<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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 May 31, 1996, 35,189,933 shares of the registrant's common stock were
outstanding.
================================================================================
<PAGE> 2
ZALE CORPORATION AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Part 1. Financial Information: Page
----
<S> <C>
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>
-2-
<PAGE> 3
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------ ----------------------
1996 1995 1996 1995
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $222,283 $192,083 $888,519 $824,749
Cost of Sales 114,435 97,212 450,615 413,318
-------- -------- -------- --------
Gross Margin 107,848 94,871 437,904 411,431
Selling, General and
Administrative Expenses 101,924 93,618 345,295 336,891
Depreciation and Amortization
Expense (Credit) 2,101 344 4,756 (206)
Unusual Items - Reorganization Recoveries --- --- 4,486 ---
-------- -------- ------- --------
Operating Earnings 3,823 909 92,339 74,746
Interest Expense, Net 7,662 6,653 22,604 22,594
-------- -------- -------- --------
Earnings (Loss) Before Income Taxes
and Extraordinary Item (3,839) (5,744) 69,735 52,152
Income Taxes (1,400) (1,750) 24,753 17,550
--------- -------- -------- --------
Earnings (Loss) Before Extraordinary Item (2,439) (3,994) 44,982 34,602
Extraordinary Item:
Loss on Early Extinguishment of Debt,
Net of Income Tax Benefit of $(603) --- --- (1,096) ---
-------- -------- -------- --------
Net Earnings (Loss) $ (2,439) $ (3,994) $ 43,886 $ 34,602
======== ======== ======== ========
Earnings (Loss) Per Common Share:
Primary:
Earnings (Loss) Before Extraordinary Item $ (0.07) $ (0.11) $ 1.24 $ 0.99
Extraordinary Item --- --- (0.03) ---
-------- --------- -------- --------
Net Earnings (Loss) $ (0.07) $ (0.11) $ 1.21 $ 0.99
======== ========= ======== ========
Assuming Full Dilution:
Earnings (Loss) Before Extraordinary Item $ (0.07) $ (0.11) $ 1.22 $ 0.99
Extraordinary Item --- --- (0.03) ---
-------- --------- -------- --------
Net Earnings (Loss) $ (0.07) $ (0.11) $ 1.19 $ 0.99
======== ========= ======== ========
Weighted Average Number of Common
Shares Outstanding:
Primary 35,106 34,964 36,349 34,964
Assuming Full Dilution 35,106 34,964 36,956 34,964
</TABLE>
See Notes to the Consolidated Financial Statements.
-3-
<PAGE> 4
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 37,204 $ 154,905
Customer Receivables, Net 417,810 396,380
Merchandise Inventories 487,714 375,413
Other Current Assets 27,075 23,859
----------- -----------
Total Current Assets 969,803 950,557
Property and Equipment, Net 100,686 71,487
Other Assets 45,367 39,864
Deferred Tax Asset, Net 48,800 48,800
----------- -----------
Total Assets $ 1,164,656 $ 1,110,708
=========== ===========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 194 $ 2,907
Notes Payable 18,000 ---
Accounts Payable and Accrued Liabilities 156,306 117,048
Deferred Tax Liability, Net 48,800 48,800
----------- -----------
Total Current Liabilities 223,300 168,755
Non-current Liabilities 35,767 32,670
Long-term Debt 380,721 440,717
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 72,253 76,676
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- ---
Common Stock 352 350
Additional Paid-In Capital (Includes
Stock Warrants) 358,898 337,534
Unrealized Gains on Securities 1,526 979
Accumulated Earnings 91,839 53,027
----------- -----------
Total Stockholders' Investment 452,615 391,890
----------- -----------
Total Liabilities and Stockholders' Investment $ 1,164,656 $ 1,110,708
=========== ===========
</TABLE>
See Notes to the Consolidated Financial Statements.
