<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996
REGISTRATION NO. 333-05131
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ZALE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-0675400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ALAN P. SHOR
SENIOR VICE PRESIDENT,
GENERAL COUNSEL & SECRETARY
901 W. WALNUT HILL LANE ZALE CORPORATION
IRVING, TEXAS 75038-1003 901 W. WALNUT HILL LANE
214-580-4000 IRVING, TEXAS 75038-1003
(Address, including zip code, and telephone number, 214-580-4000
including area code, of registrant's principal (Name, address, including zip code, and telephone
executive offices) number, including area code, of agent for service)
</TABLE>
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The Commission is requested to mail signed copies of all orders, notices and
communications to:
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<S> <C> <C>
MERRILL J. WERTHEIMER THOMAS E. WHIDDON
EXECUTIVE VICE PRESIDENT CHIEF FINANCIAL OFFICER
ZALE CORPORATION ZALE CORPORATION
901 W. WALNUT HILL LANE 901 W. WALNUT HILL LANE
IRVING, TEXAS 75038-1003 IRVING, TEXAS 75038-1003
JAMES L. SMITH, III, ESQ. JOHN F. HARTIGAN, ESQ. ALAN L. BELLER, ESQ.
TROUTMAN SANDERS LLP MORGAN, LEWIS & BOCKIUS LLP CLEARY, GOTTLIEB,
600 PEACHTREE STREET, N.E. 801 SOUTH GRAND AVENUE STEEN & HAMILTON
SUITE 5200 LOS ANGELES, CALIFORNIA 90017 ONE LIBERTY PLAZA
ATLANTA, GEORGIA 30308-2216 NEW YORK, NEW YORK 10006-1470
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS MAXIMUM PROPOSED MAXIMUM
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT* PRICE* REGISTRATION FEE
<S> <C> <C> <C> <C>
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Common Stock, par value $.01 per share........ 8,016,750 shares $19.375 $155,324,532 $53,561
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</TABLE>
*These figures are based upon the average of the high and low prices on May
31, 1996, as reported by the Nasdaq National Market and are used solely for the
purpose of calculating the registration fee pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
Subject to Completion
June 21, 1996
PROSPECTUS
7,126,000 SHARES
[ZALE CORPORATION LOGO]
COMMON STOCK
($.01 PAR VALUE)
Of the shares of Common Stock, $.01 par value per share (the "Common Stock"), of
Zale Corporation offered hereby, 2,250,146 shares are being sold by the Company
and 4,875,854 shares are being sold by the Selling Shareholder, as defined
herein. See "Selling Shareholder". The Company will not receive any proceeds
from the sale of shares of Common Stock by the Selling Shareholder.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
trading symbol "ZLC". On June 19, the last reported sale price of the Common
Stock by the NYSE was $17.875 per share. See "Price Range of Common Stock".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT COMPANY(1) SHAREHOLDER(1)
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(2).......................... $ $ $ $
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(1) Before deducting expenses of the offering estimated at $375,000 payable by
the Company and the Selling Shareholder.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
890,750 additional shares of Common Stock at the Price to Public, less the
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sales and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, in New York, New York
or through the facilities of The Depository Trust Company, on or about
, 1996.
SALOMON BROTHERS INC
MCDONALD & COMPANY
SECURITIES, INC.
PAINEWEBBER INCORPORATED
The date of this Prospectus is , 1996.
<PAGE> 3
INSIDE FRONT COVER
ZALE CORPORATION
Zale Corporation, headquartered in Dallas, Texas, is the largest
specialty retailer of fine jewelry, operating approximately 1,200 retail
jewelry stores and leased departments across the United States. Zales Jewelers
is the company's flagship division, serving as the national nameplate. Gordon's
Jewelers is positioned as a major regional player in select U.S. markets. Fine
Jewelers Guild represents the company's upscale jewelry operation and is
recognized under names such as Bailey Banks & Biddle and Corrigan's. The
Diamond Park Fine Jewelers Division manages leased jewelry departments in
national and regional host stores such as Marshall Field's and Dillard's.
[Following the above-stated caption are four photographs described
below]
Picture 1 - The store front of a Zales Jewelers mall store
Picture 2 - The store front of a Gordon's Jewelers mall store
Picture 3 - The store front of a Bailey Banks & Biddle mall store
Picture 4 - The selling area of a Diamond Park Fine Jewelers leased jewelry
department
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
included elsewhere in this Prospectus or incorporated by reference in this
Prospectus. As used in this Prospectus, the "Company" refers to Zale Corporation
and its subsidiaries unless the context otherwise indicates. Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. In connection with the forward-looking
statements in this Prospectus, see "Risk Factors".
THE COMPANY
Zale Corporation is the largest specialty retailer of fine jewelry in the
United States in terms of both retail sales and number of stores. The Company
had sales of $1.04 billion for the fiscal year ended July 31, 1995 and 1,207
retail locations at April 30, 1996 throughout the U.S., Guam and Puerto Rico,
primarily in regional shopping malls. The Company conducts business through four
distinct divisions. The Zales(R) Division, with 571 stores, represents the
Company's national brand and is focused on a broad range of mainstream
consumers. The Gordon's(SM) Division operates 336 stores and is being positioned
as a major regional jeweler focusing on twelve regional markets and offering
merchandise that is more contemporary and targeted at regional tastes. The Fine
Jewelers Guild ("Guild Division") operates 118 upscale jewelry stores under the
Bailey, Banks & Biddle(R) and other locally established names. The Diamond Park
Fine Jewelers Division ("Diamond Park Division") manages 178 leased fine jewelry
departments in several major department store chains including Marshall Field's,
Dillard's and Mercantile. In addition, the Company operates four outlet stores.
The Company believes that the jewelry retail sector is large and highly
fragmented, with total U.S. jewelry retail sales in 1995, based on publicly
available data, of approximately $32 billion. Management believes that the
Company's size, nationwide presence and market position are significant
competitive advantages, providing economies of scale in television and print
advertising, distribution and buying which are not available to smaller chains
and independents. The Company also enjoys significant brand name recognition,
with the Zales name in existence since 1924, Gordon's since 1905 and Bailey,
Banks & Biddle since 1832. The Company believes that name recognition is an
important advantage in jewelry retailing because jewelry is generally unbranded
by product and the consumer must trust in a retailer's reliability and
credibility.
On July 30, 1993 the Company emerged from bankruptcy after completing a
comprehensive restructuring of its capital structure and operations through
implementation of its plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code. In April 1994, Robert DiNicola joined the Company as Chairman
and Chief Executive Officer and began recruiting other experienced retailing
executives to build a new management team. This team undertook to revitalize the
Company by making it customer-focused and instituting back-to-basics retailing
disciplines. Management believes that, since April 1994, the following
initiatives have significantly improved the Company's operating performance:
Reestablished Brand Identities. Distinct brand identities have been
reemphasized for the Zales and Gordon's Divisions. Separate divisional
management and buying teams have been brought on board to create and implement
an individualized merchandising and marketing strategy.
Refocused Merchandising. Merchandising has been refocused and strengthened.
In the Zales and Gordon's Divisions, management has developed a large selection
of key items from among the best selling products in the retail jewelry
industry, such as tennis bracelets, bridal sets and diamond stud earrings, and
made certain that these items are available in an appropriate variety of styles
and a range of competitive price points. At the same time, the Company has
structured inventory management systems to ensure that these items are
consistently in stock. The Company has more recently introduced a similar key
item approach in the Guild and Diamond Park Divisions.
3
<PAGE> 5
Initiated Product and Event-Focused Marketing. The Company's marketing
effort has become more product and event-focused. Television, radio, newspaper
inserts, and direct mail advertising now feature selected key items at a variety
of price points. The Company has also broadened its marketing efforts beyond the
Christmas season to tie in with other gift-giving holidays, such as Valentines
Day and Mother's Day. In addition, advertising and in-store promotions have been
synchronized to take advantage of other periods of high mall traffic. These
strategies have helped to position Zales and Gordon's stores as gift-giving
centers.
Strengthened Buying Organization. The Company has recruited experienced
buyers and eliminated store-level buying to ensure consistency of quality and
cost. In addition, management believes that the Company is now leveraging its
size to achieve better terms with its suppliers for certain products.
Enhanced Price-Competitive Image. The Company's image as a provider of fine
jewelry at competitive prices has been enhanced by establishing price points for
merchandise that are perceived by customers as good values. These products are
labeled "Brilliant Buys", "Gordon's Gems" and "Best Buys" in the Zales, Gordon's
and Guild Division stores, respectively. These items are prominently displayed
throughout the store and prices are displayed as well, a practice that is
uncommon in the U.S. jewelry retailing industry and one that the Company
believes enhances its reputation for pricing integrity.
Improved Store Management and Environment. The Company has taken steps to
ensure that its most capable store managers are in its top stores and to provide
upgraded sales and product training to sales personnel company-wide. Staffing
schedules are now coordinated to better allocate employees during peak periods.
In addition, approximately 475 stores have received some level of physical
improvement over the last two years, ranging from major renovations to less
extensive remodeling.
Enhanced Credit Program. The Company has enhanced the approval process for
its private label credit cards, whereby those customers with a satisfactory
prior credit history can be approved rapidly. In addition, the Company refines
its credit standards on an ongoing basis and in June 1995 upgraded minimum
credit standards in the Gordon's Division. Private label credit cards are used
in approximately 50% of sales and the Company believes that its private label
credit cards increase sales, build customer loyalty and assist in providing a
customer database for direct marketing efforts.
These initiatives have contributed to significant improvements in operating
results. Average sales per store increased to $855,700 for the year ended July
31, 1995 from $738,300 for the year ended July 31, 1994, and increased to
$735,200 for the nine months ended April 30, 1996 from $677,400 for the nine
months ended April 30, 1995. Comparable store sales increased by 12.8% for the
year ended July 31, 1995 as compared to the year ended July 31, 1994, and
increased by 8.7% for the nine months ended April 30, 1996 as compared to the
nine months ended April 30, 1995.
In addition, selling, general and administrative expenses as a percentage
of sales decreased to 41.9% for the year ended July 31, 1995 from 43.7% for the
year ended July 31, 1994, and decreased to 38.9% for the nine months ended April
30, 1996 from 40.8% for the nine months ended April 30, 1995. Operating margin,
excluding unusual items, increased to 7.5% for the year ended July 31, 1995 from
6.8% for the year ended July 31, 1994, and to 9.9% for the nine months ended
April 30, 1996 from 9.1% for the comparable prior-year period. (The nine-month
periods ended April 30 include the Christmas selling season. See "Risk
Factors -- Variability of Quarterly Results and Seasonality".)
Now that the Company has refocused its operating strategy, management
believes that further improvements in operating performance and growth can be
achieved through a number of additional initiatives under consideration,
including those set forth below.
4
<PAGE> 6
Further Improve Store Productivity. Management believes that store
productivity and profitability at all divisions can be further improved. The
Zales and Gordon's Divisions together had average sales per store of
approximately $790,000 for the fiscal year ended July 31, 1995, which, based on
publicly available data, is still below the industry average of slightly more
than $1 million for comparable jewelry retailers. The Company believes it can
continue to increase store productivity and profitability by: (1) expanding key
item assortments to include more "better" and "best" classifications; (2)
tailoring its merchandise assortments to specific store locations in the
Gordon's and Guild Divisions; (3) fully implementing the back-to-basics
retailing strategy at the Guild Division, where the strategy was introduced
approximately one year later than at the Zales and Gordon's Divisions; (4)
relocating certain existing stores to more attractive sites within the malls
where they are currently located; (5) increasing advertising during
non-traditional gift-giving times and widening market coverage; (6) improving
store personnel hiring and retention and continuing to invest in focused
training of management and store personnel; (7) better utilizing customer buying
information gathered from its proprietary customer databases to tailor
merchandising and marketing; and (8) enhancing information systems to enable
buyers to interpret data more easily and make decisions more quickly.
Increase and Enhance Store Base. Over the next three years, the Company
plans to increase the number of stores in the Zales Division to approximately
750 from 571 at April 30, 1996, an increase of approximately 15% in the
Company's total store base. One of the objectives of the Company's expansion
strategy for the Zales Division is to add Zales stores in parts of the country
where the Division is currently underrepresented. The Company has identified
malls for this planned expansion which satisfy Zales' real estate criteria. In
the Gordon's Division, the Company plans to add a small number of stores to
increase concentration within that Division's targeted regional markets. In the
Guild Division, the Company intends to open a small number of additional stores
under the Bailey, Banks & Biddle name. The Company plans to reposition some of
the Guild Division's stores in more desirable locations in upscale malls to
capitalize on the current strength of the luxury retailing sector and to take
advantage of the upscale image projected by the Bailey, Banks & Biddle name. See
"Risk Factors -- Expansion Programs".
The Company believes that as opportunities arise acquisitions may be used
as part of its expansion strategy to increase penetration in a particular
market. For example, in January 1996 the Company acquired Karten's Jewelers, a
20-store chain, which immediately increased the Company's presence in the New
England market. The Company plans to operate these stores under the Zales name.
The Diamond Park Division recently agreed, subject to certain conditions, to
operate leased jewelry departments in 25 Parisian department stores in the
Southeast.
Utilize Alternative Distribution Channels. Under its "direct fulfillment"
program, the Company is seeking to capitalize on the Zales name and national
reputation by experimenting with a series of direct marketing strategies to
complement its store-based operations. The Zales Division tested a program in
the fall of 1995 in which a 1-800 number and order forms were placed in a
sampling of the Division's newspaper and direct marketing inserts. The Company
also began testing home shopping during the 1995 Christmas season by including a
1-800 number in some of the Zales Division's television advertising. These
programs will be expanded on a selective basis during the 1996 holiday shopping
season. In addition, the Company is experimenting with marketing over the
Internet.
Leverage Costs. As increases in store productivity, an expanding store base
and new distribution channels increase sales, the Company expects to be able to
leverage its expenses, such as administrative, general corporate, and
advertising expenses, resulting in higher operating profit margins.
5
<PAGE> 7
Explore Freestanding Store Concept. The Company, through the Zales
Division, plans to test the concept of freestanding stores located in or near
power strip centers with heavy customer traffic. It is expected that these
stores would be larger in size, 3,000 to 4,000 square feet (versus 1,400 square
feet in mall stores), with a much broader and deeper selection of merchandise.
If this test is successful, the Company may expand the freestanding store
program. However, there is no assurance that the Company will implement the
freestanding store program, and any pursuit of this program will follow
substantial completion of the mall-based expansion program.
THE OFFERING
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Common Stock offered by:
The Company................................. 2,250,146 shares
The Selling Shareholder..................... 4,875,854
----------------
Total..................................... 7,126,000 shares(1)
================
Common Stock outstanding after the
offering.................................. 37,436,729 shares(2)
Use of Proceeds............................. The Company will use the net proceeds from
the offering to continue its expansion
program and for general corporate purposes.
In that regard, the Company will use a
portion of the proceeds to repay outstanding
amounts under its Revolving Credit
Agreement. See "Use of Proceeds".
NYSE symbol................................. ZLC
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(1) Excludes 890,750 shares of Common Stock that may be sold upon exercise of
the Underwriters' over-allotment option.
(2) Based upon outstanding shares as of April 30, 1996 and exclusive of
outstanding warrants and stock options representing 3,734,650 shares of
Common Stock. See "Notes to Consolidated Financial Statements". On June 25,
1996, the Compensation Committee of the Board of Directors, as well as the
entire Board, will meet to consider granting additional options to certain
Company employees under the Company's Omnibus Stock Incentive Plan.
6
<PAGE> 8
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following information for the years ended July 31, 1995 and 1994, the
predecessor pro forma year ended July 31, 1993, and the nine-month periods ended
April 30, 1996 and 1995 should be read in conjunction with "Selected
Consolidated Financial Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto contained elsewhere in this Prospectus. The
information for the nine-month periods ended April 30, 1996 and 1995 and for the
predecessor pro forma year ended July 31, 1993 is derived from the Company's
unaudited Consolidated Financial Statements for such periods, which, in the
opinion of the Company, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such information.
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NINE MONTHS ENDED FISCAL YEAR ENDED PREDECESSOR
------------------------- ------------------------- PRO FORMA
YEAR ENDED(1)
APRIL 30, JULY 31, -------------
------------------------- ------------------------- JULY 31,
1996 1995 1995 1994 1993
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(IN THOUSANDS EXCEPT PER SHARE DATA, RATIOS AND STORE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................... $ 888,519 $ 824,749 $1,036,149 $ 920,307 $ 956,447
Cost of sales................................ 450,615 413,318 524,010 460,060 533,080
---------- ---------- ---------- ---------- -------------
Gross margin................................. 437,904 411,431 512,139 460,247 423,367
Selling, general and administrative
expenses................................... 345,295 336,891 434,101 401,744 402,116
Depreciation and amortization expense
(credit)(2)................................ 4,756 (206) 381 (4,385) 26,459
Unusual items(3)............................. (4,486) -- -- -- 163,890
---------- ---------- ---------- ---------- -------------
Operating earnings (loss).................... 92,339 74,746 77,657 62,888 (169,098)
Interest expense, net........................ 22,604 22,594 29,837 28,142 23,508
Fresh-start revaluation(2)................... -- -- -- -- (246,236)
Income taxes(4).............................. 24,753 17,550 16,350 11,621 --
---------- ---------- ---------- ---------- -------------
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change..................................... $ 44,982 $ 34,602 $ 31,470 $ 23,125 $ (438,842)
========== ========== ========== ========== ============
Earnings per common share before
extraordinary items(5)..................... $ 1.24 $ 0.99 $ 0.88 $ 0.66
Weighted average number of common shares
outstanding(5)............................. 36,349 34,964 35,849 34,965
SELECTED RATIOS:
Gross margin as a % of sales................. 49.3% 49.9% 49.4% 50.0% 44.3%
Selling, general and administrative expenses
as a % of sales............................ 38.9% 40.8% 41.9% 43.7% 42.0%
Operating earnings (loss) excluding unusual
items as a % of sales(6)................... 9.9% 9.1% 7.5% 6.8% (0.5%)
SELECTED STORE DATA:
Stores open at end of period................. 1,207 1,184 1,181 1,231 1,265
Change in comparable stores sales............ 8.7% 14.4% 12.8% N/A N/A
Average sales per store:
Zales...................................... $ 722,500 $ 671,400 $ 849,100 $ 716,700 $ 692,100
Gordon's................................... 611,300 567,800 711,500 624,900 580,000
Guild...................................... 1,364,700 1,201,200 1,529,200 1,391,400 1,171,500
Diamond Park............................... 588,700 554,200 701,500 591,500 577,600
Consolidated............................... 735,200 677,400 855,700 738,300 703,000
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 30, 1996
-------------------------
AS
ACTUAL ADJUSTED(7)
---------- ----------
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BALANCE SHEET DATA:
Working capital.............................. $ 746,503 $ 785,086
Total assets................................. 1,164,656 1,185,239
Total debt................................... 398,915 380,915
Total stockholders' investment............... 452,615 491,198
</TABLE>
7
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(1) On July 30, 1993, (the "Effective Date"), the Company consummated its plan
of reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Plan of
Reorganization") and emerged from bankruptcy. The Company adopted
"fresh-start" reporting as of the close of business on July 31, 1993. As a
result, the Consolidated Financial Statements of the Company for and as of
the end of the fiscal years and other periods subsequent to July 31, 1993
are not comparable in certain material respects to predecessor statements
for any period prior thereto.
On December 13, 1993, the Board of Directors of the Company authorized the
change in the Company's fiscal year end to July 31. Such change was
effective as of April 1, 1994. To facilitate a comparison of the Company's
operating performance for the years ended July 31, 1995 and 1994, the four
months ended July 31, 1993 and the year ended March 31, 1993, the results
of operations include a presentation of historical income statement data
for twelve months ended July 31, 1993. This includes the eight months ended
March 31, 1993 and the four month period ended July 31, 1993. This twelve
month period ended July 31, 1993 is referred to as "predecessor pro forma
year ended July 31, 1993" and is unaudited.
(2) As a result of the adoption of fresh-start reporting, the Company's assets
and liabilities were revalued as of the Effective Date, which resulted in a
$246.2 million charge. In connection with this revaluation, the book value
of certain non-current assets was reduced to zero, which resulted in lower
depreciation and amortization than would be the case in the absence of such
revaluation but also results in higher percentage increases in depreciation
and amortization on growth of depreciable and amortizable assets in
subsequent years.
In connection with the adoption of fresh-start reporting, after reducing the
value of certain non-current assets to zero, the excess of the fair value of
the remaining assets over the fair value of liabilities and stockholders'
investment was recorded as a deferred credit and is being amortized over 15
years at the rate of $5.9 million per year.
(3) For the nine months ended April 30, 1996, unusual items included the
recovery of a $3.0 million advance to a limited partnership formed upon the
Company's emergence from bankruptcy and a $1.5 million recovery of cash
funds related to cash approved for distribution to pre-confirmation
creditors of Zale but not claimed. See the note to the April 30, 1996,
Consolidated Financial Statements "Unusual Items -- Reorganization
Recoveries". For the predecessor pro forma year ended July 31, 1993, unusual
items included $20.2 million of provision for valuation of assets and $143.7
million of reorganization and restructure costs. See the notes to the July
31, 1995 Consolidated Financial Statements "Reorganization and Restructure
Costs" and "Unusual Items -- Provisions for Valuation of Assets".
(4) An income tax benefit was not provided for the predecessor pro forma year
ended July 31, 1993 because realization of a tax benefit for those losses
was not assured. 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 have to
pay any significant income taxes for the near future.
As of April 30, 1996, the Company had a net operating loss carryforward
("NOL"), after limitations, of approximately $370 million. Whether the
Company will be able to utilize this NOL depends on the Company's earnings
and the statutory limitations on use of such NOL. Any tax benefits realized
for financial reporting purposes subsequent to the Effective Date are
reported as additions to additional paid-in capital rather than as a
reduction in the tax provision in the Company's Statement of Operations, and
thus will not be reflected in the Company's earnings. However, the Company
will realize cash benefits from any such utilization of its NOL.
(5) Earnings (loss) per share is not presented for the predecessor pro forma
year because such presentation would not be meaningful. The old stock, which
was not publicly traded, was cancelled under the Plan of Reorganization and
the new stock was not issued until the Effective Date.
(6) Operating earnings (loss) excluding unusual items as a percent of sales is
calculated on the basis of Net sales, less (a) Cost of sales, (b) Selling,
general and administrative expense and (c) Depreciation and amortization
expense (credit). The calculation excludes unusual items which are included
in calculating Operating earnings (loss).
(7) Adjusted to reflect the estimated net proceeds from the sale of the Common
Stock offered by the Company and the application of the proceeds therefrom,
as described in "Use of Proceeds", and the application of the proceeds from
the exercise of 26,200 warrants by the Selling Shareholder.
8
<PAGE> 10
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
factors set forth below, as well as the other information contained in this
Prospectus, in evaluating an investment in the Common Stock offered hereby.
In addition to the historical information contained herein, the discussion
in this Prospectus contains forward-looking statements with respect to the
Company that involve risks and uncertainties. The actual performance and results
of the Company could differ materially from those discussed in this Prospectus.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Risk Factors", below, as well as those discussed
elsewhere in this Prospectus.
IMPACT OF GENERAL ECONOMIC CONDITIONS
Jewelry purchases are discretionary for consumers and may be particularly
affected by adverse trends in the general economy. The success of the Company's
operations depends to a significant extent upon a number of factors relating to
discretionary consumer spending, including economic conditions (and perceptions
of such conditions by consumers) affecting disposable consumer income such as
employment, wages and salaries, business conditions, interest rates,
availability of credit and taxation, for the economy as a whole and in regional
and local markets where the Company operates. In addition, the Company is
dependent upon the continued popularity of malls as a shopping destination and
the ability of malls, their tenants and other mall attractions to generate
customer traffic for its stores. There can be no assurance that consumer
spending will not be adversely affected by general economic conditions or that
mall traffic will not decrease, either of which could negatively impact the
Company's results of operations or financial condition.
In addition, because a substantial portion of the Company's sales are made
on credit, any significant deterioration in general economic conditions may
inhibit consumers' use of credit and cause a material adverse effect on the
Company's revenues and profitability. Furthermore, the Company expects that any
downturn in general or local economic conditions in the markets in which it
operates would adversely affect its collection of outstanding credit accounts
receivables.
COMPETITION
The retail jewelry business is highly competitive. The industry is
fragmented, and the Company competes with a large number of independent regional
and local jewelry retailers, as well as with nationally recognized jewelry
chains. The Company must also compete with other types of retailers who sell
jewelry and gift items, such as department stores, catalog showrooms,
discounters, direct mail suppliers and televised home shopping networks.
Competition may increase in the future as various additional forms of direct
access shopping (with lower built-in costs) become available through
developments in technology. Management believes that the primary competitive
factors affecting its operations are reputation, breadth and depth of
merchandise offered, store location and atmosphere, marketing, pricing, quality
of sales personnel and customer service, credit and availability to customers of
attractive direct marketing alternatives. The Company also believes that it
competes for consumers' discretionary spending dollars with retailers that offer
merchandise other than jewelry. In addition, the Company competes with jewelry
and other retailers for desirable locations and qualified personnel. If the
Company falls behind competitors with respect to one or more of these factors,
the Company's results of operations or financial condition could be adversely
affected. See "Business -- Competition".
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
The Company's business is highly seasonal, with a significant portion of
its sales and most of its income generated during the second fiscal quarter
ending January 31, which includes the Christmas season. Sales in the second
quarters of fiscal 1995 and 1994 accounted for 41.2% and 40.1%, respectively, of
annual sales for such fiscal years. Operating earnings for the second
9
<PAGE> 11
quarters of fiscal 1995 and 1994 accounted for 91.0% and 94.6%, respectively, of
annual operating earnings for such fiscal years. The Company has historically
experienced net losses and lower net sales in each of its first, third and
fourth fiscal quarters. The Company expects this trend to continue in the
current fiscal year and, in particular, expects to experience a net loss in its
fourth fiscal quarter of 1996. The Company expects to continue to experience
this seasonal fluctuation in its net sales and net income. Because a very
significant percentage of the Company's total sales and earnings for a fiscal
year results from operations in the second quarter, the Company has limited
ability to compensate for shortfalls in second quarter sales or earnings by
changes in its operations or strategies in other quarters. A significant
shortfall in results for the second quarter of any fiscal year can thus be
expected to have a material adverse effect on the Company's annual results of
operations. The Company's quarterly results of operations also may fluctuate
significantly as a result of a variety of factors, including the timing of new
store openings, net sales contributed by new stores, increases or decreases in
comparable store sales, timing of certain holidays, changes in the Company's
merchandise, general economic, industry and weather conditions that affect
consumer spending and actions of competitors. "See Management's Discussion and
Analysis of Financial Condition and Results of Operations".
PRODUCTIVITY AND SALES IN EXISTING STORES
The growth of the Company's sales and earnings depends, in part, on its
ability to improve productivity in existing stores and increase comparable store
sales. The Company closed more than 700 stores during and after its
reorganization and has already taken a number of steps to increase store
productivity, including making changes in basic retailing, merchandising and
marketing strategies to attract customers and to increase sales. Although
average store sales for existing Zales and Gordon's Division stores remain below
the industry average, and the Company believes that there is significant
potential for further increases in sales for existing stores, average or
comparable store sales may vary. Increases in average or comparable store sales
are not assured and failure to achieve such increases would adversely affect the
Company's results. In addition, certain of the changes in strategy, such as the
Company's strategy of emphasizing "key items" at attractive prices, may reduce
the gross margins realized by the Company. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations."
EXPANSION PROGRAM
The growth of the Company's sales and net earnings will depend, to some
extent, on the Company's ability to expand its operations through the opening of
new stores (including leased departments) in existing and new markets and to
operate those stores profitably. The Company operated 1,207 stores in all 50
states, Puerto Rico and Guam at April 30, 1996 and has opened or plans to open
approximately 95 new stores and leased departments, including 20 acquired
Karten's stores, in fiscal 1996 and approximately 110 new stores and leased
departments in fiscal 1997, compared to 35 new stores and leased departments
opened in fiscal 1995. The average cost of opening a new mall store in the Zales
and Gordon's Divisions is approximately $700,000 to $750,000, including
inventory, capital expenditures and pre-opening expenses. The Company expects to
fund the opening of new stores with a portion of the proceeds from this
offering, cash flow from operating activities and borrowings under its Revolving
Credit Agreement and Receivables Securitization Facility (as defined herein).
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". Achieving the Company's
expansion goals will depend on a number of factors, including the Company's
ability to secure suitable locations on acceptable terms, open new stores in a
timely manner, hire and train additional store and supervisory personnel,
integrate new stores into its operations on a profitable basis and modify its
management information systems for growth. Furthermore, the Company will
continually need to evaluate the adequacy of its store management and systems to
manage its planned expansion. The Company anticipates that there will continue
to be significant competition among specialty retailers for desirable store
sites and qualified personnel. There can be no
10
<PAGE> 12
assurance that the Company will be able to open new stores and relocate existing
stores in desirable sites or on a timely basis or that such stores will operate
profitably. See "Business -- Business Strategy".
Management believes that the Company's proceeds from the offering, cash
flow from operating activities and borrowings under the Company's Revolving
Credit Agreement and Receivables Securitization Facility will provide adequate
funds to finance the Company's expansion. However, if these sources of funds are
inadequate to finance the Company's expansion, it may require capital from
additional sources. There can be no assurance as to the future availability of
additional financing or the terms thereof, and failure to obtain such financing
on acceptable terms could require the Company to alter its expansion plans or
otherwise adversely affect the Company.
