<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1996
SUBJECT TO AMENDMENT
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-0675400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 W. Walnut Hill Lane
Irving, Texas 75038-1003
214-580-4000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
ALAN P. SHOR, SENIOR VICE PRESIDENT,
GENERAL COUNSEL & SECRETARY
ZALE CORPORATION
901 W. Walnut Hill Lane
Irving, Texas 75038-1003
214-580-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------------
The Commission is requested to mail signed copies of all orders, notices and
communications to:
<TABLE>
<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
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
---------------------------------
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. [ ]
<PAGE> 2
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. [ ]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Title of each class Amount to be Proposed maximum Proposed maximum Amount of
of securities registered offering price aggregate offering registration fee
to be registered per unit* price*
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $.01 per share 8,016,750 shares $19.375 $155,324,532 $53,561
====================================================================================================================
</TABLE>
*THESE FIGURES ARE BASED UPON THE AVERAGE OF THE HIGH AND LOW PRICES
ON MAY 31, 1996, AS REPORTED BY THE NASDAQ NATIONAL MARKET AND ARE USED SOLELY
FOR THE PURPOSE OF CALCULATING THE REGISTRATION FEE PURSUANT TO RULE 457(C).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 3
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. *
* A registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may *
* not be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
Subject to Completion
June 4, 1996
Prospectus
7,126,000 Shares
ZALE CORPORATION [LOGO]
Common Stock
($.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 National Association of Securities Dealers,
Inc.'s National Market ("Nasdaq") under the trading symbol "ZALE." On
, the last reported sale price of the Common Stock by Nasdaq was per
share. See "Price Range of Common Stock." The Company intends to apply for
listing of the Common Stock on The New York Stock Exchange and expects such
listing to be effective in June 1996.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Price to Underwriting Proceeds to Proceeds to
Public Discount Company (1) Selling Shareholder (1)
<S> <C> <C> <C> <C>
Per Share . . . . . . .
Total(2) . . . . . . .
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses of the offering estimated at $
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> 4
INSIDE FRONT COVER
[PICTURES TO BE ADDED]
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 NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
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
1,213 retail locations at January 31, 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 568 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 119
upscale jewelry stores under the Bailey, Banks & Biddle(R) and other locally
established names. The Diamond Park Fine Jewelers Division ("Diamond Park
Division") manages 186 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> 6
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 $551,700 for the six months ended January 31, 1996 from $513,700
for the six months ended January 31, 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 7.1% for the six months ended January 31, 1996 as
compared to the six months ended January 31, 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 36.5% for the six
months ended January 31, 1996 from 38.5% for the six months ended January 31,
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
12.6% for the six months ended January 31, 1996 from 11.7% for the comparable
prior-year period. (The six-month periods ended January 31 include the
Christmas selling season. See "Risk Factors -Variability of Quarterly Results
and Seasonality".)
4
<PAGE> 7
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 from 568
at January 31, 1996 to approximately 750, an increase of 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.
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> 8
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
<TABLE>
<S> <C>
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 . . . . 37,264,461 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".
Nasdaq symbol(3) . . . . . . . . . . . . . . . . . ZALE
</TABLE>
______________
(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 January 31, 1996 and exclusive of
outstanding warrants and stock options representing 3,933,318 shares of
Common Stock. See "Notes to Consolidated Financial Statements".
(3) The Company intends to apply for listing of its Common Stock on The New
York Stock Exchange and expects that such listing will be effective in
June 1996.
6
<PAGE> 9
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 six-month periods
ended January 31, 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 six-month periods ended January 31, 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.
