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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________to_______________________
Commission file number 0-21526
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-0675400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 West Walnut Hill Lane, Irving, Texas 75038-1003
(Address of principal executive offices) (Zip Code)
(214) 580-4000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]. No [ ].
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X]. No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 29, 1996, 35,030,676 shares of the registrant's common stock
were outstanding.
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<PAGE> 2
ZALE CORPORATION AND SUBSIDIARIES
Index
<TABLE>
<S> <C>
Part 1. Financial Information: Page
----
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information: 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
</TABLE>
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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.
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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.
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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.
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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.
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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.
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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.
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ZALE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements of the Company (and the related
notes thereto) included in this report.
RESULT OF OPERATIONS
The following table sets forth operating results as a percentage of
sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------- --------------------
1996 1995 1996 1995
------- ------- ------ -------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 50.0 49.7 50.5 50.0
------- ------- ------ ------
Gross Margin 50.0 50.3 49.5 50.0
Selling, General and
Administrative Expenses 32.0 33.7 36.5 38.5
Depreciation and Amortization
Expense (Credit) 0.4 --- 0.4 (0.2)
Unusual Items - Reorganization
Recoveries --- --- 0.7 ---
------- ------- ------ ------
Operating Earnings 17.6 16.6 13.3 11.7
Interest Expense, Net 1.8 1.9 2.2 2.5
------- ------- ------ ------
Earnings Before Income Tax
Expense and Extraordinary Item 15.8 14.7 11.1 9.2
Income Tax Expense 5.6 4.9 3.9 3.1
------- ------- ------ ------
Earnings Before Extraordinary Item 10.2 9.8 7.2 6.1
Extraordinary Item:
Loss on Early Extinguishment of
Debt, Net of Income Tax Benefit --- --- (0.2) ---
------- ------- ------ ------
Net Earnings 10.2% 9.8% 7.0% 6.1%
======= ======= ====== ======
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1996 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1995
NET SALES. Net Sales for the three months ended January 31, 1996
increased by $24.8 million to $452.0 million, a 5.8 percent increase compared
to the previous year. Sales for stores open for comparable periods increased
by 7.4 percent. The sales increase primarily resulted from continued
improvement on key merchandise assortments, focused marketing and store
execution.
GROSS Margin. Gross Margin as a percentage of sales decreased by 0.3
percent from higher markdowns for clearance of discontinued merchandise during
the current quarter. The current quarter net LIFO provision was $0.8 million
or 0.2 percent of sales higher than last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.7 percent as a percentage of sales. Store
expenses decreased by 1.1 percent of sales as store occupancy costs increased
at a lower rate than sales. Store payroll expense decreased as both a
percentage of sales and in total dollars. Corporate expenses decreased by 1.2
percent of sales principally as a result of lower costs for employee benefits,
outside services and insurance. These improvements were offset by a slight
increase in promotional expenditures and a slight increased provision for
chargeoffs of customer accounts.
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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 $81.4 million and $70.7 million for the
three months ended January 31, 1996 and 1995, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $1.6 million. Amortization of the Excess of Revalued Net
Assets Over Stockholders' Investment was $1.5 million in both periods.
However, depreciation and amortization of property and equipment increased from
$1.4 million to $3.0 million as new assets have been purchased since the fresh
start reporting writeoff of substantially all fixed assets of the Company at
July 31, 1993.
INTEREST EXPENSE, NET. Interest Expense, Net was $8.0 million and
$8.1 million for the three months ended January 31, 1996 and 1995,
respectively. The decrease in interest expense for the three months ended
January 31, 1996 was principally due to the early redemption of the $60.0
million 11.0 Percent Second Priority Senior Secured Notes on September 11, 1995
partially offset by an increase in interest expense due to borrowings under the
Revolving Credit Agreement.
INCOME TAXES. The income tax expense for the three month periods
ended January 31, 1996 and 1995 was $25.5 million and $20.8 million,
respectively, reflecting an effective tax rate of 35.5 percent and 33.2
percent, respectively. As a result of guidelines regarding accounting for
income taxes of companies utilizing Fresh-Start reporting, the Company reports
earnings on a fully-taxed basis even though it does not expect to pay any
significant income taxes for the near future. The Company will realize the
cash benefit from utilization of the tax net operating loss ("NOL") against
current and future tax liabilities. As of January 31, 1996, the Company has a
NOL carryforward (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.
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 percent increase compared
to the previous year. Sales for stores open for comparable periods increased
by 7.1 percent. The sales increase primarily resulted from continued
improvement on key merchandise assortments, focused marketing and store
execution.
GROSS MARGIN. Gross Margin as a percentage of sales decreased by 0.5
percent from higher markdowns for clearance of discontinued merchandise during
the current year. The current year net LIFO provision was $1.0 million or 0.2
percent of sales higher than last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 2.0 percent as a percentage of sales. Store
expenses decreased by 1.3 percent 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 percent 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.
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.
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<PAGE> 11
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 Percent
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.
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 percent and 33.3 percent,
respectively. As a result of guidelines regarding accounting for income taxes
of companies utilizing FreshStart reporting, the Company reports earnings on a
fully-taxed basis even though it does not expect to pay any significant income
taxes for the near future. The Company will realize the cash benefit from
utilization of the tax net operating loss ("NOL") against current and future
tax liabilities. As of January 31, 1996, the Company has a NOL carryforward
(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 percent
Second Priority Senior Secured Notes. See the note to the Consolidated
Financial Statements "WORKING CAPITAL FINANCING."