MERCHANDISE SUPPLY AND INVENTORY
During the years ended July 31, 1995 and 1994, the Company purchased
approximately 29% and 36%, respectively, of its merchandise from its top five
vendors. Although the Company believes that alternate sources of supply are
available, the abrupt loss of any significant supplier during the three month
period leading up to the Christmas season could result in a material adverse
effect on the Company's business. The jewelry industry generally is affected by
fluctuations in the prices of gold and diamonds and, to a lesser extent, other
precious and semi-precious stones. The Company does not hedge against
fluctuations in the cost of diamonds or gold. A significant increase in prices
or decrease in the availability of gold or diamonds could have a material
adverse effect on the Company's business. The supply and price of diamonds in
the principal world markets are significantly influenced by a single entity, the
Central Selling Organization (the "CSO"), a marketing arm of DeBeers
Consolidated Mines Ltd. of South Africa. The CSO has traditionally controlled
the marketing of a substantial majority of the world's supply of diamonds and
sells rough diamonds to worldwide diamond cutters from its London office in
quantities and at prices determined in its sole discretion. The availability of
diamonds to the CSO and the Company's suppliers is to some extent dependent on
the political situation in diamond producing countries, such as South Africa,
Botswana, Zaire, the Russian republics and Australia, and on the continuation of
the prevailing supply and marketing arrangements for raw diamonds. Until
alternate sources could be developed, any sustained interruption in the supply
of diamonds from the significant producing countries could adversely affect the
Company and the retail jewelry industry as a whole. See "Business -- Purchasing
and Inventory".
A portion of the Company's inventory represents slow-moving merchandise.
The Company has a methodology that it believes results in timely identification
and valuation of this merchandise. In addition, it believes that the disposition
of this merchandise can continue to be carried out without materially affecting
the Company's merchandising and pricing strategies. However, there can be no
assurance that slow-moving inventory will not adversely affect the Company's
business or financial results.
DEPENDENCE ON KEY PERSONNEL
Since its emergence from bankruptcy, the Company has hired Robert J.
DiNicola, its Chairman, President and Chief Executive Officer, and has retained
or recruited a number of other senior executives and other key employees. The
Company is dependent on these personnel, who have been instrumental in designing
and implementing the Company's recent initiatives and are involved in the
strategies for the Company's future growth and profitability. The loss of
services of Mr. DiNicola or other key members of management could have a
material adverse effect on the Company's results of operations or financial
condition. Mr. DiNicola and the Company have entered into an employment
agreement that will expire on April 17, 1998, unless earlier terminated. See
"Management". There can be no assurance that the Company will be able to attract
and retain additional qualified personnel as needed in the future.
11
<PAGE> 13
REGULATION
The Company's operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts and limitations on the maximum amount of
finance charges that may be charged by a credit provider. In addition to the
Company's private label credit cards, credit to the Company's customers is
provided primarily through bank cards such as Visa, MasterCard, and Discover,
without recourse to the Company based upon a customer's failure to pay. Any
change in the regulation of credit which would materially limit the availability
of credit to the Company's traditional customer base could adversely affect the
Company's results of operations or financial condition.
RESTRICTIONS ON DIVIDENDS
The Company does not currently pay dividends on its Common Stock and does
not anticipate paying dividends on its Common Stock in the foreseeable future.
The Company's ability to pay dividends on its Common Stock is limited by
restrictive covenants in its Revolving Credit Agreement.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby by the Company are estimated to be approximately $38.3 million ($53.5
million if the Underwriters' over-allotment option is exercised in full) (based
on a market price of $17.875 per share at June 19, 1996) after deducting
underwriting discounts and estimated offering expenses to be paid by the
Company. The Company will use the net proceeds from the offering to continue its
expansion program and for general corporate purposes. In that regard, the
Company will use a portion of its proceeds to repay outstanding amounts under
its Revolving Credit Agreement, which expires on August 11, 1998 and, at April
30, 1996, had an outstanding balance of approximately $18.0 million, bearing
interest at approximately 7.4%. The Company's unused commitment under the
Revolving Credit Agreement after the offering would be $150 million, which along
with the remaining proceeds of the offering, cash flow from operations and the
Receivables Securitization Facility will be utilized to fund the Company's store
growth plan and finance the working capital requirements of its business,
primarily inventory and accounts receivable.
Pending application for the foregoing uses, the net proceeds will be
invested in short-term, interest-bearing securities.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1996, and as adjusted to reflect the sale of the 2,250,146 shares of
Common Stock offered hereby by the Company (assuming no exercise of the
Underwriters' over-allotment option) and the application of the net proceeds
thereof (at an estimated offering price of $17.875 per share, based on the
market price at June 19, 1996, and after deducting the estimated underwriting
discount and other offering expenses to be paid by the Company), and the
application of proceeds from the exercise of 26,200 warrants by the Selling
Shareholder:
<TABLE>
<CAPTION>
APRIL 30, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-Term Debt:
Revolving Credit Loans............................................ $ 18,000 $ --
Current Portion of Long-Term Debt................................. 194 194
-------- ----------
Total Short-Term Debt..................................... 18,194 194
Long-Term Debt:
Receivables Securitization Facility............................... 380,625 380,625
Other............................................................. 96 96
-------- ----------
Total Long-Term Debt...................................... 380,721 380,721
Stockholders' Investment:
Preferred Stock -- $.01 par value; 5,000,000 shares authorized; no
shares issued.................................................. -- --
Common Stock -- $.01 par value; 70,000,000 shares authorized;
35,160,383 shares issued; 37,436,729 shares issued as
adjusted(1).................................................... 352 374
Additional Paid-in Capital (Includes
Stock Warrants)................................................ 358,898 397,459
Unrealized Gains on Securities.................................... 1,526 1,526
Accumulated Earnings.............................................. 91,839 91,839
-------- ----------
Total Stockholders' Investments........................... 452,615 491,198
-------- ----------
Total Capitalization...................................... $851,530 $ 872,113
======== ==========
</TABLE>
- ---------------
(1) Includes 26,200 shares issued to the Selling Shareholder upon exercise of
warrants.
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the NYSE under the symbol ZLC. Prior to June
19, 1996, the Common Stock was listed on the National Association of Securities
Dealers, Inc.'s National Market ("Nasdaq") under the symbol ZALE. The following
table sets forth the high and low sale prices for the Common Stock for each
fiscal quarter during the two most recent fiscal years and during the current
fiscal year as reported by Nasdaq prior to June 19, 1996 and as reported on the
NYSE Composite Tape commencing June 19, 1996.
<TABLE>
<CAPTION>
BY FISCAL QUARTERS HIGH LOW
------------------ ------- -------
<S> <C> <C>
1994
First Quarter............................................... 11 1/4 9 3/8
Second Quarter.............................................. 11 8 1/8
Third Quarter............................................... 9 1/2 8 1/2
Fourth Quarter.............................................. 9 1/4 8 11/16
1995
First Quarter............................................... 13 5/8 8 3/8
Second Quarter.............................................. 13 10 1/4
Third Quarter............................................... 12 10 1/4
Fourth Quarter.............................................. 14 3/8 11 1/4
1996
First Quarter............................................... 15 5/8 13 5/8
Second Quarter.............................................. 16 11/16 13 1/2
Third Quarter............................................... 18 5/8 13 11/16
Fourth Quarter (through June 19)............................ 20 1/4 17 7/8
</TABLE>
The last sale price of the Common Stock on June 19, 1996, as reported by
the NYSE, was $17 7/8 per share.
DIVIDEND POLICY
The Company currently intends to retain future earnings for use in the
expansion and operation of its business. The Company does not anticipate paying
dividends on its Common Stock in the foreseeable future. The payment of future
dividends will be at the sole discretion of the Company based on the Company's
financial condition and general business conditions. In addition, the Company's
payment of dividends is limited by restrictive covenants in its bank credit
agreement.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information is qualified in
its entirety by the Consolidated Financial Statements of the Company (and the
related Notes thereto) contained elsewhere in this Prospectus and should be read
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition". The Income Statement and Balance Sheet Data
shown below and for each of the years ended July 31, 1995 and 1994, the four
months ended July 31, 1993, and for each of the years ended March 31, 1993, 1992
and 1991 have been derived from the Company's audited Consolidated Financial
Statements. The information for the nine month periods ended April 30, 1996 and
1995 and for the predecessor pro forma year ended July 31, 1993 is derived from
the Company's unaudited Consolidated Financial Statements which, in the opinion
of the Company, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such information. The results
of operations for the four months ended July 31, 1993 are not necessarily
indicative of the results of operations that may be expected for the full year
due to the seasonal nature of the Company's business. As a result of the
adoption of fresh-start financial reporting upon emergence from bankruptcy, the
Company's results of operations subsequent to July 31, 1993 are not comparable
to results of operations for the prior periods.
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------------------------------
PRO
FORMA(1)
-----------
YEAR FOUR MOS.
YEAR ENDED JULY 31, ENDED ENDED YEAR ENDED MARCH 31,
------------------------- JULY 31, JULY 31, ---------------------------------------
1995 1994 1993 1993 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
INCOME STATEMENT DATA:
Net sales........................ $ 1,036,149 $ 920,307 $ 956,447 $ 244,539 $ 980,832 $ 1,156,455 $ 1,335,269
Cost of sales.................... 524,010 460,060 533,080 127,484 534,420 663,707 662,788
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin..................... 512,139 460,247 423,367 117,055 446,412 492,748 672,481
Selling, general and
administrative expenses........ 434,101 401,744 402,116 119,786 418,133 575,592 562,167
Depreciation and amortization
expense (credit)............... 381 (4,385) 26,459 8,973 26,316 50,899 56,024
Unusual items -- provision for
valuation of assets............ -- -- 20,200 -- 20,200 574,336 --
Reorganization and restructure
costs.......................... -- -- 143,690 47,879 137,937 175,659 --
Net reduction of reserves for
preacquisition contingencies... -- -- -- -- -- 5,566 13,141
Gain on sale of assets........... -- -- -- -- -- 2,667 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating earnings (loss)........ 77,657 62,888 (169,098) (59,583) (156,174) (875,505) 67,431
Interest expense, net............ 29,837 28,142 23,508 6,623 24,829 84,885 126,008
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before
fresh-start revaluation, income
taxes, extraordinary items and
cumulative effect of accounting
change......................... 47,820 34,746 (192,606) (66,206) (181,003) (960,390) (58,577)
Fresh-start revaluation.......... -- -- (246,236) (246,236) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes, extraordinary items and
cumulative effect of accounting
change......................... 47,820 34,746 (438,842) (312,442) (181,003) (960,390) (58,577)
Income taxes..................... 16,350 11,621 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary items and
cumulative effect of accounting
change......................... $ 31,470 $ 23,125 $ (438,842) $ (312,442) $ (181,003) $ (960,390) $ (58,577)
========== ========== ========== ========== ========== ========== ==========
Net earnings (loss).............. $ 31,470 $ 21,557 $ 664,991 $ 791,391 $ (181,003) $ (960,390) $ (54,125)
========== ========== ========== ========== ========== ========== ==========
Earnings per common share(2):
Primary:
Earnings before extraordinary
item....................... $ 0.88 $ 0.66
Net earnings................. $ 0.88 $ 0.62
Assuming full dilution:
Earnings before extraordinary
item....................... $ 0.86 $ 0.66
Net earnings................. $ 0.86 $ 0.62
Weighted average number of
common shares outstanding(2):
Primary...................... 35,849 34,965
Assuming full dilution....... 36,565 34,965
BALANCE SHEET DATA:
Working capital.................. $ 781,802 $ 763,216 $ 676,677 $ 676,677 $ 961,671 $ 809,417 $ 487,439
Total assets..................... 1,110,708 1,112,647 1,013,523 1,013,523 1,252,448 1,088,060 1,789,178
Total debt....................... 443,624 447,478 355,125 355,125 284,554 -- 1,173,559
Total stockholders' investment
(deficit)...................... 391,890 342,740 311,070 311,070 (791,391) (610,388) 350,002
STORES OPEN AT END OF PERIOD:.... 1,181 1,231 1,265 1,265 1,265 1,521 1,938
</TABLE>
- ---------------
(1) Income statement data in this column represent historical income statement
data for the twelve months ended July 31, 1993 which includes the four month
period ended July 31, 1993 and the eight month period ended March 31, 1993.
(2) Earnings (loss) per share is not presented in the "Predecessor" columns
because such presentation would not be meaningful. The old stock, which was
not publicly traded, was cancelled under the Plan of Reorganization and the
new stock was not issued until the Effective Date.
15
<PAGE> 17
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL
30,(1)
---------------------------
1996 1995
---------- ----------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................................ $ 888,519 $ 824,749
Cost of sales............................................................ 450,615 413,318
---------- ----------
Gross margin............................................................. 437,904 411,431
Selling, general and administrative expenses............................. 345,295 336,891
Depreciation and amortization expense (credit)........................... 4,756 (206)
Unusual items -- reorganization recoveries............................... (4,486) --
---------- ----------
Operating earnings....................................................... 92,339 74,746
Interest expense, net.................................................... 22,604 22,594
---------- ----------
Earnings before income taxes and extraordinary item...................... 69,735 52,152
Income taxes............................................................. 24,753 17,550
---------- ----------
Earnings before extraordinary item....................................... $ 44,982 $ 34,602
========= =========
Net earnings............................................................. $ 43,886 $ 34,602
========= =========
Earnings per common share:
Primary:
Earnings before extraordinary item................................... $ 1.24 $ 0.99
Net earnings......................................................... $ 1.21 $ 0.99
Assuming full dilution:
Earnings before extraordinary item................................... $ 1.22 $ 0.99
Net earnings......................................................... $ 1.19 $ 0.99
Weighted average number of common shares outstanding:
Primary.............................................................. 36,349 34,964
Assuming full dilution............................................... 36,956 34,964
BALANCE SHEET DATA:
Working capital........................................................ $ 746,503 $ 783,011
Total assets........................................................... 1,164,656 1,147,318
Total debt............................................................. 398,915 444,627
Total stockholders' investment......................................... 452,615 395,167
STORES OPEN AT END OF PERIOD:............................................ 1,207 1,184
</TABLE>
- ---------------
(1) The results of operations for the nine month periods ended April 30, 1996
and 1995 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 season.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On July 30, 1993, the Company completed a comprehensive restructuring of
its capital structure through implementation of its Plan of Reorganization as
confirmed on May 20, 1993 by the bankruptcy court. As a result of the
restructuring transaction and the implementation of fresh-start financial
reporting, the Company's results of operations subsequent to July 31, 1993 are
not comparable to results of operations for prior periods. The most significant
effects of fresh-start financial reporting on results of operations are the
reduction in amortization and depreciation expense from the write-off of
substantially all the Company's fixed assets and the amortization of the "Excess
of Revalued Net Assets Over Stockholders' Investment". See the note to the July
31, 1995 Consolidated Financial Statements of the Company entitled
"Reorganization and Basis of Presentation" included elsewhere in this Prospectus
for information on consummation of the Plan of Reorganization and implementation
of fresh-start financial reporting.
On December 13, 1993, the Board of Directors of the Company authorized the
change in the Company's fiscal year end to July 31. Such change was effective as
of April 1, 1994. To facilitate a comparison of the Company's operating
performance for the years ended July 31, 1995 and 1994, the four months ended
July 31, 1993 and the year ended March 31, 1993, the results of operations
include a presentation of historical income statement data for twelve months
ended July 31, 1993. This includes the eight months ended March 31, 1993 and the
four month period ended July 31, 1993. This twelve month period ended July 31,
1993 is referred to as "pro forma year ended July 31, 1993" and is unaudited.
17
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's audited and unaudited consolidated statements of operations expressed
as a percentage of net sales and should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
NINE MONTHS -----------------------
ENDED YEAR ENDED PRO FORMA
APRIL 30, JULY 31, YEAR ENDED YEAR ENDED
--------------- --------------- JULY 31, MARCH 31,
1996 1995 1995 1994 1993 1993
----- ----- ----- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 50.7 50.1 50.6 50.0 55.7 54.5
----- ----- ----- ----- ----- -----
Gross margin........................... 49.3 49.9 49.4 50.0 44.3 45.5
Selling, general and administrative
expenses............................... 38.9 40.8 41.9 43.7 42.0 42.6
Depreciation and amortization expense
(credit)............................... 0.5 -- -- (0.5) 2.8 2.7
Unusual items and reorganization costs... (0.5) -- -- -- 17.1 16.1
----- ----- ----- ----- ----- -----
Operating earnings (loss)................ 10.4 9.1 7.5 6.8 (17.6) (15.9)
Interest expense, net.................... 2.5 2.8 2.9 3.0 2.6 2.5
Fresh-start revaluation.................. -- -- -- -- (25.7) --
----- ----- ----- ----- ----- -----
Earnings (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change............ 7.9 6.3 4.6 3.8 (45.9) (18.4)
Income taxes............................. 2.8 2.1 1.6 1.3 -- --
----- ----- ----- ----- ----- -----
Earnings (loss) before extraordinary
items and cumulative effect of
accounting change...................... 5.1 4.2 3.0 2.5 (45.9) (18.4)
Extraordinary items:
Loss on early extinguishment of debt,
net of income taxes.................. (0.2) -- -- (0.2) -- --
Gain on debt discharge, net of income
taxes................................ -- -- -- -- 116.9 --
Cumulative effect of accounting change
for postretirement benefits, net of
income taxes........................... -- -- -- -- (1.5) --
----- ----- ----- ----- ----- -----
Net earnings (loss)...................... 4.9% 4.2% 3.0% 2.3% 69.5% (18.4%)
===== ===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL 30, 1995
Net Sales. Net Sales for the nine months ended April 30, 1996 increased by
$63.8 million to $888.5 million, a 7.7 percent increase compared to the previous
year. Sales for stores open for comparable periods increased by 8.7 percent. The
sales increase primarily resulted from improved merchandise assortments,
successful holiday and non-holiday promotions and strong store level execution.
Gross Margin. Gross Margin as a percentage of net sales decreased by 0.6
percent due to the transition in sales mix to more key item merchandise and
higher markdowns for clearance of discontinued merchandise during the current
year. Key item merchandise produces higher sales volumes but has a slightly
lower gross margin rate, on average, than other merchandise. The current year
net LIFO provision was $1.9 million or 0.2 percent of net sales higher than last
year.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses decreased 1.9 percent as a percentage of net sales.
Store payroll expense decreased 1.0 percent
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as a percentage of net sales as a result of focused control measures. Other
store expenses decreased 0.6 percent of net sales principally related to store
occupancy costs, which increased at a lower rate than net sales. Corporate
expenses decreased by 1.1 percent of net sales principally as a result of lower
costs for employee benefits, outside services and insurance. The current year
demonstrates the Company's ability to leverage its fixed store and corporate
operating expenses while increasing sales in the stores. These improvements were
partially offset by an increased provision for chargeoffs of customer accounts
resulting from general economic conditions and previous credit policies at the
Gordon's Division. See "Business -- Credit Operations".
Earnings Before Interest, Taxes, Depreciation and Amortization Expense
(Credit), Extraordinary Item and Unusual Items. As a result of the factors
discussed above, Earnings Before Interest, Taxes, Depreciation and Amortization
Expense (Credit), Extraordinary Item and Unusual Items were $92.6 million and
$74.5 million for the nine months ended April 30, 1996 and 1995, respectively.
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $5.0 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 $4.2
million to $9.0 million as new assets have been purchased since the fresh-start
reporting writeoff of substantially all fixed assets of the Company as of July
31, 1993.
Unusual Items -- Reorganization Recoveries. Unusual Items -- Reorganization
Recoveries were $4.5 million for the nine month period ended April 30, 1996.
There were no unusual items for the prior year. See the note to the Consolidated
Financial Statements "Unusual Items -- Reorganization Recoveries".
Interest Expense, Net. Interest Expense, Net was $22.6 million for both
nine month periods ended April 30, 1996 and 1995. Interest expense for the nine
months ended April 30, 1996 remained constant due to the early redemption of the
$60.0 million 11.0 Percent Second Priority Senior Secured Notes on September 11,
1995 partially offset by the increase in interest expense due to higher
borrowings under the Revolving Credit Agreement and a reduction in interest
income due to lower average balances in short-term investments. Also, the prior
year included $1.2 million of interest income on funds escrowed for previous
bankruptcy matters.
Income Taxes. The income tax expense for the nine month periods ended April
30, 1996 and 1995 was $24.8 million and $17.6 million, respectively, reflecting
an effective tax rate of 35.5 percent and 33.7 percent, respectively. As a
result of guidelines regarding accounting for income taxes of companies
utilizing fresh-start reporting, the Company reports earnings on a fully-taxed
basis even though it does not expect to pay any significant income taxes for the
near future. The Company will realize the cash benefit from utilization of the
tax NOL against current and future tax liabilities. As of April 30, 1996, the
Company has a NOL (after limitations) of approximately $370 million.
As the Company develops a longer-term earnings record, it may determine
that a portion of the valuation reserve on the Company's deferred tax asset will
not be required as such asset will more likely than not be realizable. Any
reduction in the valuation reserve will increase Additional Paid-In Capital
directly.
Extraordinary Item. The extraordinary charge of $1.1 million, net of an
income tax benefit of $0.6 million, for the nine month period ended April 30,
1996 was the result of the early redemption of the $60.0 million 11.0 Percent
Second Priority Senior Secured Notes. See the note to the Consolidated Financial
Statements "Working Capital Financing".
YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1994
Net Sales. Net Sales for the year ended July 31, 1995 increased by $115.8
million to $1,036.1 million, a 12.6% increase compared to the previous year. The
increase is primarily the result of new management's implementation of a key
item merchandising strategy, product-focused
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marketing and improved execution in the stores. Sales for stores open for
comparable periods increased by approximately 12.8%.
Gross Margin. Gross Margin as a percentage of sales decreased by 0.6% from
higher markdowns for clearance of discontinued merchandise.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses, which increased by $32.4 million, were 41.9% and 43.7%
of sales for the years ended July 31, 1995 and 1994, respectively. Store
expenses decreased by 1.7% of sales as store occupancy costs and payroll
increased at a lower rate than sales. Promotional expenditures decreased as both
a percentage of sales and in total dollars. Corporate expenses decreased by 1.2%
of sales principally as a result of lower costs for management information
systems and insurance. These improvements were offset by a decrease in net
credit income principally from reduced finance charge income on a lower average
receivables portfolio in relation to the prior year. The reduction in the
average receivables portfolio resulted from the decrease of accounts from
significant store closings in 1992 and 1993, coupled with faster cash
collections of customer balances than in the prior year.
Earnings Before Interest, Taxes and Depreciation and Amortization Expense
(Credit). Earnings Before Interest, Taxes and Depreciation and Amortization
Expense (Credit) were $78.0 million and $58.5 million for the years ended July
31, 1995 and 1994, respectively, an increase of 33.4%.
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $4.8 million. Amortization of the Excess of Revalued Net
Assets Over Stockholders' Investment was $5.9 million in both periods. However,
depreciation and amortization of property and equipment increased from $1.4
million to $6.2 million as new assets have been purchased since the fresh-start
reporting write-off of substantially all fixed assets of the Company at July 31,
1993.
Interest Expense, Net. Interest Expense, Net was $29.8 million and $28.1
million for the years ended July 31, 1995 and 1994, respectively. The increase
was principally due to the refinancing of the Receivables Securitization
Facility (as defined herein) in July 1994 at a higher amount, partially offset
by an increase in investment income. The current year also includes $1.2 million
of interest income on funds escrowed for bankruptcy matters.
Income Taxes. Income Taxes for the years ended July 31, 1995 and 1994 were
$16.4 million and $10.6 million, respectively, reflecting an effective tax rate
of 34.2% and 32.9%, respectively. As of July 31, 1995, the Company had a NOL
(after limitations) of approximately $378 million.
YEAR ENDED JULY 31, 1994 COMPARED TO PRO FORMA YEAR ENDED JULY 31, 1993
Net Sales. Net Sales for the year ended July 31, 1994 decreased by $36.1
million or 3.8% when compared with the pro forma year ended July 31, 1993. The
significant decrease in Net Sales in fiscal 1994 is primarily the result of
closing approximately 175 locations in January through March 1993 as part of the
Company's operational restructuring.
Gross Margin. Gross Margin as a percentage of sales increased 5.7% due
primarily to the provision of a reserve against merchandise inventory of
approximately $43.0 million during the pro forma year ended July 31, 1993 for
estimated markdowns, damage, shrinkage or other loss in value caused by closing
approximately 175 locations. Excluding the reserve provision, Gross Margin as a
percentage of sales increased by 1.3% due to higher initial merchandise margin
partially offset by increased markdowns.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses as a percentage of sales were 43.7% for fiscal year 1994
and 42.0% for the pro forma year ended July 31, 1993. The percentage increase in
fiscal 1994 resulted primarily from higher promotional and employee benefit
costs incurred during the year relative to sales.
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Depreciation and Amortization Expense. Depreciation and Amortization
Expense decreased by $30.8 million principally due to the fresh-start reporting
write-off of substantially all fixed assets of the Company at July 31, 1993.
Unusual Items. The Unusual Items in the pro forma year ended July 31, 1993
relate to provisions made to reduce the value of certain non-operating assets,
including properties held for sale and a large diamond held for investment, to
their estimated net realizable values. A provision was also made for the
valuation of customer receivables. See the note to the Consolidated Financial
Statements "Unusual Items -- Provisions for Valuation of Assets".
Reorganization and Restructure Costs. Reorganization and Restructure Costs
are segregated from normal operations in the pro forma year ended July 31, 1993
Consolidated Statement of Operations and reflect the costs incurred by the
Company in the implementation of its operational and financial restructuring
plan as well as costs related directly to the bankruptcy filing.
Interest Expense, Net. Interest Expense, Net was $28.1 million for fiscal
year 1994 and $23.5 million for the pro forma year ended July 31, 1993. The
increase in fiscal 1994 primarily represents interest incurred on the 11% $60.0
million Second Priority Senior Secured Notes which were issued in conjunction
with the Company's emergence from bankruptcy and a reduction in interest income
due to lower average balances in short-term investments as a result of payment
of bankruptcy obligations in July 1993.
Income Taxes. Income Taxes for the year ended July 31, 1994 were $10.6
million. An income tax benefit was not provided in the period ended July 31,
1993 because all operating losses would have to be carried forward to future
years and the realization of a tax benefit for those losses was not assured.
FOUR MONTHS ENDED JULY 31, 1993
Net Sales for the four months ended July 31, 1993 were $244.5 million.
Gross Margin was 47.9% of sales and Selling, General and Administrative Expenses
were 49.0% of sales for the four month period ended July 31, 1993. Due to the
seasonality of the business, these results were not representative of results
expected for a full year. Reorganization and Restructure Costs are segregated
from normal operations in the four months ended July 31, 1993 Consolidated
Statement of Operations and primarily represent professional fees incurred in
conjunction with the Chapter 11 reorganization. Reorganization and Restructure
Costs of $47.9 million, the Fresh-Start Revaluation of $246.2 million and Gain
on Debt Discharge of $1.1 billion all relate to the Company's reorganization
under Chapter 11 and are described in the notes to the Consolidated Financial
Statements "Reorganization and Basis of Presentation" and "Reorganization and
Restructure Costs". Net earnings were substantially affected by these
reorganization-related items and are not comparable in material respects to
earnings for subsequent periods.
YEAR ENDED MARCH 31, 1993
Net Sales for the year ended March 31, 1993 were $980.8 million. Gross
Margin was 45.5% of sales for the year ended March 31, 1993. A reserve against
merchandise inventory of approximately $43.0 million was provided in Cost of
Sales for estimated shrinkage, markdowns, damage or other loss in value caused
by closing approximately 175 locations. Excluding the reserve provision, Gross
Margin as a percentage of sales was 49.9%. Selling, General and Administrative
Expenses were 42.6% of sales for the year ended March 31, 1993.
The unusual items in the year ended March 31, 1993 relate to provisions
made to reduce the value of certain non-operating assets, including properties
held for sale and a large diamond held for investment, to their estimated net
realizable values. A provision was also made for the valuation of customer
receivables. See the note to the Consolidated Financial Statements "Unusual
Items -- Provisions for Valuation of Assets".
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Reorganization and Restructure Costs are segregated from normal operations
in the March 31, 1993 Consolidated Statement of Operations and reflect the costs
incurred by the Company in the implementation of its operational and financial
restructuring plan as well as costs related directly to the bankruptcy filing.
The major components are described in the notes to the Consolidated Financial
Statements "Reorganization and Basis of Presentation" and "Reorganization and
Restructure Costs".
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory
and receivables growth, capital expenditures primarily for renovations and new
store growth, and debt service. As of April 30, 1996, the Company had cash and
cash equivalents of $37.2 million, including $33.0 million restricted primarily
by the collateral requirements under the Receivables Securitization Facility
established by the Company in July 1994 (the "Receivables Securitization
Facility"). The retail jewelry business is highly seasonal, with a significant
proportion of sales and operating income being generated in November and
December of each year. Approximately 41.2 percent and 40.1 percent of the
Company's annual sales were made during the three months ended January 31, 1995
and 1994, respectively, which includes the Christmas selling season. The
Company's working capital requirements fluctuate during the year, increasing
substantially during the fall season as a result of higher planned seasonal
inventory levels.
Zale Funding Trust, a limited purpose Delaware business trust and an
indirect wholly-owned subsidiary of the Company formed to finance customer
accounts receivable, issued approximately $380.6 million, net of discount,
aggregate principal amount of Receivables Backed Notes ("ZFT Receivables Notes")
in July 1994 pursuant to the Receivables Securitization Facility. The ZFT
Receivables Notes are secured by a lien on all customer accounts receivable and
mature in July 1999.
On August 11, 1995, the Company entered into a new three-year revolving
credit agreement (the "Revolving Credit Agreement") which provides for revolving
credit loans in an aggregate amount of up to $150.0 million, with a $30.0
million sublimit for letters of credit. The Revolving Credit Agreement replaced
an earlier agreement entered into by the Company in July 1993. At no time may
the total amount of loans outstanding under the Revolving Credit Agreement
exceed the lesser of the total commitment of $150.0 million and a defined
borrowing base ($218.4 million at April 30, 1996, based on a fixed percentage of
eligible inventory, as defined).