-4-
<PAGE> 5
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1996 1995
---------- ---------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 43,886 $ 34,602
Non cash expenses, gains and losses:
Depreciation and amortization expense 5,780 635
Utilization of pre-emergence net operating loss 23,757 17,480
Other adjustments to reconcile net earnings
to net cash used in operating activities:
Extraordinary loss on early extinguishment of debt 1,699 ---
(Increase) decrease in:
Customer receivables, net (20,256) (14,957)
Merchandise inventories (104,591) (21,295)
Other current assets (2,793) (4,763)
Other assets 642 (2,175)
Increase (decrease) in:
Accounts payable and accrued liabilities 28,759 (11,422)
Non-current liabilities 3,097 787
---------- ---------
Net Cash Used in Operating Activities (20,020) (1,108)
---------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (37,036) (29,867)
Dispositions of property and equipment 590 1,340
Acquisition, net of cash acquired (2,547) ---
Other (238) 28
---------- ---------
Net Cash Used in Investing Activities (39,231) (28,499)
---------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (66,437) (2,883)
Net borrowings under revolving credit agreement 18,000 ---
Payment for redemption of Series B Warrants (9,264) ---
Payment of prepayment penalty and other related costs
on early extinguishment of debt (1,699) ---
Debt issue and capitalized financing costs (618) ---
Proceeds from exercise of stock options 1,568 ---
---------- ---------
Net Cash Used in Financing Activities (58,450) (2,883)
---------- ---------
Net Decrease in Cash and Cash Equivalents (117,701) (32,490)
---------- ---------
Cash and Cash Equivalents at Beginning of Period 154,905 153,700
---------- ---------
Cash and Cash Equivalents at End of Period $ 37,204 $ 121,210
========== =========
</TABLE>
See Notes to the Consolidated Financial Statements.
-5-
<PAGE> 6
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1996 1995
---------- ----------
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 27,413 $ 28,993
Interest received $ 2,802 $ 4,442
Income taxes paid (net of refunds received) $ 883 $ 302
Restricted cash - at period end date $ 33,019 $ 36,567
</TABLE>
See Notes to the Consolidated Financial Statements.
-6-
<PAGE> 7
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
Zale Corporation is the largest specialty retailer of fine jewelry in
the United States in terms of both retail sales and number of stores. The
Company had 1,208 retail locations at April 30, 1996 throughout the U.S., Guam
and Puerto Rico, primarily in regional shopping malls. The Company conducts
business through four distinct divisions consisting of the Zales Division, with
573 stores, the Gordon's Division, with 335 stores, the Fine Jewelers Guild
Division, with 118 stores and the Diamond Park Fine Jewelers Division, with 178
leased fine jewelry departments. In addition, the Company operates four outlet
stores. On January 18, 1996, the Company acquired Karten's Jewelers, Inc.,
("Karten's") a privately owned chain of 20 fine jewelry stores. The Company
acquired all the outstanding shares of common stock for $3.0 million in cash
and assumption of all liabilities. The addition of Karten's significantly
increased the Company's presence in the Northeast. These stores will initially
keep the Karten's trade name and will change to the Zales' name prior to the
1996 Christmas selling season.
The accompanying Consolidated Financial Statements are those of Zale
Corporation and its wholly-owned subsidiaries (the "Company" or "Zale") as of
and for the three and nine month periods ended April 30, 1996. The
Consolidated Financial Statements are unaudited and have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In managements' opinion, all material adjustments and
disclosures necessary for a fair presentation have been made. The accompanying
Consolidated Financial Statements should be read in conjunction with the
January 31, 1996 and October 31, 1995 Consolidated Financial Statements and
related notes of Zale included in Zale's financial statements filed with the
Securities and Exchange Commission in a Form 10-Q on March 15, 1996, and
December 8, 1995, respectively, and the audited Consolidated Financial
Statements and related notes thereto included in the 1995 Annual Report to
Stockholders filed as an exhibit to the Company's Form 10-K for the fiscal year
ended July 31, 1995. The classifications in use at April 30, 1996 have been
applied to the financial statements for July 31, 1995 and April 30, 1995.
The results of operations for the three and nine month periods ended
April 30, 1996 and 1995, are not indicative of the operating results for the
full fiscal year due to the seasonal nature of the Company's business.
Seasonal fluctuations in retail sales historically have resulted in higher
earnings in the quarter of the fiscal year which includes the Christmas selling
season.