7
<PAGE> 10
<TABLE>
<CAPTION>
PREDECESSOR(1)
SIX MONTHS ENDED FISCAL YEAR ENDED PRO FORMA YEAR
JANUARY 31, JULY 31, ENDED
----------------- ------------------ JULY 31,
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS EXCEPT PER SHARE DATA, RATIOS AND STORE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales . . . . . . . . . . . . $666,236 $632,666 $1,036,149 $ 920,307 $ 956,447
Cost of sales . . . . . . . . . . 336,180 316,106 524,010 460,060 533,080
-------- -------- ---------- ----------- ---------
Gross margin . . . . . . . . . . 330,056 316,560 512,139 460,247 423,367
Selling, general and
administrative
expenses . . . . . . . . . . . 243,371 243,273 434,101 401,744 402,116
Depreciation and amortization
expense (credit)(2) . . . . . . 2,655 (550) 381 (4,385) 26,459
Unusual items (3) . . . . . . . . (4,486) --- --- --- 163,890
-------- -------- ---------- ----------- ---------
Operating earnings (loss) . . . . 88,516 73,837 77,657 62,888 (169,098)
Interest expense, net . . . . . . 14,942 15,941 29,837 28,142 23,508
Fresh-start revaluation(2) . . . --- --- --- --- (246,236)
Income taxes(4) . . . . . . . . . 26,153 19,300 16,350 11,621 ---
-------- -------- ---------- ----------- ---------
Earnings (loss) before
extraordinary
Items and cumulative effect of
accounting change . . . . . . . $ 47,421 $ 38,596 $ 31,470 $ 23,125 $(438,842)
======== ======== ========== =========== =========
Earnings per common share before
extraordinary items(5) . . . . $ 1.31 $ 1.10 $ 0.88 $ 0.66
Weighted average number of common
shares outstanding(5) . . . . . 36,320 34,964 35,849 34,965
SELECTED RATIOS:
Gross margin as a % of sales . . 49.5% 50.0% 49.4% 50.0% 44.3%
Selling, general and
administrative
expenses as a % of sales . . . 36.5% 38.5% 41.9% 43.7% 42.0%
Operating earnings (loss)
excluding unusual items as
a % of sales(6) . . . . . . . . 12.6% 11.7% 7.5% 6.8% (0.5%)
SELECTED STORE DATA:
Stores open at end of period . . 1,213 1,209 1,181 1,231 1,265
Change in comparable stores sales 7.1% 14.2% 12.8% N/A N/A
Average sales per store:
Zales . . . . . . . . . . . . . $ 541,700 $ 502,600 $ 849,100 $ 716,700 $ 692,100
Gordon's . . . . . . . . . . . 453,500 435,000 711,500 624,900 580,000
Guild . . . . . . . . . . . . . 1,032,400 921,600 1,529,200 1,391,400 1,171,500
Diamond Park . . . . . . . . . 446,300 423,500 701,500 591,500 577,600
Consolidated . . . . . . . . . 551,700 513,700 855,700 738,300 703,000
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
JANUARY 31, 1996 JULY 31, 1995
---------------- -------------
ACTUAL AS ADJUSTED (7)
------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . . . . . $ 753,630 $ $ 781,802
Total assets . . . . . . . . . . . 1,199,039 1,110,708
Total debt . . . . . . . . . . . . 381,563 443,624
Total stockholders' investment . . 455,355 391,890
</TABLE>
________________________________________
(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 six months ended January 31, 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 January 31, 1996, Consolidated Financial Statements "Unusual Item
-- 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".
9
<PAGE> 12
(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 January 31, 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".
10
<PAGE> 13
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
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 third 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
11
<PAGE> 14
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.
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 1,213
stores in all 50 states, Puerto Rico and Guam at January 31, 1996 and has
opened or plans to open approximately 97 new stores and leased departments,
including 20 acquired Karten's stores, in fiscal 1996 and approximately 112 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.
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 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 March 31, 1994, the Company
purchased approximately 29% and 38%, 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
12
<PAGE> 15
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.
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 bank credit agreement.
USE OF PROCEEDS
At the public offering price of $ per share, the net proceeds to
the Company from the sale of the Common Stock offered hereby will be
approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and estimated offering expenses to be paid by the Company. The
13
<PAGE> 16
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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 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 the public offering price of $
per share and after deducting the estimated underwriting discount and other
offering expenses to be paid by the Company):
<TABLE>
<CAPTION>
January 31, 1996
---------------------------------------------
Actual As Adjusted
------ -----------
(in thousands)
<S> <C>
Short-Term Debt:
Revolving Credit Loans . . . . . . . . . $45,050
Current Portion of Long-Term Debt . . . 850
-------
Total Short-Term Debt . . . . . 45,900
Long-Term Debt:
Receivables Securitization Facility . . 380,614
Other . . . . . . . . . . . . . . . . . 99
--------
Total Long-Term Debt . . . . . . 380,713
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;
35,014,315 shares issued; 37,264,461
shares issued as adjusted . . . . . . 350
Additional Paid-in Capital (Includes
Stock Warrants) . . . . . . . . . . . 358,998
Unrealized Gains on Securities . . . . . 1,729
Accumulated Earnings . . . . . . . . . . 94,278
-------
Total Stockholders' Investments 455,355
-------
Total Capitalization . $881,968
========
</TABLE>
14
<PAGE> 17
PRICE RANGE OF COMMON STOCK
Since April 30, 1993, the high and low closing sales prices of the
Company's Common Stock, as reported by the National Association of Securities
Dealers, Inc.'s National Market ("Nasdaq"), have been as follows:
<TABLE>
<CAPTION>
By Fiscal Quarters High Low
------------------ ---- ---
<S> <C> <C>
1993
Fourth Quarter 10 1/2 8 1/4
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 ) --------- ---------
----
</TABLE>
The last sale price of the Common Stock on , 1996, as reported
by Nasdaq, was $ 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.
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 six month periods ended January
31, 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.
15
<PAGE> 18
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------
PRO FORMA (1)
-------------
YEAR FOUR MOS.