The Revolving Credit Agreement was structured to increase the Company's
flexibility through less restrictive loan covenants, lower collateral
requirements and a lower fee and interest rate structure than its earlier
agreement. The increased flexibility allowed in the new Revolving Credit
Agreement combined with the increased liquidity from the Receivables
Securitization Facility enabled the Company to redeem its 11.0 percent notes,
redeem the Series B Warrants and continue to invest in its capital improvement
and store growth initiatives.
Approximately $60.0 million of Second Priority Senior Secured Notes due
2000 bearing interest at 11.0 percent per annum were issued by the Company upon
its emergence from bankruptcy. These notes were redeemed on September 11, 1995
utilizing cash on hand. Upon redemption, the Company paid an early redemption
premium and other costs associated with the redemption of approximately $1.7
million. An extraordinary charge of $1.1 million, net of an income tax benefit
of $0.6 million, was recorded in the first quarter of the current year. See the
note to the Consolidated Financial Statements "Working Capital Financing".
On August 31, 1995, Zale redeemed the Series B Warrants and acquired all
Swarovski International Holding, A.G. ("Swarovski") rights, title and interest
under the warrant agreement and paid $9.3 million to Swarovski in consideration
of the redemption. As a result of this, the Series B Warrants were canceled and
are no longer outstanding. See the note to the Consolidated Financial Statements
"Repurchase of Warrants".
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The Company is in the second year of a three year store remodeling and
refurbishment program. This program will enable the Company to enhance its
stores in certain key markets relative to its competition. Additionally, the
Company plans significant upgrades to its management information systems over
the next several years. The Company anticipates spending approximately $50.0
million on capital expenditures in fiscal year 1996. 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, 1996, the Company made approximately $37.0 million in
capital expenditures, principally to enhance the appearance of 86 stores and to
open 33 new stores. In addition, on January 18, 1996, the Company acquired
Karten's Jewelers, Inc., a 20-store chain. The Company acquired all the
outstanding shares of common stock for $3.0 million in cash and assumption of
all liabilities. In fiscal years 1996, 1997 and 1998, the Company intends to add
approximately 250 new locations through new store openings or strategic
acquisitions.
There has been an increase of approximately $65 million, or 15.5 percent,
in owned merchandise inventories at April 30, 1996 compared to the balance at
April 30, 1995. The increase in inventory levels is primarily a result of an
increased number of stores, improving the depth and breadth of merchandise
available in the stores to accommodate increasing sales, as well as the Company
shifting its merchandise mix to reduce the amount of consigned merchandise. Of
the $65 million increase, approximately $24 million pertains to the reduction in
the level of consigned merchandise compared to last year. As a result of the
transactions discussed above and the change in mix between owned and consigned
merchandise, the Company had outstanding borrowings of $18.0 million under the
Revolving Credit Agreement at April 30, 1996, compared to no such borrowing at
April 30, 1995.
Future liquidity will also be enhanced to the extent that the Company is
able to realize the cash benefit from utilization of its NOL against current and
future tax liabilities. Guidelines regarding accounting for income taxes of
companies utilizing fresh-start reporting, require the Company to report
earnings on a fully-taxed basis even though it does not expect to pay any
significant income taxes for the near future. As of April 30, 1996, the Company
has a NOL (after limitations) of approximately $370 million which represents up
to $144 million in future tax benefits. The utilization of this asset is subject
to limitations. The most restrictive is the Internal Revenue Code Section 382
annual limitation. The NOL will begin to expire in fiscal year 2002 but can be
utilized through 2009.
Management believes that operating cash flow, amounts available under the
Revolving Credit Agreement, amounts available under the Receivables
Securitization Facility and proceeds from the proposed sale of 2,250,146 shares
of the Common Stock offered hereby by the Company should be sufficient to fund
the Company's current operations, debt service and currently anticipated capital
expenditure requirements.
INFLATION
In management's opinion, changes in Net Sales and Net Earnings (Loss) that
have resulted from inflation and changing prices have not been material. There
is no assurance, however, that inflation will not materially affect the Company
in the future.
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BUSINESS
GENERAL
Zale Corporation is the largest specialty retailer of fine jewelry in the
United States in terms of both retail sales and number of stores. The Company
had sales of $1.04 billion for the fiscal year ended July 31, 1995 and 1,207
locations at April 30, 1996 throughout the U.S., Guam and Puerto Rico, primarily
in regional shopping malls. The Company conducts business through four distinct
divisions. The Zales(R) Division, with 571 stores, represents the Company's
national brand and is focused on a broad range of mainstream consumers. The
Gordon's(SM) Division operates 336 stores and is being positioned as a major
regional jeweler focusing on twelve regional markets and offering merchandise
that is more contemporary and targeted at regional tastes. The Guild Division
operates 118 upscale jewelry stores under the Bailey, Banks & Biddle(R) and
other locally established names. The Diamond Park Division manages 178 leased
fine jewelry departments in several major department store chains including
Marshall Field's, Dillard's and Mercantile. In addition, the Company operates
four outlet stores.
The Company believes that the jewelry retail sector is large and highly
fragmented, with total U.S. jewelry retail sales in 1995, based on publicly
available data, of approximately $32 billion. Management believes that the
Company's size, nationwide presence and market position are significant
competitive advantages, providing economies of scale in television and print
advertising, distribution and buying which are not available to smaller chains
and independents. The Company also enjoys significant brand name recognition,
with the Zales name in existence since 1924, Gordon's since 1905 and Bailey,
Banks & Biddle since 1832. The Company believes that name recognition is an
important advantage in jewelry retailing because jewelry is generally unbranded
by product and the consumer must trust in a retailer's reliability and
credibility.
The Company is incorporated in Delaware. Its principal executive offices
are located at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003, and its
telephone number at that address is (214) 580-4000.
HISTORY
The Company was founded in 1924 by Morris B. Zale. In 1986, Peoples
Jewellers Limited and Swarovski purchased the Company in a leveraged buyout. In
1989, the Company incurred additional debt to acquire Gordon's Jewelers. As a
result, the Company was severely over-leveraged and could not sustain the
downturn in jewelry sales in the early 1990s, causing the Company to default on
its interest payments and enter bankruptcy protection in January 1992. While in
bankruptcy, the Company was able to upgrade its store base by closing more than
700 poorly performing stores. In addition, the Company was able to renegotiate
more favorable terms on certain of its remaining leases. On July 30, 1993, the
Company emerged from bankruptcy protection after completing a comprehensive
restructuring of its capital structure through the implementation of its Plan of
Reorganization.
BUSINESS STRATEGY
In April 1994, Robert DiNicola joined the Company as Chairman and Chief
Executive Officer and began recruiting other experienced retailing executives to
build a new management team. This team undertook to revitalize the Company by
making it customer-focused and instituting back-to-basics retailing disciplines.
Management believes that, since April 1994, the following initiatives have
significantly improved the Company's operating performance:
Reestablished Brand Identities. Distinct brand identities have been
reemphasized for the Zales and Gordon's Divisions. Separate divisional
management and buying teams have been brought on board to create and implement
an individualized merchandising and marketing strategy.
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Refocused Merchandising. Merchandising has been refocused and strengthened.
In the Zales and Gordon's Divisions, management has developed a large selection
of key items from among the best selling products in the retail jewelry
industry, such as tennis bracelets, bridal sets and diamond stud earrings, and
made certain that these items are available in an appropriate variety of styles
and a range of competitive price points. At the same time, the Company has
structured inventory management systems to ensure that these items are
consistently in stock. The Company has more recently introduced a similar key
item approach in the Guild and Diamond Park Divisions.
Initiated Product and Event-Focused Marketing. The Company's marketing
effort has become more product and event-focused. Television, radio, newspaper
inserts, and direct mail advertising now feature selected key items at a variety
of price points. The Company has also broadened its marketing efforts beyond the
Christmas season to tie in with other gift-giving holidays, such as Valentines
Day and Mother's Day. In addition, advertising and in-store promotions have been
synchronized to take advantage of other periods of high mall traffic. These
strategies have helped to position Zales and Gordon's stores as gift-giving
centers.
Strengthened Buying Organization. The Company has recruited experienced
buyers and eliminated store-level buying to ensure consistency of quality and
cost. In addition, management believes that the Company is now leveraging its
size to achieve better terms with its suppliers for certain products.
Enhanced Price-Competitive Image. The Company's image as a provider of fine
jewelry at competitive prices has been enhanced by establishing price points for
merchandise that are perceived by customers as good values. These products are
labeled "Brilliant Buys", "Gordon's Gems" and "Best Buys" in the Zales, Gordon's
and Guild Division stores, respectively. These items are prominently displayed
throughout the store and prices are displayed as well, a practice that is
uncommon in the U.S. jewelry retailing industry and one that the Company
believes enhances its reputation for pricing integrity.
Improved Store Management and Environment. The Company has taken steps to
ensure that its most capable store managers are in its top stores and to provide
upgraded sales and product training to sales personnel company-wide. Staffing
schedules are now coordinated to better allocate employees during peak periods.
In addition, approximately 475 stores have received some level of physical
improvement over the last two years, ranging from major renovations to less
extensive remodeling.
Enhanced Credit Program. The Company has enhanced the approval process for
its private label credit cards, whereby those customers with a satisfactory
prior credit history can be approved rapidly. In addition, the Company refines
its credit standards on an ongoing basis and in June 1995 upgraded minimum
credit standards in the Gordon's Division. Private label credit cards are used
in approximately 50% of sales and the Company believes that its private label
credit cards increase sales, build customer loyalty and assist in providing a
customer database for direct marketing efforts.
These initiatives have contributed to significant improvements in operating
results. Average sales per store increased to $855,700 for the year ended July
31, 1995 from $738,300 for the year ended July 31, 1994, and increased to
$735,200 for the nine months ended April 30, 1996 from $677,400 for the nine
months ended April 30, 1995. Comparable store sales increased by 12.8% for the
year ended July 31, 1995 as compared to the year ended July 31, 1994, and
increased by 8.7% for the nine months ended April 30, 1996 as compared to the
nine months ended April 30, 1995.
In addition, selling, general and administrative expenses as a percentage
of sales decreased to 41.9% for the year ended July 31, 1995 from 43.7% for the
year ended July 31, 1994, and decreased to 38.9% for the nine months ended April
30, 1996 from 40.8% for the nine months ended April 30, 1995. Operating margin,
excluding unusual items, increased to 7.5% for the year ended July 31, 1995 from
6.8% for the year ended July 31, 1994, and to 9.9% for the nine months ended
April 30,
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1996 from 9.1% for the comparable prior-year period. (The nine-month periods
ended April 30 include the Christmas selling season. See "Risk
Factors -- Variability of Quarterly Results and Seasonality".)
Now that the Company has refocused its operating strategy, management
believes that further improvements in operating performance and growth can be
achieved through a number of additional initiatives under consideration,
including those set forth below.
Further Improve Store Productivity. Management believes that store
productivity and profitability at all divisions can be further improved. The
Zales and Gordon's Divisions together had average sales per store of
approximately $790,000 for the fiscal year ended July 31, 1995, which, based on
publicly available data, is still below the industry average of slightly more
than $1 million for comparable jewelry retailers. The Company believes it can
continue to increase store productivity and profitability by: (1) expanding key
item assortments to include more "better" and "best" classifications; (2)
tailoring its merchandise assortments to specific store locations in the
Gordon's and Guild Divisions; (3) fully implementing the back-to-basics
retailing strategy at the Guild Division, where the strategy was introduced
approximately one year later than at the Zales and Gordon's Divisions; (4)
relocating certain existing stores to more attractive sites within the malls
where they are currently located; (5) increasing advertising during
non-traditional gift-giving times and widening market coverage; (6) improving
store personnel hiring and retention and continuing to invest in focused
training of management and store personnel; (7) better utilizing customer buying
information gathered from its proprietary customer databases to tailor
merchandising and marketing; and (8) enhancing information systems to enable
buyers to interpret data more easily and make decisions more quickly.
Increase and Enhance Store Base. Over the next three years, the Company
plans to increase the number of stores in the Zales Division to approximately
750 from 571 at April 30, 1996, an increase of approximately 15% in the
Company's total store base. One of the objectives of the Company's expansion
strategy for the Zales Division is to add Zales stores in parts of the country
where the Division is currently underrepresented. The Company has identified
malls for this planned expansion which satisfy Zales' real estate criteria. In
the Gordon's Division, the Company plans to add a small number of stores to
increase concentration within that Division's targeted regional markets. In the
Guild Division, the Company intends to open a small number of additional stores
under the Bailey, Banks & Biddle name. The Company plans to reposition some of
the Guild Division's stores in more desirable locations in upscale malls to
capitalize on the current strength of the luxury retailing sector and to take
advantage of the upscale image projected by the Bailey, Banks & Biddle name. See
"Risk Factors -- Expansion Programs".
The Company believes that as opportunities arise acquisitions may be used
as part of its expansion strategy to increase penetration in a particular
market. For example, in January 1996 the Company acquired Karten's Jewelers, a
20-store chain, which immediately increased the Company's presence in the New
England market. The Company plans to operate these stores under the Zales name.
The Diamond Park Division recently agreed, subject to certain conditions, to
operate leased jewelry departments in 25 Parisian department stores in the
Southeast.
Utilize Alternative Distribution Channels. Under its "direct fulfillment"
program, the Company is seeking to capitalize on the Zales name and national
reputation by experimenting with a series of direct marketing strategies to
complement its store-based operations. The Zales Division tested a program in
the fall of 1995 in which a 1-800 number and order forms were placed in a
sampling of the Division's newspaper and direct marketing inserts. The Company
also began testing home shopping during the 1995 Christmas season by including a
1-800 number in some of the Zales Division's television advertising. These
programs will be expanded on a selective basis during the 1996 holiday shopping
season. In addition, the Company is experimenting with marketing over the
Internet.
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Leverage Costs. As increases in store productivity, an expanding store base
and new distribution channels increase sales, the Company expects to be able to
leverage its expenses, such as administrative, general corporate, and
advertising expenses, resulting in higher operating profit margins.
Explore Freestanding Store Concept. The Company, through the Zales
Division, plans to test the concept of freestanding stores located in or near
power strip centers with heavy customer traffic. It is expected that these
stores would be larger in size, 3,000 to 4,000 square feet (versus 1,400 square
feet in mall stores), with a much broader and deeper selection of merchandise.
If this test is successful, the Company may expand the freestanding store
program. However, there is no assurance that the Company will implement the
freestanding store program, and any pursuit of this program will follow
substantial completion of the mall-based expansion program.
ZALES DIVISION
The Zales Division is positioned as the Company's national flagship and is
a leading brand name in jewelry retailing in the United States. At April 30,
1996, the Zales Division had 571 mall-based stores in 49 states and Puerto Rico.
Average store size is approximately 1,400 square feet and the average purchase
is $241. Zales accounted for approximately 41% of the Company's sales in fiscal
1995.
Zales' customers represent a cross-section of mainstream America. The
product focus of the Zales Division is on bridal, diamond and gold jewelry.
Bridal merchandise, including gold wedding bands, diamond bridal sets, diamond
wedding bands and diamond solitaire rings, accounts for approximately 40% of the
Division's merchandise sales. The Company maintains strong bridal assortments
because it believes that bridal jewelry is often a customer's first major
jewelry purchase and is generally considered to be the most important factor in
establishing a long-term relationship with the customer. The remaining 60% of
merchandise sales principally comprises fashion jewelry with diamonds and other
precious stones, gold fashion jewelry and watches. The Company believes that the
prominence of diamond jewelry in the product selection fosters an image of
quality and trust among consumers.
Zales' merchandise selection is generally standardized across the nation.
The combination of Zales' national presence and standardized merchandise
selection allows it to use television advertising across the nation as its
primary advertising medium, supplemented by print and direct mail advertising.
The Company's back-to-basics retailing strategy was first introduced by the
Company in the Zales Division in 1994. The Company believes that it has
contributed to the improvement in the operations and results of the Zales
Division over the past two years. The following table sets forth total sales,
the approximate number of stores and average sales per store for the Zales
Division for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, YEAR ENDED JULY 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands)...... $404,609 $340,386 $428,794 $374,849 $370,981
Average sales per store......... 722,500 671,400 849,100 716,700 692,100
Stores opened during period..... 78(1) 6 8 2 10
Stores closed during period..... 6 29 30 4 43
Total stores at end of period... 571 498 499 521 523
</TABLE>
- ---------------
(1) Includes 35 stores transferred from the Gordon's Division effective August
1, 1995 and 20 Karten's stores acquired in January 1996.
27
<PAGE> 29
GORDON'S DIVISION
The Company is repositioning Gordon's as a major regional brand focusing on
twelve regional markets. At April 30, 1996, the Gordon's Division had 336 stores
in 40 states and Puerto Rico, substantially all of which operate under the trade
name Gordon's Jewelers. Average store size is 1,300 square feet and the average
sale is $239. Gordon's accounted for approximately 25% of the Company's sales in
fiscal 1995.
In fiscal 1995, Gordon's began to operate as a separate business unit with
its own management team, which developed a separate buying and merchandising
strategy. The Division's merchandising strategy was aimed at distinguishing
Gordon's stores from Zales stores by devoting a portion of store inventory to
products that seek to satisfy demand in each particular regional market and by
emphasizing a more contemporary look in its product line. A substantial portion
of the remaining merchandise sold by stores in the Gordon's Division overlaps
the Zales Division product line. Advertising for the Gordon's Division, which
uses radio and printed inserts, has been refocused to emphasize key items. The
Division also plans to shift a portion of its advertising to regional
television.
In addition to a back-to-basics retailing approach similar to that
initiated at the Zales Division, including product-oriented merchandising and
marketing focused on key items, Gordon's Division management: (1) upgraded and
changed product assortments with more distinctive, fashion-oriented merchandise;
(2) raised credit approval standards in an effort to improve the quality of the
receivables portfolio; (3) reduced the degree of promotional pricing; and (4)
improved in-store product displays. In addition, 35 stores which did not fit
with the regional strategy of the Gordon's Division were transferred to the
Zales Division. The reduction of promotions and implementation of more stringent
credit standards slowed the improvement in sales productivity in the Gordon's
Division in fiscal 1996 to date. The Company will reach the one-year anniversary
of these changes in July 1996.
The following table sets forth total sales, the approximate number of
stores and average sales per store for the Gordon's Division for the periods
indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED APRIL 30, YEAR ENDED JULY 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands)....... $204,773 $209,535 $262,540 $234,974 $221,549
Average sales per store.......... 611,300 567,800 711,500 624,900 580,000
Stores opened during period...... 10 4 5 4 5
Stores closed during period...... 41(1) 12 13 6 14
Total stores at end of period.... 336(2) 367 367 375 377
</TABLE>
- ---------------
(1) Includes 35 stores transferred to the Zales Division effective August 1,
1995.
(2) Includes 322 stores operating under the name Gordon's and 14 stores
operating under the name Daniel's (SM) in Arizona.
28
<PAGE> 30
GUILD DIVISION
The Guild Division offers higher-end merchandise, more exclusive designs
and a prestigious shopping environment for the upscale customer. At April 30,
1996 the Guild Division operated 118 upscale jewelry stores in 26 states and
Guam. The Guild Division has an average sale of $430 and the average store is
approximately 2,600 square feet. The Guild Division accounted for approximately
19% of the Company's sales in fiscal 1995. The following table sets forth the
Guild Division's trade names and the approximate number of stores operating
under each of those names.
<TABLE>
<CAPTION>
NUMBER OF
TRADE NAMES STORES
---------------------------- ---------
<S> <C>
Bailey, Banks & Biddle(R)... 82
Corrigan's(R)............... 21
Sweeney's(R)................ 4
Stifft's(R)................. 3
<CAPTION>
NUMBER OF
TRADE NAMES STORES
---------------------------- ---------
<S> <C>
Dobbins(R).................. 2
J. Herbert Hall(R).......... 2
Linz(R)..................... 2
Zell Bros(R)................ 2
</TABLE>
The Guild Division's stores carry high quality, classic assortments with
only minimal emphasis on merchandise reflecting short-term fashion trends. There
is little product overlap with the product line of the Zales and Gordon's
Divisions, and management considers the Guild Division's primary product
franchise areas to be diamonds, watches, gold and giftware. The Guild Division
sells a larger percentage of watches (approximately 19% of its sales) than the
Zales and Gordon's Divisions, is the Company's only Division that sells
giftware, and sells a much lower percentage of bridal merchandise than the Zales
and Gordon's Divisions. Guild stores also display arrangements of coordinated
jewelry designed to stimulate multiple purchases. Advertising at the Guild
Division principally consists of catalogs sent to the Division's existing
customers and potential customers identified through the use of purchased
mailing lists. The Company seeks to enhance direct marketing in the Division
using its credit card and customer databases and other purchased data.
The Company began to employ its back-to-basics retailing strategy and other
elements of its strategic refocus in the Guild Division in 1995, the year after
their initial introduction at the Zales Division. To date the Company's efforts
at the Guild Division have centered on replacing inconsistent operating
procedures and buying practices of individual stores with a centrally designed
and executed Division-wide approach and on reducing slow-moving inventory.
The Company believes that these steps have contributed to an improvement in
the performance of the Guild Division. The following table sets forth total
sales, the approximate number of stores, and average sales per store for the
Guild Division for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED APRIL 30, YEAR ENDED JULY 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- - --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands).. $ 163,762 $ 156,155 $ 197,267 $ 182,278 $ 213,219
Average sales per
store................. 1,364,700 1,201,200 1,529,200 1,391,400 1,171,500
Stores opened during
period................ 1 4 4 4 4
Stores closed during
period................ 6 5 11 7 103
Total stores at end of
period................ 118 129 123 130 133
</TABLE>
29
<PAGE> 31
DIAMOND PARK DIVISION
The Diamond Park Division offers services for retailers that wish to use an
outside provider for specialized management and marketing skills in connection
with the sale of fine jewelry. At April 30, 1996, the Diamond Park Division
operated 178 leased locations in department stores including Dillard's(R)(62
locations), Mercantile(R) (67 locations), The Broadway(R) (26 locations) and
Marshall Field's(R) (23 locations) in 24 states. The Company is in the process
of closing its Broadway locations as a result of Broadway's sale to Federated
Department Stores, Inc. and the resulting conversion of the stores to Macy's,
which operates its own jewelry departments. Management believes that the Diamond
Park Division's opportunities for growth may be lessened by the current trend of
consolidation in the department store industry and a decreasing demand for
third-party owned jewelry departments by major department store chains. However,
this Division will seek to operate departments in additional regional department
stores as appropriate opportunities arise. The Diamond Park Division recently
agreed, subject to certain conditions, to operate leased jewelry departments in
25 Parisian department stores in the Southeast.
The Diamond Park Division tailors its merchandising concept to that of the
host store as opposed to using one standard for all stores. Management considers
Diamond Park's primary product franchise areas to be watches, gold and diamond
fashion jewelry. Diamond Park coordinates its advertising with that of its host
department stores and principally utilizes inserts in four-color direct mail
catalogs and newspaper advertising of the host store groups. Diamond Park
accounted for approximately 13% of the Company's sales in fiscal 1995.
The following table sets forth total sales, the approximate number of
departments and average sales per department for the Diamond Park Division for
the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, YEAR ENDED JULY 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands)....... $108,322 $110,835 $138,187 $127,761 $149,595
Average sales per department..... 588,700 554,200 701,500 591,500 577,600
Departments opened during
period......................... 9 14 18 19 1
Departments closed during
period......................... 19 33 35 46 94
Total departments at end of
period......................... 178 186 188 205 232
</TABLE>
PURCHASING AND INVENTORY
The Company purchases substantially all of its merchandise in finished form
from a network of established suppliers and manufacturers located primarily in
the United States, Southeast Asia, Hong Kong and Italy. The Company either
purchases merchandise from its vendors or acquires merchandise on consignment.
The Company has intentionally shifted its merchandising mix over the last year
to reduce the amount of consigned merchandise and increase its investment in
owned merchandise. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources". The
Company had approximately $76.3 million and $99.9 million of consignment
inventory on hand at April 30, 1996 and 1995, respectively. The Company is
subject to the risk of fluctuation in prices of diamonds, precious stones and
gold. The Company historically has not engaged in any substantial amount of
hedging activities with respect to merchandise held in inventory, since the
Company has been able to adjust retail prices to reflect significant price
fluctuations in the commodities that are used in the merchandise it sells. No
assurances, however, can be given that the Company will be able to adjust prices
to reflect commodity price fluctuations in the future. The Company is not
subject to substantial currency fluctuations because most purchases are dollar
denominated. During the years ended July 31, 1995
30
<PAGE> 32
and 1994, the Company purchased approximately 29% and 36%, respectively, of its
merchandise from its top five vendors.
CREDIT OPERATIONS
The Company offers and grants credit through its private label credit card
program. See "Business -- Strategy". The credit programs help facilitate the
sale of merchandise to customers who wish to finance their purchases rather than
use cash or available credit limits on their major credit cards. Approximately
52% of the Company's retail sales during the fiscal year ended July 31, 1995
through its Zales, Gordon's and Guild Divisions were generated by credit sales
on the private label credit cards. The Company has more than 1.1 million active
charge customers who have a good credit history and available credit and more
than 1.9 million customer names on file that are not current charge customers.
The Company uses many of these customer names in its targeted marketing
programs.
Credit extension, customer service, payment processing and collections for
all the accounts are performed at one or more of the Company's servicing centers
located in Tempe, Arizona; Clearwater, Florida; Irving, Texas; San Marcos,
Texas; San Juan, Puerto Rico; and Guam. The Company has enhanced the approval
process for its private label credit card, whereby those customers with a
satisfactory prior credit history can be approved rapidly. Flexible payment
arrangements, typically twenty-eight to thirty-four months, are extended to
credit customers.
The following table presents certain data concerning sales, credit sales
and accounts receivable for the past two fiscal years and for the nine months
ended April 30, 1996 and 1995 (1):
<TABLE>
<CAPTION>
AS AT OR FOR THE AS AT OR FOR THE
NINE MONTHS ENDED FISCAL YEAR ENDED
APRIL 30, JULY 31,
--------------------- ---------------------
1996 1995 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales (thousands)............... $773,144 $706,076 $888,601 $792,101
Net credit sales (thousands)........ 383,064 362,972 458,664 413,305
Accounts receivable (thousands)..... 463,740 454,766 436,336 437,936
Credit sales as a percentage of net
sales............................. 49.5% 51.4% 51.6% 52.2%
Average number of active customer
accounts (thousands).............. 677 694 689 729
Average balance per customer
account........................... $ 675 $ 665 $ 668 $ 645
Average monthly collection
percentage........................ 9.3% 9.2% 9.1% 8.8%
Bad debt expense as a percentage of
credit sales...................... 10.5% 8.9% 9.1% 8.7%
Bad debt expense as a percentage of
net sales......................... 5.2% 4.6% 4.7% 4.6%
</TABLE>
- ---------------
(1) The table excludes the Diamond Park Division which does not have a
proprietary credit plan.
Credit sales have decreased as a percentage of total sales, in part because
of an upgrading in minimum credit standards at the Gordon's Division and
increased competition from issuers of major credit cards. However, bad debt
expense as a percentage of credit sales and net sales increased in fiscal 1995
compared to fiscal 1994 and in the nine months ended April 30, 1996 compared to
the nine months ended April 30, 1995. The Company believes that these increases
have resulted from general economic conditions and previous credit policies at
the Gordon's Division and that its new credit policies should contribute to an
improvement in the receivables portfolio.
31
<PAGE> 33
The Company has three subsidiaries which provide various types of insurance
coverage, typically marketed to the Company's private label credit card
customers. These subsidiaries are the insurers (either through direct written or
reinsurance contracts) of the Company's customer credit insurance coverages. In
addition to providing replacement property coverage for certain perils, such as
theft, credit insurance coverage provides protection to the creditor and
cardholder for losses associated with the disability, involuntary unemployment
or death of the cardholder. Credit insurance operations are dependent on the
Company's retail sales on its private label credit cards and are not significant
on a stand-alone basis.
COMPETITION
The jewelry retailing industry is highly competitive. The industry is
fragmented, and the Company competes with a large number of independent regional
and local jewelry retailers, as well as national jewelry chains. The Company
must also compete with other types of retailers who sell jewelry and gift items,
such as department stores, catalog showrooms, discounters, direct mail suppliers
and home shopping programs. The Company believes that it is also competing for
consumers' discretionary spending dollars. The Company must, therefore, also
compete with retailers who offer merchandise other than jewelry or giftware.
Notwithstanding the national or regional reputation of its competition, the
Company believes that it must compete on a mall-by-mall basis with other
retailers of jewelry as well as with retailers of other types of discretionary
items. Therefore, the Company competes primarily on the basis of reputation for
high-quality, store location, distinctive and value-priced merchandise, personal
service and its ability to offer private label credit card programs to customers
wishing to finance their purchases. The Company's success is also dependent on
its ability to react to and create customer demand for specific product lines.
The Company holds no material patents, licenses (other than its licenses to
operate its Diamond Park leased locations), franchises or concessions; however,
the established tradenames for stores and products in the Company's Zales,
Gordon's and Guild Divisions are important to the Company in maintaining its
competitive position in the jewelry retailing industry.
EMPLOYEES
As of May 29, 1996, the Company had approximately 9,900 employees, less
than 1% of whom were represented by unions. The Company considers its relations
with its employees to be good.
PROPERTIES
The Company occupies a corporate headquarters facility, completed in March
1984 with 430,000 square feet, under a lease extending through September 2008.
The facility is located on a 17-acre tract in Las Colinas, a planned business
development in Irving, Texas, near the Dallas/Fort Worth International Airport.
The Company owns 33 acres of land surrounding the corporate headquarters
facility and a 120,000 square foot warehouse in Dallas, Texas.
The Company also leases four servicing centers located in Clearwater,
Florida (30,000 square feet), Tempe, Arizona (24,200 square feet), San Juan,
Puerto Rico (2,900 square feet) and Guam (556 square feet) and one national
collections center located in San Marcos, Texas (9,000 square feet).
