<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1996
REGISTRATION NO. 333-05131
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ZALE CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 75-0675400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ALAN P. SHOR
SENIOR VICE PRESIDENT,
GENERAL COUNSEL & SECRETARY
901 W. WALNUT HILL LANE ZALE CORPORATION
IRVING, TEXAS 75038-1003 901 W. WALNUT HILL LANE
214-580-4000 IRVING, TEXAS 75038-1003
(Address, including zip code, and telephone number, 214-580-4000
including area code, of registrant's principal (Name, address, including zip code, and telephone
executive offices) number, including area code, of agent for service)
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The Commission is requested to mail signed copies of all orders, notices and
communications to:
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MERRILL J. WERTHEIMER JAMES L. SMITH, III, ESQ.
EXECUTIVE VICE PRESIDENT TROUTMAN SANDERS LLP
ZALE CORPORATION 600 PEACHTREE STREET, N.E.
901 W. WALNUT HILL LANE SUITE 5200
IRVING, TEXAS 75038-1003 ATLANTA, GEORGIA 30308-2216
ALAN L. BELLER, ESQ.
JOHN F. HARTIGAN, ESQ. CLEARY, GOTTLIEB,
MORGAN, LEWIS & BOCKIUS LLP STEEN & HAMILTON
801 SOUTH GRAND AVENUE ONE LIBERTY PLAZA
LOS ANGELES, CALIFORNIA 90017 NEW YORK, NEW YORK 10006-1470
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED* PER UNIT** PRICE** FEE***
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Common Stock, par value $.01 per share........ 2,750,000 shares $19.375 $155,324,532 $53,561
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*As initially filed, this Registration Statement covered 8,016,750
shares. This Amendment No. 2 reduces such amount to be registered to 2,750,000
shares, the balance being withdrawn hereby.
**These figures are based upon the average of the high and low prices on
May 31, 1996, as reported by the Nasdaq National Market and are used solely for
the purpose of calculating the registration fee pursuant to Rule 457(c). These
figures are further based upon the number of shares (8,016,750) formerly covered
by this Registration Statement.
***Previously paid.
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<PAGE> 2
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PROSPECTUS
2,500,000 SHARES
</TABLE>
[ZALE CORPORATION LOGO]
COMMON STOCK
($.01 PAR VALUE)
All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), of Zale Corporation offered hereby 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 offered hereby.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
trading symbol "ZLC". On July 23, 1996, the last reported sale price of the
Common Stock by the NYSE was $16.50 per share. See "Price Range of Common
Stock".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING SELLING
PUBLIC DISCOUNT SHAREHOLDER(1)
<S> <C> <C> <C>
Per Share....................................... $16.50 $.76 $15.74
Total(2)........................................ $41,250,000 $1,900,000 $39,350,000
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(1) Before deducting expenses of the offering estimated at $375,000 payable by
the Company and the Selling Shareholder.
(2) The Selling Shareholder has granted the Underwriters a 30-day option to
purchase up to 250,000 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 Selling Shareholder will
be $45,375,000, $2,090,000 and $43,285,000, 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 July 29,
1996.
SALOMON BROTHERS INC
MCDONALD & COMPANY
SECURITIES, INC.
PAINEWEBBER INCORPORATED
The date of this Prospectus is July 24, 1996.
<PAGE> 3
INSIDE FRONT COVER
ZALE CORPORATION
Zale Corporation, headquartered in Dallas, Texas, is the largest
specialty retailer of fine jewelry, operating approximately 1,200 retail
jewelry stores and leased departments across the United States. Zales Jewelers
is the company's flagship division, serving as the national nameplate. Gordon's
Jewelers is positioned as a major regional player in select U.S. markets. Fine
Jewelers Guild represents the company's upscale jewelry operation and is
recognized under names such as Bailey Banks & Biddle and Corrigan's. The
Diamond Park Fine Jewelers Division manages leased jewelry departments in
national and regional host stores such as Marshall Field's and Dillard's.
[Following the above-stated caption are four photographs described
below]
Picture 1 - The store front of a Zales Jewelers mall store
Picture 2 - The store front of a Gordon's Jewelers mall store
Picture 3 - The store front of a Bailey Banks & Biddle mall store
Picture 4 - The selling area of a Diamond Park Fine Jewelers leased jewelry
department
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
included elsewhere in this Prospectus or incorporated by reference in this
Prospectus. As used in this Prospectus, the "Company" refers to Zale Corporation
and its subsidiaries unless the context otherwise indicates. Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. In connection with the forward-looking
statements in this Prospectus, see "Risk Factors".
THE COMPANY
Zale Corporation is the largest specialty retailer of fine jewelry in the
United States in terms of both retail sales and number of stores. The Company
had sales of $1.04 billion for the fiscal year ended July 31, 1995 and 1,207
retail locations at April 30, 1996 throughout the U.S., Guam and Puerto Rico,
primarily in regional shopping malls. The Company conducts business through four
distinct divisions. The Zales(R) Division, with 571 stores, represents the
Company's national brand and is focused on a broad range of mainstream
consumers. The Gordon's(SM) Division operates 336 stores and is being positioned
as a major regional jeweler focusing on twelve regional markets and offering
merchandise that is more contemporary and targeted at regional tastes. The Fine
Jewelers Guild ("Guild Division") operates 118 upscale jewelry stores under the
Bailey, Banks & Biddle(R) and other locally established names. The Diamond Park
Fine Jewelers Division ("Diamond Park Division") manages 178 leased fine jewelry
departments in several major department store chains including Marshall Field's,
Dillard's and Mercantile. In addition, the Company operates four outlet stores.
The Company believes that the jewelry retail sector is large and highly
fragmented, with total U.S. jewelry retail sales in 1995, based on publicly
available data, of approximately $32 billion. Management believes that the
Company's size, nationwide presence and market position are significant
competitive advantages, providing economies of scale in television and print
advertising, distribution and buying which are not available to smaller chains
and independents. The Company also enjoys significant brand name recognition,
with the Zales name in existence since 1924, Gordon's since 1905 and Bailey,
Banks & Biddle since 1832. The Company believes that name recognition is an
important advantage in jewelry retailing because jewelry is generally unbranded
by product and the consumer must trust in a retailer's reliability and
credibility.