YEAR ENDED JULY 31, ENDED ENDED
------------------------- JULY 31, JULY 31,
1995 1994 1993 1993
----------- ---------- ---------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 1,036,149 $ 920,307 $ 956,447 $244,539
Cost of sales 524,010 460,060 533,080 127,484
----------- ---------- ---------- --------
Gross margin 512,139 460,247 423,367 117,055
Selling, general and
administrative expenses 434,101 401,744 402,116 119,786
Depreciation and amortization
expense (credit) 381 (4,385) 26,459 8,973
Unusual items - provision for
valuation of assets --- --- 20,200 ---
Reorganization and restructure costs --- --- 143,690 47,879
Net reduction of reserves for
preacquisition contingencies --- --- --- ---
Gain on sale of assets --- --- --- ---
----------- ---------- ---------- ---------
Operating earnings (loss) 77,657 62,888 (169,098) (59,583)
Interest expense, net 29,837 28,142 23,508 6,623
----------- ---------- ---------- ---------
Earnings (loss) before fresh-
start revaluation, income taxes,
extraordinary items and
cumulative effect of
accounting change 47,820 34,746 (192,606) (66,206)
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)
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)
=========== ========== ========== ==========
Net earnings (loss) $ 31,470 $ 21,557 $ 664,991 $ 791,391
=========== ========== ========== ==========
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
Total assets 1,110,708 1,112,647 1,013,523 1,013,523
Total debt 443,624 447,478 355,125 355,125
Total stockholders' investment
(deficit) 391,890 342,740 311,070 311,070
STORES OPEN AT END OF PERIOD: 1,181 1,231 1,265 1,265
<CAPTION>
PREDECESSOR
-------------------------------------------
YEAR ENDED MARCH 31,
-------------------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 980,832 $1,156,455 $1,335,269
Cost of sales 534,420 663,707 662,788
---------- ---------- ----------
Gross margin 446,412 492,748 672,481
Selling, general and
administrative expenses 418,133 575,592 562,167
Depreciation and amortization
expense (credit) 26,316 50,899 56,024
Unusual items - provision for
valuation of assets 20,200 574,336 ---
Reorganization and restructure costs 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) (156,174) (875,505) 67,431
Interest expense, net 24,829 84,885 126,008
---------- ---------- ----------
Earnings (loss) before fresh-
start revaluation, income taxes,
extraordinary items and
cumulative effect of
accounting change (181,003) (960,390) (58,577)
Fresh-start revaluation --- --- ---
---------- ---------- ----------
Earnings (loss) before income
taxes, extraordinary items and
cumulative effect of accounting
change (181,003) (960,390) (58,577)
Income taxes --- --- ---
---------- ---------- ----------
Earnings (loss) before
extraordinary items and
cumulative effect of
accounting change $ (181,003) $ (960,390) $ (58,577)
========== ========== ==========
Net earnings (loss) $ (181,003) $ (960,390) $ (54,125)
========== ========== ==========
Earnings per common share (2):
Primary:
Earnings before
extraordinary item
Net earnings
Assuming full dilution:
Earnings before
extraordinary item
Net earnings
Weighted average number of
common
shares outstanding (2):
Primary
Assuming full dilution
BALANCE SHEET DATA:
Working capital $ 961,671 $ 809,417 $ 487,439
Total assets 1,252,448 1,088,060 1,789,178
Total debt 284,554 --- 957,192
Total stockholders' investment (791,391) (610,388) 350,002
(deficit)
STORES OPEN AT END OF PERIOD: 1,265 1,521 1,938
</TABLE>
(1) Amounts 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.
16
<PAGE> 19
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------
1996 1995
------------ -----------
(UNAUDITED)
INCOME STATEMENT DATA: (IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales $ 666,236 $ 632,666
Cost of sales 336,180 316,106
----------- ---------
Gross margin 330,056 316,560
Selling, general and administrative expenses 243,371 243,273
Depreciation and amortization expense (credit) 2,655 (550)
Unusual items - reorganization recoveries 4,486 --
----------- ---------
Operating earnings 88,516 73,837
Interest expense, net 14,942 15,941
----------- ---------
Earnings before income taxes and
extraordinary item 73,574 57,896
Income taxes 26,153 19,300
----------- ---------
Earnings before extraordinary item $ 47,421 $ 38,596
=========== =========
Net earnings $ 46,325 $ 38,596
=========== =========
Earnings per common share:
Primary:
Earnings before extraordinary item $1.31 $1.10
Net earnings $1.28 $1.10
Assuming full dilution:
Earnings before extraordinary item $1.31 $1.10
Net earnings $1.28 $1.10
Weighted average number of common shares outstanding:
Primary 36,320 34,964
Assuming full dilution 36,308 34,964
BALANCE SHEET DATA:
Working capital $753,630 $796,459
Total assets 1,199,039 1,161,405
Total debt 381,563 445,887
Total stockholders' investment 455,355 400,087
STORES OPEN AT END OF PERIOD: 1,213 1,209
</TABLE>
17
<PAGE> 20
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.