The Company rents all of its retail spaces, other than the Diamond Park
Division leased locations, under leases with terms ranging from five to fifteen
years. Most of the store leases provide for the payment of base rentals plus
real estate taxes, insurance, common area maintenance fees and merchants
association dues, as well as percentage rents based on the stores' gross sales.
32
<PAGE> 34
The following table indicates the expiration dates of the current terms of
the Company's leases as of May 21, 1996:
<TABLE>
<CAPTION>
DIAMOND
TERM EXPIRES ZALES GORDON'S GUILD PARK PERCENTAGE
IN CALENDAR YEARS DIVISION DIVISION DIVISION DIVISION TOTAL OF TOTAL
--------------------------- -------- -------- -------- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 and prior................................. 87 69 14 26 196 16%
1997........................................... 90 56 19 74 239 20%
1998........................................... 72 41 16 39 168 14%
1999........................................... 43 31 16 16 106 9%
2000 and thereafter............................ 280 139 53 22 494 41%
--- --- --- --- ---- ----
Total number of leases......................... 572 336 118 177 1,203 100%
=== === === === ===== ====
</TABLE>
Management believes substantially all of the store leases expiring in 1996
that it wishes to renew (including leases which expired earlier and are on
month-to-month extensions) will be renewed on terms not materially less
favorable to the Company than the terms of the expiring leases.
LITIGATION
The Company has agreed to indemnify certain parties to litigation
settlements entered into by the Company in connection with the Plan of
Reorganization against certain cross-claims, similar third-party claims or costs
of defending such claims brought against such parties. At May 21, 1996, no
material claims had been asserted against the Company for such indemnification.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such litigation and
claims will be resolved without material effect on the Company's financial
position or results of operations.
33
<PAGE> 35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert J. DiNicola........... 48 Chairman of the Board, Chief Executive Officer and
Director
Merrill J. Wertheimer........ 56 Executive Vice President, Finance and Administration
Max A. Brown................. 67 Senior Vice President and President, Diamond Park
Division
Mary L. Forte................ 45 Senior Vice President and President, Gordon's
Division
Sue E. Gove.................. 37 Senior Vice President, Corporate Planning and
Analysis
Gregory Humenesky............ 44 Senior Vice President, Human Resources
Paul D. Kanneman............. 38 Senior Vice President and Chief Information Officer
Paul G. Leonard.............. 41 Senior Vice President and President, Guild Division
Ervin G. Polze............... 44 Senior Vice President, Operations
Beryl B. Raff................ 45 Senior Vice President and President, Zales Division
Alan P. Shor................. 37 Senior Vice President, General Counsel and Secretary
Thomas E. Whiddon............ 43 Senior Vice President and Chief Financial Officer
Glen Adams................... 57 Director
Peter P. Copses.............. 37 Director
Frank E. Grzelecki........... 59 Director
Andrea Jung.................. 37 Director
Richard C. Marcus............ 57 Director
Andrew H. Tisch.............. 46 Director
</TABLE>
The following is a brief description of the business experience of the
directors and executive officers of the Company for at least the past five
years.
Mr. Robert J. DiNicola has served as Chairman of the Board, Chief Executive
Officer and a director of the Company since April 18, 1994. For the three years
prior to joining the Company, Mr. DiNicola was a senior executive officer of The
Bon Marche Division of Federated Department Stores, Inc., having served as
Chairman and Chief Executive Officer of that Division from 1992 to 1994 and as
its President and Chief Operating Officer from 1991 to 1992. From 1989 to 1991,
Mr. DiNicola was a Senior Vice President of Rich's Department Store Division of
Federated. For seventeen years, prior to joining the Federated organization, Mr.
DiNicola was associated with Macy's, where he held various executive, management
and merchandising positions, except for a one-year period while he held a
division officer position with May Co.
Mr. Merrill J. Wertheimer was appointed Executive Vice President -- Finance
and Administration on January 27, 1995. From June 1991 through January 1995, he
served as Senior Vice President and Controller of the Company. From February
1990 to May 1991, Mr. Wertheimer served as President and Chief Executive Officer
of Henry Silverman Jewelers. Mr. Wertheimer served as Senior Vice President of
the Company from September 1987 to October 1989 and also served as Chief
Financial Officer of the Company from March 1987 to October 1989.
Mr. Max A. Brown has been President of the Company's Diamond Park Division
since January 11, 1993. From July 1989 to January 1993, Mr. Brown was Vice
President and General Manager of the Diamond Park Division. Prior to 1989, he
served as the Director of Stores for the Diamond Park Division.
Ms. Mary L. Forte joined the Company on July 18, 1994 as President of the
Gordon's Division. From January 1994 to July 1994, Ms. Forte served as Senior
Vice President of QVC -- Home Shopping Network. From July 1991 through January
1994, Ms. Forte served as Senior Vice
34
<PAGE> 36
President of the Bon Marche', Home Division. From July 1989 to July 1991, Ms.
Forte was Vice President of Rich's Department Store, Housewares Division. In
addition to the above, Ms. Forte has an additional 13 years of retailing and
merchandising experience with Macy's, The May Company and Federated Department
stores.
Ms. Sue E. Gove was appointed Senior Vice President, Corporate Planning and
Analysis on January 17, 1996. From February 1989 through January 1996, she
served as Vice President, Corporate Planning and Analysis. Ms. Gove joined the
Company in 1980 and served in numerous assignments until her appointment to Vice
President in 1989.
Mr. Gregory Humenesky was appointed Senior Vice President, Human Resources
on April 15, 1996. From January 1995 to April 1996 he held the position of Vice
President, Personnel Development and Staffing for the Company. For eight years
prior to joining the Company, Mr. Humenesky was Senior Vice President, Human
Resources for Macy's West. From June 1973 to February 1987, Mr. Humenesky held
senior level Human Resources positions within the Macy's organization.
Mr. Paul D. Kanneman joined the Company on November 14, 1994 as Chief
Information Officer. From July 1993 to November 1994, Mr. Kanneman was an
Associate Partner with Andersen Consulting LLP. Mr. Kanneman was a Principal
from August 1991 to July 1993, and a Senior Associate from August 1989 to July
1991 with Booz, Allen & Hamilton, Inc.
Mr. Paul G. Leonard was appointed President of the Company's Fine Jewelers
Guild Division on January 27, 1995. From October 1994 to January 1995, Mr.
Leonard served as President of Corporate Merchandising for the Company. For
three years prior to joining the Company, Mr. Leonard held positions as General
Manager of Jewelry and then Senior Vice President of Soft Lines for Ames
Department Store. Prior to that, Mr. Leonard was a Merchandise Vice President
with The May Company. Mr. Leonard has more than 20 years of retailing and
merchandising experience with an emphasis in jewelry.
Mr. Ervin G. Polze was appointed Senior Vice President, Operations on
January 17, 1996. From February 1995 through January 1996, he served as Vice
President, Operations. He held the position of Vice President, Controller from
March 1988 through February 1995. Mr. Polze joined the Company in January 1983
and served in several assignments until his appointment to Vice President in
March 1988.
Ms. Beryl B. Raff joined the Company on November 21, 1994 as President of
the Zales Division. From March 1991 through October 1994, Ms. Raff served as
Senior Vice President of Macy's East with responsibilities for its jewelry
business in a twelve-state region. From April 1988 to March 1991, Ms. Raff
served as Group Vice President of Macy's South/Bullocks. Prior to 1988, Ms. Raff
had 17 years of retailing and merchandising experience with the Emporium and
Macy's department stores.
Mr. Alan P. Shor joined the Company on June 5, 1995 as Senior Vice
President, General Counsel and Secretary. For two years prior to joining the
Company, Mr. Shor was the managing partner of the Washington, D.C. office of the
Troutman Sanders law firm, whose principal office is based in Atlanta, Georgia.
Mr. Shor, a member of Troutman Sanders since 1983, was a partner of the firm
from 1990 to 1995.
Mr. Thomas E. Whiddon was appointed Senior Vice President and Chief
Financial Officer on August 28, 1995. From April 1994 through August 1995, he
served as Senior Vice President and Treasurer of the Company. From September
1988 to April 1994, Mr. Whiddon served as Vice President and Treasurer of Eckerd
Corporation. Prior to becoming Treasurer, Mr. Whiddon served as Vice President
and Assistant Treasurer of Eckerd Corporation from April 1986 to August 1988.
Mr. Glen Adams has served as a director of the Company since July 21, 1993.
From 1990 to the present, Mr. Adams has served as Chairman, President and Chief
Executive Officer of Southmark Corporation in Dallas, Texas. From 1986 to 1989,
he served as Chairman, President and Chief
35
<PAGE> 37
Executive Officer of The Great Western Sugar Company. In addition to Southmark
Corporation, Mr. Adams is also a director of U.S. Home Corporation.
Mr. Peter P. Copses has served as a director of the Company since September
9, 1993. Since 1990, Mr. Copses has been an officer of Apollo Capital
Management, Inc., the general partner of Apollo Advisors, L.P., which, together
with its affiliates, acts as the managing general partner of Apollo Investment
Fund, L.P., AIF II, L.P. and Apollo Investment Fund III, L.P., private
securities investment funds. AIF II, L.P. is the general partner of the Selling
Shareholder. Mr. Copses is a director of Family Restaurants Inc., Dominick's
Finer Foods, Inc., Food 4 Less Holdings, Inc., and Forum Group, Inc.
Mr. Frank E. Grzelecki has served as a director of the Company since July
21, 1993. Since 1988, Mr. Grzelecki has served in several capacities with Handy
& Harman, including outside director and consultant from 1988 to 1989, Vice
Chairman of the Board from 1989 to 1992, and President, Chief Operating Officer
and director from 1992 to the present. In addition to Handy & Harman, Mr.
Grzelecki currently serves as a director of Chartwell Re Corporation.
Ms. Andrea Jung joined the board as a director on June 6, 1996. Ms. Jung is
President of the U.S. product marketing group for Avon Products, Inc. Prior to
joining Avon, Ms. Jung served as an Executive Vice President at Neiman Marcus
from 1991 to 1994. From 1987 to 1991, she served as Senior Vice President,
General Merchandising Manager for I. Magnin. Ms Jung served as General
Merchandising Manager at J.W. Robinson's from 1985 to 1987 and was with
Bloomingdales from 1979 to 1985, her latest position being Vice President and
Merchandising Manager. Ms. Jung also serves as a director of the American
Management Association and as a trustee of the Fashion Institute of Technology.
Mr. Richard C. Marcus has served as a director of the Company since July
21, 1993. Mr. Marcus is a principal of InterSolve Group, Inc., a management
services firm he co-founded in 1991. Since September 1994, Mr. Marcus has served
in several capacities with Plaid Clothing Group, including as an outside
director from September to November 1994, Chief Executive Officer and director
from December 1994 through September 1995, and is presently an outside director.
From 1988 to 1991, Mr. Marcus was a private investor and consultant for
companies serving the retail industry. From 1979 to 1988, he served as Chairman
and Chief Executive Officer of Neiman Marcus in Dallas, Texas.
Mr. Andrew H. Tisch has served as a director of the Company since July 21,
1993. Mr. Tisch has been Chairman of the Management Committee of Loews
Corporation since June 1995 and a member of that committee since October 1994.
Mr. Tisch also served as Chairman of the Board and Chief Executive Officer of
Lorillard, Inc. from 1989 to June 1995. From 1980 to 1989, he served as
President of Bulova Corporation. From 1985 to 1989, Mr. Tisch served as a
director of Gordon Jewelry Corporation prior to its acquisition by the Company.
Mr. Tisch currently serves as a director of Loews Corporation, Bulova
Corporation and Vegan Development Company.
SELLING SHAREHOLDER
This Prospectus relates to 7,126,000 shares of Common Stock, of which
4,875,854 (13.9% of the outstanding Common Stock before the offering) are being
offered by Apollo Jewelry Partners, L.P. (the "Selling Shareholder"). Following
completion of the offering, the Selling Shareholder will not beneficially own
any shares of Common Stock. Mr. Peter P. Copses, a director of the Company, is
an officer of Apollo Capital Management, Inc., the general partner of Apollo
Advisors, L.P., the managing general partner of AIF II LP, which is the sole
general partner of the Selling Shareholder.
The Selling Shareholder has agreed to pay up to $275,000 of expenses of the
offering incurred by the Company (other than underwriting discounts and
commissions), with any excess being paid 50% by the Selling Shareholder and 50%
by the Company. The Selling Shareholder and the Company have each agreed to
indemnify the other against certain liabilities which may arise from the
offering.
36
<PAGE> 38
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and the Selling Shareholder have each severally agreed to
sell to each of the Underwriters named below (the "Underwriters"), and each of
the Underwriters, for whom Salomon Brothers Inc, McDonald & Company Securities,
Inc. and PaineWebber Incorporated are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company and the
Selling Shareholder the number of shares of Common Stock set forth opposite its
name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Salomon Brothers Inc........................................
McDonald & Company Securities, Inc..........................
PaineWebber Incorporated....................................
-------------
Total..................................................... 7,126,000
=============
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
above-listed shares of Common Stock offered hereby if any such shares are
purchased. In the event of a default by any Underwriter, the Underwriting
Agreement provides that, in certain circumstances, purchase commitments of the
nondefaulting Underwriters may be increased or the Underwriting Agreement may be
terminated. The Company and the Selling Shareholder have each been advised by
the Representatives that the several Underwriters propose initially to offer
such shares to the public at the public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price, less a concession
not in excess of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to other
dealers. After the initial public offering, the public offering price and such
concession may be changed.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 890,750
additional shares at the same price per share as the initial 7,126,000 shares of
Common Stock to be purchased by the Underwriters. The Underwriters may exercise
such option only to cover over-allotments in the sale of the shares of Common
Stock that the Underwriters have agreed to purchase. To the extent that the
Underwriters exercise such option, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase the same proportion of the option
shares as the number of shares of Common Stock to be purchased and offered by
such Underwriters in the above table bears to the total number of shares of
Common Stock initially offered by the Underwriters.
The Company and certain executive officers of the Company have agreed not
to sell, or otherwise dispose of, any shares of Common Stock, or any securities
convertible or exchangeable for shares of Common Stock, except the shares of
Common Stock offered hereby, for a period of 90 days from the date of the
Underwriting Agreement without the prior written consent of Salomon Brothers Inc
and prior written notice to the other Representatives, (provided, however, the
Company may issue and sell shares issuable pursuant to any employee stock option
plan, employee stock purchase plan, stock ownership plan or dividend
reinvestment plan in effect on the date the Underwriting Agreement is executed
and may issue shares issuable upon the conversion of securities or the exercise
of warrants outstanding on the date the Underwriting Agreement is executed).
37
<PAGE> 39
The Underwriting Agreement provides that the Company and the Selling
Shareholder will indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments the
Underwriters may be required to make in respect thereof. The Company and the
Selling Shareholder have each also agreed to indemnify the other against certain
such liabilities.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Troutman Sanders LLP, Atlanta, Georgia. Certain legal matters
will be passed upon for the Selling Shareholder by Morgan, Lewis & Bockius LLP,
New York, New York and for the Underwriters by Cleary, Gottlieb, Steen &
Hamilton, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Zale Corporation and
subsidiaries included or incorporated by reference in this Prospectus and
elsewhere in the Registration Statement to the extent and for the periods
indicated in their reports have been audited by Arthur Andersen LLP, independent
public accountants, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement on Form S-3 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), as well as such reports, proxy statements and other
information filed by the Company with the Commission, can be inspected and
copied at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C.; 500 West Madison Street, Suite 1400, Chicago,
Ill.; and 13th Floor, Seven World Trade Center, New York, N.Y. Copies of this
material can also be obtained at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common
Stock of the Company is listed on the NYSE and the aforementioned material can
also be inspected at the offices of the NYSE at 20 Broad Street, New York, New
York 10005.
The Company has filed a Registration Statement with the Commission in
Washington, D.C. with respect to the Common Stock offered hereby. This
Prospectus constitutes a part of the Registration Statement and does not contain
all the information set forth therein, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Any
statements contained herein concerning the provisions of any contract or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. For further
information regarding the Company and the securities offered hereby, reference
is made to the Registration Statement and to the exhibits thereto.
38
<PAGE> 40
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated and made a part of this Prospectus
by reference, except as superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the year ended July
31, 1995;
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
October 31, 1995, January 31, 1996, and April 30, 1996;
3. The description of Common Stock in the Company's Registration
Statement on Form 8-A filed with the Commission under the Exchange
Act as it may be amended by any amendment or report filed
subsequent to the date of this Registration Statement for the
purpose of updating such description.
All documents subsequently filed by the Company with the Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and made a part hereof from the date of filing of
such documents. Any statement contained in this Prospectus shall be deemed to be
modified or superseded to the extent that a statement contained herein or in a
subsequently filed document, which is deemed to be incorporated by reference,
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus is delivered, on the written or oral request of
any such person, a copy of any or all of the documents referred to herein under
the caption "incorporation of certain documents by reference" which have been or
may be incorporated by reference in this Prospectus, other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the information incorporated into this Prospectus. Requests for such copies
should be directed to Mr. Alan P. Shor, Senior Vice President, General Counsel &
Secretary, Zale Corporation, 901 W. Walnut Hill Lane, Irving, Texas 75038-1003,
(214) 580-4000.
39
<PAGE> 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Audited Consolidated Financial Statements
Reports of Independent Public Accountants.......................................... F-2
Consolidated Statements of Operations for the Years Ended July 31, 1995 and 1994,
the Four Months Ended July 31, 1993 and the Year Ended March 31, 1993........... F-4
Consolidated Balance Sheets as of July 31, 1995 and 1994........................... F-5
Consolidated Statements of Cash Flows for the Years Ended July 31, 1995 and 1994,
the Four Months Ended July 31, 1993 and the Year Ended March 31, 1993........... F-6
Consolidated Statements of Stockholders' Investment for the Years Ended July 31,
1995 and 1994, the Four Months Ended July 31, 1993 and the Year Ended March 31,
1993............................................................................ F-7
Notes to Consolidated Financial Statements......................................... F-8
Interim Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the Three and Nine Months Ended April 30,
1996 and 1995 (Unaudited)....................................................... F-23
Consolidated Balance Sheets as of April 30, 1996 (Unaudited) and July 31, 1995
(Audited)....................................................................... F-24
Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 1996 and
1995 (Unaudited)................................................................ F-25
Notes to Consolidated Financial Statements (Unaudited)............................. F-26
</TABLE>
F-1
<PAGE> 42
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Zale Corporation:
We have audited the accompanying consolidated balance sheets of Zale
Corporation (a Delaware corporation) and subsidiaries (subsequent to emergence
from bankruptcy -- See Notes to Consolidated Financial
Statements -- "Reorganization and Basis of Presentation" for discussion) as of
July 31, 1995 and 1994, and the related consolidated statements of operations,
cash flows, and stockholders' investment for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Zale Corporation and
subsidiaries as of July 31, 1995 and 1994, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 12, 1995
F-2
<PAGE> 43
To the Stockholders and Board of Directors of Zale Corporation:
We have audited the accompanying consolidated statements of operations,
cash flows, and stockholders' investment of Zale Corporation (a Delaware
corporation) and subsidiaries for the four month period ended July 31, 1993, and
for the year ended March 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in the Notes to Consolidated Financial
Statements -- "Reorganization and Basis of Presentation," the Company emerged
from bankruptcy on July 30, 1993, and adopted fresh-start reporting as of July
31, 1993. The effects resulting from the adoption of fresh-start reporting and
the forgiveness of debt have been reflected in the statement of operations for
the four month period ended July 31, 1993. As such, results of operations
through July 31, 1993, are not comparable with results of operations subsequent
to that date.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Zale
Corporation and subsidiaries for the four month period ended July 31, 1993, and
for the year ended March 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in the Notes to Consolidated Financial Statements, on April 1,
1993, the Company changed its method of accounting for post-retirement benefits
other than pensions and its method of accounting for income taxes.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 12, 1995
F-3
<PAGE> 44
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------
FOUR
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, MARCH 31,
1995 1994 1993 1993
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net Sales................................ $1,036,149 $920,307 $ 244,539 $ 980,832
Cost of Sales............................ 524,010 460,060 127,484 534,420
Selling, General and Administrative
Expenses............................... 434,101 401,744 119,786 418,133
Depreciation and Amortization Expense
(Credit)............................... 381 (4,385) 8,973 26,316
Unusual Items -- Provisions for Valuation
of Assets.............................. -- -- -- 20,200
Reorganization and Restructure Costs..... -- -- 47,879 137,937
Interest Expense, Net.................... 29,837 28,142 6,623 24,829
---------- -------- ---------- ----------
Earnings (Loss) Before Fresh-Start
Revaluation, Income Taxes,
Extraordinary Items and Cumulative
Effect of Accounting Change............ 47,820 34,746 (66,206) (181,003)
Fresh-Start Revaluation.................. -- -- (246,236) --
---------- -------- ---------- ----------
Earnings (Loss) Before Income Taxes,
Extraordinary Items and Cumulative
Effect of Accounting Change............ 47,820 34,746 (312,442) (181,003)
Income Taxes............................. 16,350 11,621 -- --
---------- -------- ---------- ----------
Earnings (Loss) Before Extraordinary
Items and Cumulative Effect of
Accounting Change...................... 31,470 23,125 (312,442) (181,003)
Extraordinary Items:
Loss on Early Extinguishment of Debt,
Net of Income Taxes of $(1,045)..... -- (1,568) -- --
Gain on Debt Discharge, Net of Income
Taxes of $-0-....................... -- -- 1,118,587 --
Cumulative Effect of Accounting Change:
Postretirement Benefits, Net of Income
Taxes of $-0-....................... -- -- (14,754) --
---------- -------- ---------- ----------
Net Earnings (Loss)...................... $ 31,470 $ 21,557 $ 791,391 $ (181,003)
========== ======== ========== ==========
Earnings Per Common Share(1):
Primary:
Earnings Before Extraordinary
Item.............................. $ 0.88 $ 0.66
Extraordinary Item.................. -- (0.04)
---------- --------
Net Earnings........................ $ 0.88 $ 0.62
========== ========
Assuming full dilution:
Earnings Before Extraordinary
Item.............................. $ 0.86 $ 0.66
Extraordinary Item.................. -- (0.04)
---------- --------
Net Earnings........................ $ 0.86 $ 0.62
========== ========
Weighted Average Number of Common Shares
Outstanding (1):
Primary............................. 35,849 34,965
Assuming full dilution.............. 36,565 34,965
</TABLE>
- ---------------
(1) Earnings (loss) per share is not presented in the four months ended July 31,
1993 or the year ended March 31, 1993 because such presentation would not be
meaningful. The shares of the Predecessor, which were not publicly traded,
were cancelled under the plan of reorganization and the new shares were not
issued until the Effective Date.
See Notes to the Consolidated Financial Statements.
F-4
<PAGE> 45
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
---------- ----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents......................................... $ 154,905 $ 153,700
Customer Receivables, Net......................................... 396,380 397,886
Merchandise Inventories........................................... 375,413 401,034
Other Current Assets.............................................. 23,859 21,474
---------- ----------
Total Current Assets...................................... 950,557 974,094
Property and Equipment, Net......................................... 71,487 37,211
Other Assets........................................................ 39,864 39,342
Deferred Tax Asset, Net............................................. 48,800 62,000
---------- ----------
Total Assets.............................................. $1,110,708 $1,112,647
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt................................. $ 2,907 $ 3,897
Accounts Payable and Accrued Liabilities.......................... 117,048 144,981
Deferred Tax Liability, Net....................................... 48,800 62,000
---------- ----------
Total Current Liabilities................................. 168,755 210,878
Non-current Liabilities............................................. 32,670 32,873
Long-term Debt...................................................... 440,717 443,581
Excess of Revalued Net Assets Over Stockholders' Investment, Net.... 76,676 82,575
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock................................................... -- --
Common Stock...................................................... 350 350
Additional Paid-In Capital (Includes Stock Warrants).............. 337,534 321,159
Unrealized Gains (Losses) on Securities........................... 979 (326)
Accumulated Earnings.............................................. 53,027 21,557
---------- ----------
Total Stockholders' Investment............................ 391,890 342,740
---------- ----------
Total Liabilities and Stockholders' Investment............ $1,110,708 $1,112,647
========== ==========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-5
<PAGE> 46
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------
FOUR
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, MARCH 31,
1995 1994 1993 1993
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................. $ 31,470 $ 21,557 $ 791,391 $(181,003)
Non cash expenses, gains and losses:
Depreciation and amortization expense (credit)..... 1,498 (4,186) 8,973 26,316
Increase in inventory restructure reserve.......... -- -- -- 42,988
Unusual items -- provisions for valuation of
assets........................................... -- -- -- 20,200
Reorganization and restructure costs, net of cash
payments......................................... -- -- 42,373 86,925
Utilization of pre-emergence net operating loss.... 16,204 10,439 -- --
Cumulative effect of change in accounting for
postretirement benefits.......................... -- -- 14,754 --
Fresh-start revaluation charge..................... -- -- 246,236 --
Extraordinary gain on debt discharge............... -- -- (1,118,587) --
Other adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
(Increase) decrease in:
Customer receivables, net........................ 1,506 27,214 37,216 75,927
Merchandise inventories.......................... 25,621 (19,609) 10,248 10,983
Other current assets............................. (2,385) 8,148 3,888 40,876
Other assets..................................... (55) 6,360 (2,325) (2,210)
Increase (decrease) in:
Accounts payable and accrued liabilities......... (27,752) (40,666) (8,284) 30,404
Non-current liabilities.......................... (203) 4,885 (191) (790)
Obligations subject to settlement under
reorganization proceedings..................... -- -- (2,396) (28,111)
--------- --------- ----------- ---------
Net Cash Provided by Operating Activities.............. 45,904 14,142 23,296 122,505
--------- --------- ----------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.................. (42,295) (27,838) (7,346) (10,177)
Dispositions of property and equipment............... 1,987 63 814 963
Other................................................ (205) 103 1,005 1,014
--------- --------- ----------- ---------
Net Cash Used in Investing Activities.................. (40,513) (27,672) (5,527) (8,200)
--------- --------- ----------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt........................... $ (3,896) $ (3,630) $ (1,410) $ (4,212)
Borrowings under accounts receivable securitization
facility........................................... -- 380,551 -- --
Borrowings (repayments) of prior accounts receivable
securitization facility............................ -- (284,700) -- 284,522
Payment of prepayment penalty on early extinguishment
of debt............................................ -- (2,613) -- --
Repurchase of Zale and Gordon customer receivables... -- -- -- (414,053)
Redemption of marketable security collateral for
Private Label Credit Card Program.................. -- -- -- 97,600
Debt issue and capitalized financing costs........... (461) (5,400) (4,565) (625)
Cash distributions at date of plan consummation...... -- -- (54,989) --
Proceeds from exercise of stock options and
warrants........................................... 171 -- -- --
Other................................................ -- (243) (27) (1,069)
--------- --------- ----------- ---------
Net Cash Provided by (Used in) Financing Activities.... (4,186) 83,965 (60,991) (37,837)
--------- --------- ----------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents... 1,205 70,435 (43,222) 76,468
Cash and Cash Equivalents at Beginning of Period....... 153,700 83,265 126,487 50,019
--------- --------- ----------- ---------
Cash and Cash Equivalents at End of Period............. $ 154,905 $ 153,700 $ 83,265 $ 126,487
========= ========= =========== =========
Supplemental cash flow information:
Interest paid........................................ $ 36,443 $ 27,278 $ 9,408 $ 27,257
Interest received.................................... $ 7,641 $ 1,724 $ 1,536 $ 3,577
Income taxes paid (net of refunds received).......... $ 568 $ 470 $ 368 $ (333)
Restricted cash -- at period end date.................. $ 51,422 $ 58,528 $ 15,988 $ 6,233
Noncash transaction:
Capital lease obligation incurred for acquisition of
equipment.......................................... $ -- $ -- $ 10,265 $ --
</TABLE>
See Notes to the Consolidated Financial Statements.
F-6
<PAGE> 47
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL UNREALIZED ACCUMULATED
COMMON SHARES COMMON PAID-IN GAINS (LOSSES) EARNINGS
OUTSTANDING STOCK CAPITAL ON SECURITIES (DEFICIT) TOTAL
------------- ------ ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR --
Balance, March 31, 1992....... 3 $ -- $ 404,127 $ -- $(1,014,515) $(610,388)
Net Loss...................... -- -- -- -- (181,003) (181,003)
---------- ----- --------- ------- ----------- ---------
Balance, March 31, 1993....... 3 -- 404,127 -- (1,195,518) (791,391)
Net Earnings................ -- -- -- -- 791,391 791,391
Elimination of Former Equity
Interests in Connection
with Emergence from
Bankruptcy................ (3) -- (404,127) -- 404,127 --
Issuance of New Equity
Interests in Connection
with Emergence from
Bankruptcy................ 34,972 350 310,720 -- -- 311,070
---------- ----- --------- ------- ----------- ---------
POST-EMERGENCE --
Balance, July 31, 1993 (Fresh-
Start Reporting Date)....... 34,972 350 310,720 -- -- 311,070
Net Earnings................ -- -- -- -- 21,557 21,557
Utilization of Pre-Emergence
Net Operating Loss........ -- -- 10,439 -- -- 10,439
Treasury Stock Acquired..... (7) -- -- -- -- --
Unrealized Holding Period
Loss...................... -- -- -- (326) -- (326)
---------- ----- --------- ------- ----------- --------
Balance, July 31, 1994........ 34,965 350 321,159 (326) 21,557 342,740
Net Earnings................ -- -- -- -- 31,470 31,470
Utilization of Pre-Emergence
Net Operating Loss........ -- -- 16,204 -- -- 16,204
Exercise of Stock Options
and Warrants.............. 19 -- 171 -- -- 171
Treasury Stock Acquired..... (1) -- -- -- -- --
Unrealized Holding Period
Gain...................... -- -- -- 1,305 -- 1,305
---------- ----- --------- ------- ----------- ---------
Balance, July 31, 1995........ 34,983 $350 $ 337,534 $ 979 $ 53,027 $ 391,890
========== ===== ========= ======= =========== =========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-7
<PAGE> 48
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REORGANIZATION AND BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements are those of Zale
Corporation and its wholly-owned subsidiaries (the "Company"). The
classifications in use at July 31, 1995 have been applied to the financial
statements for July 31, 1994, July 31, 1993 and March 31, 1993.
