<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 January 31, 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 February 28, 1995, 34,964,708 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 Six Months Ended
January 31, January 31,
----------------------------- ---------------------------
1995 1994 1995 1994
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net Sales $427,194 $368,596 $632,666 $553,344
Cost of Sales 212,519 185,157 316,106 278,050
Selling, General and
Administrative Expenses 144,020 125,114 243,273 218,091
Depreciation and Amortization Credit (46) (1,187) (550) (2,576)
--------- --------- --------- ---------
Operating Earnings 70,701 59,512 73,837 59,779
Interest Expense, Net 8,130 7,097 15,941 13,487
--------- --------- --------- ---------
Earnings Before Income Tax Expense 62,571 52,415 57,896 46,292
Income Tax Expense 20,800 14,873 19,300 14,897
--------- --------- --------- ---------
Net Earnings $ 41,771 $ 37,542 $ 38,596 $ 31,395
========= ========= ========= =========
Net Earnings Per Common Share $ 1.19 $ 1.07 $ 1.10 $ 0.90
========= ========= ========= =========
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>
JANUARY 31, JULY 31,
1995 1994
----------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 95,719 $ 153,700
Customer Receivables, Net 451,819 397,886
Merchandise Inventories 431,783 401,034
Other Current Assets 24,174 21,474
------------ -----------
Total Current Assets 1,003,495 974,094
Property and Equipment, Net 56,388 37,211
Other Assets 39,522 39,342
Deferred Tax Asset, Net 62,000 62,000
------------ -----------
Total Assets $ 1,161,405 $1,112,647
============ ===========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 4,077 $ 3,897
Accounts Payable and Accrued Liabilities 140,959 144,981
Deferred Tax Liability, Net 62,000 62,000
------------ -----------
Total Current Liabilities 207,036 210,878
Non-current Liabilities 32,847 32,873
Long-term Debt 441,810 443,581
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 79,625 82,575
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- ---
Common Stock 350 350
Additional Paid-In Capital (Includes
Stock Warrants) 340,483 321,159
Unrealized Losses on Securities (899) (326)
Accumulated Earnings 60,153 21,557
----------- -----------
Total Stockholders' Investment 400,087 342,740
------------ -----------
Total Liabilities and Stockholders' Investment $ 1,161,405 $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>
SIX MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
1995 1994
------------ ------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 38,596 $ 31,395
Non cash expenses, gains and losses:
Depreciation and amortization expense (credit) 12 (2,501)
Utilization of pre-emergence net operating loss 19,324 14,846
Other adjustments to reconcile net earnings
to net cash used in operating activities:
(Increase) decrease in:
Customer receivables, net (53,933) (24,963)
Merchandise inventories (30,749) (36,987)
Other current assets (2,700) 7,157
Other assets (1,162) 2,108
Increase (decrease) in:
Accounts payable and accrued liabilities (4,176) (43,820)
Non-current liabilities (26) 1,525
---------- ---------
Net Cash Used in Operating Activities (34,814) (51,240)
---------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (22,737) (11,963)
Dispositions of property and equipment 1,155 (4)
Other 27 (84)
---------- ---------
Net Cash Used in Investing Activities (21,555) (12,051)
---------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (1,612) (1,833)
Other --- (266)
---------- ---------
Net Cash Used in Financing Activities (1,612) (2,099)
---------- ---------
Net Decrease in Cash and Cash Equivalents (57,981) (65,390)
---------- ---------
Cash and Cash Equivalents at Beginning of Period 153,700 83,265
---------- ---------
Cash and Cash Equivalents at End of Period $ 95,719 $ 17,875
========== =========
Supplemental cash flow information:
Interest paid $ 18,257 $ 14,799
Interest received $ 2,947 $ 900
Income taxes paid (net of refunds received) $ 258 $ 268
Restricted cash - at period end date $ 19,803 $ 8,398
</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 six months ended January 31, 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 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
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 January 31, 1995 have been applied to the financial
statements for July 31, 1994 and January 31, 1994.
The results of operations for the three and six month periods ended
January 31, 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 JANUARY 31, 1995 COMPARED TO THREE
MONTHS ENDED JANUARY 31, 1994
Net Sales
Net Sales for the three months ended January 31, 1995 increased by
$58.6 million to $427.2 million, a 15.9 percent increase compared to the
previous year. Sales for stores open for comparable periods increased by 15.7
percent. The sales increase primarily resulted from maintaining better depth
of key merchandise items during the holiday season coupled with a
product-focused marketing strategy.
Costs and Expenses
Cost of Sales as a percentage of sales was 49.7 percent and 50.2
percent for the three month periods ended January 31, 1995 and 1994,
respectively. The decrease as a percentage of sales resulted primarily from a
greater proportion of sales occurring in operating divisions with higher
margins compared to the prior year.
Selling, General and Administrative Expenses were 33.7 percent and
33.9 percent of sales for the three months ended January 31, 1995 and 1994,
respectively. Store expenses decreased by 1.1 percent of sales as store
occupancy costs, promotional expenses and payroll continue to increase at a
lower rate than sales. Corporate expenses decreased by 0.6 percent of sales
principally as a result of lower management information system and insurance
expenses. These improvements were partially offset by a net decrease in credit
income principally from a reduction in 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 $1.1 million.