18
<PAGE> 21
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
-----------------------
Pro Forma
Six Months Ended Year Ended Year Ended Year Ended
January 31, July 31, 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 50.5 50.0 50.6 50.0 55.7 54.5
------- ------- ------- ------- ------- -------
Gross margin 49.5 50.0 49.4 50.0 44.3 45.5
Selling, general and administrative
expenses 36.5 38.5 41.9 43.7 42.0 42.6
Depreciation and amortization
expense (credit) 0.4 (0.2) -- (0.5) 2.8 2.7
Unusual items and reorganization costs (0.7) -- -- -- 17.1 16.1
------- ------- ------- ------- ------- -------
Operating earnings (loss) 13.3 11.7 7.5 6.8 (17.6) (15.9)
Interest expense, net 2.2 2.5 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 11.1 9.2 4.6 3.8 (45.9) (18.4)
Income taxes 3.9 3.1 1.6 1.3 -- --
------- ------- ------- ------- ------- -------
Earnings (loss) before extraordinary
items and cumulative effect of
accounting change 7.2 6.1 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) 7.0% 6.1% 3.0% 2.3% 69.5% (18.4)%
======= ======= ======= ======= ======= =======
</TABLE>
SIX MONTHS ENDED JANUARY 31, 1996 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1995
NET SALES. Net Sales for the six months ended January 31, 1996 increased
by $33.6 million to $666.2 million, a 5.3% increase compared to the previous
year. Sales for stores open for comparable periods increased by 7.1%. The
sales increase primarily resulted from continued improvement in key merchandise
assortments, focused marketing and store execution.
GROSS MARGIN. Gross Margin as a percentage of sales decreased by 0.5%
from primarily higher markdowns for clearance of discontinued merchandise
during the current year. The current year net LIFO provision was $1.0 million
or 0.2% of sales higher than last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 2.0% as a percentage of sales. Store
expenses decreased by 1.3% of sales as store occupancy costs and promotional
expenditures increased at a lower rate than sales. Store payroll expense
decreased as a percentage of sales. Corporate expenses decreased by 1.4% of
sales principally as a result of lower costs for employee benefits, outside
services and insurance. These improvements were offset by an increased
provision for chargeoffs of customer accounts.
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EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION EXPENSE
(CREDIT), EXTRAORDINARY ITEM AND UNUSUAL ITEMS. Earnings Before Interest,
Taxes, Depreciation and Amortization Expense (Credit), Extraordinary Item and
Unusual Items were $86.7 million and $73.3 million for the six months ended
January 31, 1996 and 1995, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $3.2 million. Amortization of the Excess of Revalued Net
Assets Over Stockholders' Investment was 3.0 million in both periods. However,
depreciation and amortization of property and equipment increased from $2.4
million to $5.6 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 six month period ended
January 31, 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 $14.9 million and $15.9
million for the six months ended January 31, 1996 and 1995, respectively. The
decrease in interest expense for the six months ended January 31, 1996 was
principally due to the early redemption of the $60.0 million 11.0% Second
Priority Senior Secured Notes on September 11, 1995 partially offset by an
increase in interest expense due to borrowings under the Revolving Credit
Agreement (as defined herein).
INCOME TAXES. The income tax expense for the six month periods ended
January 31, 1996 and 1995 was $26.2 million and $19.3 million, respectively,
reflecting an effective tax rate of 35.5% and 33.3%, 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 in the near
future. The Company will realize the cash benefit from utilization of its tax
NOL against current and future tax liabilities. As of January 31, 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 item of $1.1 million, net of an
income tax benefit of $0.6 million, for the six month period ended January 31,
1996 was the result of the early redemption of the $60.0 million 11.0% 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 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.
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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.
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.
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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".
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 January 31, 1996, the Company had cash
and cash equivalents of $41.4 million, including $24.6 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% and 40.1% 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.
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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 ($215.1 million at January 31, 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% 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% 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 item of $1.1 million, net of an income tax benefit
of $0.6 million, was recorded in 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."
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 six
months ended January 31, 1996, the Company made approximately $28.0 million
capital expenditures, principally to enhance the appearance of 68 stores and
to open 24 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.
Over the last year the Company has shifted its merchandise mix to reduce
the amount of consigned merchandise and increase its investment in owned
merchandise. Although there has been an increase of approximately $51 million
in owned merchandise inventories at January 31, 1996 compared to the balance at
January 31, 1995, the Company has comparable levels of merchandise in the
stores due to a reduction of approximately $46 million 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 $45.1 million under the Revolving
Credit Agreement at January 31, 1996, compared to no such borrowings at July
31, 1995. The Company intends to use a portion of the proceeds from this
offering to repay the amount outstanding ($18.0 million at April 30, 1996)
under the Revolving Credit Agreement in order to maintain greater flexibility
in financing its existing store operations and expansion program.