On July 30, 1993 the Company emerged from bankruptcy after completing a
comprehensive restructuring of its capital structure and operations through
implementation of its plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code. In April 1994, Robert DiNicola joined the Company as Chairman
and Chief Executive Officer and began recruiting other experienced retailing
executives to build a new management team. This team undertook to revitalize the
Company by making it customer-focused and instituting back-to-basics retailing
disciplines. Management believes that, since April 1994, the following
initiatives have significantly improved the Company's operating performance:
Reestablished Brand Identities. Distinct brand identities have been
reemphasized for the Zales and Gordon's Divisions. Separate divisional
management and buying teams have been brought on board to create and implement
an individualized merchandising and marketing strategy.
Refocused Merchandising. Merchandising has been refocused and strengthened.
In the Zales and Gordon's Divisions, management has developed a large selection
of key items from among the best selling products in the retail jewelry
industry, such as tennis bracelets, bridal sets and diamond stud earrings, and
made certain that these items are available in an appropriate variety of styles
and a range of competitive price points. At the same time, the Company has
structured inventory management systems to ensure that these items are
consistently in stock. The Company has more recently introduced a similar key
item approach in the Guild and Diamond Park Divisions.
3
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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
$735,200 for the nine months ended April 30, 1996 from $677,400 for the nine
months ended April 30, 1995. Comparable store sales increased by 12.8% for the
year ended July 31, 1995 as compared to the year ended July 31, 1994, and
increased by 8.7% for the nine months ended April 30, 1996 as compared to the
nine months ended April 30, 1995.
In addition, selling, general and administrative expenses as a percentage
of sales decreased to 41.9% for the year ended July 31, 1995 from 43.7% for the
year ended July 31, 1994, and decreased to 38.9% for the nine months ended April
30, 1996 from 40.8% for the nine months ended April 30, 1995. Operating margin,
excluding unusual items, increased to 7.5% for the year ended July 31, 1995 from
6.8% for the year ended July 31, 1994, and to 9.9% for the nine months ended
April 30, 1996 from 9.1% for the comparable prior-year period. (The nine-month
periods ended April 30 include the Christmas selling season. See "Risk
Factors -- Variability of Quarterly Results and Seasonality".)
Now that the Company has refocused its operating strategy, management
believes that further improvements in operating performance and growth can be
achieved through a number of additional initiatives under consideration,
including those set forth below.
4
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Further Improve Store Productivity. Management believes that store
productivity and profitability at all divisions can be further improved. The
Zales and Gordon's Divisions together had average sales per store of
approximately $790,000 for the fiscal year ended July 31, 1995, which, based on
publicly available data, is still below the industry average of slightly more
than $1 million for comparable jewelry retailers. The Company believes it can
continue to increase store productivity and profitability by: (1) expanding key
item assortments to include more "better" and "best" classifications; (2)
tailoring its merchandise assortments to specific store locations in the
Gordon's and Guild Divisions; (3) fully implementing the back-to-basics
retailing strategy at the Guild Division, where the strategy was introduced
approximately one year later than at the Zales and Gordon's Divisions; (4)
relocating certain existing stores to more attractive sites within the malls
where they are currently located; (5) increasing advertising during
non-traditional gift-giving times and widening market coverage; (6) improving
store personnel hiring and retention and continuing to invest in focused
training of management and store personnel; (7) better utilizing customer buying
information gathered from its proprietary customer databases to tailor
merchandising and marketing; and (8) enhancing information systems to enable
buyers to interpret data more easily and make decisions more quickly.
Increase and Enhance Store Base. Over the next three years, the Company
plans to increase the number of stores in the Zales Division to approximately
750 from 571 at April 30, 1996, an increase of approximately 15% in the
Company's total store base. One of the objectives of the Company's expansion
strategy for the Zales Division is to add Zales stores in parts of the country
where the Division is currently underrepresented. The Company has identified
malls for this planned expansion which satisfy Zales' real estate criteria. In
the Gordon's Division, the Company plans to add a small number of stores to
increase concentration within that Division's targeted regional markets. In the
Guild Division, the Company intends to open a small number of additional stores
under the Bailey, Banks & Biddle name. The Company plans to reposition some of
the Guild Division's stores in more desirable locations in upscale malls to
capitalize on the current strength of the luxury retailing sector and to take
advantage of the upscale image projected by the Bailey, Banks & Biddle name. See
"Risk Factors -- Expansion Program".
The Company believes that as opportunities arise acquisitions may be used
as part of its expansion strategy to increase penetration in a particular
market. For example, in January 1996 the Company acquired Karten's Jewelers, a
20-store chain, which immediately increased the Company's presence in the New
England market. The Company plans to operate these stores under the Zales name.
The Diamond Park Division recently began to operate leased jewelry departments
in 25 Parisian department stores in the Southeast.
Utilize Alternative Distribution Channels. Under its "direct fulfillment"
program, the Company is seeking to capitalize on the Zales name and national
reputation by experimenting with a series of direct marketing strategies to
complement its store-based operations. The Zales Division tested a program in
the fall of 1995 in which a 1-800 number and order forms were placed in a
sampling of the Division's newspaper and direct marketing inserts. The Company
also began testing home shopping during the 1995 Christmas season by including a
1-800 number in some of the Zales Division's television advertising. These
programs will be expanded on a selective basis during the 1996 holiday shopping
season. In addition, the Company is experimenting with marketing over the
Internet.
Leverage Costs. As increases in store productivity, an expanding store base
and new distribution channels increase sales, the Company expects to be able to
leverage its expenses, such as administrative, general corporate, and
advertising expenses, resulting in higher operating profit margins.
5
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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.
THE OFFERING
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Common Stock offered by the Selling
Shareholder............................... 2,500,000 shares(1)
Common Stock outstanding after the
offering.................................. 35,186,583 shares(2)
NYSE symbol................................. ZLC
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(1) Excludes 250,000 shares of Common Stock that may be sold upon exercise of
the Underwriters' over-allotment option.
(2) Based upon outstanding shares as of April 30, 1996 and exclusive of
outstanding warrants and stock options representing 3,734,650 shares of
Common Stock. See "Notes to Consolidated Financial Statements". In addition,
on June 25, 1996, the Compensation Committee of the Board of Directors, and
the entire Board, granted additional options to certain Company employees to
purchase 538,000 shares of Common Stock under the Company's Omnibus Stock
Incentive Plan.