WORKING CAPITAL FINANCING
On August 11, 1995, Zale and Zale Delaware, Inc. ("ZDel") a
wholly-owned subsidiary of Zale, (the "Borrowers") entered into a new
three-year revolving credit agreement (the "Revolving Credit Agreement") which
provides for revolving credit loans in an aggregate amount of up to $150.0
million, with a $30.0 million sublimit for letters of credit. At no time may
the total amount of revolving credit loans outstanding under the Revolving
Credit Agreement exceed the lesser of the total commitment of $150.0 million
and a defined borrowing base ($218.4 million at April 30, 1996, based on a
fixed percentage of eligible inventory, as defined).
The Borrowers' obligations under the Revolving Credit Agreement are
primarily secured by a first lien on and security interest in all inventory
(excluding inventory on consignment).
The revolving credit loans bear interest at floating rates, currently
LIBOR + 2.0 percent or the agent's adjusted base rate + 0.75 percent, at the
Borrowers' option, and can be adjusted based on certain future performance
levels attained by the Borrowers. The Company pays a commitment fee of 3/8
percent per annum on the preceding month's unused Revolving Credit Agreement
commitment. The Borrowers may repay the revolving credit loans at any time
without penalty. At April 30, 1996, there were $18.0 million in loans
outstanding under the Revolving Credit Agreement. There were approximately
$0.6 million in letters of credit outstanding at April 30, 1996.
-7-
<PAGE> 8
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
WORKING CAPITAL FINANCING (CONTINUED)
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, keeps within certain limits the Borrowers ability to
pay dividends and make other restricted payments, incur additional
indebtedness, engage in certain transactions with affiliates, incur liens, make
investments and sell assets. The Revolving Credit Agreement also requires the
Borrowers to maintain certain financial ratios and specified levels of net
worth.
The increased flexibility allowed in the new Revolving Credit Agreement
enabled the Company to redeem early the $60.0 million 11.0 Percent Second
Priority Senior Secured Notes (the "Notes") on September 11, 1995 utilizing
cash on hand. The Notes were optionally redeemable by ZDel at a redemption
price equal to 102 percent of their principal amount together with accrued
interest to the redemption date. Upon redemption, the Company paid an early
redemption premium and other costs associated with the redemption of
approximately $1.7 million resulting in an extraordinary charge of $1.1
million, net of an income tax benefit of $0.6 million, being recorded in the
first quarter of the current year.
REPURCHASE OF WARRANTS
As part of Zale's settlement of certain bankruptcy litigation in 1993
with Swarovski International Holding, A.G. ("Swarovski"), Zale issued its
Series B Warrants to purchase common stock. The Series B Warrants were
presently exercisable and, if not previously exercised, would expire on
September 9, 1998, subject to the Company's right to accelerate the expiration
date of the Series B Warrants if certain conditions were met. On August 31,
1995, Zale redeemed the Series B Warrants and acquired all Swarovski's rights,
title and interest under the warrant agreement and paid $9.3 million to
Swarovski in consideration of the redemption. As a result of this, the Series
B Warrants were canceled and are no longer outstanding. Additional Paid-In
Capital decreased $4.2 million, whereas Accumulated Earnings decreased $5.1
million due to this transaction.
UNUSUAL ITEMS - REORGANIZATION RECOVERIES
On July 30, 1993 (the "Effective Date"), Zale consummated its plan of
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Plan") and emerged from bankruptcy. Pursuant to the Plan, Zale assigned
certain claims and causes of action and advanced $3.0 million to Jewel
Recovery, L.P., a limited partnership ("Jewel Recovery") which was formed upon
Zale's emergence from bankruptcy. The sole purpose of Jewel Recovery is to
prosecute and settle such assigned claims and causes of action. The general
partner of Jewel Recovery is Jewel Recovery, Inc., a subsidiary of the Company.
Its limited partners are holders of various prior unsecured claims against
Zale. The $3.0 million advance was fully reserved as of the Effective Date as
its collectibility was uncertain.
Jewel Recovery has pursued certain claims and has been awarded
significant recoveries against third parties. During the first quarter, Zale
was notified that it would recover its $3.0 million advance to Jewel Recovery.
The $3.0 million advance was repaid to Zale in December 1995.
Additionally, Shawmut Bank ("Shawmut") was elected as Disbursement
Agent and held all cash and common stock to be used in settlements of creditors
claims. Shawmut recently provided Zale with information on creditors whose
claim rights have terminated. As a result, during the current year, Zale
recovered cash funds of approximately $1.5 million held by Shawmut related to
cash approved for distribution to pre-confirmation creditors of Zale but not
claimed by such pre- confirmation creditors. The $3.0 million and the $1.5
million recoveries were recorded as unusual items in the Company's first
quarter and are reflected on the Consolidated Statements of Operations for the
nine month period ended April 30, 1996 and had an after-tax impact of $0.08 per
share.