Chapter 11 Reorganization. On July 30, 1993 (the "Effective Date"), Zale
Corporation ("Zale") consummated its plan of reorganization under Chapter 11 of
the United States Bankruptcy Code (the "Plan") and emerged from bankruptcy. The
Plan terminated the former direct or indirect ownership of the Company by
Peoples Jewellers Limited and Swarovski International Holding, A.G.
("Swarovski"). See discussion of Swarovski warrants in the note to the
Consolidated Financial Statements "CAPITAL STOCK". On the Effective Date, the
Company consolidated substantially all its retail operations into Zale Delaware,
Inc. ("ZDel"), which is a wholly-owned subsidiary of Zale. ZDel, in turn, is the
parent company for several subsidiaries, including three that are engaged
primarily in providing credit insurance to credit customers of the Company. The
Plan resulted in the elimination, through merger or liquidation, of seventeen
former Zale subsidiaries.
In connection with the consummation of the Plan, the Company distributed
shares of its common stock to various classes of its pre-bankruptcy creditors.
The Plan provided for, among other things, cash payments of approximately $55.0
million (including $45.0 million paid in settlement of certain senior and
subordinated bondholder claims), the issuance of approximately $60.0 million of
secured notes and the distribution of the common stock of reorganized Zale.
The value of the cash, other assets, new debt and equity securities
distributed under the Plan was approximately $1.1 billion less in total value
than the allowed claims being settled, and the resulting gain was recorded as an
extraordinary item in the Consolidated Statement of Operations for the four
month period ended July 31, 1993.
Fresh-Start Reporting. Pursuant to the guidance provided by the American
Institute of Certified Public Accountants in Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), the Company adopted fresh-start reporting as of the close of
business on July 31, 1993. Fresh-start reporting resulted in a revaluation of
the Company's assets and liabilities as of the Effective Date to reflect
allocation of the reorganization value based upon the estimated fair market
values of those assets and liabilities.
The resulting charge of $246.2 million from all fresh-start adjustments,
including the write-off of most noncurrent assets, is presented as "Fresh-Start
Revaluation" in the Consolidated Statement of Operations for the four month
period ended July 31, 1993.
In accordance with fresh-start reporting guidelines, certain noncurrent
assets were reduced to zero because the fair value of the Company's assets
exceeded the fair value of its liability and stockholders' investment. After
reducing the value of certain noncurrent assets to zero, the excess of the fair
value of the remaining assets over the fair value of liabilities and
stockholders' investment was recorded as a deferred credit, "Excess of Revalued
Net Assets Over Stockholders' Investment". This balance is being amortized over
15 years.
In connection with the adoption of fresh-start reporting, the Company
adopted Statement of Financial Accounting Standards ("SFAS"), No. 109,
"Accounting for Income Taxes", which had no impact on the statement of
operations. See the note to the Consolidated Financial Statements "INCOME TAXES"
for further discussion.
As a result of fresh-start reporting being used to reflect the fair values
of assets, liabilities and stockholders' investment of the reorganized Company
at July 31, 1993, the Consolidated Statements of Operations, Consolidated
Statements of Cash Flows and Consolidated Statements of
F-8
<PAGE> 49
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stockholders' Investment for the fiscal years ended July 31, 1995 and 1994, are
not comparable in certain material respects to such predecessor statements for
any prior periods. The Consolidated Financial Statements for the periods after
July 31, 1993, are those of the reorganized entity.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's Business consists principally of the retail sale of fine
jewelry merchandise.
Consolidated Financial Statements include all subsidiaries including ZDel
and Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust,
wholly-owned by ZDel and formed in July 1994 to finance customer accounts
receivable, and the Company's insurance subsidiaries. All significant
intercompany transactions have been eliminated.
Cash and Cash Equivalents include cash on hand, deposits in banks and
short-term marketable securities at varying interest rates with maturities of
three months or less. The carrying amount approximates fair value because of the
short maturity of those instruments. At July 31, 1995, $51.4 million was
restricted of which $50.8 million was restricted based on collateral
requirements under the Receivables Securitization Facility.
Customer Receivables are classified as current assets, including amounts
which are due after one year, in accordance with industry practices. The
allowance for doubtful accounts was $42.6 million and $42.7 million at July 31,
1995 and 1994, respectively. Finance charge income of $79.3 million and $82.4
million for the years ended July 31, 1995 and 1994, respectively, $29.2 million
for the four months ended July 31, 1993 and $92.1 million for the year ended
March 31, 1993 has been reflected as a reduction of Selling, General and
Administrative Expenses.
Merchandise Inventories are stated at the lower of cost or market, which is
determined primarily in accordance with the retail inventory method.
Substantially all inventories represent finished goods which are valued using
the last-in, first-out ("LIFO") method. Since July 31, 1993 the Company has
employed a methodology which provides better inventory turnover and
profitability information in order to identify and determine the appropriate
merchandising action for problem merchandise on a more timely basis and ensure
that such inventory is valued at the lower of cost or market.
Depreciation and Amortization are computed using the straight-line method
over the estimated useful lives of the assets or remaining lease life. Estimated
useful lives of the assets range from three to forty years. Original cost and
related accumulated depreciation or amortization are removed from the accounts
in the year assets become retired. Gains or losses on dispositions of property
and equipment are included in operations in the year of disposal. Computer
software costs related to the development of major systems are capitalized as
incurred and are amortized over their useful lives.
Excess of Revalued Net Assets Over Stockholders' Investment is being
amortized over fifteen years. Amortization was $5.9 million for the years ended
July 31, 1995 and 1994. Accumulated amortization was $11.8 million and $5.9
million at July 31, 1995 and 1994, respectively.
Store Preopening Costs are charged to results of operations in the period
in which the store is opened. Store closing costs are estimated and recognized
in the period in which the Company makes the decision that the store will close.
Such costs include the present value of estimated future rentals net of
anticipated sublease income, loss on retirement of property and equipment and
other related occupancy costs.
Advertising Expenses are charged against operations when incurred. Amounts
charged against operations were $35.2 million and $36.9 million for the years
ended July 31, 1995 and 1994, respectively, $9.6 million for the four months
ended July 31, 1993 and $33.3 million for the year
F-9
<PAGE> 50
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended March 31, 1993. The amounts of prepaid advertising at July 31, 1995 and
1994 are $1.8 million and $0.3 million, respectively.
Year-End Change. On December 13, 1993, the Board of Directors of the
Company authorized the change in the Company's fiscal year end to July 31. Such
change was effective as of April 1, 1994. The Company's determination to change
its fiscal year was based on several considerations. By changing to a July 31
fiscal year end, the Company has established quarterly reporting periods that
are more consistent with other companies in the retail industry. Additionally, a
July 31 year end coincides with the Company's emergence from bankruptcy
proceedings, thereby providing for greater comparability of historical financial
data in the future, and, it makes the Company's planning process more effective.
MERCHANDISE INVENTORIES
The Company uses the last-in, first-out ("LIFO") method of accounting for
inventory, which results in a matching of current costs with current revenues.
The estimated cost of replacing the Company's inventories exceeds its net LIFO
cost by approximately $9.9 million and $7.1 million at July 31, 1995 and 1994,
respectively. Inventories on a first-in, first-out ("FIFO") basis were $385.3
million and $408.1 million at July 31, 1995 and 1994, respectively. The Company
also maintained consigned inventory at its retail locations of approximately
$85.9 million and $111.4 million at July 31, 1995 and 1994, respectively. This
consigned inventory and related contingent obligation are not reflected in the
Company's financial statements. At the time of sale, the Company records the
purchase liability in accounts payable and the related cost of merchandise in
Cost of Sales.
Upon implementation of fresh-start reporting, the LIFO reserve as of July
31, 1993 was eliminated for financial reporting purposes when merchandise
inventories were revalued at their fair market value. The Company began
reporting, for financial reporting purposes, its LIFO inventories using a new
base period starting July 31, 1993.
PROPERTY AND EQUIPMENT
The Company's property and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Buildings and Leasehold Improvements........................... $ 21,357 $ 8,240
Furniture and Fixtures......................................... 36,976 14,143
Construction in Progress....................................... 10,752 5,361
Property Held for Sale......................................... 9,896 10,894
-------- --------
78,981 38,638
Less: Accumulated Amortization and Depreciation................ (7,494) (1,427)
-------- --------
Total Net Property and Equipment.......................... $ 71,487 $ 37,211
======== ========
</TABLE>
Property Held for Sale represents land and buildings which are being held
for future sale and are not being used in the Company's operations.
F-10
<PAGE> 51
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES
The Company's accounts payable and accrued liabilities consists of the
following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
-------- --------
<S> <C> <C>
(AMOUNTS IN
THOUSANDS)
Accounts Payable............................................... $ 43,108 $ 66,242
Accrued Payroll................................................ 20,690 15,025
Accrued Taxes.................................................. 14,000 16,010
Other Accruals................................................. 39,250 47,704
-------- --------
Total Accounts Payable and Accrued Liabilities....... $117,048 $144,981
========= =========
</TABLE>
The Company's non-current liabilities consists principally of the
accumulated obligation for postretirement benefits under SFAS No. 106.
Postretirement Benefits. The Company provides medical and dental insurance
benefits for all eligible retirees and spouses with benefits to the latter
continuing after the death of the retiree for a maximum of thirty-six months.
Substantially all of the Company's full-time employees, who were hired on or
before November 14, 1994, become eligible for those benefits upon reaching age
55 while working for the Company and having ten years of continuous service. The
medical and dental benefits are provided under a single plan. The lifetime
maximum on medical benefits is $500,000 up to the age of 65 and $50,000
thereafter. These benefits include deductibles, retiree contributions and
co-insurance provisions that are assumed to grow with the health care cost trend
rate.
Effective April 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
This standard requires that the costs of the postretirement benefits described
in the preceding paragraph be recognized in the financial statements over an
employee's active working career on an accrual basis. In previous years, the
Company recognized the costs on a cash basis.
The accumulated postretirement benefits obligation ("APBO"), which
represents the actuarial present value of benefits attributed to employee
service rendered as of July 31, 1995 and 1994 for the unfunded plan, include the
following components (amounts in thousands):
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
-------- --------
<S> <C> <C>
Active Employees Under Retirement Age........................... $ 6,574 $ 5,945
Active Employees Eligible to Retire............................. 3,624 3,102
Current Retirees................................................ 10,488 9,825
------- -------
Accumulated Benefit Obligation.................................. 20,686 18,872
Unrecognized Prior Service Cost................................. (406) --
Unrecognized Net Loss........................................... (1,607) (2,276)
------- -------
Accrued Postretirement Benefit Liability................... $ 18,673 $ 16,596
======= =======
</TABLE>
F-11
<PAGE> 52
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The APBO of approximately $14.8 million was recognized as a cumulative
effect of an accounting change at April 1, 1993. In addition to the one-time
cumulative effect adjustment, the annual expense relating to postretirement
benefits is approximately $2.5 million. The components of such annual expense,
which are reflected in Selling, General and Administrative Expenses, are as
follows (amounts in thousands):
<TABLE>
<S> <C>
Service Cost on benefits earned during the year................... $1,035
Interest Cost on accumulated benefit obligation................... 1,465
Amortization...................................................... 16
------
Total................................................... $2,516
======
</TABLE>
This represents a $1.4 million increase over the annual expense that would
have been recognized under the old accounting method.
The weighted-average discount rate used in determining the APBO at July 31,
1994 was 8.0 percent. At July 31, 1995, this rate was lowered to 7.75 percent.
The weighted-average annual assumed rates of increase in the cost of covered
medical and dental benefits at July 31, 1994 are 14.0 percent and 8.75 percent,
respectively, and are assumed to decrease gradually to 7.0 percent in the year
2001 and remain at that level thereafter. At July 31, 1995, the initial medical
and dental trend rates are 13.0 percent and 8.5 percent, respectively, and are
assumed to gradually decrease to 6.0 percent in the year 2003. The effect of a
one percent increase in the health care cost trend rate on the APBO and the net
periodic expense would be an increase of approximately $1.0 million and $0.2
million, respectively.
CREDIT ARRANGEMENTS
Working Capital Financing. On July 30, 1993, ZDel, as borrower, and Zale
and certain of ZDel's subsidiaries, as guarantors, entered into a three-year
revolving credit and gold consignment agreement (the "Working Capital
Facility"). The Working Capital Facility provided for (a) revolving credit 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 July 31,
1995 and 1994, there were no loans outstanding under the Working Capital
Facility and no borrowings were made during the current year under this
facility. There were approximately $7.3 million and $5.9 million of letters of
credit outstanding at July 31, 1995 and 1994, respectively.
On August 11, 1995, Zale and ZDel (the "Borrowers") entered into a new
three-year revolving credit agreement (the "Revolving Credit Agreement") which
provides for revolving credit loans in an aggregate amount of up to $150.0
million, with a $30.0 million sublimit for letters of credit. At no time may the
total amount of revolving credit loans outstanding exceed a defined borrowing
base (based on a fixed percentage of eligible inventory, as defined).
The Borrowers' obligations under the Revolving Credit Agreement are
primarily secured by a first lien on and security interest in all inventory
(excluding inventory on consignment).
The revolving credit loans bear interest at floating rates, currently
LIBOR + 2.0 percent or the agent's adjusted base rate + 0.75 percent, at the
Borrowers' option, and can be adjusted based on certain future performance
levels attained by the Borrowers. The Borrowers incur letter of credit fees and
also pay a commitment fee of 3/8 percent per annum on the preceding month's
unused Revolving Credit Agreement commitment. The Borrowers may repay the
revolving credit loans at any time without penalty.
F-12
<PAGE> 53
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, keeps within certain limits the Borrowers ability to
pay dividends and make other restricted payments, incur additional indebtedness,
engage in certain transactions with affiliates, incur liens, make investments
and sell assets. The Revolving Credit Agreement also requires the Borrowers to
maintain certain financial ratios and specified levels of net worth.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
-------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Receivables Securitization Facility.................................. $380,593 $380,551
Second Priority Senior Secured Notes................................. 60,017 60,017
Capital Lease Obligations............................................ 2,499 5,922
Other (primarily mortgages).......................................... 515 988
-------- --------
443,624 447,478
Less Current Portion................................................. (2,907) (3,897)
-------- --------
$440,717 $443,581
======== ========
</TABLE>
Fiscal year scheduled maturities of long-term debt at July 31, 1995 were as
follows: 1996 -- $2.9 million; 1997 -- $-0- million; 1998 -- $-0- million;
1999 -- $380.6 million; 2000 -- $60.0 million; thereafter -- $0.1 million; for a
total of $443.6 million.
Receivables Securitization Facilities. In November 1992, Diamond Funding
Corp. ("DFC") established an accounts receivable securitization facility (the
"DFC Securitization") pursuant to which it issued approximately $284.6 million,
net of discount, aggregate principal amount of 6.35 percent Receivables Backed
Notes ("DFC Receivables Notes"). The proceeds from the DFC Receivables Notes
were used to buy the revolving credit card accounts receivable of ZDel and other
Zale affiliates.
The Company refinanced its DFC Receivables Notes effective July 15, 1994
through a new securitization program discussed below. Upon consummation of the
new securitization program, the DFC Receivables Notes were redeemed. The Company
was required to pay a special redemption premium in the amount of approximately
$2.6 million upon early redemption of the DFC Receivables Notes. This amount,
net of an income tax benefit of $1.0 million, has been classified as an
extraordinary item on the Consolidated Statement of Operations as of July 31,
1994.
In connection with the refinancing, ZFT established an accounts receivable
securitization facility (the "ZFT Securitization"), pursuant to which it issued
approximately $380.6 million, net of discount, aggregate principal amount of
Receivables Backed Notes ("ZFT Receivables Notes"). The proceeds from the ZFT
Receivables Notes were used to buy the revolving credit card accounts receivable
of DFC, ZDel and other affiliates. Collections from those receivables are used
in part to pay interest on the ZFT Receivables Notes and to purchase daily
ZDel's customer accounts receivable. The ZFT Receivables Notes are secured by a
lien on all customer accounts receivable and are nonrecourse with regard to Zale
and ZDel.
F-13
<PAGE> 54
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ZFT Receivables Notes bear interest at the following rates, payable
monthly in arrears (amounts in thousands):
<TABLE>
<CAPTION>
PRINCIPAL RATE
- --------- -----------------------------------
<C> <S>
$37,620 LIBOR + .40%, not to exceed 12.0%
294,100 7.325%
28,600 7.50%
20,440 8.15%
--------
$380,760
========
</TABLE>
The effective interest rate, including amortization of debt issuance costs,
will approximate 7.6 percent based on the current LIBOR rate of 6.0 percent,
with a maximum of 8.1 percent.
Jewelers Financial Services, Inc. (the "Servicer"), a subsidiary of ZDel,
is the servicing entity for the collection of the customer accounts receivable
and its servicing obligations are guaranteed by ZDel.
The ZFT Receivables Notes will be subject to redemption at the option of
ZFT in whole but not in part, on the Scheduled Redemption Date of July 15, 1999
at a redemption price equal to the outstanding principal amount of the ZFT
Receivables Notes together with accrued and unpaid interest thereon at the
applicable interest rates. If ZFT has not given notice by June 15, 1999 that it
will redeem the ZFT Receivables Notes in full on the scheduled payment date
occurring in July 1999, the Servicer will promptly solicit bids for the purchase
of all or a portion of the receivables. If the Servicer is unable to sell the
receivables for a price such that the proceeds of such sale, together with other
available funds, is sufficient to pay in full the outstanding principal amount
of the ZFT Receivables Notes and interest thereon to the Scheduled Redemption
Date, the ZFT Receivables Notes will remain outstanding and will begin
amortizing based on collections of customer accounts receivable beginning in
August 1999.
The ZFT Securitization imposes certain reporting obligations on the Company
and limits ZFT's ability, among other things, to grant liens, incur certain
indebtedness, or enter into other lines of business. Additionally, under certain
conditions as defined, including among other things, failure to pay principal or
interest when due, failure to cure a borrowing base deficiency and breach of any
covenant that is not cured, the ZFT Securitization is subject to an early
amortization whereby the ZFT Receivables Notes may be declared due and payable
immediately. The restricted cash balance shown on the Consolidated Statements of
Cash Flows as of July 31, 1995 and 1994 primarily represents the restricted cash
of ZFT which is based on the relationship between the ZFT Receivables Notes
outstanding and gross accounts receivable as of July 31, 1995 and 1994.
11.0 Percent Second Priority Senior Secured Notes Due 2000. The 11.0
Percent Second Priority Senior Secured Notes due 2000 (the "Notes") were issued
by ZDel under an indenture dated as of July 30, 1993 among ZDel, as issuer,
Zale, as guarantor and IBJ Schroder Bank & Trust Company, as trustee. At July
31, 1995 and 1994, there was approximately $60.0 million principal amount of
Notes outstanding. The Notes were guaranteed by Zale and were secured by second
liens on substantially all the assets of Zale and ZDel.
The terms of the new Revolving Credit Agreement allowed the Company to
redeem the Notes on September 11, 1995 utilizing cash on hand. The Notes were
optionally redeemable by ZDel at a redemption price equal to 102 percent of
their principal amount together with accrued interest to the redemption date.
Upon redemption, the Company paid an early redemption premium and other costs
associated with the redemption of approximately $1.7 million. An extraordinary
item of
F-14
<PAGE> 55
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1.0 million, net of an income tax benefit of $0.7 million, will be recorded in
the first quarter of fiscal year 1996.
Capital Lease Obligation. The Company entered into a capital lease
effective April 1, 1993 for certain store point-of-sale equipment in the amount
of approximately $10.3 million with a borrowing rate of 11.0 percent. The
related debt is payable monthly over a three-year period.
LEASE COMMITMENTS
The Company rents most of its retail space under leases that generally
range from five to fifteen years and may contain minimum rent escalations and
renewal options for consecutive one-to-five year periods. In addition, the
corporate headquarters is leased under a five-year agreement that began on
August 1, 1992 after the original lease agreement was rejected in the
reorganization process. All existing real estate leases are treated as operating
leases. Sublease rental income under noncancellable leases is not material.
Rent expense, exclusive of lease rejection provisions which are recorded in
Reorganization and Restructure Costs in the year ended March 31, 1993, is as
follows:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------
FOUR
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, MARCH 31,
1995 1994 1993 1993
---------- ---------- ------------ ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Retail Space:
Minimum Rentals.................. $ 55,645 $ 52,064 $ 16,737 $ 57,145
Rentals Based on Sales........... 28,365 25,346 6,387 29,174
------- ------- ------- -------
84,010 77,410 23,124 86,319
Equipment and Corporate
Headquarters..................... 3,386 3,478 1,374 5,502
------- ------- ------- -------
Total Rent Expense....... $ 87,396 $ 80,888 $ 24,498 $ 91,821
======= ======= ======= =======
</TABLE>
Contingent rentals paid to lessors of certain store facilities are
determined principally on the basis of a percentage of sales in excess of
contractual limits.
Future minimum rent commitments as of July 31, 1995, for all noncancellable
leases of ongoing operations were as follows: 1996 -- $54.3 million;
1997 -- $48.2 million; 1998 -- $39.4 million; 1999 -- $33.2 million;
2000 -- $28.1 million; thereafter -- $81.6 million; for a total of $284.8
million.
INTEREST
Interest expense for the years ended July 31, 1995 and 1994, for the four
months ended July 31, 1993 and for the year ended March 31, 1993 was
approximately $37.5 million, $30.3 million, $8.0 million and $25.7 million,
respectively.
Interest income for the years ended July 31, 1995 and 1994, for the four
months ended July 31, 1993 and for the year ended March 31, 1993 was $7.7
million, $2.1 million, $1.3 million and $0.8 million, respectively.
Generally, interest expense on prepetition debt did not accrue after the
commencement of bankruptcy. If the prepetition debts were secured by property
with a value that was greater than the amount of the debt, interest was accrued
up to the value of the collateral. For financial statement
F-15
<PAGE> 56
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes prior to the Effective Date, the Company accrued interest expense on
secured debt. The Company ceased accruing interest expense on its unsecured
prepetition debt.
INCOME TAXES
Effective April 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes". SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on
estimated future tax effects of the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect. There
was no cumulative effect on income taxes related to this change in method of
accounting.
Currently, the Company files a consolidated income tax return. The
effective income tax rate varies from the federal statutory rate as follows:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------
YEAR YEAR FOUR YEAR
ENDED ENDED MONTHS ENDED
JULY JULY ENDED MARCH
31, 31, JULY 31, 31,
1995 1994 1993 1993
------- ------- --------- --------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Federal Income Tax Expense (Benefit) at
Statutory Rate......................... $16,737 $12,161 $(109,355) $(61,541)
Amortization of Excess of Revalued Net
Assets Over Stockholders' Investment... (2,064) (2,064) -- --
State Income Taxes, Net of Federal Income
Tax Benefit............................ 1,677 1,524 -- --
Effects of Unused Net Operating Loss
Carryforwards.......................... -- -- 109,355 61,541
------- ------- --------- --------
Total Income Tax Expense................. 16,350 11,621 -- --
Tax Benefit on Extraordinary Item........ -- (1,045) -- --
------- ------- --------- --------
Total Income Tax Expense................. $16,350 $10,576 $ -- $ --
======== ======== ========== =========
Effective Income Tax Rate................ 34.2% 32.9% 0.0% 0.0%
======== ======== ========== =========
</TABLE>
An income tax benefit was not provided in the four month period ended July
31, 1993 or the year ended March 31, 1993 because all operating losses would
have to be carried forward to future years and the realization of a tax benefit
for those losses was not assured.
In connection with the adoption of fresh-start reporting, the net book
values of substantially all non-current assets existing at the Effective Date
were eliminated. As a consequence, SFAS No. 109, in conjunction with SOP 90-7,
requires that any tax benefits realized for book purposes after the Effective
Date, from the reduction of the valuation allowance existing as of the Effective
Date be reported in the future as an addition to additional paid-in capital
rather than as a reduction in the tax provision in the Consolidated Statements
of Operations. However, the Company will realize the cash benefit from
utilization of the tax net operating loss ("NOL") against current and future tax
liabilities.
As of July 31, 1995, the Company has a NOL carryforward (after limitations)
of approximately $378 million. A majority of the tax basis NOL carryforward,
which will be available to offset future taxable income of the Company, was
determined based upon the initial equity valuation of the Company as determined
upon the Effective Date. The utilization of this asset is subject to
limitations. The most restrictive is the Internal Revenue Code Section 382
annual limitation. Until the Company
F-16
<PAGE> 57
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
develops a longer term earnings record, the NOL carryover and other assets are
fully reserved to the extent there are no long-term deferred liabilities to
offset. The NOL carryforward will begin to expire in fiscal year 2002 but can be
utilized through 2009.
As of July 31, 1995, all years through fiscal year 1988 have been settled
with the Internal Revenue Service ("IRS") and all income tax liabilities thereon
have been paid. In addition, the IRS did not file any income tax claims in the
bankruptcy case; therefore, the Company believes that under the bankruptcy laws
any potential income tax liabilities have been discharged through the Effective
Date.
Tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at July
31,1995 and 1994 are presented below (amounts in thousands).
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
--------- ---------
<S> <C> <C>
Current Deferred Taxes:
Assets --
Customer receivables..................................... $ 17,628 $ 17,083
Accrued liabilities...................................... 11,883 9,692
State and local taxes.................................... 2,194 2,780
Net operating loss carryforward.......................... 7,601 7,803
Other.................................................... 78 1,353
--------- ---------
Total Assets............................................. 39,384 38,711
Less -- Valuation Allowance.............................. (28,793) (26,181)
--------- ---------
10,591 12,530
Liabilities --
Merchandise inventories, principally due to LIFO
reserve............................................... (59,391) (74,530)
--------- ---------
Deferred Current Tax Liability, Net...................... $ (48,800) $ (62,000)
========== ==========
Non-current Deferred Taxes:
Assets --
Property and equipment, principally due to fresh-start
adjustments........................................... $ 24,997 $ 37,250
Net operating loss carryforward.......................... 139,894 143,512
Postretirement benefits.................................. 9,333 6,833
Other.................................................... 7,402 4,994
--------- ---------
Total Assets............................................. 181,626 192,589
Less -- Valuation Allowance.............................. (132,641) (130,330)
--------- ---------
48,985 62,259
Liabilities --
Other.................................................... (185) (259)
--------- ---------
Deferred Non-current Tax Asset, Net........................ $ 48,800 $ 62,000
========== ==========
</TABLE>
The valuation reserve of approximately $161.4 million and $156.5 million
recognizes that, as of July 31, 1995 and 1994, respectively, net deferred tax
assets are only realizable to the extent of net deferred tax liabilities.
F-17
<PAGE> 58
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net increase in the valuation allowance from July 31, 1994 to July 31,
1995 was $4.9 million. This amount was comprised of the following (amounts in
thousands):
<TABLE>
<S> <C>
Utilization of pre-emergence net deferred tax assets............. $(16,204)
Increase in net deferred tax assets resulting from identification
of additional temporary differences............................ 21,127
--------
Net change in valuation allowance account........................ $ 4,923
=========
</TABLE>
CAPITAL STOCK
Common Stock. At July 31, 1995 and 1994, 70,000,000 shares of Common Stock,
par value of $0.01 per share, were authorized and 34,983,258 shares and
34,965,481 shares, respectively, were outstanding. The Company held 35,942 and
34,519 treasury shares at July 31, 1995 and 1994, respectively.
Preferred Stock. At July 31, 1995 and 1994, 5,000,000 shares of Preferred
Stock, par value of $0.01, were authorized. None are issued or outstanding.
Warrants. Pursuant to the Plan, Zale had authorized 2,000,000 Series A
Warrants to purchase common stock. At July 31, 1995 and 1994, 1,999,550 and
2,000,000 Series A Warrants, respectively, were outstanding. Each Series A
Warrant entitles the holder to purchase, for $10.368 per share, one share of
Zale common stock (subject to certain anti-dilution adjustments). The Series A
Warrants are exercisable on or before July 30, 1998, although their expiration
date may be shortened if the market value of Zale's common stock increases to at
least 150.0 percent of the warrant exercise price for a specified number of days
and less than 5.0 percent of the Series A Warrants originally issued under the
Plan are outstanding on the date on which Zale gives the acceleration notice.
As part of its settlement of certain litigation with Swarovski, Zale issued
its Series B Warrants to purchase common stock. Each Series B Warrant entitled
the holder to purchase for $10.368 per share, one share of Zale common stock
(subject to certain anti-dilution adjustments). The Series B Warrants were
presently exercisable and, if not previously exercised, would expire on
September 9, 1998, subject to the Company's right to accelerate the expiration
date of the Series B Warrants if certain conditions were met. At July 31, 1995,
the Series B Warrants issued entitled the holders to purchase an aggregate of
1,852,884 shares of Zale common stock. Zale, at its expense, filed and
maintained effective a shelf registration statement covering the resale of the
Series B Warrants and the issuance and sale of shares of common stock upon
exercise of the Series B Warrants (the "Shelf Registration").
On August 31, 1995, Zale redeemed the Series B Warrants and acquired all
Swarovski's rights, title and interest under the warrant agreement and paid $9.3
million to Swarovski in consideration of the redemption. As a result of this,
the Series B Warrants were cancelled and are no longer outstanding.
Stock Option Plan. As of the Effective Date, the Company adopted a stock
option plan (the "Stock Option Plan") to enable the Company to attract, retain
and motivate officers and key employees by providing for proprietary interest of
such individuals in the Company. Options to purchase an aggregate of 3,055,000
shares of Common Stock may be granted under the Stock Option Plan to eligible
employees. Options granted under the Stock Option Plan (i) must be granted at an
exercise price not less than the fair market value of the shares of Common Stock
into which such options are exercisable, (ii) vest over a four-year vesting
period and (iii) expire ten years from the date of grant.