6
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SUMMARY FINANCIAL AND OPERATING INFORMATION
The following information for the years ended July 31, 1995 and 1994, the
predecessor pro forma year ended July 31, 1993, and the nine-month periods ended
April 30, 1996 and 1995 should be read in conjunction with "Selected
Consolidated Financial Information", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the Notes thereto contained elsewhere in this
Prospectus. The information for the nine-month periods ended April 30, 1996 and
1995 and for the predecessor pro forma year ended July 31, 1993 is derived from
the Company's unaudited Consolidated Financial Statements for such periods,
which, in the opinion of the Company, include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of such
information.
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NINE MONTHS ENDED FISCAL YEAR ENDED PREDECESSOR
------------------------- ------------------------- PRO FORMA
YEAR ENDED(1)
APRIL 30, JULY 31, -------------
------------------------- ------------------------- JULY 31,
1996 1995 1995 1994 1993
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(IN THOUSANDS EXCEPT PER SHARE DATA, RATIOS AND STORE DATA)
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INCOME STATEMENT DATA:
Net sales.................................... $ 888,519 $ 824,749 $1,036,149 $ 920,307 $ 956,447
Cost of sales................................ 450,615 413,318 524,010 460,060 533,080
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Gross margin................................. 437,904 411,431 512,139 460,247 423,367
Selling, general and administrative
expenses................................... 345,295 336,891 434,101 401,744 402,116
Depreciation and amortization expense
(credit)(2)................................ 4,756 (206) 381 (4,385) 26,459
Unusual items(3)............................. (4,486) -- -- -- 163,890
---------- ---------- ---------- ---------- -------------
Operating earnings (loss).................... 92,339 74,746 77,657 62,888 (169,098)
Interest expense, net........................ 22,604 22,594 29,837 28,142 23,508
Fresh-start revaluation(2)................... -- -- -- -- (246,236)
Income taxes(4).............................. 24,753 17,550 16,350 11,621 --
---------- ---------- ---------- ---------- -------------
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change..................................... $ 44,982 $ 34,602 $ 31,470 $ 23,125 $ (438,842)
========== ========== ========== ========== ============
Earnings per common share before
extraordinary items(5)..................... $ 1.24 $ 0.99 $ 0.88 $ 0.66
Weighted average number of common shares
outstanding(5)............................. 36,349 34,964 35,849 34,965
SELECTED RATIOS:
Gross margin as a % of sales................. 49.3% 49.9% 49.4% 50.0% 44.3%
Selling, general and administrative expenses
as a % of sales............................ 38.9% 40.8% 41.9% 43.7% 42.0%
Operating earnings (loss) excluding unusual
items as a % of sales(6)................... 9.9% 9.1% 7.5% 6.8% (0.5%)
SELECTED STORE DATA:
Stores open at end of period................. 1,207 1,184 1,181 1,231 1,265
Change in comparable stores sales............ 8.7% 14.4% 12.8% N/A N/A
Average sales per store:
Zales...................................... $ 722,500 $ 671,400 $ 849,100 $ 716,700 $ 692,100
Gordon's................................... 611,300 567,800 711,500 624,900 580,000
Guild...................................... 1,364,700 1,201,200 1,529,200 1,391,400 1,171,500
Diamond Park............................... 588,700 554,200 701,500 591,500 577,600
Consolidated............................... 735,200 677,400 855,700 738,300 703,000
<CAPTION>
AT APRIL
30,
1996
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BALANCE SHEET DATA:
Working capital.............................. $ 746,503
Total assets................................. 1,164,656
Total debt................................... 398,915
Total stockholders' investment............... 452,615
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(1) On July 30, 1993, (the "Effective Date"), the Company consummated its plan
of reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Plan of
Reorganization") and emerged from bankruptcy. The Company adopted
"fresh-start" reporting as of the close of business on July 31, 1993. As a
result, the Consolidated Financial Statements of the Company for and as of
the end of the fiscal years and other periods subsequent to July 31, 1993
are not comparable in certain material respects to predecessor statements
for any period prior thereto.
On December 13, 1993, the Board of Directors of the Company authorized the
change in the Company's fiscal year end to July 31. Such change was
effective as of April 1, 1994. To facilitate a comparison of the Company's
operating performance for the years ended July 31, 1995 and 1994, the four
months ended July 31, 1993 and the year ended March 31, 1993, the results
of operations include a presentation of historical income statement data
for twelve months ended July 31, 1993. This includes the eight months ended
March 31, 1993 and the four month period ended July 31, 1993. This twelve
month period ended July 31, 1993 is referred to as "predecessor pro forma
year ended July 31, 1993" and is unaudited.
(2) As a result of the adoption of fresh-start reporting, the Company's assets
and liabilities were revalued as of the Effective Date, which resulted in a
$246.2 million charge. In connection with this revaluation, the book value
of certain non-current assets was reduced to zero, which resulted in lower
depreciation and amortization than would be the case in the absence of such
revaluation but also results in higher percentage increases in depreciation
and amortization on growth of depreciable and amortizable assets in
subsequent years.
In connection with the adoption of fresh-start reporting, after reducing the
value of certain non-current assets to zero, the excess of the fair value of
the remaining assets over the fair value of liabilities and stockholders'
investment was recorded as a deferred credit and is being amortized over 15
years at the rate of $5.9 million per year.
(3) For the nine months ended April 30, 1996, unusual items included the
recovery of a $3.0 million advance to a limited partnership formed upon the
Company's emergence from bankruptcy and a $1.5 million recovery of cash
funds related to cash approved for distribution to pre-confirmation
creditors of Zale but not claimed. See the note to the April 30, 1996,
Consolidated Financial Statements "Unusual Items -- Reorganization
Recoveries". For the predecessor pro forma year ended July 31, 1993, unusual
items included $20.2 million of provision for valuation of assets and $143.7
million of reorganization and restructure costs. See the notes to the July
31, 1995 Consolidated Financial Statements "Reorganization and Restructure
Costs" and "Unusual Items -- Provisions for Valuation of Assets".
(4) An income tax benefit was not provided for the predecessor pro forma year
ended July 31, 1993 because realization of a tax benefit for those losses
was not assured. As a result of guidelines regarding accounting for income
taxes of companies utilizing fresh-start reporting, the Company reports
earnings on a fully taxed basis even though it does not expect to have to
pay any significant income taxes for the near future.