-8-
<PAGE> 9
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 elsewhere in this report. Except for the historical
information contained herein, the following discussion contains forward-looking
statements that involve a number of risks and uncertainties. Factors which
could cause the Company's actual results in future periods to differ materially
include, but are not limited to, those discussed or identified from time to
time in the Company's filings with the Securities and Exchange Commission,
including the Company's annual report on Form 10-K for the fiscal year ended
July 31, 1995 and the Company's registration statement on Form S-3, filed June
4, 1996.
RESULT OF OPERATIONS
The following table sets forth certain financial information from the
Company's unaudited Consolidated Statements of Operations expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
-----------------------------------------------
1996 1995 1996 1995
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 51.5 50.6 50.7 50.1
------- ------- ------ --------
Gross Margin 48.5 49.4 49.3 49.9
Selling, General and
Administrative Expenses 45.9 48.7 38.9 40.8
Depreciation and Amortization
Expense 0.9 0.2 0.5 ---
Unusual Items - Reorganization
Recoveries --- --- 0.5 ---
------- -------- ------- --------
Operating Earnings 1.7 0.5 10.4 9.1
Interest Expense, Net 3.4 3.5 2.5 2.8
------- -------- ------- --------
Earnings (Loss) Before Income Taxes
and Extraordinary Item (1.7) (3.0) 7.9 6.3
Income Taxes (0.6) (0.9) 2.8 2.1
------- -------- ------- --------
Earnings (Loss) Before Extraordinary Item (1.1) (2.1) 5.1 4.2
Extraordinary Item:
Loss on Early Extinguishment of
Debt, Net of Income Taxes --- --- (0.2) ---
------- -------- ------- --------
Net Earnings (Loss) (1.1)% (2.1)% 4.9% 4.2%
======= ======== ======= ========
</TABLE>
THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 30, 1995
NET SALES. Net Sales for the three months ended April 30, 1996
increased by $30.2 million to $222.3 million, a 15.7 percent increase compared
to the previous year. Sales for stores open for comparable periods increased
by 13.9 percent. The sales increase primarily resulted from improved
merchandise assortments, a successful Valentine's Day promotion and strong
store level execution.
GROSS MARGIN. Gross Margin as a percentage of net sales decreased by
0.9 percent due to the transition in sales mix to more key item merchandise and
higher markdowns for clearance of discontinued merchandise during the current
quarter. Key item merchandise produces higher sales volumes but has a slightly
lower gross margin rate, on average, than other merchandise. The current
quarter net LIFO provision was $0.9 million or 0.4 percent of net sales higher
than last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 2.8 percent as a percentage of net sales.
Store payroll expense decreased 1.7 percent as a percentage of net sales as a
result of focused control measures. Other store expenses decreased 1.4 percent
of net sales principally related to store occupancy costs, which increased at a
lower rate than net sales. Corporate expenses decreased by 1.5 percent of net
sales principally as a result of lower costs for payroll, outside services and
insurance. The current quarter demonstrates the Company's ability to leverage
its fixed store and corporate operating expenses while increasing sales in the
stores. These improvements were partially offset by an increased provision for
chargeoffs of customer accounts resulting from general economic conditions and
previous credit policies at the Gordon's Division.
-9-
<PAGE> 10
EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION AND AMORTIZATION
EXPENSE. As a result of the factors discussed above, Earnings Before Interest,
Taxes and Depreciation and Amortization Expense were $5.9 million and $1.3
million for the three months ended April 30, 1996 and 1995, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $1.8 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 $1.8
million to $3.5 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 $7.7 million and $6.7
million for the three months ended April 30, 1996 and 1995, respectively. The
prior year included $1.2 million of interest income on funds escrowed for
previous bankruptcy matters. Excluding this non-recurring interest income
item, interest expense decreased 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 the increase in interest expense due to higher
borrowings under the Revolving Credit Agreement and a reduction in interest
income due to lower average balances in short-term investments.