F-18
<PAGE> 59
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
SHARES GRANT PRICE
------------------------- --------------------------
FISCAL 1995 FISCAL 1994 FISCAL 1995 FISCAL 1994
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year...... 1,629,200 -- $ 8.68- 9.74 $ --
Granted............................. 779,000 1,679,100 10.75-14.00 8.68-9.74
Exercised........................... (18,750) -- 8.87- 9.74 --
Cancelled........................... (176,525) (49,900) 8.87-13.19 9.74
----------- ----------- ------------ -----------
Outstanding, end of year............ 2,212,925 1,629,200 $ 8.68-14.00 $ 8.68-9.74
========= ========= ============ ==========
</TABLE>
As of July 31, 1995 and 1994, 359,350 and 200, respectively, of options
outstanding were exercisable. The remaining options will become exercisable over
the next three years based on vesting percentages.
COMMITMENTS AND CONTINGENCIES
Jewel Recovery, L.P. Pursuant to the Plan, Zale assigned certain claims and
causes of action and advanced $3.0 million to Jewel Recovery, L.P., a limited
partnership ("Jewel Recovery") which was formed upon Zale's emergence from
bankruptcy. The sole purpose of Jewel Recovery is to prosecute and settle such
assigned claims and causes of action. The general partner of Jewel Recovery is
Jewel Recovery, Inc., a subsidiary of the Company. Its limited partners are
holders of various prior unsecured claims against Zale.
There is a possibility that the Company may recover the $3.0 million
advance made to Jewel Recovery as well as other amounts related to the
finalization of the Chapter 11 claims settlement process. It is likely that
these matters will be resolved by the end of the second quarter of fiscal 1996.
The Company does not expect these recoveries to be material to its financial
position or recurring operations.
In addition, the Company and ZDel have agreed to indemnify certain parties
to litigation settlements entered into by the Company in connection with the
Plan against cross-claims, similar third-party claims or costs of defending such
claims brought against such parties as a result of litigation instigated by the
Company, ZDel or Jewel Recovery. At September 12, 1995, no material claims had
been asserted against the Company or ZDel for such indemnification.
Other. The Company is involved in certain other legal actions and claims
arising in the ordinary course of business. Management believes that such
litigation and claims will be resolved without material effect on the Company's
financial position or results of operations.
The Company has an operations services agreement for management information
systems with a third-party servicer. The agreement, which originally began in
February 1993, was amended on August 1, 1994 and, requires payments totaling
$31.5 million over a thirty-six month term and is paid monthly on a
straight-line basis.
PROFIT SHARING PLAN
At July 31, 1995, the Company maintains The Zale Corporation Savings &
Investment Plan. Substantially all employees who are at least age 21 are
eligible to participate in the plan. Each employee can contribute from one
percent to fifteen percent of their annual salary. Under this plan, the Company
will match 50 cents in Zale stock for every dollar an employee contributes up to
two percent of annual earnings. In order for an employee to be eligible for the
Company match, the
F-19
<PAGE> 60
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee must have worked at least 1,000 hours during the plan year and be
employed on the last day of the plan year.
An employee is 33.3 percent vested in the Zale stock after one year of
service, 66.7 percent vested after two years of service and 100 percent vested
after three years of service. As of July 31, 1995 approximately 2,100 employees
participated in The Zale Corporation Savings & Investment Plan.
Also, under this plan, the Company may make a profit sharing contribution
at its sole discretion. To be eligible for such discretionary profit sharing
contributions, an employee must have at least twelve consecutive months of
service, have worked at least 1,000 hours during the plan year and be employed
on the last day of the plan year.
An employee is 20 percent vested in the profit sharing contributions after
three years of service, 40 percent vested after four years of service, 60
percent vested after five years of service, 80 percent vested after six years of
service and 100 percent vested after seven years of service. The Company's
contribution to the plan was $2.5 million and $2.2 million for fiscal years 1995
and 1994, respectively.
ACCOUNTING CHANGES
Effective April 1, 1994, the Company adopted the provisions of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" and SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Debt and equity securities are classified as
available for sale under SFAS No. 115. The effects of these standards on the
consolidated financial position and results of operations are not material.
FINANCIAL INSTRUMENTS
In fiscal 1993, the Company adopted SFAS No. 107 "Disclosures about Fair
Value of Financial Instruments" which extends existing fair value disclosure
practices by requiring all entities to disclose the fair value of financial
instruments, for which it is practicable to estimate fair value.
As cash and short-term cash investments, customer receivables, trade
payables and certain other short-term financial instruments are all short-term
in nature, their carrying amount approximates fair value. The carrying amount of
the $380.6 million, net of discount, Receivables Securitization Facility also
approximates fair value. The carrying amount of the $60.0 million 11.0 Percent
Second Priority Senior Secured Notes which were secured by second liens on
substantially all the assets of Zale and ZDel were redeemed on September 11,
1995 for 102 percent of face value. The investments of the Company's insurance
subsidiaries, primarily stocks and bonds in the amount of $28.8 million,
approximate market value at July 31, 1995 and are reflected in Other Assets on
the Consolidated Balance Sheets.
Concentrations of Credit Risk. Financial instruments which potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments and customer receivables. The Company maintains
cash and cash equivalents, short and long-term investments and certain other
financial instruments with various financial institutions. These financial
institutions are located throughout the country. Concentrations of credit risk
with respect to customer receivables are limited due to the Company's large
number of customers and their dispersion across many regions. As of July 31,
1995 and 1994, the Company had no significant concentrations of credit risk.
F-20
<PAGE> 61
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RELATED PARTY TRANSACTIONS
One of the Company's directors serves as a director of a company from which
the Company purchased approximately $0.4 million and $0.2 million of jewelry
merchandise during fiscal year 1995 and 1994, respectively. The Company believes
the terms were equivalent to those of unrelated parties.
REORGANIZATION AND RESTRUCTURE COSTS
Reorganization and Restructure Costs are shown on a separate line item in
the Consolidated Statements of Operations and reflect the costs incurred by the
Company in the implementation of its restructuring plan as well as costs related
directly to its bankruptcy case. No Reorganization and Restructure Costs, for
which the Company had not previously provided, were incurred in the years ended
July 31, 1995 and 1994. During January through March 1993, the Company closed
approximately 130 under-performing store locations as it continued to focus
operations in its most profitable locations. These store closings were primarily
in the Company's Guild division. In addition, approximately 45 of the Company's
leased locations with one landlord in its Diamond Park division were closed at
the end of January 1993 in department stores that no longer carry fine jewelry.
UNUSUAL ITEMS -- PROVISIONS FOR VALUATION OF ASSETS
There were no unusual items recognized during the years ended July 31, 1995
and 1994 or the four months ended July 31, 1993. The unusual items recognized
during the year ended March 31, 1993 were as follows (amounts in thousands):
<TABLE>
<S> <C>
Write-off of favorable lease rights and property.................. $ 4,200
Provision for valuation of customer receivables................... 12,500
Provision for valuation of diamond held for investment............ 3,500
-------
$20,200
=======
</TABLE>
The Company determined during the March 31, 1993 year-end closing process
that the methodology used to calculate its allowance for doubtful customer
receivables, which had been applied consistently since the early 1980's, did not
provide a sufficient allowance for doubtful accounts. The $12.5 million
shortfall was an accumulation of individual amounts during certain prior years,
none of which was material to a specific prior year, and, accordingly, the
cumulative effect has been reflected as an unusual item in the year ended March
31, 1993. There was no material effect to the March 31, 1993 operating results.
Additionally, the Company made provisions to reduce the value of certain
non-operating assets, including properties held for sale and a large diamond
held for investment, to their estimated net realizable values.
F-21
<PAGE> 62
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for the years ended July 31, 1995
and 1994 were as follows (amounts in thousands except per share data):
<TABLE>
<CAPTION>
FISCAL 1995
FOR THE THREE MONTHS ENDED
------------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1995 1995 1995 1994
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................... $211,400 $ 192,083 $ 427,194 $ 205,472
Gross profit....................... 100,708 94,871 214,675 101,885
Net earnings (loss)................ (3,132) (3,994) 41,771 (3,175)
Net earnings (loss) per primary
common share..................... (0.09) (0.11) 1.19 (0.09)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1994
FOR THE THREE MONTHS ENDED
------------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1994 1994 1994 1993
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................... $199,885 $ 167,078 $ 368,596 $ 184,748
Gross profit....................... 99,345 85,608 183,439 91,855
Net earnings (loss) (5,380) (4,458) 37,542 (6,147)
Net earnings (loss) per primary
common share..................... (0.15) (0.13) 1.07 (0.18)
</TABLE>
F-22
<PAGE> 63
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales...................................... $222,283 $192,083 $888,519 $824,749
Cost of Sales.................................. 114,435 97,212 450,615 413,318
-------- -------- -------- --------
Gross Margin................................. 107,848 94,871 437,904 411,431
Selling, General and Administrative Expenses... 101,924 93,618 345,295 336,891
Depreciation and Amortization Expense
(Credit)..................................... 2,101 344 4,756 (206)
Unusual Items -- Reorganization Recoveries..... -- -- (4,486) --
-------- -------- -------- --------
Operating Earnings............................. 3,823 909 92,339 74,746
Interest Expense, Net.......................... 7,662 6,653 22,604 22,594
-------- -------- -------- --------
Earnings (Loss) Before Income Taxes and
Extraordinary Item........................... (3,839) (5,744) 69,735 52,152
Income Taxes................................... (1,400) (1,750) 24,753 17,550
-------- -------- -------- --------
Earnings (Loss) Before Extraordinary Item...... (2,439) (3,994) 44,982 34,602
Extraordinary Item:
Loss on Early Extinguishment of Debt, Net of
Income Tax Benefit of $(603).............. -- -- (1,096) --
-------- -------- -------- --------
Net Earnings (Loss)............................ $ (2,439) $ (3,994) $ 43,886 $ 34,602
======== ======== ======== ========
Earnings (Loss) Per Common Share:
Primary:
Earnings (Loss) Before Extraordinary
Item.................................... $ (0.07) $ (0.11) $ 1.24 $ 0.99
Extraordinary Item........................ -- -- (0.03) --
-------- -------- -------- --------
Net Earnings (Loss)....................... $ (0.07) $ (0.11) $ 1.21 $ 0.99
======== ======== ======== ========
Assuming Full Dilution:
Earnings (Loss) Before Extraordinary
Item.................................... $ (0.07) $ (0.11) $ 1.22 $ 0.99
Extraordinary Item........................ -- -- (0.03) --
-------- -------- -------- --------
Net Earnings (Loss)....................... $ (0.07) $ (0.11) $ 1.19 $ 0.99
======== ======== ======== ========
Weighted Average Number of Common Shares
Outstanding:
Primary................................... 35,106 34,964 36,349 34,964
Assuming Full Dilution.................... 35,106 34,964 36,956 34,964
</TABLE>
See Notes to the Consolidated Financial Statements.
F-23
<PAGE> 64
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents........................................ $ 37,204 $ 154,905
Customer Receivables, Net........................................ 417,810 396,380
Merchandise Inventories.......................................... 487,714 375,413
Other Current Assets............................................. 27,075 23,859
--------- ---------
Total Current Assets..................................... 969,803 950,557
Property and Equipment, Net........................................ 100,686 71,487
Other Assets....................................................... 45,367 39,864
Deferred Tax Asset, Net............................................ 48,800 48,800
--------- ---------
Total Assets............................................. $ 1,164,656 $ 1,110,708
========= =========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt................................ $ 194 $ 2,907
Notes Payable.................................................... 18,000 --
Accounts Payable and Accrued Liabilities......................... 156,306 117,048
Deferred Tax Liability, Net...................................... 48,800 48,800
--------- ---------
Total Current Liabilities................................ 223,300 168,755
Non-current Liabilities............................................ 35,767 32,670
Long-term Debt..................................................... 380,721 440,717
Excess of Revalued Net Assets Over Stockholders' Investment, Net... 72,253 76,676
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock.................................................. -- --
Common Stock..................................................... 352 350
Additional Paid-In Capital (Includes Stock Warrants)............. 358,898 337,534
Unrealized Gains on Securities................................... 1,526 979
Accumulated Earnings............................................. 91,839 53,027
--------- ---------
Total Stockholders' Investment........................... 452,615 391,890
--------- ---------
Total Liabilities and Stockholders' Investment........... $ 1,164,656 $ 1,110,708
========= =========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-24
<PAGE> 65
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1996 1995
----------- -----------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings...................................................... $ 43,886 $ 34,602
Non cash expenses, gains and losses:
Depreciation and amortization expense.......................... 5,780 635
Utilization of pre-emergence net operating loss................ 23,757 17,480
Other adjustments to reconcile net earnings to net cash used in
operating activities:
Extraordinary loss on early extinguishment of debt................ 1,699 --
(Increase) decrease in:
Customer receivables, net...................................... (20,256) (14,957)
Merchandise inventories........................................ (104,591) (21,295)
Other current assets........................................... (2,793) (4,763)
Other assets................................................... 642 (2,175)
Increase (decrease) in:
Accounts payable and accrued liabilities....................... 28,759 (11,422)
Non-current liabilities........................................ 3,097 787
--------- --------
Net Cash Used in Operating Activities............................... (20,020) (1,108)
--------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................... (37,036) (29,867)
Dispositions of property and equipment............................ 590 1,340
Acquisition, net of cash acquired................................. (2,547) --
Other............................................................. (238) 28
--------- --------
Net Cash Used in Investing Activities............................... (39,231) (28,499)
--------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt........................................ (66,437) (2,883)
Net borrowings under revolving credit agreement................... 18,000 --
Payment for redemption of Series B Warrants....................... (9,264) --
Payment of prepayment penalty and other related costs on early
extinguishment of debt......................................... (1,699) --
Debt issue and capitalized financing costs........................ (618) --
Proceeds from exercise of stock options........................... 1,568 --
--------- --------
Net Cash Used in Financing Activities............................... (58,450) (2,883)
--------- --------
Net Decrease in Cash and Cash Equivalents........................... (117,701) (32,490)
Cash and Cash Equivalents at Beginning of Period.................... 154,905 153,700
--------- --------
Cash and Cash Equivalents at End of Period.......................... $ 37,204 $ 121,210
========= ========
Supplemental cash flow information:
Interest paid..................................................... $ 27,413 $ 28,993
Interest received................................................. $ 2,802 $ 4,442
Income taxes paid (net of refunds received)....................... $ 883 $ 302
Restricted cash -- at period end date............................. $ 33,019 $ 36,567
</TABLE>
See Notes to the Consolidated Financial Statements.
F-25
<PAGE> 66
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
Zale Corporation is the largest specialty retailer of fine jewelry in the
United States in terms of both retail sales and number of stores. The Company
had 1,207 retail locations at April 30, 1996 throughout the U.S., Guam and
Puerto Rico, primarily in regional shopping malls. The Company conducts business
through four distinct divisions consisting of the Zales Division, with 571
stores, the Gordon's Division, with 336 stores, the Fine Jewelers Guild
Division, with 118 stores and the Diamond Park Fine Jewelers Division, with 178
leased fine jewelry departments. In addition, the Company operates four outlet
stores. On January 18, 1996, the Company acquired Karten's Jewelers, Inc.,
("Karten's") a privately owned chain of 20 fine jewelry stores. The Company
acquired all the outstanding shares of common stock for $3.0 million in cash and
assumption of all liabilities. The addition of Karten's significantly increased
the Company's presence in the Northeast. These stores will initially keep the
Karten's trade name and will change to the Zales' name prior to the 1996
Christmas selling season.
The accompanying 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 month periods ended April 30, 1996. The 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 managements' opinion, all material adjustments and
disclosures necessary for a fair presentation have been made. The accompanying
Consolidated Financial Statements should be read in conjunction with the January
31, 1996 and October 31, 1995 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 15, 1996, and December 8, 1995,
respectively, and the audited Consolidated Financial Statements and related
notes thereto included in the 1995 Annual Report to Stockholders filed as an
exhibit to the Company's Form 10-K for the fiscal year ended July 31, 1995. The
classifications in use at April 30, 1996 have been applied to the financial
statements for July 31, 1995 and April 30, 1995.
The results of operations for the three and nine month periods ended April
30, 1996 and 1995, 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.
WORKING CAPITAL FINANCING
On August 11, 1995, Zale and Zale Delaware, Inc. ("ZDel") a wholly-owned
subsidiary of Zale, (the "Borrowers") entered into a new three-year revolving
credit agreement (the "Revolving Credit Agreement") which provides for revolving
credit loans in an aggregate amount of up to $150.0 million, with a $30.0
million sublimit for letters of credit. At no time may the total amount of
revolving credit loans outstanding under the Revolving Credit Agreement exceed
the lesser of the total commitment of $150.0 million and a defined borrowing
base ($218.4 million at April 30, 1996, based on a fixed percentage of eligible
inventory, as defined).
The Borrowers' obligations under the Revolving Credit Agreement are
primarily secured by a first lien on and security interest in all inventory
(excluding inventory on consignment).
The revolving credit loans bear interest at floating rates, currently LIBOR
+ 2.0 percent or the agent's adjusted base rate + 0.75 percent, at the
Borrowers' option, and can be adjusted based on certain future performance
levels attained by the Borrowers. The Company pays a commitment fee
F-26
<PAGE> 67
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
of 3/8 percent per annum on the preceding month's unused Revolving Credit
Agreement commitment. The Borrowers may repay the revolving credit loans at any
time without penalty. At April 30, 1996, there were $18.0 million in loans
outstanding under the Revolving Credit Agreement. There were approximately $0.6
million in letters of credit outstanding at April 30, 1996.
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, keeps within certain limits the Borrowers ability to
pay dividends and make other restricted payments, incur additional indebtedness,
engage in certain transactions with affiliates, incur liens, make investments
and sell assets. The Revolving Credit Agreement also requires the Borrowers to
maintain certain financial ratios and specified levels of net worth.
The increased flexibility allowed in the new Revolving Credit Agreement
enabled the Company to redeem early the $60.0 million 11.0 Percent Second
Priority Senior Secured Notes (the "Notes") on September 11, 1995 utilizing cash
on hand. The Notes were optionally redeemable by ZDel at a redemption price
equal to 102 percent of their principal amount together with accrued interest to
the redemption date. Upon redemption, the Company paid an early redemption
premium and other costs associated with the redemption of approximately $1.7
million resulting in an extraordinary charge of $1.1 million, net of an income
tax benefit of $0.6 million, being recorded in the first quarter of the current
year.
REPURCHASE OF WARRANTS
As part of Zale's settlement of certain bankruptcy litigation in 1993 with
Swarovski International Holding, A.G. ("Swarovski"), Zale issued its Series B
Warrants to purchase common stock. The Series B Warrants were presently
exercisable and, if not previously exercised, would expire on September 9, 1998,
subject to the Company's right to accelerate the expiration date of the Series B
Warrants if certain conditions were met. On August 31, 1995, Zale redeemed the
Series B Warrants and acquired all Swarovski's rights, title and interest under
the warrant agreement and paid $9.3 million to Swarovski in consideration of the
redemption. As a result of this, the Series B Warrants were canceled and are no
longer outstanding. Additional Paid-In Capital decreased $4.2 million, whereas
Accumulated Earnings decreased $5.1 million due to this transaction.
UNUSUAL ITEMS -- REORGANIZATION RECOVERIES
On July 30, 1993 (the "Effective Date"), Zale consummated its plan of
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Plan") and emerged from bankruptcy. Pursuant to the Plan, Zale assigned certain
claims and causes of action and advanced $3.0 million to Jewel Recovery, L.P., a
limited partnership ("Jewel Recovery") which was formed upon Zale's emergence
from bankruptcy. The sole purpose of Jewel Recovery is to prosecute and settle
such assigned claims and causes of action. The general partner of Jewel Recovery
is Jewel Recovery, Inc., a subsidiary of the Company. Its limited partners are
holders of various prior unsecured claims against Zale. The $3.0 million advance
was fully reserved as of the Effective Date as its collectibility was uncertain.
Jewel Recovery has pursued certain claims and has been awarded significant
recoveries against third parties. During the first quarter, Zale was notified
that it would recover its $3.0 million advance to Jewel Recovery. The $3.0
million advance was repaid to Zale in December 1995.
Additionally, Shawmut Bank ("Shawmut") was elected as Disbursement Agent
and held all cash and common stock to be used in settlements of creditors
claims. Shawmut recently provided Zale with information on creditors whose claim
rights have terminated. As a result, during the current year, Zale recovered
cash funds of approximately $1.5 million held by Shawmut related to
F-27
<PAGE> 68
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
cash approved for distribution to pre-confirmation creditors of Zale but not
claimed by such pre-confirmation creditors. The $3.0 million and the $1.5
million recoveries were recorded as unusual items in the Company's first quarter
and are reflected on the Consolidated Statements of Operations for the nine
month period ended April 30, 1996 and had an after-tax impact of $0.08 per
share.
F-28
<PAGE> 69
INSIDE BACK COVER
[The page is divided into four horizontal sections each including a
divisional logo, a divisional description, and a picture of jewelry]
Section 1 - Zales - The Diamond Store [LOGO]
Zales offers a wide assortment of traditional fine jewelry at
affordable prices. Its customers represent a cross-section of
mainstream America.
Picture 1 - A ladies gold and diamond wedding band with diamond
solitaire
Section 2 - Gordon's Jewelers - Since 1905 [LOGO]
Gordon's offers a contemporary selection of merchandise, appealing
to fashion-oriented consumers. Because Gordon's is strategically
positioned in 12 major regions across the country, the stores also
reflect local trends and styles.
Picture 2 - A ladies gold, ruby, and diamond fashion ring.
Section 3 - Fine Jewelers Guild [LOGO]
Fine Jewelers Guild offers higher-end merchandise, more exclusive
designs and a prestigious shopping environment for the upscale
customer. These stores operate under locally established names
that are synonymous with quality and tradition.
Picture 3 - Watch
Section 4 - Diamond Park Fine Jewelers [LOGO]
The leased jewelry departments operated by the Diamond Park Fine
Jewelers Division custom design merchandising concepts to blend in
with the host store and complement buying patterns in other
departments.
Picture 4 - A gold and diamond ensemble with a heart pendant,
bracelet, and earrings
<PAGE> 70
NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDER OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 9
Use of Proceeds...................... 12
Capitalization....................... 13
Price Range of Common Stock.......... 14
Dividend Policy...................... 14
Selected Consolidated Financial
Information........................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 17
Business............................. 24
Management........................... 34
Selling Shareholder.................. 36
Underwriting......................... 37
Legal Matters........................ 38
Experts.............................. 38
Available Information................ 38
Incorporation of Certain Information
by Reference....................... 39
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
7,126,000 SHARES
[ZALE CORPORATION LOGO]
COMMON STOCK
($.01 PAR VALUE)
SALOMON BROTHERS INC
MCDONALD & COMPANY
SECURITIES, INC.
PAINEWEBBER INCORPORATED
PROSPECTUS
DATED , 1996
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of issuance and distribution, other than
underwriting discounts and commissions, expected to be incurred by the
Registrant (up to $275,000 of which will be paid by the Selling Shareholder with
any excess being paid 50% by the Selling Shareholder and 50% by the Company) are
as follows:
<TABLE>
<S> <C>
SEC registration fee............................................. $ 53,561
Blue sky fees and expenses....................................... 15,000
NASD filing fee.................................................. 16,033
Printing and engraving expenses.................................. 75,000
Legal fees and expenses.......................................... 100,000
Accountants fees and expenses.................................... 50,000
Miscellaneous, including telephone charges and
traveling expenses............................................. 65,000
--------
Total.................................................. $374,594
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of Title 8 of the Delaware Code gives a corporation power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The same Section also
gives a corporation power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper. Also, the Section states that, to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any such action, suit or proceeding, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
II-1
<PAGE> 72
The Restated Certificate of Incorporation ("Certificate") of the Company
provides in substance that no director will be personally liable either to the
Company or any stockholder for monetary damages for breach of fiduciary duty as
a director except (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of the law, (iii) for
any matter in respect of which such director will be liable under the General
Corporation Law of the State of Delaware or (iv) for any transaction from which
the director has derived an improper personal benefit.
The Certificate further provides as follows:
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to, or testifies in, any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative in nature, by reason of (i) the fact that
such person is or was a director, officer, employee or agent of the
Corporation at any time after the Commencement Time (as defined below), or
is or was serving at any time after the Commencement Time at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise and (ii) any acts or omissions by such person in such
capacity that occurred after the Commencement Time, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding to the full extent permitted by law,
so long as such person acted or omitted to act in good faith and in a
manner that such person (x) reasonably believed to be in or not opposed to
the best interests of the Corporation and (y) with respect to any criminal
action or proceeding, had reasonable cause to believe was lawful; provided,
however, that if a court of competent jurisdiction, after exhaustion of all
appeals therefrom, adjudges such person to be liable to the Corporation for
any amount or if such person pays an amount in settlement to the
Corporation, the Corporation may indemnify such person for such amount only
with the approval of such court. The Corporation may adopt Bylaws or enter
into agreements with any such person for the purpose of providing for such
indemnification. "Commencement Time" means 8:00 a.m., C.S.T., on July 21,
1993.
The Company has an insurance policy covering its liabilities and expenses
which might arise in connection with its lawful indemnification of its directors
and officers for certain of their liabilities and expenses and also covering its
officers and directors against certain other liabilities.
II-2
<PAGE> 73
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
1.1 -- Form of Underwriting Agreement.
1.2 -- Letter Agreement between the Company, the Selling Shareholder and AIF
II, LP as of May 31, 1996.
2.1 -- Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code
with Respect to Plan of Reorganization under Chapter 11 of the
Bankruptcy Code for Zale Corporation and its Affiliated Debtors,
dated March 22, 1993 (Exhibit T3E-1), incorporated by reference from
the exhibit shown in parenthesis to the registrant's Form T-3 (No.
22-24-68) filed with the Commission on April 2, 1993.
2.2 -- Motion to Approve Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 19, 1993 (Exhibit 2.6), incorporated by
reference from the exhibit shown in parenthesis to the registrant's
Form 8-A/A (No. 02-21526) filed with the Commission on July 16, 1993.
2.3 -- Order Approving Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 20, 1993 (Exhibit 2.7), incorporated by
reference from the exhibit shown in parenthesis to the registrant's
Form 8-A/A (No. 02-21526) filed with the Commission on July 16, 1993.
5 -- Opinion of Troutman Sanders, LLP.
23.1 -- Consent of Troutman Sanders LLP (contained in the opinion filed as
Exhibit 5).
23.2 -- Consent of Arthur Andersen LLP.
</TABLE>
II-3
<PAGE> 74
ITEM 17. UNDERTAKINGS.
(b) Filings Incorporating Subsequent Exchange Act Documents by Reference:
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(h) Request For Acceleration of Effective Date or Filing of Registration
Statement on Form S-8:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(i) Include the Following in a Registration Statement Permitted by Rule
430A Under the Securities Act of 1933:
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of Prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be initial bona fide offering
thereof.
II-4
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on the 20th day of June,
1996.
ZALE CORPORATION
By: /s/ ROBERT J. DINICOLA
---------------------------------
Robert J. DiNicola
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT J. DINICOLA Chairman of the Board, June 20, 1996
- --------------------------------------------- President and Chief
Robert J. DiNicola Executive Officer (principal
executive officer of the
registrant)
/s/ MERRILL J. WERTHEIMER Executive Vice President June 20, 1996
- --------------------------------------------- Finance and Administration
Merrill J. Wertheimer
/s/ THOMAS E. WHIDDON Senior Vice President and June 20, 1996
- --------------------------------------------- Chief Financial Officer
Thomas E. Whiddon (principal financial officer
of the registrant)
/s/ MARK R. LENZ Vice President and June 20, 1996
- --------------------------------------------- Controller (principal
Mark R. Lenz accounting officer of the
registrant)
* Director June 20, 1996
- ---------------------------------------------
Glen Adams
* Director June 20, 1996
- ---------------------------------------------
Peter P. Copses
* Director June 20, 1996
- ---------------------------------------------
Frank E. Grzelecki
* Director June 20, 1996
- ---------------------------------------------
Richard C. Marcus
* Director June 20, 1996
- ---------------------------------------------
Andrew H. Tisch
*By: /s/ THOMAS E. WHIDDON
-----------------------------------------
Thomas E. Whiddon
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------- -----------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.
1.2 -- Letter Agreement between the Company, the Selling Shareholder and
AIF II, LP as of May 31, 1996.
2.1 -- Disclosure Statement Pursuant to Section 1125 of the Bankruptcy
Code with Respect to Plan of Reorganization under Chapter 11 of the
Bankruptcy Code for Zale Corporation and its Affiliated Debtors,
dated March 22, 1993 (Exhibit T3E-1), incorporated by reference
from the exhibit shown in parenthesis to the registrant's Form T-3
(No. 22-24-68) filed with the Commission on April 2, 1993.
2.2 -- Motion to Approve Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 19, 1993 (Exhibit 2.6), incorporated
by reference from the exhibit shown in parenthesis to the
registrant's Form 8-A/A (No. 02-21526) filed with the Commission on
July 16, 1993.
2.3 -- Order Approving Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 20, 1993 (Exhibit 2.7), incorporated
by reference from the exhibit shown in parenthesis to the
registrant's Form 8-A/A (No. 02-21526) filed with the Commission on
July 16, 1993.
5 -- Opinion of Troutman Sanders, LLP.
23.1 -- Consent of Troutman Sanders LLP (contained in the opinion filed as
Exhibit 5).
23.2 -- Consent of Arthur Andersen LLP.
</TABLE>
<PAGE> 1
EXHIBIT 1.1
Zale Corporation
7,126,000*
Common Stock
$.01 par value
Underwriting Agreement
New York, New York
July ___, 1996
Salomon Brothers Inc.
McDonald & Company Securities, Inc.