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 January 31, 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 the Company's proceeds from the offering,
operating cash flow, amounts available under the Revolving Credit Agreement and
amounts available under the Receivables Securitization Facility should be
sufficient to fund the Company's current operations, debt service and currently
anticipated capital expenditure requirements.
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INFLATION
In management's opinion, changes in Net Sales and Earnings Before Income
Taxes and Extraordinary Item 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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<PAGE> 27
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 retail sales of $1.04 billion for the fiscal year ended July 31, 1995 and
1,213 locations at January 31, 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 568 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 119 upscale jewelry stores under the Bailey, Banks
& Biddle(R) and other locally established names. The Diamond Park Division
manages 186 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
critical 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 International Holding A.G. 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.
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.
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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 $551,700 for the six months ended January 31, 1996 from $513,700
for the six months ended January 31, 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 7.1% for the six months ended January 31, 1996 as
compared to the six months ended January 31, 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 36.5% for the six months ended
January 31, 1996 from 38.5% for the six months ended January 31, 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 12.6% for the
six months ended January 31, 1996 from 11.7% for the comparable prior-year
period. (The six-month periods ended January 31 include the Christmas selling
season. See "Risk Factors -Variability of Quarterly Results and Seasonality".)
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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 from 568 at
January 31, 1996 to approximately 750, an increase of 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.
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.
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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 January
31, 1996, the Zales Division had 568 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 42% 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 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
store revenues 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 number of stores and average sales per store for the Zales Division for the
periods indicated.
<TABLE>
<CAPTION>
Six Months
Ended January 31, Year Ended July 31,
----------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands) $300,617 $257,322 $428,794 $374,849 $370,981
Average sales per store 541,700 502,600 849,100 716,700 692,100
Stores opened during period 74 (1) 2 8 2 10
Stores closed during period 5 16 30 4 43
Total stores at end of period 568 507 499 521 523
</TABLE>
- -----------------
(1) Includes 35 stores transferred from the Gordon's Division effective
August 1, 1995 and 20 Karten's stores acquired in January 1996.
28
<PAGE> 31
GORDON'S DIVISION
The Company is repositioning Gordon's as a major regional brand focusing
on twelve regional markets. At January 31, 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 26% 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 the 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 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.
29
<PAGE> 32
The following table sets forth total sales, the number of stores and
average sales per store for the Gordon's Division for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Ended January 31, Year Ended July 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands) $151,937 $160,951 $262,540 $234,974 $221,549
Average sales per store 453,500 435,000 711,500 624,900 580,000
Stores opened during period 9 3 5 4 5
Stores closed during period 40(1) 11 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.
GUILD DIVISION
The Guild Division offers higher-end merchandise, more exclusive designs
and a prestigious shopping environment for the upscale customer. At January
31, 1996 the Guild Division operated 119 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 19% of
the Company's sales in fiscal 1995. The following table sets forth the Guild
Division's trade names and the number of stores operating under each of those
names.
<TABLE>
<CAPTION>
Trade Names Number of Stores Trade Names Number of Stores
----------- --------------- ----------- ----------------
<S> <C> <C> <C>
Bailey, Banks & Biddle(R) . 83 Dobbins(R) . . . . 2
Corrigan's(R) . . . . . . . 20 J. Herbert Hall(R) . 2
Sweeney's(R) . . . . . . . 5 Linz(R) . . . . . . 2
Stifft's(R) . . . . . . . . 3 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 the largest percentage of watches of any of the Company's Divisions
(comprising approximately 19% of its sales), 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 number of stores, and average sales per store for the Guild Division
for the periods indicated.
30
<PAGE> 33
<TABLE>
<CAPTION>
Six Months
Ended January 31, Year Ended July 31,
----------------------- ----------------------------------------
1996 1995 1995 1994 1993
---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands) $ 124,920 $120,733 $ 197,267 $ 182,278 $ 213,219
Average sales per store 1,032,400 921,600 1,529,200 1,391,400 1,171,500
Stores opened during period 0 4 4 4 4
Stores closed during period 4 5 11 7 103
Total stores at end of period 119 129 123 130 133
</TABLE>
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 January 31, 1996, the Diamond
Park Division operated 186 leased locations in department stores including
Dillard's(R) (64 locations), Mercantile(R) (59 locations), The Broadway(R) (41
locations) and Marshall Field's(R) (22 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 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 13% of the Company's sales in fiscal 1995.
The following table sets forth total sales, the number of departments and
average sales per department for the Diamond Park Division for the periods
indicated.
<TABLE>
<CAPTION>
Six Months
Ended January 31, Year Ended July 31,
--------------------- -----------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands) $ 83,457 $ 87,667 $138,187 $127,761 $149,595
Average sales per department 446,300 423,500 701,500 591,500 577,600
Departments opened during 1 14 18 19 1
period
Departments closed during 3 17 35 46 94
period
Total departments at end of 186 202 188 205 232
period
</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 $71.5 million and $117.1 million of
consignment inventory on hand at January 31, 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
31
<PAGE> 34
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 and March 31, 1994, the
Company purchased approximately 29% and 38%, 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.