INCOME TAXES. The income tax benefit for the three month periods ended
April 30, 1996 and 1995 was $1.4 million and $1.8 million, respectively,
reflecting an effective tax rate of 36.5 percent and 30.5 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 April 30, 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.
NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL 30, 1995
NET SALES. Net Sales for the nine months ended April 30, 1996
increased by $63.8 million to $888.5 million, a 7.7 percent increase compared
to the previous year. Sales for stores open for comparable periods increased
by 8.7 percent. The sales increase primarily resulted from improved
merchandise assortments, successful holiday and non- holiday promotions and
strong store level execution.
GROSS MARGIN. Gross Margin as a percentage of net sales decreased by
0.6 percent due to the transition in sales mix to more key item merchandise and
higher markdowns for clearance of discontinued merchandise during the current
year. Key item merchandise produces higher sales volumes but has a slightly
lower gross margin rate, on average, than other merchandise. The current year
net LIFO provision was $1.9 million or 0.2 percent of net sales higher than
last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.9 percent as a percentage of net sales.
Store payroll expense decreased 1.0 percent as a percentage of net sales as a
result of focused control measures. Other store expenses decreased 0.6 percent
of net sales principally related to store occupancy costs, which increased at a
lower rate than net sales. Corporate expenses decreased by 1.1 percent of net
sales principally as a result of lower costs for employee benefits, outside
services and insurance. The current year demonstrates the Company's ability to
leverage its fixed store and corporate operating expenses while increasing
sales in the stores. These improvements were partially offset by an increased
provision for chargeoffs of customer accounts resulting from general economic
conditions and previous credit policies at the Gordon's Division.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION EXPENSE
(CREDIT), EXTRAORDINARY ITEM AND UNUSUAL ITEMS. As a result of the factors
discussed above, Earnings Before Interest, Taxes, Depreciation and Amortization
Expense (Credit), Extraordinary Item and Unusual Items were $92.6 million and
$74.5 million for the nine months ended April 30, 1996 and 1995, respectively.
-10-
<PAGE> 11
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $5.0 million. Amortization of the Excess of Revalued Net
Assets Over Stockholders' Investment was $4.4 million in both periods. However,
depreciation and amortization of property and equipment increased from $4.2
million to $9.0 million as new assets have been purchased since the fresh-start
reporting writeoff of substantially all fixed assets of the Company as of July
31, 1993.
UNUSUAL ITEMS - REORGANIZATION RECOVERIES. Unusual Items -
Reorganization Recoveries were $4.5 million for the nine month period ended
April 30, 1996. There were no unusual items for the prior year. See the note
to the Consolidated Financial Statements "UNUSUAL ITEMS - REORGANIZATION
RECOVERIES."
INTEREST EXPENSE, NET. Interest Expense, Net was $22.6 million for the
nine months ended April 30, 1996 and 1995, respectively. Interest expense for
the nine months ended April 30, 1996 remained constant due to the early
redemption of the $60.0 million 11.0 Percent Second Priority Senior Secured
Notes on September 11, 1995 partially offset by the increase in interest expense
due to higher borrowings under the Revolving Credit Agreement and a reduction in
interest income due to lower average balances in short-term investments. Also,
the prior year included $1.2 million of interest income on funds escrowed for
previous bankruptcy matters.
INCOME TAXES. The income tax expense for the nine month periods ended
April 30, 1996 and 1995 was $24.8 million and $17.6 million, respectively,
reflecting an effective tax rate of 35.5 percent and 33.7 percent,
respectively. As a result of guidelines regarding accounting for income taxes
of companies utilizing fresh-start reporting, the Company reports earnings on a
fully-taxed basis even though it does not expect to pay any significant income
taxes for the near future. The Company will realize the cash benefit from
utilization of the tax net operating loss ("NOL") against current and future
tax liabilities. As of April 30, 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 charge of $1.1 million, net of an
income tax benefit of $0.6 million, for the nine month period ended April 30,
1996 was the result of the early redemption of the $60.0 million 11.0 Percent
Second Priority Senior Secured Notes. See the note to the Consolidated
Financial Statements "WORKING CAPITAL FINANCING."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding
inventory and receivables growth, capital expenditures primarily for
renovations and new store growth, and debt service. As of April 30, 1996, the
Company had cash and cash equivalents of $37.2 million, including $33.0 million
restricted primarily by the collateral requirements under the Receivables
Securitization Facility established by the Company in July 1994 (the
"Receivables Securitization Facility"). The retail jewelry business is highly
seasonal, with a significant proportion of sales and operating income being
generated in November and December of each year. Approximately 41.2 percent and
40.1 percent of the Company's annual sales were made during the three months
ended January 31, 1995 and 1994, respectively, which includes the Christmas
selling season. The Company's working capital requirements fluctuate during
the year, increasing substantially during the fall season as a result of higher
planned seasonal inventory levels.
