Exhibit 27 -- Financial data schedule.
<PAGE> 1
EXHIBIT 11
ZALE CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
(unaudited)
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------------------- -----------------------------
1995 1994 1995 1994
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Primary:
Net earnings (loss) applicable to common stock $ (3,994) $ (4,458) $ 34,602 $ 26,937
============== ========== ============ ============
Shares
Weighted average number of common shares
issued 35,000 35,000 35,000 35,000
Less treasury stock (36) (28) (36) (28)
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options - - - (1) - - - 358 - - -
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants - - - (1) - - - 408 - - -
-------------- ---------- ------------ ------------
Weighted average number of common shares
outstanding as adjusted 34,964 34,972 35,730 34,972
============== ========== ============ ============
Net earnings (loss) per common share $ (0.11) $ (0.13) $ 0.97 $ 0.77
============== ========== ============ ============
Fully Diluted:
Net earnings (loss) applicable to common stock $ (3,994) $ (4,458) $ 34,602 $ 26,937
============== ========== ============ ============
Shares
Weighted average number of common shares
issued 35,000 35,000 35,000 35,000
Less treasury stock (36) (28) (36) (28)
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options - - - (1) - - - 367 - - -
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants - - - (1) - - - 435 - - -
-------------- ---------- ------------ ------------
Weighted average number of common shares
outstanding as adjusted 34,964 34,972 35,766 34,972
============== ========== ============ ============
Net earnings (loss) per common share $ (0.11) $ (0.13) $ 0.97 $ 0.77
============== ========== ============ ============
</TABLE>
Note: This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution less than 3%.
(1): Not used in the calculation of weighted average number of common
shares outstanding due to the antidilutive effect of the common stock
equivalents.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the April
30, 1995 condensed consolidated financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> APR-30-1995
<CASH> 121,210
<SECURITIES> 0
<RECEIVABLES> 412,843<F1>
<ALLOWANCES> 0
<INVENTORY> 422,329
<CURRENT-ASSETS> 982,619
<PP&E> 61,523<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,147,318
<CURRENT-LIABILITIES> 199,608
<BONDS> 440,732
<COMMON> 350
0
0
<OTHER-SE> 394,817
<TOTAL-LIABILITY-AND-EQUITY> 1,147,318
<SALES> 824,749
<TOTAL-REVENUES> 824,749
<CGS> 413,318
<TOTAL-COSTS> 413,318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,594
<INCOME-PRETAX> 52,152
<INCOME-TAX> 17,550
<INCOME-CONTINUING> 34,602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,602
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0
<FN>
<F1>This asset value represents a net amount.
</FN>
</TABLE>