32
<PAGE> 35
The following table presents certain data concerning sales, credit sales
and accounts receivable for the past two fiscal years and for the six months
ended January 31, 1996 and 1995 (1):
<TABLE>
<CAPTION>
AS AT OR FOR THE AS AT OR FOR THE FISCAL
SIX MONTHS ENDED JANUARY 31, YEAR ENDED JULY 31,
---------------------------- -----------------------
1996 1995 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales (thousands) $ 577,240 $ 539,006 $ 888,601 $ 792,101
Net credit sales (thousands) 283,663 274,910 458,664 413,305
Accounts receivable (thousands) 497,536 493,566 436,336 437,936
Credit sales as a percentage of net sales 49.1% 51.0% 51.6% 52.2%
Average number of active customer accounts 657 679 690 729
(thousands)
Average balance per customer account $686 $674 $668 $645
Average monthly collection percentage 9.0% 8.9% 9.1% 8.8%
Bad debt expense as a percentage of credit 9.8% 8.2% 9.1% 8.7%
sales
Bad debt expense as a percentage of net 4.8% 4.2% 4.7% 4.6%
sales
</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 six months ended January 31, 1996
compared to the six months ended January 31, 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.
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.
33
<PAGE> 36
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, of
whom 26 are 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.
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 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 stores' leases expiring in 1996
that it wishes to renew 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.
34
<PAGE> 37
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.
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 . . 58 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.
35
<PAGE> 38
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 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 thirteen 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
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 twenty 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 has seventeen 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.
36
<PAGE> 39
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 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.
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.
37
<PAGE> 40
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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and the Selling Shareholder have each 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 the
Representatives, (provided, however, the Company may issue and sell shares
issuable pursuant to any
38
<PAGE> 41
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).
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 Nasdaq and the aforementioned
material can also be inspected at 1735 K Street, N.W., Washington, D.C.
20006-1506. The Company intends to list its Common Stock on The New York Stock
Exchange and in the event of such listing the aforementioned material can also
be inspected at its offices 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.
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:
39
<PAGE> 42
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 and January 31, 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.
40
<PAGE> 43
INDEX TO 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-8
Notes to Consolidated Financial Statements F-9
Interim Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the Three and
Six Months Ended January 31, 1996 and 1995 (Unaudited) F-22
Consolidated Balance Sheets as of January 31, 1996
(Unaudited) and July 31, 1995 (Audited) F-23
Consolidated Statements of Cash Flows for the Six
Months Ended January 31, 1996 and 1995 (Unaudited) F-24
Notes to Consolidated Financial Statements (Unaudited) F-26
</TABLE>
F-1
<PAGE> 44
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> 45
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> 46
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> 47
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
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> 48
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 reorgani-
zation 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)
-------- -------- ----------- ---------
</TABLE>
See Notes to the Consolidated Financial Statements.
F-6
<PAGE> 49
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(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 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-7
<PAGE> 50
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-8
<PAGE> 51
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
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.
F-9
<PAGE> 52
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 includes cash on hand, deposits in banks and
short-term marketable securities at varying interest rates with maturities of
three months or less. The carrying amount approximates fair value because of
the short maturity of those instruments. At July 31, 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 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.
F-10
<PAGE> 53
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1995 July 31, 1994
------------- -------------
(amounts in thousands)
<S> <C> <C>
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.
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES
The Company's accounts payable and accrued liabilities consists of the
following:
<TABLE>
<CAPTION>
July 31, 1995 July 31, 1994
------------- -------------
(amounts in thousands)
<S> <C> <C>
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.
F-11
<PAGE> 54
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES (CONTINUED)
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>
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.
F-12
<PAGE> 55
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CREDIT ARRANGEMENTS (CONTINUED)
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.
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, 1995 July 31, 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.
F-13
<PAGE> 56
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT (CONTINUED)
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.
The ZFT Receivables Notes bear interest at the following rates, payable
monthly in arrears (amounts in thousands):
<TABLE>
<CAPTION>
Principal Rate
--------- ----
<S> <C>
$ 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 $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.
F-14
<PAGE> 57
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-15
<PAGE> 58
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONTINUED)
Currently, the Company files a consolidated income tax return.
The effective income tax rate varies from the federal statutory rate as follows:
<TABLE>
<CAPTION>
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>
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 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
F-16
<PAGE> 59
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONTINUED)
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.