As of April 30, 1996, the Company had a net operating loss carryforward
("NOL"), after limitations, of approximately $370 million. Whether the
Company will be able to utilize this NOL depends on the Company's earnings
and the statutory limitations on use of such NOL. Any tax benefits realized
for financial reporting purposes subsequent to the Effective Date are
reported as additions to additional paid-in capital rather than as a
reduction in the tax provision in the Company's Statement of Operations, and
thus will not be reflected in the Company's earnings. However, the Company
will realize cash benefits from any such utilization of its NOL.
(5) Earnings (loss) per share is not presented for the predecessor pro forma
year because such presentation would not be meaningful. The old stock, which
was not publicly traded, was cancelled under the Plan of Reorganization and
the new stock was not issued until the Effective Date.
(6) Operating earnings (loss) excluding unusual items as a percent of sales is
calculated on the basis of Net sales, less (a) Cost of sales, (b) Selling,
general and administrative expense and (c) Depreciation and amortization
expense (credit). The calculation excludes unusual items which are included
in calculating Operating earnings (loss).
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RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
factors set forth below, as well as the other information contained in this
Prospectus, in evaluating an investment in the Common Stock offered hereby.
In addition to the historical information contained herein, the discussion
in this Prospectus contains forward-looking statements with respect to the
Company that involve risks and uncertainties. The actual performance and results
of the Company could differ materially from those discussed in this Prospectus.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Risk Factors", below, as well as those discussed
elsewhere in this Prospectus.
IMPACT OF GENERAL ECONOMIC CONDITIONS
Jewelry purchases are discretionary for consumers and may be particularly
affected by adverse trends in the general economy. The success of the Company's
operations depends to a significant extent upon a number of factors relating to
discretionary consumer spending, including economic conditions (and perceptions
of such conditions by consumers) affecting disposable consumer income such as
employment, wages and salaries, business conditions, interest rates,
availability of credit and taxation, for the economy as a whole and in regional
and local markets where the Company operates. In addition, the Company is
dependent upon the continued popularity of malls as a shopping destination and
the ability of malls, their tenants and other mall attractions to generate
customer traffic for its stores. There can be no assurance that consumer
spending will not be adversely affected by general economic conditions or that
mall traffic will not decrease, either of which could negatively impact the
Company's results of operations or financial condition.
In addition, because a substantial portion of the Company's sales are made
on credit, any significant deterioration in general economic conditions may
inhibit consumers' use of credit and cause a material adverse effect on the
Company's revenues and profitability. Furthermore, the Company expects that any
downturn in general or local economic conditions in the markets in which it
operates would adversely affect its collection of outstanding credit accounts
receivables.
COMPETITION
The retail jewelry business is highly competitive. The industry is
fragmented, and the Company competes with a large number of independent regional
and local jewelry retailers, as well as with nationally recognized jewelry
chains. The Company must also compete with other types of retailers who sell
jewelry and gift items, such as department stores, catalog showrooms,
discounters, direct mail suppliers and televised home shopping networks.
Competition may increase in the future as various additional forms of direct
access shopping (with lower built-in costs) become available through
developments in technology. Management believes that the primary competitive
factors affecting its operations are reputation, breadth and depth of
merchandise offered, store location and atmosphere, marketing, pricing, quality
of sales personnel and customer service, credit and availability to customers of
attractive direct marketing alternatives. The Company also believes that it
competes for consumers' discretionary spending dollars with retailers that offer
merchandise other than jewelry. In addition, the Company competes with jewelry
and other retailers for desirable locations and qualified personnel. If the
Company falls behind competitors with respect to one or more of these factors,
the Company's results of operations or financial condition could be adversely
affected. See "Business -- Competition".
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
The Company's business is highly seasonal, with a significant portion of
its sales and most of its income generated during the second fiscal quarter
ending January 31, which includes the Christmas season. Sales in the second
quarters of fiscal 1995 and 1994 accounted for 41.2% and 40.1%, respectively, of
annual sales for such fiscal years. Operating earnings for the second
9
<PAGE> 11
quarters of fiscal 1995 and 1994 accounted for 91.0% and 94.6%, respectively, of
annual operating earnings for such fiscal years. The Company has historically
experienced net losses and lower net sales in each of its first, third and
fourth fiscal quarters. The Company expects this trend to continue in the
current fiscal year and, in particular, expects to experience a net loss in its
fourth fiscal quarter of 1996. The Company expects to continue to experience
this seasonal fluctuation in its net sales and net income. Because a very
significant percentage of the Company's total sales and earnings for a fiscal
year results from operations in the second quarter, the Company has limited
ability to compensate for shortfalls in second quarter sales or earnings by
changes in its operations or strategies in other quarters. A significant
shortfall in results for the second quarter of any fiscal year can thus be
expected to have a material adverse effect on the Company's annual results of
operations. The Company's quarterly results of operations also may fluctuate
significantly as a result of a variety of factors, including the timing of new
store openings, net sales contributed by new stores, increases or decreases in
comparable store sales, timing of certain holidays, changes in the Company's
merchandise, general economic, industry and weather conditions that affect
consumer spending and actions of competitors. "See Management's Discussion and
Analysis of Financial Condition and Results of Operations".
PRODUCTIVITY AND SALES IN EXISTING STORES
The growth of the Company's sales and earnings depends, in part, on its
ability to improve productivity in existing stores and increase comparable store
sales. The Company closed more than 700 stores during and after its
reorganization and has already taken a number of steps to increase store
productivity, including making changes in basic retailing, merchandising and
marketing strategies to attract customers and to increase sales. Although
average store sales for existing Zales and Gordon's Division stores remain below
the industry average, and the Company believes that there is significant
potential for further increases in sales for existing stores, average or
comparable store sales may vary. Increases in average or comparable store sales
are not assured and failure to achieve such increases would adversely affect the
Company's results. In addition, certain of the changes in strategy, such as the
Company's strategy of emphasizing "key items" at attractive prices, may reduce
the gross margins realized by the Company. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations."