Zale Funding Trust, a limited purpose Delaware business trust and an
indirect wholly-owned subsidiary of the Company formed to finance customer
accounts receivable, issued approximately $380.6 million, net of discount,
aggregate principal amount of Receivables Backed Notes ("ZFT Receivables Notes")
in July 1994 pursuant to the Receivables Securitization Facility. The ZFT
Receivables Notes are secured by a lien on all customer accounts receivable and
mature in July 1999.
On August 11, 1995, the Company entered into a new three-year revolving
credit agreement (the "Revolving Credit Agreement") which provides for revolving
credit loans in an aggregate amount of up to $150.0 million, with a $30.0
million sublimit for letters of credit. The Revolving Credit Agreement replaced
an earlier agreement entered into by the Company in July 1993. At no time may
the total amount of loans outstanding under the Revolving Credit Agreement
exceed the lesser of the total commitment of $150.0 million and a defined
borrowing base ($218.4 million at April 30, 1996, based on a fixed percentage of
eligible inventory, as defined).
-11-
<PAGE> 12
The Revolving Credit Agreement was structured to increase the
Company's flexibility through less restrictive loan covenants, lower collateral
requirements and a lower fee and interest rate structure than its earlier
agreement. The increased flexibility allowed in the new Revolving Credit
Agreement combined with the increased liquidity from the Receivables
Securitization Facility enabled the Company to redeem its 11.0 percent notes,
redeem the Series B Warrants and continue to invest in its capital improvement
and store growth initiatives.
Approximately $60.0 million of Second Priority Senior Secured Notes due
2000 bearing interest at 11.0 percent per annum were issued by the Company upon
its emergence from bankruptcy. These notes were redeemed on September 11, 1995
utilizing cash on hand. Upon redemption, the Company paid an early redemption
premium and other costs associated with the redemption of approximately $1.7
million. An extraordinary charge of $1.1 million, net of an income tax benefit
of $0.6 million, was recorded in the first quarter of the current year. See the
note to the Consolidated Financial Statements "WORKING CAPITAL FINANCING."
On August 31, 1995, Zale redeemed the Series B Warrants and acquired all
Swarovski International Holding, A.G. ("Swarovski") rights, title and interest
under the warrant agreement and paid $9.3 million to Swarovski in consideration
of the redemption. As a result of this, the Series B Warrants were canceled and
are no longer outstanding. See the note to the Consolidated Financial
Statements "REPURCHASE OF WARRANTS."
The Company is in the second year of a three year store remodeling and
refurbishment program. This program will enable the Company to enhance its
stores in certain key markets relative to its competition. Additionally, the
Company plans significant upgrades to its management information systems over
the next several years. The Company anticipates spending approximately $50.0
million on capital expenditures in fiscal year 1996. Capital expenditures are
typically scheduled for the late spring through early fall in order to have new
or renovated stores ready for the Christmas selling season. During the nine
months ended April 30, 1996, the Company made approximately $37.0 million in
capital expenditures, principally to enhance the appearance of 86 stores and to
open 33 new stores. In addition, on January 18, 1996, the Company acquired
Karten's Jewelers, Inc., a 20-store chain. The Company acquired all the
outstanding shares of common stock for $3.0 million in cash and assumption of
all liabilities. In fiscal years 1996, 1997 and 1998, the Company intends to
add approximately 250 new locations through new store openings or strategic
acquisitions.