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>
F-17
<PAGE> 60
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-18
<PAGE> 61
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-19
<PAGE> 62
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-20
<PAGE> 63
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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-21
<PAGE> 64
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------- --------------------------
1996 1995 1996 1995
------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Net Sales $451,962 $427,194 $666,236 $632,666
Cost of Sales 226,010 212,519 336,180 316,106
-------- -------- -------- --------
Gross Margin 225,952 214,675 330,056 316,560
Selling, General and
Administrative Expenses 144,602 144,020 243,371 243,273
Depreciation and Amortization
Expense (Credit) 1,580 (46) 2,655 (550)
Unusual Items - Reorganization Recoveries --- --- 4,486 ---
-------- -------- -------- --------
Operating Earnings 79,770 70,701 88,516 73,837
Interest Expense, Net 8,036 8,130 14,942 15,941
-------- -------- -------- --------
Earnings Before Income Tax Expense
and Extraordinary Item 71,734 62,571 73,574 57,896
Income Tax Expense 25,500 20,800 26,153 19,300
-------- -------- -------- --------
Earnings Before Extraordinary Item 46,234 41,771 47,421 38,596
Extraordinary Item:
Loss on Early Extinguishment of Debt,
Net of Income Tax Benefit of $(603) --- --- (1,096) ---
-------- -------- -------- --------
Net Earnings $ 46,234 $ 41,771 $ 46,325 $ 38,596
======== ======== ======== ========
Earnings Per Common Share:
Primary:
Earnings Before Extraordinary Item $ 1.27 $ 1.19 $ 1.31 $ 1.10
Extraordinary Item --- --- (0.03) ----
-------- --------- -------- --------
Net Earnings $ 1.27 $ 1.19 $ 1.28 $ 1.10
======== ========= ======== ========
Assuming Full Dilution:
Earnings Before Extraordinary Item $ 1.27 $ 1.19 $ 1.31 $ 1.10
Extraordinary Item --- --- (0.03) ---
-------- ---------- -------- --------
Net Earnings $ 1.27 $ 1.19 $ 1.28 $ 1.10
======== ========== ======== ========
Weighted Average Number of Common
Shares Outstanding:
Primary 36,336 34,964 36,320 34,964
Assuming Full Dilution 36,314 34,964 36,308 34,964
</TABLE>
See Notes to the Consolidated Financial Statements.
F-22
<PAGE> 65
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 41,373 $ 154,905
Customer Receivables, Net 452,855 396,380
Merchandise Inventories 482,974 375,413
Other Current Assets 30,989 23,859
----------- -----------
Total Current Assets 1,008,191 950,557
Property and Equipment, Net 95,054 71,487
Other Assets 46,994 39,864
Deferred Tax Asset, Net 48,800 48,800
----------- -----------
Total Assets $ 1,199,039 $ 1,110,708
=========== ===========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 850 $ 2,907
Notes Payable 45,050 ---
Accounts Payable and Accrued Liabilities 159,861 117,048
Deferred Tax Liability, Net 48,800 48,800
----------- -----------
Total Current Liabilities 254,561 168,755
Non-current Liabilities 34,683 32,670
Long-term Debt 380,713 440,717
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 73,727 76,676
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- ---
Common Stock 350 350
Additional Paid-In Capital (Includes
Stock Warrants) 358,998 337,534
Unrealized Gains on Securities 1,729 979
Accumulated Earnings 94,278 53,027
----------- -----------
Total Stockholders' Investment 455,355 391,890
----------- -----------
Total Liabilities and Stockholders' Investment $ 1,199,039 $ 1,110,708
=========== ===========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-23
<PAGE> 66
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
1996 1995
----------- -----------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 46,325 $ 38,596
Non cash expenses, gains and losses:
Depreciation and amortization expense 3,333 12
Utilization of pre-emergence net operating loss 25,380 19,324
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 (55,301) (53,933)
Merchandise inventories (99,851) (30,749)
Other current assets (6,707) (2,700)
Other assets (327) (1,162)
Increase (decrease) in:
Accounts payable and accrued liabilities 32,083 (4,176)
Non-current liabilities 2,013 (26)
---------- ---------
Net Cash Used in Operating Activities (51,353) (34,814)
---------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (27,968) (22,737)
Dispositions of property and equipment 481 1,155
Acquisition, net of cash acquired (2,547) ---
Other (110) 27
---------- ---------
Net Cash Used in Investing Activities (30,144) (21,555)
---------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (65,778) (1,612)
Net borrowings under revolving credit agreement 45,050 ---
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 274 ---
---------- ---------
Net Cash Used in Financing Activities (32,035) (1,612)
---------- ---------
Net Decrease in Cash and Cash Equivalents (113,532) (57,981)
---------- ---------
Cash and Cash Equivalents at Beginning of Period 154,905 153,700
---------- ---------
Cash and Cash Equivalents at End of Period $ 41,373 $ 95,719
========== =========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-24
<PAGE> 67
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
1996 1995
----------- -----------
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 19,679 $ 18,257
Interest received $ 2,419 $ 2,947
Income taxes paid (net of refunds received) $ 594 $ 258
Restricted cash - at period end date $ 24,582 $ 19,803
</TABLE>
See Notes to the Consolidated Financial Statements.