EXPANSION PROGRAM
The growth of the Company's sales and net earnings will depend, to some
extent, on the Company's ability to expand its operations through the opening of
new stores (including leased departments) in existing and new markets and to
operate those stores profitably. The Company operated 1,207 stores in all 50
states, Puerto Rico and Guam at April 30, 1996 and has opened or plans to open
approximately 95 new stores and leased departments, including 20 acquired
Karten's stores, in fiscal 1996 and approximately 110 new stores and leased
departments in fiscal 1997, compared to 35 new stores and leased departments
opened in fiscal 1995. The average cost of opening a new mall store in the Zales
and Gordon's Divisions is approximately $700,000 to $750,000, including
inventory, capital expenditures and pre-opening expenses. The Company expects to
fund the opening of new stores with cash flow from operating activities and
borrowings under its Revolving Credit Agreement and Receivables Securitization
Facility (as defined herein). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources". Achieving the Company's expansion goals will depend on a number of
factors, including the Company's ability to secure suitable locations on
acceptable terms, open new stores in a timely manner, hire and train additional
store and supervisory personnel, integrate new stores into its operations on a
profitable basis and modify its management information systems for growth.
Furthermore, the Company will continually need to evaluate the adequacy of its
store management and systems to manage its planned expansion. The Company
anticipates that there will continue to be significant competition among
specialty retailers for desirable store sites and qualified personnel. There can
be no assurance that the Company will be able to open new
10
<PAGE> 12
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 cash flow from operating activities and borrowings
under the Company's Revolving Credit Agreement and Receivables Securitization
Facility will provide adequate funds to finance the Company's expansion.
However, if these sources of funds are inadequate to finance the Company's
expansion, it may require capital from additional sources. There can be no
assurance as to the future availability of additional financing or the terms
thereof, and failure to obtain such financing on acceptable terms could require
the Company to alter its expansion plans or otherwise adversely affect the
Company.
MERCHANDISE SUPPLY AND INVENTORY
During the years ended July 31, 1995 and 1994, the Company purchased
approximately 29% and 36%, respectively, of its merchandise from its top five
vendors. Although the Company believes that alternate sources of supply are
available, the abrupt loss of any significant supplier during the three month
period leading up to the Christmas season could result in a material adverse
effect on the Company's business. The jewelry industry generally is affected by
fluctuations in the prices of gold and diamonds and, to a lesser extent, other
precious and semi-precious stones. The Company does not hedge against
fluctuations in the cost of diamonds or gold. A significant increase in prices
or decrease in the availability of gold or diamonds could have a material
adverse effect on the Company's business. The supply and price of diamonds in
the principal world markets are significantly influenced by a single entity, the
Central Selling Organization (the "CSO"), a marketing arm of DeBeers
Consolidated Mines Ltd. of South Africa. The CSO has traditionally controlled
the marketing of a substantial majority of the world's supply of diamonds and
sells rough diamonds to worldwide diamond cutters from its London office in
quantities and at prices determined in its sole discretion. The availability of
diamonds to the CSO and the Company's suppliers is to some extent dependent on
the political situation in diamond producing countries, such as South Africa,
Botswana, Zaire, the Russian republics and Australia, and on the continuation of
the prevailing supply and marketing arrangements for raw diamonds. Until
alternate sources could be developed, any sustained interruption in the supply
of diamonds from the significant producing countries could adversely affect the
Company and the retail jewelry industry as a whole. See "Business -- Purchasing
and Inventory".
A portion of the Company's inventory represents slow-moving merchandise.
The Company has a methodology that it believes results in timely identification
and valuation of this merchandise. In addition, it believes that the disposition
of this merchandise can continue to be carried out without materially affecting
the Company's merchandising and pricing strategies. However, there can be no
assurance that slow-moving inventory will not adversely affect the Company's
business or financial results.
DEPENDENCE ON KEY PERSONNEL
Since its emergence from bankruptcy, the Company has hired Robert J.
DiNicola, its Chairman, President and Chief Executive Officer, and has retained
or recruited a number of other senior executives and other key employees. The
Company is dependent on these personnel, who have been instrumental in designing
and implementing the Company's recent initiatives and are involved in the
strategies for the Company's future growth and profitability. The loss of
services of Mr. DiNicola or other key members of management could have a
material adverse effect on the Company's results of operations or financial
condition. Mr. DiNicola and the Company have entered into an employment
agreement that will expire on April 17, 1998, unless earlier terminated. Thomas
E. Whiddon, who was Senior Vice President and Chief Financial Officer of the
Company, resigned June 27, 1996 to become Executive Vice President and Chief
Financial Officer of Lowe's Corporation. Mr. Whiddon's former areas of
responsibility will report to Merrill J. Wertheimer, who has
11
<PAGE> 13
reassumed the title of Chief Financial Officer. 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 Revolving Credit Agreement.
USE OF PROCEEDS
All of the shares of Common Stock to which this Prospectus relates are
being offered by the Selling Shareholder. The Company will not receive any of
the proceeds from the sale of such shares.
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the NYSE under the symbol ZLC. Prior to June
19, 1996, the Common Stock was listed on the National Association of Securities
Dealers, Inc.'s National Market ("Nasdaq") under the symbol ZALE. The following
table sets forth the high and low sale prices for the Common Stock for each
fiscal quarter during the two most recent fiscal years and during the current
fiscal year as reported by Nasdaq prior to June 19, 1996 and as reported on the
NYSE Composite Tape commencing June 19, 1996.
<TABLE>
<CAPTION>
BY FISCAL QUARTERS HIGH LOW
-------------------------------------------------------------- ------- -------
<S> <C> <C>
1994
First Quarter............................................... 11 1/4 9 3/8
Second Quarter.............................................. 11 8 1/8
Third Quarter............................................... 9 1/2 8 1/2
Fourth Quarter.............................................. 9 1/4 8 11/16
1995
First Quarter............................................... 13 5/8 8 3/8
Second Quarter.............................................. 13 10 1/4
Third Quarter............................................... 12 10 1/4
Fourth Quarter.............................................. 14 3/8 11 1/4
1996
First Quarter............................................... 15 5/8 13 5/8
Second Quarter.............................................. 16 11/16 13 1/2
Third Quarter............................................... 18 5/8 13 11/16
Fourth Quarter (through July 23)............................ 20 1/4 16 1/2
</TABLE>
The last sale price of the Common Stock on July 23, 1996, as reported by
the NYSE, was $16 1/2 per share.
12
<PAGE> 14
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.