There has been an increase of approximately $65 million, or 15.5%, in
owned merchandise inventories at April 30, 1996 compared to the balance at April
30, 1995. The increase in inventory levels is primarily a result of an
increased number of stores, improving the depth and breadth of merchandise
available in the stores to accommodate increasing sales, as well as the Company
shifting its merchandise mix to reduce the amount of consigned merchandise in
order to increase its investment in owned merchandise. Of the $65 million
increase, approximately $24 million pertains to the reduction in the level of
consigned merchandise compared to last year. As a result of the transactions
discussed above and the change in mix between owned and consigned merchandise,
the Company had outstanding borrowings of $18.0 million under the Revolving
Credit Agreement at April 30, 1996, compared to no such borrowing at April 30,
1995.
Future liquidity will also be enhanced to the extent that the Company is
able to realize the cash benefit from utilization of its NOL against current and
future tax liabilities. Guidelines regarding accounting for income taxes of
companies utilizing fresh-start reporting, require the Company to report
earnings on a fully-taxed basis even though it does not expect to pay any
significant income taxes for the near future. As of April 30, 1996, the
Company has a NOL 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, amounts available under the Receivables
Securitization Facility and proceeds from the proposed sale of 2,250,146 shares
of the Company's common stock in an underwritten offering (as described in a
registration statement recently filed with the Securities and Exchange
Commission) should be sufficient to fund the Company's current operations, debt
service and currently anticipated capital expenditure requirements.
INFLATION
In management's opinion, changes in net sales and net earnings (loss)
that have resulted from inflation and changing prices have not been material.
There is no assurance; however, that inflation will not materially affect the
Company in the future.
-12-
<PAGE> 13
<TABLE>
<CAPTION>
Part II. - Other Information:
<S> <C>
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.
</TABLE>
-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)
<TABLE>
<S> <C> <C>
Date June 7, 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)
</TABLE>
-14-
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number
- --------------
<S> <C>
11 Statement re-computation of per share earnings.
27 Financial data schedule.
</TABLE>
<PAGE> 1
EXHIBIT 11
ZALE CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
(unaudited)
(amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------- ----------------------
1996 1995 (1) 1996 1995(1)
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Primary:
Net earnings (loss) applicable to common stock $ (2,439) $ (3,994) $ 43,886 $ 34,602
========== ========= ======== ========
Shares
Weighted average number of common shares
outstanding 35,106 34,964 35,029 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 --- (2) --- (2) 621 358
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants --- (2) --- (2) 699 408
---------- --------- -------- --------
Weighted average number of common shares
outstanding as adjusted 35,106 34,964 36,349 35,730
========== ========= ======== ========
Net earnings (loss) per common share $ (0.07) $ (0.11) $ 1.21 $ 0.97
========== ========= ======== ========
Fully Diluted:
Net earnings (loss) applicable to common stock $ (2,439) $ (3,994) $ 43,886 $ 34,602
========== ========= ======== ========
Shares
Weighted average number of common shares
outstanding 35,106 34,964 35,029 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 --- (2) --- (2) 908 367
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants --- (2) --- (2) 1,019 435
---------- --------- -------- --------
Weighted average number of common shares
outstanding as adjusted 35,106 34,964 36,956 35,766
========== ========= ======== ========
Net earnings (loss) per common share $ (0.07) $ (0.11) $ 1.19 $ 0.97
========== ========= ======== ========
</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%.
(2) Not used in the calculation of weighted average number of common shares
outstanding due to the antidilutive effect of the common stock
equivalents.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the April
30, 1996 consolidated fiancial statements and is qualified in its entirety by
reference to such financial statments.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> APR-30-1996
<CASH> 37,204
<SECURITIES> 0
<RECEIVABLES> 417,810<F1>
<ALLOWANCES> 0
<INVENTORY> 487,714
<CURRENT-ASSETS> 969,803
<PP&E> 100,686<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,164,656
<CURRENT-LIABILITIES> 223,300
<BONDS> 380,721
<COMMON> 352
0
0
<OTHER-SE> 452,263
<TOTAL-LIABILITY-AND-EQUITY> 1,164,656
<SALES> 888,519
<TOTAL-REVENUES> 888,519
<CGS> 450,615
<TOTAL-COSTS> 450,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,604
<INCOME-PRETAX> 69,735
<INCOME-TAX> 24,753
<INCOME-CONTINUING> 44,982
<DISCONTINUED> 0
<EXTRAORDINARY> (1,096)
<CHANGES> 0
<NET-INCOME> 43,886
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.19
<FN>
<F1>This asset value represents a net amount.
</FN>
</TABLE>