Amortization of the Excess of Revalued Net Assets Over Stockholders' Investment
was $1.5 million in both periods. However, amortization and depreciation of
property and equipment increased from $0.3 million to $1.4 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 $8.1 million and $7.1 million for the three
months ended January 31, 1995 and 1994, respectively. The increase in the
three months ended January 31, 1995 was principally due to the refinancing of
the Receivables Securitization Facility in July 1994 at a higher amount. 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 three month periods ended January 31, 1995
and 1994 was $20.8 million and $14.9 million, respectively, reflecting an
effective tax rate of 33.2 percent and 28.4 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 -- SIX MONTHS ENDED JANUARY 31, 1995 COMPARED TO SIX MONTHS
ENDED JANUARY 31, 1994
Net Sales
Net Sales for the six months ended January 31, 1995 increased by $79.3
million to $632.7 million, a 14.3 percent increase compared to the previous
year. Sales for stores open for comparable periods increased by 14.2 percent.
Costs and Expenses
Cost of Sales as a percentage of sales was 50.0 percent and 50.2
percent for the six month periods ended January 31, 1995 and 1994,
respectively. The decrease as a percentage of sales resulted primarily from a
greater proportion of sales occurring in operating divisions with higher
margins compared to the prior year.
Selling, General and Administrative Expenses were 38.5 percent and
39.4 percent of sales for the six months ended January 31, 1995 and 1994,
respectively. Store expenses decreased by 1.4 percent of sales as store
occupancy costs, promotional expenses and payroll continue to increase at a
lower rate than sales. Corporate expenses decreased by 0.7 percent of sales
principally as a result of lower management information system and insurance
expenses. These improvements were offset by a net decrease in credit income
principally from reduced finance charge income on a lower average receivables
portfolio in relation to the prior year. The reduction in the average
receivables portfolio resulted from the decrease of accounts from significant
store closings in 1992 and 1993, coupled with faster cash collections of
customer balances than the prior year.
The Depreciation and Amortization Credit decreased by $2.0 million.
Amortization of the Excess of Revalued Net Assets Over Stockholders' Investment
was $2.9 million in both periods. However, amortization and depreciation of
property and equipment increased from $0.3 million to $2.4 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 $15.9 million and $13.5 million for the six
months ended January 31, 1995 and 1994, respectively. The increase in the six
months ended January 31, 1995 was principally due to the refinancing of the
Receivables Securitization Facility in July 1994 at a higher amount. 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 six month periods ended January 31, 1995
and 1994 was $19.3 million and $14.9 million, respectively, reflecting an
effective tax rate of 33.3 percent and 32.2 percent, respectively.
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
January 31, 1995, the Company had cash and cash equivalents of $95.7 million,
including $19.8 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 January 31, 1995 was approximately $139.4 million. At
January 31, 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 $1.5 million of letters of credit outstanding at
January 31, 1995.
The Company anticipates spending approximately $51.0 million on
capital expenditures in fiscal 1995. As part of the Company's business
strategy, it is embarking 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 increased liquidity under the
new 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. 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 six months ended January 31, 1995, the
Company made approximately $22.7 million in capital expenditures principally to
enhance the appearance of approximately 320 stores prior to the holiday selling
season.
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 March 10, 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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<S> <C>
11 Statement re computation of per share earnings.
27 Financial data schedule.
</TABLE>
<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 Six Months Ended
January 31, January 31,
------------------------ --------------------------
1995 1994 1995 1994
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Primary:
Net earnings applicable to common stock $ 41,771 $ 37,542 $ 38,596 $ 31,395
========= ========= ========= =========
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 400 --- 364 ---
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 511 --- 404 ---
--------- --------- --------- ---------
Weighted average number of common shares
outstanding as adjusted 35,875 34,972 35,732 34,972
========= ========= ========= =========
Net earnings per common share $ 1.16 $ 1.07 $ 1.08 $ 0.90
========= ========= ========= =========
Fully Diluted:
Net earnings applicable to common stock $ 41,771 $ 37,542 $ 38,596 $ 31,395
========= ========= ========= =========
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 399 --- 365 ---
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 511 --- 404 ---
--------- --------- --------- ---------
Weighted average number of common shares
outstanding as adjusted 35,874 34,972 35,733 34,972
========= ========= ========= =========
Net earnings per common share $ 1.16 $ 1.07 $ 1.08 $ 0.90
========= ========== ========= =========
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%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the January
31, 1995 condensed consolidated financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JAN-31-1995
<CASH> 95,719
<SECURITIES> 0
<RECEIVABLES> 451,819<F1>
<ALLOWANCES> 0
<INVENTORY> 431,783
<CURRENT-ASSETS> 1,003,495
<PP&E> 56,388<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,161,405
<CURRENT-LIABILITIES> 207,036
<BONDS> 441,810
<COMMON> 350
0
0
<OTHER-SE> 399,737
<TOTAL-LIABILITY-AND-EQUITY> 1,161,405
<SALES> 632,666
<TOTAL-REVENUES> 632,666
<CGS> 316,106
<TOTAL-COSTS> 316,106
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,941
<INCOME-PRETAX> 57,896
<INCOME-TAX> 19,300
<INCOME-CONTINUING> 38,596
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,596
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 0
<FN>
<F1>This asset value represents a net amount.
</FN>
</TABLE>