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information is qualified in
its entirety by the Consolidated Financial Statements of the Company (and the
related Notes thereto) contained elsewhere in this Prospectus and should be read
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition". The Income Statement and Balance Sheet Data
shown below and for each of the years ended July 31, 1995 and 1994, the four
months ended July 31, 1993, and for each of the years ended March 31, 1993, 1992
and 1991 have been derived from the Company's audited Consolidated Financial
Statements. The information for the nine month periods ended April 30, 1996 and
1995 and for the predecessor pro forma year ended July 31, 1993 is derived from
the Company's unaudited Consolidated Financial Statements which, in the opinion
of the Company, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such information. The results
of operations for the four months ended July 31, 1993 are not necessarily
indicative of the results of operations that may be expected for the full year
due to the seasonal nature of the Company's business. As a result of the
adoption of fresh-start financial reporting upon emergence from bankruptcy, the
Company's results of operations subsequent to July 31, 1993 are not comparable
to results of operations for the prior periods.
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------------------------------
PRO
FORMA(1)
-----------
YEAR FOUR MOS.
YEAR ENDED JULY 31, ENDED ENDED YEAR ENDED MARCH 31,
------------------------- JULY 31, JULY 31, ---------------------------------------
1995 1994 1993 1993 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $1,036,149 $ 920,307 $ 956,447 $ 244,539 $ 980,832 $1,156,455 $1,335,269
Cost of sales.................... 524,010 460,060 533,080 127,484 534,420 663,707 662,788
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin..................... 512,139 460,247 423,367 117,055 446,412 492,748 672,481
Selling, general and
administrative expenses........ 434,101 401,744 402,116 119,786 418,133 575,592 562,167
Depreciation and amortization
expense (credit)............... 381 (4,385) 26,459 8,973 26,316 50,899 56,024
Unusual items -- provision for
valuation of assets............ -- -- 20,200 -- 20,200 574,336 --
Reorganization and restructure
costs.......................... -- -- 143,690 47,879 137,937 175,659 --
Net reduction of reserves for
preacquisition contingencies... -- -- -- -- -- 5,566 13,141
Gain on sale of assets........... -- -- -- -- -- 2,667 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating earnings (loss)........ 77,657 62,888 (169,098) (59,583) (156,174) (875,505) 67,431
Interest expense, net............ 29,837 28,142 23,508 6,623 24,829 84,885 126,008
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before
fresh-start revaluation, income
taxes, extraordinary items and
cumulative effect of accounting
change......................... 47,820 34,746 (192,606) (66,206) (181,003) (960,390) (58,577)
Fresh-start revaluation.......... -- -- (246,236) (246,236) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes, extraordinary items and
cumulative effect of accounting
change......................... 47,820 34,746 (438,842) (312,442) (181,003) (960,390) (58,577)
Income taxes..................... 16,350 11,621 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary items and
cumulative effect of accounting
change......................... $ 31,470 $ 23,125 $ (438,842) $ (312,442) $ (181,003) $ (960,390) $ (58,577)
========== ========== ========== ========== ========== ========== ==========
Net earnings (loss).............. $ 31,470 $ 21,557 $ 664,991 $ 791,391 $ (181,003) $ (960,390) $ (54,125)
========== ========== ========== ========== ========== ========== ==========
Earnings per common share(2):
Primary:
Earnings before extraordinary
item....................... $ 0.88 $ 0.66
Net earnings................. $ 0.88 $ 0.62
Assuming full dilution:
Earnings before extraordinary
item....................... $ 0.86 $ 0.66
Net earnings................. $ 0.86 $ 0.62
Weighted average number of
common shares outstanding(2):
Primary...................... 35,849 34,965
Assuming full dilution....... 36,565 34,965
BALANCE SHEET DATA:
Working capital.................. $ 781,802 $ 763,216 $ 676,677 $ 676,677 $ 961,671 $ 809,417 $ 487,439
Total assets..................... 1,110,708 1,112,647 1,013,523 1,013,523 1,252,448 1,088,060 1,789,178
Total debt....................... 443,624 447,478 355,125 355,125 284,554 -- 1,173,559
Total stockholders' investment
(deficit)...................... 391,890 342,740 311,070 311,070 (791,391) (610,388) 350,002
STORES OPEN AT END OF PERIOD:.... 1,181 1,231 1,265 1,265 1,265 1,521 1,938
</TABLE>
- ---------------
(1) Income statement data in this column represent historical income statement
data for the twelve months ended July 31, 1993 which includes the four month
period ended July 31, 1993 and the eight month period ended March 31, 1993.
(2) Earnings (loss) per share is not presented in the "Predecessor" columns
because such presentation would not be meaningful. The old stock, which was
not publicly traded, was cancelled under the Plan of Reorganization and the
new stock was not issued until the Effective Date.
14
<PAGE> 16
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,(1)
------------------------------
1996 1995
---------- ----------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................................ $ 888,519 $ 824,749
Cost of sales............................................................ 450,615 413,318
---------- ----------
Gross margin............................................................. 437,904 411,431
Selling, general and administrative expenses............................. 345,295 336,891
Depreciation and amortization expense (credit)........................... 4,756 (206)
Unusual items -- reorganization recoveries............................... (4,486) --
---------- ----------
Operating earnings....................................................... 92,339 74,746
Interest expense, net.................................................... 22,604 22,594
---------- ----------
Earnings before income taxes and extraordinary item...................... 69,735 52,152
Income taxes............................................................. 24,753 17,550
---------- ----------
Earnings before extraordinary item....................................... $ 44,982 $ 34,602
========== ==========
Net earnings............................................................. $ 43,886 $ 34,602
========== ==========
Earnings per common share:
Primary:
Earnings before extraordinary item................................... $ 1.24 $ 0.99
Net earnings......................................................... $ 1.21 $ 0.99
Assuming full dilution:
Earnings before extraordinary item................................... $ 1.22 $ 0.99
Net earnings......................................................... $ 1.19 $ 0.99
Weighted average number of common shares outstanding:
Primary.............................................................. 36,349 34,964
Assuming full dilution............................................... 36,956 34,964
BALANCE SHEET DATA:
Working capital........................................................ $ 746,503 $ 783,011
Total assets........................................................... 1,164,656 1,147,318
Total debt............................................................. 398,915 444,627
Total stockholders' investment......................................... 452,615 395,167
STORES OPEN AT END OF PERIOD:............................................ 1,207 1,184
</TABLE>
- ---------------
(1) The results of operations for the nine month periods ended April 30, 1996
and 1995 are not indicative of the operating results for the full fiscal
year due to the seasonal nature of the Company's business. Seasonal
fluctuations in retail sales historically have resulted in higher earnings
in the quarter of the fiscal year which includes the Christmas season.