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. The retail jewelry business is highly
seasonal, with a significant proportion of sales and operating income being
generated in November and December of each year. Approximately 41.2 percent
and 40.1 percent of the Company's annual sales were made during the three
months ended January 31, 1995 and 1994, respectively, which includes the
Christmas selling season. The Company's working capital requirements fluctuate
during the year, increasing substantially during the fall season as a result of
higher planned seasonal inventory levels.
Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust
and wholly-owned by Zale Delaware, Inc. ("ZDel"), a wholly-owned subsidiary of
Zale, formed to finance customer accounts receivable, issued in July 1994
approximately $380.6 million, net of discount, aggregate principal amount of
Receivables Backed Notes ("ZFT Receivables Notes") pursuant to an accounts
receivable securitization facility (the "ZFT Securitization"). The ZFT
Receivables Notes are secured by a lien on all customer accounts receivable and
mature in July 1999.
On August 11, 1995, Zale Corporation ("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 ($215.1 million at January 31,
1996,
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<PAGE> 12
based on a fixed percentage of eligible inventory, as defined). As of January
31, 1996, the maximum amount the Company could borrow was the lesser of the
borrowing base and total commitment which was $150.0 million.
The Revolving Credit Agreement was structured to increase the
Company's flexibility through less restrictive loan covenants, minimized
collateral requirements and a lower fee and interest rate structure. The
increased flexibility allowed in the new Revolving Credit Agreement combined
with the increased liquidity from the ZFT Securitization 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.
The Company had approximately $60.0 million of Second Priority Senior
Secured Notes due 2000 bearing interest at 11.0 percent per annum that were
issued upon exit 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 two years. The Company anticipates spending approximately $50.0
million on capital expenditures in fiscal 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
the opening of 24 new stores. On January 18, 1996, the Company acquired
Karten's Jewelers, Inc., 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 Company intends to add
250 new locations through new store openings or strategic acquisitions from
fiscal year 1996 through fiscal year 1998.
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 merchandise mix, the Company had outstanding
borrowings of $45.1 million under the Revolving Credit Agreement at January 31,
1996.
Future liquidity will also be enhanced because the Company will
realize the cash benefit from utilization of NOL's 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
carryforward (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 carryforward will begin to expire
in fiscal year 2002 but can be utilized through 2009.
Management believes that operating cash flow, amounts available under
the Revolving Credit Agreement and amounts available under the ZFT
Securitization should be sufficient to fund the Company's operating, debt
service and capital expenditure requirements for the foreseeable future.
INFLATION
In management's opinion, changes in net sales and earnings (loss)
before income taxes and extraordinary item that have resulted from inflation
and changing prices have not been material.
-12-
<PAGE> 13
Part II. - Other Information:
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits -
11 Statement re computation of per share earnings.
27 Financial data schedule.
(b) Form 8-K-
None.
-13-
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zale Corporation
-------------------------------------------
(Registrant)
Date March 15, 1996 /s/ MARK R. LENZ
----------------- ---------------------------------------------
Mark R. Lenz
Vice-President and Controller
(Duly authorized to sign on
behalf of the registrant and
principal accounting officer
of the registrant)
-14-
<PAGE> 15
INDEX TO EXHIBITS
Exhibit Number
11 Statement re computation of per share earnings.
27 Financial data schedule.
<PAGE> 1
EXHIBIT 11
ZALE CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
(unaudited)
(amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------- -----------------------
1996 1995 (1) 1996 1995 (1)
---------- --------- ---------- --------
<S> <C> <C> <C>
Primary:
Net earnings applicable to common stock $ 46,234 $ 41,771 $ 46,325 $ 38,596
========== ========= ========== ========
Shares
Weighted average number of common shares
outstanding 34,996 34,964 34,991 34,964
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 683 400 636 364
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 657 511 693 404
---------- --------- --------- --------
Weighted average number of common shares
outstanding as adjusted 36,336 35,875 36,320 35,732
========== ========= ========= ========
Net earnings per common share $ 1.27 $ 1.16 $ 1.28 $ 1.08
========== ========= ========= ========
Fully Diluted:
Net earnings applicable to common stock $ 46,234 $ 41,771 $ 46,325 $ 38,596
========== ========= ========= ========
Shares
Weighted average number of common shares
outstanding 34,996 34,964 34,991 34,964
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 661 399 621 365
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 657 511 696 404
---------- --------- --------- --------
Weighted average number of common shares
outstanding as adjusted 36,314 35,874 36,308 35,733
========== ======== ========= ========
Net earnings per common share $ 1.27 $ 1.16 $ 1.28 $ 1.08
========== ======== ========= ========
</TABLE>
(1): This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the January
31, 1996 consolidated financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 41,373
<SECURITIES> 0
<RECEIVABLES> 452,855<F1>
<ALLOWANCES> 0
<INVENTORY> 482,974
<CURRENT-ASSETS> 1,008,191
<PP&E> 95,054<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,199,039
<CURRENT-LIABILITIES> 254,561
<BONDS> 380,713
<COMMON> 350
0
0
<OTHER-SE> 455,005
<TOTAL-LIABILITY-AND-EQUITY> 1,199,039
<SALES> 666,236
<TOTAL-REVENUES> 666,236
<CGS> 336,180
<TOTAL-COSTS> 336,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,942
<INCOME-PRETAX> 73,574
<INCOME-TAX> 26,153
<INCOME-CONTINUING> 47,421
<DISCONTINUED> 0
<EXTRAORDINARY> (1,096)
<CHANGES> 0
<NET-INCOME> 46,325
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<FN>
<F1>
This asset value represents a net amount.
</FN>
</TABLE>