F-25
<PAGE> 68
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. Founded in 1924, the Company has 1,209 locations throughout
the U.S., Guam and Puerto Rico. The Company maintains its leadership in
jewelry sales through four distinct divisions consisting of the Zales Division,
with 548 stores, the Gordon's Division, with 336 stores, the Fine Jewelers
Guild Division, with 119 stores and Diamond Park Fine Jewelers, with 186 leased
fine jewelry departments. 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 increases 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 six months ended January 31, 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 the opinion of the Company, 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 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 January 31, 1996 have been applied to the financial
statements for July 31, 1995 and January 31, 1995.
The results of operations for the three and six month periods ended
January 31, 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 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 Company pays 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. At January 31, 1996, there were $45.1 million in loans
outstanding under the Revolving Credit Agreement. There were approximately
$0.5 million in letters of credit outstanding at January 31, 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.
F-26
<PAGE> 69
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
WORKING CAPITAL FINANCING (CONTINUED)
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 item of $1.1 million,
net of an income tax benefit of $0.6 million, being recorded in 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
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 on the January 31, 1996
Consolidated Statements of Operations and had an after-tax impact of $0.08 per
share.
F-27
<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
Page
----
Prospectus Summary . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . 11
Use of Proceeds . . . . . . . . . . . . . . . . . . 13
Capitalization . . . . . . . . . . . . . . . . . . 14
Price Range of Common Stock . . . . . . . . . . . . 15
Dividend Policy . . . . . . . . . . . . . . . . . . 15
Selected Consolidated Financial Information . . . . 15
Zale Corporation . . . . . . . . . . . . . . . . . 16
Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Business . . . . . . . . . . . . . . . . . . . . . 25
Management . . . . . . . . . . . . . . . . . . . . 35
Selling Shareholder . . . . . . . . . . . . . . . . 38
Underwriting . . . . . . . . . . . . . . . . . . . 38
Legal Matters . . . . . . . . . . . . . . . . . . . 39
Experts . . . . . . . . . . . . . . . . . . . . . . 39
Available Information . . . . . . . . . . . . . . . 39
Information Incorporated by Reference . . . . . . . 39
Index to Consolidated Financial Statements . . . . F-1
7,126,000 SHARES
ZALE CORPORATION
COMMON STOCK
($.01 PAR VALUE)
[LOGO]
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>
Filing fee of Securities and Exchange Commission
relating to registration statement . . . . . . . . . . . . . . . . . . . $ 53,561
Charges of transfer agent and registrar . . . . . . . . . . . . . . . . .
---------
Printing and preparation of registration statement,
prospectus, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------
Fee of counsel for Zale Corporation, Troutman Sanders . . . . . . . . . .
---------
Fee of accountants, Arthur Andersen LLP. . . . . . . . . . . . . . . . . .
---------
Miscellaneous, including telephone charges
and traveling expenses . . . . . . . . . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
=========
</TABLE>
II-1
<PAGE> 72
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.
The 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.
Exhibit
Number Description
------- -----------
1 Form of Underwriting Agreement.*
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.
*To be filed by Amendment.
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.
II-3
<PAGE> 74
(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
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on the 3rd day of
June, 1996.
ZALE CORPORATION
By: /s/ ROBERT J. DINICOLA
-------------------------------
Robert J. DiNicola
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Robert J. DiNicola, Merrill J.
Wertheimer, Thomas E. Whiddon and Alan P. Shor and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this registration statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and to perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or would do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT J. DINICOLA Chairman of the Board, President June 3, 1996
- ------------------------------------- and Chief Executive Officer
Robert J. DiNicola (principal executive officer of the
registrant)
/s/ MERRILL J. WERTHEIMER Executive Vice President Finance June 3, 1996
- ------------------------------------- and Administration
Merrill J. Wertheimer
/s/ THOMAS E. WHIDDON Senior Vice President and Chief June 3, 1996
- ------------------------------------- Financial Officer (principal
Thomas E. Whiddon financial officer of the registrant)
/s/ MARK R. LENZ Vice President and Controller June 3, 1996
- ------------------------------------- (principal accounting officer of
Mark R. Lenz the registrant)
/s/ GLEN ADAMS Director June 3, 1996
- -------------------------------------
Glen Adams
/s/ PETER P. COPSES Director June 3, 1996
- -------------------------------------
Peter P. Copses
/s/ FRANK E. GRZELECKI Director June 3, 1996
- -------------------------------------
Frank E. Grzelecki
/s/ RICHARD C. MARCUS Director June 3, 1996
- -------------------------------------
Richard C. Marcus
/s/ ANDREW H. TISCH Director June 3, 1996
- -------------------------------------
Andrew H. Tisch
</TABLE>
II-5
<PAGE> 76
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
1 Form of Underwriting Agreement.*
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.
*To be filed by Amendment.
<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 3, 1996