PaineWebber Incorporated
As Representatives of the several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Zale Corporation, a Delaware corporation (the "Company"), proposes to
sell to the underwriters named in Schedule I hereto (the "Underwriters"), for
whom you (the "Representatives") are acting as representatives, an aggregate of
2,250,146 shares of Common Stock, $.01 par value, of the Company ("Common
Stock") and the entity named in Schedule II hereto (the "Selling Shareholder")
proposes to sell to the Underwriters 4,875,854 shares of Common Stock (said
shares to be sold by the Company and the Selling Shareholder
- ---------
* Plus an option to purchase from Zale Corporation up to 890,750 additional
shares to cover over-allotments.
<PAGE> 2
collectively being hereinafter called the "Underwritten Securities"). The
Company proposes to grant to the Underwriters an option to purchase up to
890,750 additional shares of Common Stock (the "Option Securities"; the Option
Securities, together with the Underwritten Securities, being hereinafter called
the "Securities").
1. Representations and Warranties. (a) The Company represents and
warrants to, and agrees with, each Underwriter and the Selling Shareholder as
set forth below in this paragraph (a) of this Section 1. Certain terms used in
this Agreement are defined in paragraph (a)(iii) of this Section 1.
(i) The Company meets the requirements for use of Form S-3 under the
Securities Act of 1933, as amended (the "Act"), and has filed with the
Securities and Exchange Commission (the "Commission") a registration
statement (file number 333-05131) on such Form, including a related
preliminary prospectus, for the registration under the Act of the offering
and sale of the Securities. The Company may have filed one or more
amendments thereto, including the related preliminary prospectus, each of
which has previously been furnished to you and the Selling Shareholder. The
Company will next file with the Commission one of the following: (A) prior
to effectiveness of such registration statement, a further amendment to
such registration statement (including the form of final prospectus), (B)
after effectiveness of such registration statement (if the Company relies
on Rule 434), a Term Sheet relating to the Securities, that shall identify
the preliminary prospectus that it supplements, and, if required to be
filed pursuant to Rules 434(c)(2) and 424(b), an Integrated Prospectus, in
either case in accordance with Rules 434, 430A and 424(b), or (C) after
effectiveness of such registration statement (if the Company does not rely
on Rule 434), a final prospectus in accordance with Rules 430A and
424(b)(1) or (4). In the case of clauses (B) and (C) to the immediately
preceding sentence, the Company has included in such registration
statement, as amended at the Effective Date, all information (other than
Rule 430A Information) required by the Act and the rules thereunder to be
included in the Prospectus and, if required to be filed pursuant to Rules
434(c)(2) and 424(b), in the Integrated Prospectus with respect to the
Securities and the offering thereof. As filed, (A) such amendment and form
of final prospectus, (B) such Term Sheet and the Preliminary Prospectus
identified therein and any such Integrated Prospectus, or (C) such final
prospectus, shall contain all Rule 430A Information, together with all
other such required information, with respect to the Securities and the
offering thereof and, except to the extent the Representatives shall agree
in writing to a modification, shall be in all substantive respects in the
form furnished to you and the Selling Shareholder prior to the Execution
Time or, to the extent not completed at the Execution Time, shall contain
only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has advised
you, prior to the Execution Time, will be included or made therein.
2
<PAGE> 3
(ii) On the Effective Date, the Registration Statement did or will,
and when any written confirmation of sale is first sent or given, when the
Prospectus or any Term Sheet that is a part thereof is first filed (if
required) in accordance with Rule 424(b) and on the Closing Date, the
Prospectus and, if required to be filed pursuant to Rules 434(c)(2) and
424(b), the Integrated Prospectus (and any supplement thereto) will,
comply in all material respects with the applicable requirements of the
Act and the Securities Exchange Act of 1934 (the "Exchange Act") and the
respective rules thereunder; on the Effective Date, the Registration
Statement did not or will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on
the Effective Date, the Prospectus, if not filed (either in whole or in
part) pursuant to Rule 424(b), did not or will not, and on the date
written confirmations of sale are first sent or given, on the date of any
filing of the Prospectus or any Term Sheet that is a part thereof pursuant
to Rule 424(b) and on the Closing Date, the Prospectus and, if required to
be filed pursuant to Rules 434(c)(2) and 424(b), the Integrated Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to the information
contained in or omitted from the Registration Statement or the Prospectus
or, if required to be filed pursuant to Rules 434(c)(2) and 424(b), the
Integrated Prospectus (or any supplement thereto) in reliance upon and in
conformity with information furnished in writing to the Company by or on
behalf of any Underwriter through the Representatives, or by the Selling
Shareholder, specifically for inclusion in the Registration Statement, the
Prospectus or, if required to be filed pursuant to Rules 434(c)(2) and
424(b), the Integrated Prospectus (or any supplement thereto).
(iii) The terms which follow, when used in this Agreement, shall have
the meanings indicated. The term "the Effective Date" shall mean each date
that the Registration Statement and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean
the date and time that this Agreement is executed and delivered by the
parties hereto. "Integrated Prospectus" shall mean a prospectus relating
to the Securities that is first filed pursuant to Rules 434(c)(2) and
424(b) after the Execution Time. "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in paragraph (i) above and any
preliminary prospectus included in the Registration Statement at the
Effective Date that omits Rule 430A Information. "Prospectus" shall mean:
(A) if the Company relies on Rule 434 in connection with the
offering of the Securities, the Term Sheet relating to the Securities
that is first filed pursuant to Rule 424(b)(7) after the Execution
Time, together with the Preliminary Prospectus identified therein
that such Term Sheet supplements;
3
<PAGE> 4
(B) if the Company does not so rely on Rule 434, the prospectus
relating to the Securities that is first filed pursuant to Rule
424(b) after the Execution Time; or
(C) if the Company does not so rely on Rule 434 and no filing
pursuant to Rule 424(b) is required, the form of final prospectus
relating to the Securities included in the Registration Statement at
the Effective Date.
"Registration Statement" shall mean the registration statement referred to
in paragraph (i) above, including incorporated documents, exhibits and
financial statements, as amended at the Execution Time (or, if not
effective at the Execution Time, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended. Such term shall include
any Rule 434 Information and any Rule 430A Information deemed to be
included therein at the Effective Date as provided by Rule 434 and Rule
430A, respectively. "Rule 430A" and "Rule 434" refer to such rules or
regulation under the Act. "Rule 434 Information" means any information
contained in a Term Sheet that is filed pursuant to Rule 424(b)(7). "Rule
430A Information" means information with respect to the Securities and the
offering thereof permitted to be omitted from the Registration Statement
when it becomes effective pursuant to Rule 430A. Any reference herein to
the Registration Statement, a Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 which were filed under
the Exchange Act on or before the Effective Date of the Registration
Statement or the issue date of such Preliminary Prospectus or the
Prospectus, as the case may be; any reference herein to the term "issue
date" with respect to a Prospectus that includes a Term Sheet shall mean
the issue date of such Term Sheet. "Term Sheet" means any abbreviated term
sheet that satisfies the requirements of Rule 434. Any reference herein to
the terms "amend", "amendment" or "supplement" with respect to the
Registration Statement, any Preliminary Prospectus or the Prospectus shall
be deemed to refer to and include the filing of any document under the
Exchange Act after the Effective Date of the Registration Statement, or
the issue date of any Preliminary Prospectus or the Prospectus, as the
case may be, deemed to be incorporated therein by reference.
(iv) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement (except
for such rights as have been waived or complied with prior to the date
hereof).
(v) The Company and the Subsidiaries (as defined in Section 1(a)(ix)
hereof) own or possess all trademarks, trademark registrations, service
marks, service mark registrations, trade names, trade secrets and rights
necessary for the conduct of their
4
<PAGE> 5
respective businesses as described in the Prospectus or any Integrated
Prospectus, and the Company is not aware of any claim to the contrary or
any challenge by any other person to the rights of the Company and the
Subsidiaries with respect to the foregoing.
(vi) All the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable
and are free of any preemptive or similar rights; the Securities to be
issued and sold by the Company (if the option described in Section 2(b) is
exercised) have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and free of any
preemptive or similar rights; and the capital stock of the Company
conforms to the description thereof in the Registration Statement, the
Prospectus and any Integrated Prospectus.
(vii) The Company is a corporation duly organized and active under
the laws of the State of Delaware with full corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement, the Prospectus and any Integrated
Prospectus, and is duly registered and qualified to conduct its business
and is in good standing in each jurisdiction or place where the nature of
its properties or the conduct of its business requires such registration
or qualification, except where the failure so to register or qualify will
not have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company
and the Subsidiaries (as defined below) taken as a whole.
(viii) The Company's subsidiaries listed in an exhibit to the
Company's annual report on Form 10-K for the fiscal year ended July 31,
1995, together with Karten's Jewelers, Inc., constitute all of the
Company's subsidiaries (collectively, the "Subsidiaries"). Each Subsidiary
is a corporation duly organized and active in the jurisdiction of its
incorporation, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement, the Prospectus and any Integrated Prospectus, and
is duly registered and qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature of its properties
or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify will not
have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company
and the Subsidiaries taken as a whole; all the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable, and are owned by the
Company directly, or indirectly through one of the other Subsidiaries,
free and clear of any lien, adverse claim, security interest, equity or
other encumbrance.
5
<PAGE> 6
(ix) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened, against the Company or any of
the Subsidiaries, or to which the Company or any of the Subsidiaries or
any of their respective properties is subject, that are required to be
described in the Registration Statement, the Prospectus or any Integrated
Prospectus but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement, the Prospectus or any Integrated
Prospectus or to be filed as an exhibit to the Registration Statement that
are not described or filed as required by the Act.
(x) Neither the Company nor any of the Subsidiaries is in violation
of its certificate or articles of incorporation or by-laws, or other
organizational documents, or of any material law, ordinance,
administrative or governmental rule or regulation applicable to the
Company or any of the Subsidiaries or of any material decree of any court
or governmental agency or body having jurisdiction over the Company or any
of the Subsidiaries, or is in default in any material respect in the
performance of any obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness or in any
material agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which any of them or
any of their respective properties may be bound.
(xi) Neither the issuance and sale of the Option Securities, the
execution, delivery or performance of this Agreement by the Company nor
the consummation of the transactions contemplated hereby (A) requires any
consent, approval, authorization or other order of or registration or
filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required for
the registration of the Securities under the Act and compliance with the
securities or blue sky laws of various jurisdictions, all of which have
been or will be effected in accordance with this Agreement) or conflicts
with or constitutes a breach of, or a default under, the certificate or
articles of incorporation or bylaws, or other organizational documents, of
the Company or any of the Subsidiaries or (B) conflicts with or
constitutes a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries
is a party or by which any of them or any of their respective properties
is bound, or violates any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of the Subsidiaries pursuant to
the terms of any agreement or instrument to which any of them is a party
or by which any of them is bound or to which any of the property or assets
of any of them is subject.
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(xii) The accountants, Arthur Andersen & Co., who have certified or
shall certify the financial statements included in the Registration
Statement, the Prospectus and any Integrated Prospectus (or any amendment
or supplement thereto) are independent public accountants as required by
the Act and the regulations thereunder.
(xiii) The financial statements, together with related schedules and
notes, included in the Registration Statement, the Prospectus and any
Integrated Prospectus (and any amendment or supplement thereto), present
fairly the consolidated financial position, results of operations, cash
flows and stockholders' equity of the Company and the Subsidiaries on the
basis stated in the Registration Statement at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved, except as disclosed therein; and the other financial and
statistical information and data included in the Registration Statement,
the Prospectus and any Integrated Prospectus (and any amendment or
supplement thereto) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Company and the Subsidiaries.
(xiv) The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and
validly authorized by the Company, and this Agreement has been duly
executed and delivered by the Company.
(xv) Except as disclosed in the Registration Statement, the
Prospectus and any Integrated Prospectus (or any amendment or supplement
thereto), subsequent to the respective dates as of which such information
is given in the Registration Statements, the Prospectus and any Integrated
Prospectus (or any amendment or supplement thereto), neither the Company
nor any of the Subsidiaries has incurred any liability or obligation,
direct or contingent, or entered into any transaction, not in the ordinary
course of business, that is material to the Company and the Subsidiaries
taken as a whole, and there has not been any change in the capital stock,
or material increase in the short-term debt or long-term debt, of the
Company or any of the Subsidiaries, or any material adverse change, or any
development involving or which may reasonably be expected to involve, a
material adverse change, in the condition (financial or other), business
or results of operations of the Company and the Subsidiaries taken as a
whole.
(b) The Selling Shareholder represents and warrants to, and agrees with,
each Underwriter and the Company that:
(i) The Selling Shareholder is the lawful owner of the Securities to
be sold by it hereunder and upon delivery of such Securities to the
several Underwriters and the payment by the several Underwriters of the
purchase price therefor as provided herein,
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<PAGE> 8
the Selling Shareholder will convey good and marketable title to such
Securities, free and clear of all liens, encumbrances, equities and claims
whatsoever.
(ii) The Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result, under the Exchange
Act or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities, and has not effected any sales of shares of Common Stock
which, if effected by the issuer, would be required to be disclosed in
response to Item 701 of Regulation S-K.
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the
Selling Shareholder of the transactions contemplated herein, except such
as may be required under the Act and under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters and such other approvals as have been
obtained.
(iv) Neither the sale of the Securities being sold by the Selling
Shareholder nor the consummation by the Selling Shareholder of any other of
the transactions herein contemplated or the fulfillment of the terms hereof
by the Selling Shareholder will conflict with, result in a breach or
violation of, or constitute a default under any material law applicable to
the Selling Shareholder or the charter or by-laws of the Selling
Shareholder or the terms of any indenture or other agreement or instrument
to which the Selling Shareholder or any of its subsidiaries is a party or
bound, or any judgment, order or decree applicable to the Selling
Shareholder or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over the Selling Shareholder or any of its subsidiaries.
(v) On the Effective Date, the Registration Statement did not or will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading; and, on the Effective Date, the
Prospectus, if not filed (either in whole or in part) pursuant to Rule
424(b), did not or will not, and on the date written confirmations of sale
are first sent or given, on the date of any filing of the Prospectus or
any Term Sheet that is a part thereof pursuant to Rule 424(b) and on the
Closing Date, the Prospectus and, if required to be filed pursuant to
Rules 434(c)(2) and 424(b), the Integrated Prospectus (together with any
supplement thereto) will not, include any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the Selling Shareholder
makes each of the representations or warranties contained in this
paragraph 1(b)(v) only
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<PAGE> 9
in respect of any statements in or omissions from the Registration
Statement, the Prospectus, any Integrated Prospectus or any supplement
thereto made in reliance upon and in conformity with information furnished
in writing to the Company by the Selling Shareholder in a separate side
letter specifically for use in connection with the preparation thereof.
(vi) The Selling Shareholder has no knowledge of any fact, condition
or information not disclosed in the Prospectus or any Integrated
Prospectus which has materially adversely affected or may materially
adversely affect the business of the Company and the Subsidiaries taken as
a whole; the sale of such Securities by the Selling Shareholder is not
prompted by any information concerning the Company or any of the
Subsidiaries which is not set forth in the Prospectus or any Integrated
Prospectus; and nothing has come to the attention of the Selling
Shareholder (without independent verification) that has caused the Selling
Shareholder to believe that the Registration Statement, the Prospectus or
any Integrated Prospectus contain any untrue statement of a material fact.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Company
and the Selling Shareholder (collectively, the "Sellers" and individually, a
"Seller") agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the
Sellers, at a purchase price of $_____ per share, the amount of the
Underwritten Securities set forth opposite such Underwriter's name in Schedule
I hereto. The number of shares of the Underwritten Securities to be purchased
by each Underwriter from each Seller shall be the same percentage of the total
number of shares of the Underwritten Securities to be purchased by such
Underwriter as the total number of shares of Underwritten Securities to be sold
by each Seller bears to the total number of shares of Underwritten Securities
to be sold pursuant hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option to the several Underwriters to purchase, severally and not jointly, up
to 890,750 shares of the Option Securities at the same purchase price per share
as the Underwriters shall pay for the Underwritten Securities. Said option may
be exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or in
part at any time (but not more than once) on or before the 30th day after the
date of the Prospectus upon written notice by the Representatives to the
Company setting forth the number of shares of the Option Securities as to which
the several Underwriters are exercising the option and the settlement date.
Delivery of certificates for the shares of Option Securities by the Company,
and payment therefor to it, shall be made as provided in Section 3 hereof. The
number of shares of the Option Securities to be purchased by each Underwriter
shall be the same percentage of the total number of shares of the Option
Securities to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Securities,
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<PAGE> 10
subject to such adjustments as you in your absolute discretion shall make to
eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section
2(b) hereof shall have been exercised on or before the first business day prior
to the Closing Date) shall be made at 10:00 AM, New York City time, on July __,
1996, or such later date (not later than July __, 1996) as the Representatives
shall designate, which date and time may be postponed by agreement among the
Representatives, the Company and the Selling Shareholder or as provided in
Section 9 hereof (such date and time of delivery and payment for the Securities
being herein called the "Closing Date"). Delivery of the Securities shall be
made to the Representatives for the respective accounts of the several
Underwriters against payment by the several Underwriters through the
Representatives of the respective aggregate purchase prices of the Securities
being sold by the Company and the Selling Shareholder to or upon the order of
the Company and the Selling Shareholder, respectively, by certified or official
bank check or checks drawn on or by a New York Clearing House bank and payable
in same day funds or, if wire transfer information is provided two full
business days in advance of the Closing Date, by intra-bank wire transfer
payable in same day funds. Delivery of the Underwritten Securities and the
Option Securities shall be made at such location as the Representatives shall
reasonably designate at least one business day in advance of the Closing Date
and payment for such Securities shall be made at the office of Cleary,
Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York 10006.
Certificates for the Securities shall be registered in such names and in such
denominations as the Representatives may request not less than one business day
in advance of the Closing Date.
The Company and the Selling Shareholder agree to have the Securities
available for inspection, checking and packaging by the Representatives in New
York, New York not later than 1:00 PM on the business day prior to the Closing
Date if the Securities are to be delivered to the Underwriters in physical
form.
The Underwriters will take appropriate action to assure compliance
with the New York State Stock Transfer Tax, including making appropriate
filings and undertakings with the State of New York with respect to Securities
sold by the Selling Shareholder pursuant to this Agreement; provided that the
Underwriters shall not be required to pay any sums that are not, by their
terms, refundable and the Selling Shareholder shall promptly reimburse the
Underwriters any sums that are not promptly so refunded with respect to the
Selling Shareholder's Securities. Except as aforementioned, the Selling
Shareholder will pay all applicable state transfer taxes, if any, involved in
the transfer to the several Underwriters of the Securities to be purchased by
them from the Selling Shareholder.
If the option provided for in Section 2(b) hereof is exercised after
the first business day prior to the Closing Date, the Company will deliver (at
its expense) to the
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<PAGE> 11
Representatives at Seven World Trade Center, New York, New York, on the date
specified by the Representatives (which shall be within three business days
after exercise of said option), certificates for the Option Securities in such
names and denominations as the Representatives shall have requested against
payment of the purchase price thereof to or upon the order of the Company by
certified or official bank check or checks drawn on or by a New York Clearing
House bank and payable in same day funds or, if wire transfer information is
provided two full business days in advance of the Closing Date, by intra-bank
wire transfer payable in same day funds. If settlement for the Option
Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions and certificates confirming
as of such date the opinions and certificates delivered on the Closing Date
pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set
forth in the Prospectus.
5. Agreements. (a) The Company agrees with the several Underwriters
and the Selling Shareholder that:
(i) The Company will use its commercially reasonable best efforts to
cause the Registration Statement, if not effective at the Execution Time,
and any amendment thereof to become effective. Prior to the termination of
the offering of the Securities, the Company will not file any amendment of
the Registration Statement or supplement (including any Term Sheet) to the
Prospectus or to any Integrated Prospectus unless the Company has
furnished you and the Selling Shareholder a copy for your review prior to
filing and will not file any such proposed amendment or supplement to
which you reasonably object. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus or any Term Sheet that constitutes a
part thereof or any Integrated Prospectus is otherwise required under
Rules 434 or 424(b), the Company will cause the Prospectus or any Term
Sheet that constitutes a part thereof or any Integrated Prospectus,
properly completed, and any supplement thereto to be filed with the
Commission pursuant to the applicable paragraph of Rules 434 and 424(b)
within the time period prescribed and, in the case of any such filing of
an Integrated Prospectus, will cause such filing to be made (A) where the
determination of the public offering price of the Securities occurs at or
prior to Noon, New York City time, no later than the date of such
determination and (B) where such determination occurs after Noon, New York
City time, on such date, no later than the business day immediately
following such date; and the Company will provide evidence satisfactory to
the Representatives and the Selling Shareholder of such timely filing. The
Company will promptly advise the Representatives and the Selling
Shareholder (A) when the Registration Statement, if not effective at the
Execution Time, and any amendment thereto, shall have become effective,
(B) when
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<PAGE> 12
the Prospectus or any Term Sheet that constitutes a part thereof or any
Integrated Prospectus, and any supplement thereto, shall have been filed
(if required) with the Commission pursuant to Rule 424(b), (C) when, prior
to termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (D) of
any request by the Commission for any amendment of the Registration
Statement or supplement (including by way of a Term Sheet) to the
Prospectus or to any Integrated Prospectus or for any additional
information, (E) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (F) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(ii) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectus or any Integrated Prospectus as then supplemented
would include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall be
necessary to amend the Registration Statement or supplement (including by
way of a Term Sheet) the Prospectus or any Integrated Prospectus to comply
with the Act or the Exchange Act or the respective rules thereunder, the
Company promptly will prepare and file with the Commission, subject to the
second sentence of paragraph (a)(i) of this Section 5, an amendment or
supplement which will correct such statement or omission or effect such
compliance.
(iii) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an earnings
statement or statements of the Company and its subsidiaries which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under the
Act.
(iv) The Company will furnish to the Representatives, counsel for the
Underwriters, the Selling Shareholder and counsel for the Selling
Shareholder, without charge, signed copies of the Registration Statement
(including exhibits thereto), and to each other Underwriter a copy of the
Registration Statement (without exhibits thereto). The Company will
furnish to each Underwriter and the Selling Shareholder as many copies of
each Preliminary Prospectus, the Prospectus and any Integrated Prospectus
and any supplement thereto as the Representatives may reasonably request.
Such copies of the Prospectus or any Integrated Prospectus shall be made
available not later than (A) 6:00 PM, New York City time, on the date of
determination of the public offering price, if such determination occurred
at or prior to 12:00 Noon, New York
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<PAGE> 13
City time, on such date or (B) 6:00 PM, New York City time, on the
business day following the date on which the public offering price was
determined, if such determination occurred after 12:00 Noon, New York City
time, on such date. Further, so long as delivery of a prospectus by an
Underwriter or dealer may be required by the Act, the Company will furnish
as many additional copies of the foregoing documents as the
Representatives may reasonably request. The Company will pay the expenses
of printing or other production of all documents relating to the offering.
(v) The Company will cooperate with the Representatives and their
counsel in connection with the qualification of the Securities for sale
under the laws of such jurisdictions as the Representatives may designate,
will maintain such qualifications in effect so long as required for the
distribution of the Securities and will pay any fees payable in connection
with such qualifications and the fee of the National Association of
Securities Dealers, Inc., in connection with its review of the offering.
(vi) The Company will not, for a period of 90 days following the
Execution Time, without the prior written consent of the Representatives,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, any shares of Common Stock (other
than the Securities to be sold by it hereunder) or any securities
convertible into, or exchangeable for, shares of Common Stock; provided,
however, that the Company may issue and sell options to acquire Common
Stock or shares of Common Stock pursuant to any employee stock option
plan, employee stock purchase plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the Execution Time and the
Company may issue Common Stock issuable upon the conversion of securities
or the exercise of warrants outstanding at the Execution Time.
(vii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information, if any,
reported in the Prospectus and any Integrated Prospectus concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to
the Department.
(b) The Selling Shareholder agrees with the several Underwriters that
it will not, for a period of 90 days following the Execution Time, without the
prior written consent of the Representatives, offer, sell or contract to sell,
or otherwise dispose of, directly or
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<PAGE> 14
indirectly, or announce the offering of, any shares of Common Stock (other than
the Securities to be sold by it hereunder) beneficially owned by the Selling
Shareholder, or any securities beneficially owned by the Selling Shareholder
that are convertible into, or exchangeable for, shares of Common Stock.
(c) The Selling Shareholder and AIF II, L.P. ("AIF"), the general
partner of the Selling Shareholder, have agreed to reimburse the Company for
certain expenses relating to the offering of the Securities pursuant to a
separate agreement dated as of May 31, 1996 among the Selling Shareholder, AIF
and the Company.
6. Conditions to the Obligations of the Underwriters. The obligations
of the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Shareholder contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, as applicable, to the accuracy of
the statements of the Company and the Selling Shareholder made in any
certificates pursuant to the provisions hereof, to the performance by the
Company and the Selling Shareholder of their respective obligations hereunder
and to the following additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement will become effective not later than (i) 6:00
PM, New York City time, on the date of determination of the public offering
price, if such determination occurred at or prior to 3:00 PM, New York City
time, on such date or (ii) 12:00 Noon, New York City time, on the business day
following the day on which the public offering price was determined, if such
determination occurred after 3:00 PM, New York City time, on such date; if
filing of the Prospectus or any Term Sheet that constitutes a part thereof, any
Integrated Prospectus, or any supplement to the foregoing, is required pursuant
to Rule 424(b), the Prospectus or such part thereof, the Integrated Prospectus,
and any such supplement, will be filed in the manner and within the time period
required by Rule 424(b) and, in the case of any such filing of an Integrated
Prospectus, such filing will be made (i) where the determination of the public
offering price of the Securities occurs at or prior to Noon, New York City
time, no later than the date of such determination and (ii) where such
determination occurs after Noon New York City time, on such date, no later than
the business day immediately following such date; and no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or threatened.
(b) The Company shall have furnished to the Representatives and the
Selling Shareholder the opinion of:
(i) Troutman Sanders LLP, counsel for the Company, dated the Closing
Date, to the effect that:
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<PAGE> 15
(A) each of the Company and the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction in which it is chartered
or organized, with full corporate power and authority to own its
properties and conduct its business as described in the Prospectus
and any Integrated Prospectus, and is duly qualified to do business
as a foreign corporation and is in good standing under the laws of
each jurisdiction in which such qualification is required wherein it
owns or leases material properties or conducts material business and
the Company and its Subsidiaries together operate twenty or more
stores and leased departments or conduct other significant
operations;
(B) all the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable and, except as otherwise set forth in
the Prospectus and any Integrated Prospectus, all outstanding shares
of capital stock of the Subsidiaries are owned by the Company either
directly or through wholly owned subsidiaries free and clear of any
perfected security interest and, to the best of such counsel's
knowledge, any other security interests, claims, liens or
encumbrances;
(C) the Company's authorized equity capitalization is as set
forth in the Prospectus and any Integrated Prospectus; the capital
stock of the Company conforms to the description thereof contained in
the Prospectus and any Integrated Prospectus; the outstanding shares
of Common Stock (including the Securities being sold hereunder by the
Selling Shareholder) have been duly and validly authorized and issued
and are fully paid and nonassessable (except as to 611,642 shares
delivered to the Disbursing Agent pursuant to the Company's Plan of
Reorganization under Chapter 11 of the Bankruptcy Code, but not yet
delivered to former creditors of the Company who have not provided
required documentation or whose claims are disputed, as to which such
counsel expresses no opinion or belief); the Securities being sold
hereunder by the Company have been duly and validly authorized, and,
when issued and delivered to and paid for by the Underwriters
pursuant to this Agreement, will be duly and validly issued and fully
paid and nonassessable; the Securities being sold hereunder by the
Selling Shareholder are duly listed and admitted for trading on the
New York Stock Exchange (the "Stock Exchange"); the Securities being
sold hereunder by the Company are duly authorized for listing,
subject to official notice of issuance on the Stock Exchange; the
certificates for the Securities are in valid and sufficient form; and
the holders of outstanding securities of the Company are not entitled
to preemptive or other rights to subscribe for the Securities;
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<PAGE> 16
(D) to the best knowledge of such counsel, (i) there is no
pending or threatened action, suit or proceeding before any court or
governmental agency, authority or body or any arbitrator involving
the Company or any of its Subsidiaries of a character required to be
disclosed in the Registration Statement which is not adequately
disclosed in the Prospectus and any Integrated Prospectus, and (ii)
there is no franchise, contract or other document of a character
required to be described in the Registration Statement or Prospectus,
or to be filed as an exhibit, which is not described or filed as
required;
(E) the Registration Statement has become effective under the
Act; any required filing of the Prospectus or any Term Sheet that
constitutes a part thereof and of any Integrated Prospectus, and of
any supplements thereto, pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b) and, in the
case of any such filing of an Integrated Prospectus, such filing has
been made (i) where the determination of the public offering price of
the Securities occurred at or prior to Noon, New York City time, no
later than the date of such determination or (ii) where such
determination occurred after Noon, New York City time, on such date,
no later than the business day immediately following the date of such
determination; to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or
threatened; and the Registration Statement, the Prospectus and any
Integrated Prospectus (other than the financial statements and other
financial and statistical information contained therein and the
documents incorporated by reference therein as to which such counsel
need express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the Exchange Act and
the respective rules thereunder;
(F) this Agreement has been duly authorized, executed and
delivered by the Company;
(G) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated herein, except such as have been obtained
under the Act and such as may be required under the securities or
blue sky laws of any jurisdiction other than the federal government
of the United States in connection with the purchase and distribution
of the Securities by the Underwriters and such other approvals
(specified in such opinion) as have been obtained; and
(H) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the
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<PAGE> 17
terms hereof will conflict with, result in a breach or violation of,
or constitute a default under any law or the charter or by-laws of
the Company or, to the best knowledge of such counsel, the terms of
any indenture or other agreement or instrument which is material to
the Company and its Subsidiaries taken as a whole and to which the
Company or any of its Subsidiaries is a party or bound, or any
judgment, order or decree applicable to the Company or any of its
Subsidiaries of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over the Company
or any of its Subsidiaries.
In addition, such counsel shall state that although such counsel has not
undertaken to independently verify the accuracy, completeness or fairness
of the statements contained in the Registration Statement, the Prospectus
or any Integrated Prospectus, based on such counsel's participation in the
preparation of the Registration Statement, the Prospectus and any
Integrated Prospectus, such counsel's review of the documents referred to
in such opinion and such counsel's participation in conferences with
representatives of the Underwriters and officers and other representatives
of the Company, nothing has come to such counsel's attention that has
caused such counsel to believe that the Registration Statement (except as
to the financial statements and other financial and statistical data
contained or incorporated by reference therein, as to which such counsel
expresses no opinion or belief) at the Effective Date contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus or any Integrated Prospectus (except as
to the financial statements and other financial and statistical data
contained or incorporated by reference therein, as to which such counsel
expresses no opinion or belief) as of its date or at the Closing Date (or
any later date on which Option Securities are purchased), includes any
untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
United States, the State of Georgia or the General Corporation Law of the
State of Delaware, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the
Underwriters and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company, the
Selling Shareholder and public officials. References to the Prospectus or
any Integrated Prospectus in this paragraph (b) include any supplements
thereto at the Closing Date.
17
<PAGE> 18
When used in such opinion, the phrase "to the best knowledge of such
counsel" shall mean the conscious awareness of facts or other information
by (i) the person that signs such opinion, (ii) any lawyer at Troutman
Sanders LLP who has active involvement in negotiating the transactions
contemplated hereby, preparing any documentation relating to the
transactions contemplated hereby or preparing such opinion and (iii)
solely as to information relevant to a particular opinion issue or
confirmation regarding a particular factual matter, any lawyer at Troutman
Sanders LLP who is primarily responsible for providing the response
concerning that particular opinion issue or confirmation.
(ii) Alan Shor, General Counsel for the Company, dated the Closing
Date, to the effect that:
(A) to the best knowledge of such counsel, (i) there is no
pending or threatened action, suit or proceeding before any court or
governmental agency, authority or body or any arbitrator involving
the Company or any of its Subsidiaries of a character required to be
disclosed in the Registration Statement which is not adequately
disclosed in the Prospectus and any Integrated Prospectus and (ii)
there is no franchise, contract or other document of a character
required to be described in the Registration Statement or Prospectus,
or to be filed as an exhibit, which is not described or filed as
required;
(B) to the best knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated
herein, except such as have been obtained under the Act and such as
may be required under the securities or blue sky laws of any
jurisdiction other than the federal government of the United States
in connection with the purchase and distribution of the Securities by
the Underwriters and such other approvals (specified in such opinion)
as have been obtained; and
(C) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation of, or constitute a default under any law or the
charter or by-laws of the Company or, to the best knowledge of such
counsel, the terms of any indenture or other agreement or instrument
which is material to the Company and its subsidiaries taken as a
whole and to which the Company or any of its Subsidiaries is a party
or bound, or any judgment, order or decree applicable to the Company
or any of its Subsidiaries of any court, regulatory body,
administrative agency, governmental body or arbitrator having
jurisdiction over the Company or any of its Subsidiaries.
18
<PAGE> 19
(c) The Selling Shareholder shall have furnished to the
Representatives and the Company the opinion of Morgan, Lewis & Bockius LLP,
counsel for the Selling Shareholder, dated the Closing Date, to the effect
that:
(i) this Agreement has been duly authorized, executed and delivered
by the Selling Shareholder and the Selling Shareholder has full legal
right and authority to sell, transfer and deliver in the manner provided
in this Agreement the Securities being sold by the Selling Shareholder
hereunder;
(ii) the delivery by the Selling Shareholder to the several
Underwriters of certificates for the Securities being sold hereunder by
the Selling Shareholder against payment therefor as provided herein will
pass good and marketable title to such Securities to the several
Underwriters, free and clear of all liens, encumbrances, equities and
claims whatsoever;
(iii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the
Selling Shareholder of the transactions contemplated herein, except such
as may have been obtained under the Act and such as may be required under
the blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other
approvals (specified in such opinion) as have been obtained; and
(iv) neither the sale of the Securities being sold by the Selling
Shareholder nor the consummation of any other of the transactions herein
contemplated by such Selling Shareholder or the fulfillment of the terms
hereof by such Selling Shareholder will conflict with, result in a breach
or violation of, or constitute a default under any law or the articles of
association of such Selling Shareholder, the charter or by-laws of the
Selling Shareholder or the terms of any indenture or other agreement or
instrument known to such counsel and to which the Selling Shareholder or
any of its subsidiaries is a party or bound, or any judgment, order or
decree known to such counsel to be applicable to the Selling Shareholder
or any of its subsidiaries of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over the
Selling Shareholder or any of its subsidiaries.
In rendering such opinions, Morgan Lewis & Bockius may rely as to matters
involving the application of laws of any jurisdiction other than the States of
________ or the United States, to the extent they deem proper and specified in
such opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the
Underwriters, and such counsel may rely as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Selling
Shareholder and of public officials.
19
<PAGE> 20
(d) The Representatives shall have received from Cleary, Gottlieb,
Steen & Hamilton, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date, with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus and any Integrated Prospectus (together
with any supplement thereto) and other related matters as the Representatives
may reasonably require, and the Company and the Selling Shareholder shall have
furnished to such counsel such documents as they reasonably request for the
purpose of enabling them to pass upon such matters.
(e) The Company shall have furnished to the Representatives and the
Selling Shareholder a certificate of the Company, signed by the Chairman of the
Board and the principal financial or accounting officer of the Company, dated
the Closing Date, to the effect that the signers of such certificate have
carefully examined the Registration Statement, the Prospectus, any Integrated
Prospectus, any supplements to the Prospectus or to any Integrated Prospectus
and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent financial statements included
in the Prospectus (exclusive of any supplement thereto), there has been no
material adverse change in the condition (financial or other), earnings,
business or properties of the Company and its subsidiaries, whether or not
arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(f) The Selling Shareholder shall have furnished to the
Representatives a certificate, signed by an authorized officer of the Selling
Shareholder, dated the Closing Date, to the effect that the Selling
Shareholder has carefully examined the Registration Statement, the
Prospectus, any Integrated Prospectus, any supplement to the Prospectus or to
any Integrated Prospectus and this Agreement and that the representations and
warranties of the Selling Shareholder in this Agreement are true and correct
in all material respects on and as of the Closing Date to the same effect as
if made on the Closing Date.
(g) At the Execution Time and at the Closing Date, Arthur Andersen &
Co. shall have furnished to the Representatives and the Selling Shareholder a
letter or letters,
20
<PAGE> 21
dated respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representatives and the Selling
Shareholder, confirming that they are independent accountants within the
meaning of the Act and the Exchange Act and the respective applicable published
rules and regulations thereunder and stating in effect that:
(i) in their opinion the audited financial statements and financial
statement schedules included or incorporated in the Registration
Statement, the Prospectus and any Integrated Prospectus and reported on by
them comply in form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the related
published rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company and its subsidiaries; carrying
out certain specified procedures (but not an examination in accordance
with generally accepted auditing standards) which would not necessarily
reveal matters of significance with respect to the comments set forth in
such letter; a reading of the minutes of the meetings of the stockholders,
directors and each committee of the Company and the Subsidiaries; and
inquiries of certain officials of the Company who have responsibility for
financial and accounting matters of the Company and its subsidiaries as to
transactions and events subsequent to July 31, 1995, nothing came to their
attention which caused them to believe that:
(1) any unaudited financial statements included or incorporated
in the Registration Statement, the Prospectus and any Integrated
Prospectus do not comply in form in all material respects with
applicable accounting requirements and with the published rules and
regulations of the Commission with respect to financial statements
included or incorporated in quarterly reports on Form 10-Q under the
Exchange Act; or said unaudited financial statements are not in
conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial
statements included or incorporated in the Registration Statement,
the Prospectus and any Integrated Prospectus; or
(2) with respect to the period subsequent to April 30, 1996,
there were any changes, at a specified date not more than five
business days prior to the date of the letter, in the long-term debt
of the Company and its Subsidiaries or capital stock of the Company
or decreases in the shareholders' equity of the Company or decreases
in working capital of the Company and its Subsidiaries as compared
with the amounts shown on the April 30, 1996 consolidated balance
sheet included or incorporated in the Registration Statement, the
Prospectus and any Integrated Prospectus, or for the period from May
1, 1996 to such specified date there were any decreases, as compared
with the
21
<PAGE> 22
corresponding period in the preceding year in net sales, operating
income or income before income taxes or in total or per share amounts
of net income of the Company and its Subsidiaries, except in all
instances for changes or decreases set forth in such letter, in which
case the letter shall be accompanied by an explanation by the Company
as to the significance thereof unless said explanation is not deemed
necessary by the Representatives;
(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial
or statistical information derived from the general accounting records of
the Company and its subsidiaries) set forth in the Registration Statement,
the Prospectus and any Integrated Prospectus, or incorporated by reference
therein, agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
References to the Prospectus and any Integrated Prospectus in this paragraph
(h) include any supplement thereto at the date of the letter.
[(h) On or prior to the Execution Time, the Stock Exchange shall have
approved the Underwriters' participation in the distribution of the Securities
to be sold by the Selling Stockholder.]
(i) At the Execution Time, the Company shall have furnished to the
Representatives a letter substantially in the form of Exhibit A hereto from
each executive officer listed on Schedule III hereto addressed to the
Representatives, in which each such officer or director agrees not offer, sell
or contract to sell, or otherwise dispose of, directly or indirectly, or
announce an offering of, any shares of Common Stock beneficially owned by such
officer or director or any securities convertible into, or exchangeable for,
shares of Common Stock for a period of 90 days following the Execution Time
without the prior written consent of the Salomon Brothers Inc and prior written
notice to the other Representatives, subject to the conditions provided in such
forms of letter.
(j) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof), the Prospectus and any Integrated Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or decrease
specified in the letter or letters referred to in paragraph (g) of this Section
6 or (ii) any change, or any development involving a prospective change, in or
affecting the business or properties of the Company and its Subsidiaries the
effect of which, in any case referred to in clause (i) or (ii) above, is, in
the judgment of the Representatives, so material and adverse as to make it
impractical or inadvisable to proceed with the offering or delivery of the
Securities as contemplated by the Registration Statement (exclusive of any
22
<PAGE> 23
amendment thereof), the Prospectus and any Integrated Prospectus (exclusive of
any supplement thereto).
(k) Prior to the Closing Date, the Company and the Selling
Shareholder shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may reasonably
request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of
such cancellation shall be given to the Company and the Selling Shareholder in
writing or by telephone confirmed in writing.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or the Selling
Shareholder to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company shall
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities; provided, however, that if the sale of the Securities provided for
herein is not consummated because any condition to the obligations of the
Underwriters set forth in Section 6 that is to be satisfied by the Selling
Shareholder is not satisfied or because of any refusal, inability or failure on
the part of the Selling Shareholder to perform any agreement herein or comply
with any provision hereof other than by reason of a default by any of the
Underwriters, the Selling Shareholder shall reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including reasonable fees
and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Securities.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter, the directors, officers,
employees and agents of each Underwriter, and each person who controls any
Underwriter within the meaning of either the Act or the Exchange Act, and the
Selling Shareholder and its directors, officers and partners, and each
person who controls the Selling Shareholder within the meaning of either the
Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory
law or regulation, at common law or
23
<PAGE> 24
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement for the registration of the Securities as originally filed or in any
amendment thereof, or in any Preliminary Prospectus, the Prospectus or any
Integrated Prospectus, or in any amendment thereof or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter through the Representatives, or by
the Selling Shareholder, specifically for inclusion therein. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) The Selling Shareholder agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who signs the Registration
Statement, each Underwriter, the directors, officers, employees and agents of
each Underwriter and each person, if any, who controls the Company or any
Underwriter within the meaning of either the Act or Exchange Act to the same
extent as the foregoing indemnity (including the limitations set forth in the
provisos thereto) from the Company to each Underwriter, but only with reference
to (i) written information furnished to the Company by or on behalf of the
Selling Shareholder in a separate side letter specifically for use in the
preparation of the documents referred to in the foregoing indemnity and (ii) any
breach by the Selling Shareholder of its representations and warranties set
forth in Section 1(b)(vi) hereof. This indemnity agreement will be in addition
to the liability which the Selling Shareholder may otherwise have.
(c) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act and the Selling Shareholder and
its directors, officers and partners, and each person who controls the Selling
Shareholder within the meaning of either the Act or the Exchange Act, to the
same extent as the foregoing indemnity from the Company to each Underwriter, but
only with reference to written information relating to such Underwriter
furnished to the Company by or on behalf of such Underwriter through the
Representatives specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any Underwriter may otherwise have. The Company and the Selling
Shareholder each acknowledge that the statements set forth in the last paragraph
of the cover page and under the heading "Underwriting" in any Preliminary
Prospectus, the Prospectus and any Integrated Prospectus constitute the only
information furnished in writing by or on behalf of the several
24
<PAGE> 25
Underwriters for inclusion in any Preliminary Prospectus, the Prospectus and
any Integrated Prospectus, and you, as the Representatives, confirm that such
statements are correct.
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section 8, notify the indemnifying party in writing of the commencement
thereof; but the failure so to notify the indemnifying party (i) will not
relieve it from any liability under paragraph (a), (b) or (c) above unless and
to the extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a), (b) or (c) above. The indemnifying party
shall be entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise
or consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a), (b) or
(c) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company, the Selling Shareholder and the
Underwriters agree to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably
25
<PAGE> 26
incurred in connection with investigating or defending same) (collectively
"Losses") to which the Company, the Selling Shareholder and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Shareholder, on the
one hand, and by the Underwriters, on the other hand, from the offering of the
Securities; provided, however, that in no case shall any Underwriter (except as
may be provided in any agreement among underwriters relating to the offering of
the Securities) be responsible for any amount in excess of the underwriting
discount or commission applicable to the Securities purchased by such
Underwriter hereunder. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the Company, the Selling Shareholder,
and the Underwriters shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company, of the Selling Shareholder and of the Underwriters in connection with
the statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company and by the
Selling Shareholder shall be deemed to be equal to the total net proceeds from
the offering (before deducting expenses) received by them, and benefits
received by the Underwriters shall be deemed to be equal to the total
underwriting discounts and commissions, in each case as set forth on the cover
page of the Prospectus or any Integrated Prospectus. Relative fault shall be
determined by reference to whether any alleged untrue statement or omission
relates to information provided by the Company, the Selling Shareholder or the
Underwriters. The Company, the Selling Shareholder and the Underwriters agree
that it would not be just and equitable if contribution were determined by pro
rata allocation or any other method of allocation which does not take account
of the equitable considerations referred to above. Notwithstanding the
provisions of this paragraph (e) it is understood that (i) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation and (ii) neither the Selling Shareholder nor any
Underwriter shall be required to contribute with respect to any misstatement or
omission or alleged misstatement or omission in the Registration Statement, the
Prospectus or any Integrated Prospectus, or any amendment or supplement
thereto, except with reference to written information furnished to the Company
by or on behalf of the Selling Shareholder or such Underwriter through the
Representatives specifically for use in the preparation of such documents. For
purposes of this Section 8, each person who controls an Underwriter within the
meaning of either the Act or the Exchange Act and each director, officer,
employee and agent of an Underwriter shall have the same rights to contribution
as such Underwriter, and each person who controls the Company or the Selling
Shareholder within the meaning of either the Act or the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (e).
9. Default by an Underwriter. If any one or more Underwriters shall
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or
26
<PAGE> 27
Underwriters hereunder and such failure to purchase shall constitute a default
in the performance of its or their obligations under this Agreement, the
remaining Underwriters shall be obligated severally to take up and pay for (in
the respective proportions which the amount of Securities set forth opposite
their names in Schedule I hereto bears to the aggregate amount of Securities
set forth opposite the names of all the remaining Underwriters) the Securities
which the defaulting Underwriter or Underwriters agreed but failed to purchase;
provided, however, that in the event that the aggregate amount of Securities
which the defaulting Underwriter or Underwriters agreed but failed to purchase
shall exceed 10% of the aggregate amount of Securities set forth in Schedule I
hereto, the remaining Underwriters shall have the right to purchase all, but
shall not be under any obligation to purchase any, of the Securities, and if
such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter,
the Selling Shareholder or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding seven days, as the Representatives shall
determine in order that the required changes in the Registration Statement, the
Prospectus, any Integrated Prospectus or in any other documents or arrangements
may be effected. Nothing contained in this Agreement shall relieve any
defaulting Underwriter of its liability, if any, to the Company, the Selling
Shareholder and any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. Termination. This Agreement shall be subject to termination in
the absolute discretion of the Representatives, by notice given to the Company
and the Selling Shareholder prior to delivery of and payment for the
Securities, if prior to such time (i) trading in the Company's Common Stock
shall have been suspended by the Commission or the Stock Exchange or trading in
securities generally on the Stock Exchange shall have been suspended or limited
or minimum prices shall have been established on the Stock Exchange, (ii) a
banking moratorium shall have been declared by either Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the judgment of the Representatives, impracticable or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Prospectus or any Integrated Prospectus (exclusive of any supplement
thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of
the Company, of the Selling Shareholder and of the Underwriters set forth in or
made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter, the
Selling Shareholder or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and payment for the Securities. The provisions of Sections 7 and 8 hereof
shall survive the termination or cancellation of this Agreement.
27
<PAGE> 28
12. Notices. All communications hereunder shall be in writing and
effective only on receipt, and, if sent to the Representatives, shall be
mailed, delivered or telegraphed and confirmed to them care of Salomon Brothers
Inc at Seven World Trade Center, New York, New York 10048; or, if sent to the
Company, shall be mailed, delivered or telegraphed and confirmed to it at 901
West Walnut Hill Lane, Irving, Texas 75038, attention of Alan Shor, or, if sent
to the Selling Shareholder, shall be mailed, delivered or telegraphed and
confirmed to the Selling Shareholder at the address set forth in Schedule I
hereto.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. APPLICABLE LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
28
<PAGE> 29
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company, the Selling Shareholder and the several Underwriters.
Very truly yours,
Zale Corporation
By: ____________________________
Name:
Title:
Apollo Jewelry Partners, L.P.
By: AIF II, L.P., its General Partner
By: Apollo Advisors, L.P., its General Partner
By: Apollo Capital Management, Inc., its General Partner
By: ____________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Brothers Inc
McDonald & Company Securities, Inc.
PaineWebber Incorporated
By: Salomon Brothers Inc
By: ___________________________
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
29
<PAGE> 30
SCHEDULE I
<TABLE>
<CAPTION>
Number of Shares of
Underwritten Securities
Underwriter to be Purchased
- ----------- -----------------------
<S> <C>
Salomon Brothers Inc .......................... _______
McDonald & Company Securities, Inc. ........... _______
PaineWebber Incorporated. ..................... _______
_____________
Total...............................7,126,000
</TABLE>
30
<PAGE> 31
SCHEDULE II
<TABLE>
<CAPTION>
Number of Shares of
Underwritten Securities
Name of Selling Shareholder and Address for Notices to be Sold
- --------------------------------------------------- -----------------------
<S> <C>
Apollo Jewelry Partners, L.P. 4,875,854
c/o Apollo Advisors, L.P.
2 Manhattanville Road
Purchase, New York 10577
___________
Total ......................... 4,875,854
</TABLE>
31
<PAGE> 32
SCHEDULE III
Executive Officer
- -----------------
Robert J. DiNicola
Merrill J. Wertheimer
Max A. Brown
Mary L. Forte
Sue E. Gove
Gregory Humenesky
Paul D. Kanneman
Paul G. Leonard
Ervin G. Polze
Beryl B. Raff
Alan P. Shor
Thomas E. Whiddon
32
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EXHIBIT A
[Letterhead of Executive Officer of Zale Corporation]
Zale Corporation
Public Offering of Common Stock
July __, 1996
Salomon Brothers Inc
McDonald & Company Securities, Inc.
PaineWebber Incorporated
as Representatives of the several Underwriters
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between Zale
Corporation, a Delaware corporation (the "Company"), the Selling Shareholder
named therein and each of you as representatives of a group of Underwriters
named therein, relating to an underwritten public offering of Common Stock,
$.01 par value ("Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned agrees not to offer, sell or contract
to sell, or otherwise dispose of, directly or indirectly, or announce an
offering of, any shares of Common Stock beneficially owned by the undersigned
or any securities convertible into, or exchangeable for, shares of Common Stock
for a period of 90 days following the day on which the Underwriting Agreement
is executed without your prior written consent.
If for any reason the Underwriting Agreement shall terminate prior to
the Closing Date (as defined in the Underwriting Agreement), the agreement set
forth above shall likewise be terminated.
Yours very truly,
[Signature of executive officer]
[Address]
33
<PAGE> 1
EXHIBIT 1.2
AGREEMENT
This Letter Agreement (the "Agreement") is made and entered into as of
May 31, 1996 by and among Apollo Jewelry Partners, L.P. ("Apollo Jewelry"), AIF
II, L.P., the general partner of Apollo Jewelry ("AIF II" and collectively,
"Apollo"), and Zale Corporation (the "Company").
RECITALS
Apollo Jewelry owns 4,849,654 shares of Common Stock plus Warrants to
purchase 26,200 shares of Common Stock (the "Warrants") of Zale Corporation
(the "Company"). The Company understands that Apollo Jewelry intends to
exercise the Warrants and thereby own an aggregate of 4,875,854 shares of
Common Stock (herein, the "Secondary Shares").
In connection with the filing by the Company of a Registration
Statement with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act"), for the sale of (i) newly issued shares by the
Company (hereinafter, the "Primary Shares") and (ii) the Secondary Shares in an
underwritten public offering (the "Offering") to be managed by Salomon Brothers
Inc, McDonald & Company Securities and Paine Webber Incorporated (the
"Underwriters"), the Company and Apollo hereby agree as follows:
AGREEMENT
1. EXPENSES.
Subject to the qualifications herein set forth, Apollo will
reimburse the Company for all out-of-pocket expenses incurred by the Company in
connection with the registration of the Primary Shares and the Secondary
Shares, relating to (i) expenses of printing or other production of documents
relating to the Offering; (ii) registration, filing and examination fees
payable to the Securities and Exchange Commission (the "SEC"), the National
Association of Securities Dealers, Inc. and any applicable state (blue sky)
securities administrator in connection with the registration and qualification
of the Primary and Secondary Shares for the Offering; and (iii) fees and
expenses of the Company's professional advisors, including the Company's legal
counsel and its independent public accountants; provided however, that any such
expenses in excess of $275,000 shall be borne 50% by Apollo and 50% by the
Company. Notwithstanding the foregoing (i) all underwriting discounts and
commissions with respect to the Offering of the Secondary Shares will be borne
solely by Apollo, and (ii) all underwriting discounts and commissions with
respect to the offering of the Primary Shares will be borne solely by the
Company. It is understood by the parties hereto that the fees and expenses of
the Underwriters' professional advisors will be borne solely by the
Underwriters.
<PAGE> 2
2. REPRESENTATIONS AND INDEMNIFICATION.
(a) In connection with the Offering of the Secondary
Shares, and subject to Apollo having an opportunity to review the
final prospectus included in the Company's registration statement, and
all amendments and supplements thereto, as the same is filed with, and
as the same is declared effective by, the SEC with respect to the
Offering (the "Prospectus"), Apollo will represent to the Company that
based on Apollo's review of the Prospectus, nothing has come to
Apollo's attention (but without independent verification) that has
caused Apollo to believe that the Prospectus contains any untrue
statement of a material fact.
(b) Subject to the time limitation set forth in paragraph
(d) below, the Company will indemnify and hold harmless each of
Apollo, its directors, officers, partners and each person, if any, who
controls Apollo within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of
investigation) ("Loss" or "Losses") arising out of or based upon any
untrue statement or alleged untrue statement of a material fact
contained in any registration statement or Prospectus or arising out
of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided however, that the Company
will not be liable in any such case to the extent that any such Loss
arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Company by or on behalf of Apollo specifically for inclusion
therein.
(c) Subject to the time limitation set forth in paragraph
(d) below, Apollo will indemnify and hold harmless each of the
Company, its directors, its officers who sign the Registration
Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act from and against any and all Losses arising out of or based upon
any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus, or arising out of or based upon any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of
Apollo expressly for use therein; provided however, that in no event
shall Apollo be responsible
2
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for any amount in excess of the consideration received by Apollo from
the sale of the Secondary Shares.
(d) If any action, suit or proceeding shall be brought
under this Paragraph 2, the indemnified party shall promptly notify
the indemnifying party, and the indemnifying party shall assume the
defense thereof, including the employment of counsel and payment of
all fees and expenses. Notwithstanding the foregoing, any claim for
indemnity pursuant to this Paragraph 2 must be asserted by notice of
any such action, suit or proceeding to the indemnifying party on or
prior to the third anniversary of the date hereof; provided, however,
that if notice is so given, the indemnity obligations of the
indemnifying party with respect to such noticed claim shall continue
beyond the third anniversary of the date hereof.
(e) In the event that the indemnity provided in this
Paragraph 2 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and Apollo agree to
contribute to the aggregate Losses to which the other may be subject
in such proportion as is appropriate to reflect the relative fault of
the parties in connection with the statements or omissions which
resulted in such losses, claims, damages and liabilities as well as
any other relevant equitable considerations.
3. MISCELLANEOUS.
(a) This Agreement constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings with respect
thereto, including, without limitation, that certain agreement, dated
May 22, 1996 between the Company and Apollo. Further, this Agreement
may be amended only by a writing executed by the party to be bound
thereby.
(b) This Agreement shall be governed and be construed in
accordance with the laws of New York, other than its rules regarding
choice of law.
(c) All notices or other communications given or made
hereunder shall be in writing and shall be delivered by hand or mailed
by registered or certified mail, return receipt requested, postage
prepaid, to the addresses hereinafter set forth:
3
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If to the Company, to:
Zale Corporation
901 West Walnut Hill Lane
Irving, TX 75038
Attention: Alan P. Shor
Senior Vice President and
General Counsel
If to Apollo, to:
Apollo Advisors, L.P.
2 Manhattanvile Road
Purchase, New York 10577
Attention: Michael D. Weiner
Vice-President
(d) It is expected that the subject matter herein, other
than with respect to Paragraph 1, will be superseded by an
underwriting agreement among the Underwriters, the Company and Apollo.
IN WITNESS WHEREOF, the parties execute this Agreement as of the date
first written above.
APOLLO JEWELRY PARTNERS, L.P.,
By: /s/ MICHAEL D. WEINER
-----------------------------------
Authorized Signatory
AIF II, L.P.
By: /s/ MICHAEL D. WEINER
-----------------------------------
Authorized Signatory
ZALE CORPORATION
By: /s/ ALAN P. SHOR
-----------------------------------
Alan P. Shor
Senior Vice President, General
Counsel and Secretary
4
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EXHIBIT 5
[TROUTMAN SANDERS LLP LETTERHEAD]
June 20, 1996
Zale Corporation
901 West Walnut Hill Lane
Irving, Texas 75038
Gentlemen:
We have acted as counsel to Zale Corporation (the "Company")
in connection with the proposed public offering and sale by the Company and a
stockholder of the Company (the "Selling Shareholder") of up to 8,016,750
shares of the Company's Common Stock, par value $.01 per share (the "Common
Stock"), 4,875,854 of which will be sold by the Selling Shareholder (the
"Shareholder's Shares") and up to 3,140,896 of which will be sold by the
Company (the "Company Shares"), pursuant to an Underwriting Agreement (the
"Underwriting Agreement") to be entered into among the Company, the Selling
Shareholder and Salomon Brothers Inc, McDonald & Company Securities, Inc. and
PaineWebber Incorporated (the "Underwriters").
This opinion is limited by, and is in accordance with, the
January 1, 1992 edition of the Interpretive Standards applicable to Legal
Opinions to Third Parties in Corporate Transactions adopted by the Legal
Opinion Committee of the Corporate and Banking Law Section of the State Bar of
Georgia, which Interpretive Standards are incorporated in this opinion by this
reference. Capitalized terms used in this letter and not otherwise defined
herein shall have the meanings assigned to such terms in the Interpretive
Standards.
In the capacity described above, we have examined originals
(or copies certified or otherwise identified to our satisfaction) of the
Company's Registration Statement on Form S-3 (File No. 333-05131), as amended
(the "Registration Statement"), the form of Common Stock certificate, the
Restated Certificate of Incorporation and Bylaws of the Company as in effect on
the date hereof, the Warrant Agreement between the Company and The First
National Bank of Boston dated as of July 30, 1993 as to the Company's Warrants
to Purchase Common Stock, Series A (the "Series A Warrants"), corporate and
other documents, records and papers,
<PAGE> 2
Zale Corporation
June 20, 1996
Page 2
certificates of public officials and certificates of officers of the Company
and of the Selling Shareholder. In such examination, we have also assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us and the genuineness and conformity to original documents of documents
submitted to us as certified or photostatic copies.
On the basis of such examination, it is our opinion that,
subject to (i) compliance with the pertinent provisions of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended; and
(ii) compliance with the applicable provisions of the securities or "blue sky"
laws of the various states, the Shareholder's Shares and the Company Shares will
be when sold pursuant to the Underwriting Agreement duly and validly issued,
fully paid, nonassessable shares of the Company's Common Stock.
We are members of the Bar of the State of Georgia. In
expressing the opinions set forth above, we are not passing on the laws of any
jurisdiction other than the laws of the State of Georgia, the General
Corporation Law of the State of Delaware and the Federal law of the United
States of America.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to this firm under the
heading "Legal Matters" in the related prospectus.
Very truly yours,
/s/ TROUTMAN SANDERS LLP
TROUTMAN SANDERS LLP
JLS/gm
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
June 20, 1996