15
<PAGE> 17
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.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's audited and unaudited consolidated statements of operations expressed
as a percentage of net sales and should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
NINE MONTHS -----------------------
ENDED YEAR ENDED PRO FORMA
APRIL 30, JULY 31, YEAR ENDED YEAR ENDED
--------------- --------------- JULY 31, MARCH 31,
1996 1995 1995 1994 1993 1993
----- ----- ----- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 50.7 50.1 50.6 50.0 55.7 54.5
----- ----- ----- ----- ----- -----
Gross margin........................... 49.3 49.9 49.4 50.0 44.3 45.5
Selling, general and administrative
expenses............................... 38.9 40.8 41.9 43.7 42.0 42.6
Depreciation and amortization expense
(credit)............................... 0.5 -- -- (0.5) 2.8 2.7
Unusual items and reorganization costs... (0.5) -- -- -- 17.1 16.1
----- ----- ----- ----- ----- -----
Operating earnings (loss)................ 10.4 9.1 7.5 6.8 (17.6) (15.9)
Interest expense, net.................... 2.5 2.8 2.9 3.0 2.6 2.5
Fresh-start revaluation.................. -- -- -- -- (25.7) --
----- ----- ----- ----- ----- -----
Earnings (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change............ 7.9 6.3 4.6 3.8 (45.9) (18.4)
Income taxes............................. 2.8 2.1 1.6 1.3 -- --
----- ----- ----- ----- ----- -----
Earnings (loss) before extraordinary
items and cumulative effect of
accounting change...................... 5.1 4.2 3.0 2.5 (45.9) (18.4)
Extraordinary items:
Loss on early extinguishment of debt,
net of income taxes.................. (0.2) -- -- (0.2) -- --
Gain on debt discharge, net of income
taxes................................ -- -- -- -- 116.9 --
Cumulative effect of accounting change
for postretirement benefits, net of
income taxes........................... -- -- -- -- (1.5) --
----- ----- ----- ----- ----- -----
Net earnings (loss)...................... 4.9% 4.2% 3.0% 2.3% 69.5% (18.4%)
===== ===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL 30, 1995
Net Sales. Net Sales for the nine months ended April 30, 1996 increased by
$63.8 million to $888.5 million, a 7.7 percent increase compared to the previous
year. Sales for stores open for comparable periods increased by 8.7 percent. The
sales increase primarily resulted from improved merchandise assortments,
successful holiday and non-holiday promotions and strong store level execution.
Gross Margin. Gross Margin as a percentage of net sales decreased by 0.6
percent due to the transition in sales mix to more key item merchandise and
higher markdowns for clearance of discontinued merchandise during the current
year. Key item merchandise produces higher sales volumes but has a slightly
lower gross margin rate, on average, than other merchandise. The current year
net LIFO provision was $1.9 million or 0.2 percent of net sales higher than last
year.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses decreased 1.9 percent as a percentage of net sales.
Store payroll expense decreased 1.0 percent
17
<PAGE> 19
as a percentage of net sales as a result of focused control measures. Other
store expenses decreased 0.6 percent of net sales principally related to store
occupancy costs, which increased at a lower rate than net sales. Corporate
expenses decreased by 1.1 percent of net sales principally as a result of lower
costs for employee benefits, outside services and insurance. The current year
demonstrates the Company's ability to leverage its fixed store and corporate
operating expenses while increasing sales in the stores. These improvements were
partially offset by an increased provision for chargeoffs of customer accounts
resulting from general economic conditions and previous credit policies at the
Gordon's Division. See "Business -- Credit Operations".
Earnings Before Interest, Taxes, Depreciation and Amortization Expense
(Credit), Extraordinary Item and Unusual Items. As a result of the factors
discussed above, Earnings Before Interest, Taxes, Depreciation and Amortization
Expense (Credit), Extraordinary Item and Unusual Items were $92.6 million and
$74.5 million for the nine months ended April 30, 1996 and 1995, respectively.
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $5.0 million. Amortization of the Excess of Revalued Net
Assets Over Stockholders' Investment was $4.4 million in both periods. However,
depreciation and amortization of property and equipment increased from $4.2
million to $9.0 million as new assets have been purchased since the fresh-start
reporting writeoff of substantially all fixed assets of the Company as of July
31, 1993.
Unusual Items -- Reorganization Recoveries. Unusual Items -- Reorganization
Recoveries were $4.5 million for the nine month period ended April 30, 1996.
There were no unusual items for the prior year. See the note to the Consolidated
Financial Statements "Unusual Items -- Reorganization Recoveries".
Interest Expense, Net. Interest Expense, Net was $22.6 million for both
nine month periods ended April 30, 1996 and 1995. Interest expense for the nine
months ended April 30, 1996 remained constant due to the early redemption of the
$60.0 million 11.0 Percent Second Priority Senior Secured Notes on September 11,
1995 partially offset by the increase in interest expense due to higher
borrowings under the Revolving Credit Agreement and a reduction in interest
income due to lower average balances in short-term investments. Also, the prior
year included $1.2 million of interest income on funds escrowed for previous
bankruptcy matters.
Income Taxes. The income tax expense for the nine month periods ended April
30, 1996 and 1995 was $24.8 million and $17.6 million, respectively, reflecting
an effective tax rate of 35.5 percent and 33.7 percent, respectively. As a
result of guidelines regarding accounting for income taxes of companies
utilizing fresh-start reporting, the Company reports earnings on a fully-taxed
basis even though it does not expect to pay any significant income taxes for the
near future. The Company will realize the cash benefit from utilization of the
tax NOL against current and future tax liabilities. As of April 30, 1996, the
Company has a NOL (after limitations) of approximately $370 million.
As the Company develops a longer-term earnings record, it may determine
that a portion of the valuation reserve on the Company's deferred tax asset will
not be required as such asset will more likely than not be realizable. Any
reduction in the valuation reserve will increase Additional Paid-In Capital
directly.
Extraordinary Item. The extraordinary charge of $1.1 million, net of an
income tax benefit of $0.6 million, for the nine month period ended April 30,
1996 was the result of the early redemption of the $60.0 million 11.0 Percent
Second Priority Senior Secured Notes. See the note to the Consolidated Financial
Statements "Working Capital Financing".
YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1994
Net Sales. Net Sales for the year ended July 31, 1995 increased by $115.8
million to $1,036.1 million, a 12.6% increase compared to the previous year. The
increase is primarily the result of new management's implementation of a key
item merchandising strategy, product-focused
18
<PAGE> 20
marketing and improved execution in the stores. Sales for stores open for
comparable periods increased by approximately 12.8%.
Gross Margin. Gross Margin as a percentage of sales decreased by 0.6% from
higher markdowns for clearance of discontinued merchandise.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses, which increased by $32.4 million, were 41.9% and 43.7%
of sales for the years ended July 31, 1995 and 1994, respectively. Store
expenses decreased by 1.7% of sales as store occupancy costs and payroll
increased at a lower rate than sales. Promotional expenditures decreased as both
a percentage of sales and in total dollars. Corporate expenses decreased by 1.2%
of sales principally as a result of lower costs for management information
systems and insurance. These improvements were offset by a decrease in net
credit income principally from reduced finance charge income on a lower average
receivables portfolio in relation to the prior year. The reduction in the
average receivables portfolio resulted from the decrease of accounts from
significant store closings in 1992 and 1993, coupled with faster cash
collections of customer balances than in the prior year.
Earnings Before Interest, Taxes and Depreciation and Amortization Expense
(Credit). Earnings Before Interest, Taxes and Depreciation and Amortization
Expense (Credit) were $78.0 million and $58.5 million for the years ended July
31, 1995 and 1994, respectively, an increase of 33.4%.
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $4.8 million. Amortization of the Excess of Revalued Net
Assets Over Stockholders' Investment was $5.9 million in both periods. However,
depreciation and amortization of property and equipment increased from $1.4
million to $6.2 million as new assets have been purchased since the fresh-start
reporting write-off of substantially all fixed assets of the Company at July 31,
1993.
Interest Expense, Net. Interest Expense, Net was $29.8 million and $28.1
million for the years ended July 31, 1995 and 1994, respectively. The increase
was principally due to the refinancing of the Receivables Securitization
Facility (as defined herein) in July 1994 at a higher amount, partially offset
by an increase in investment income. The current year also includes $1.2 million
of interest income on funds escrowed for bankruptcy matters.
Income Taxes. Income Taxes for the years ended July 31, 1995 and 1994 were
$16.4 million and $10.6 million, respectively, reflecting an effective tax rate
of 34.2% and 32.9%, respectively. As of July 31, 1995, the Company had a NOL
(after limitations) of approximately $378 million.
YEAR ENDED JULY 31, 1994 COMPARED TO PRO FORMA YEAR ENDED JULY 31, 1993
Net Sales. Net Sales for the year ended July 31, 1994 decreased by $36.1
million or 3.8% when compared with the pro forma year ended July 31, 1993. The
significant decrease in Net Sales in fiscal 1994 is primarily the result of
closing approximately 175 locations in January through March 1993 as part of the
Company's operational restructuring.
Gross Margin. Gross Margin as a percentage of sales increased 5.7% due
primarily to the provision of a reserve against merchandise inventory of
approximately $43.0 million during the pro forma year ended July 31, 1993 for
estimated markdowns, damage, shrinkage or other loss in value caused by closing
approximately 175 locations. Excluding the reserve provision, Gross Margin as a
percentage of sales increased by 1.3% due to higher initial merchandise margin
partially offset by increased markdowns.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses as a percentage of sales were 43.7% for fiscal year 1994
and 42.0% for the pro forma year ended July 31, 1993. The percentage increase in
fiscal 1994 resulted primarily from higher promotional and employee benefit
costs incurred during the year relative to sales.
19
<PAGE> 21
Depreciation and Amortization Expense. Depreciation and Amortization
Expense decreased by $30.8 million principally due to the fresh-start reporting
write-off of substantially all fixed assets of the Company at July 31, 1993.
Unusual Items. The Unusual Items in the pro forma year ended July 31, 1993
relate to provisions made to reduce the value of certain non-operating assets,
including properties held for sale and a large diamond held for investment, to
their estimated net realizable values. A provision was also made for the
valuation of customer receivables. See the note to the Consolidated Financial
Statements "Unusual Items -- Provisions for Valuation of Assets".
Reorganization and Restructure Costs. Reorganization and Restructure Costs
are segregated from normal operations in the pro forma year ended July 31, 1993
Consolidated Statement of Operations and reflect the costs incurred by the
Company in the implementation of its operational and financial restructuring
plan as well as costs related directly to the bankruptcy filing.
Interest Expense, Net. Interest Expense, Net was $28.1 million for fiscal
year 1994 and $23.5 million for the pro forma year ended July 31, 1993. The
increase in fiscal 1994 primarily represents interest incurred on the 11% $60.0
million Second Priority Senior Secured Notes which were issued in conjunction
with the Company's emergence from bankruptcy and a reduction in interest income
due to lower average balances in short-term investments as a result of payment
of bankruptcy obligations in July 1993.
Income Taxes. Income Taxes for the year ended July 31, 1994 were $10.6
million. An income tax benefit was not provided in the period ended July 31,
1993 because all operating losses would have to be carried forward to future
years and the realization of a tax benefit for those losses was not assured.
FOUR MONTHS ENDED JULY 31, 1993
Net Sales for the four months ended July 31, 1993 were $244.5 million.
Gross Margin was 47.9% of sales and Selling, General and Administrative Expenses
were 49.0% of sales for the four month period ended July 31, 1993. Due to the
seasonality of the business, these results were not representative of results
expected for a full year. Reorganization and Restructure Costs are segregated
from normal operations in the four months ended July 31, 1993 Consolidated
Statement of Operations and primarily represent professional fees incurred in
conjunction with the Chapter 11 reorganization. Reorganization and Restructure
Costs of $47.9 million, the Fresh-Start Revaluation of $246.2 million and Gain
on Debt Discharge of $1.1 billion all relate to the Company's reorganization
under Chapter 11 and are described in the notes to the Consolidated Financial
Statements "Reorganization and Basis of Presentation" and "Reorganization and
Restructure Costs". Net earnings were substantially affected by these
reorganization-related items and are not comparable in material respects to
earnings for subsequent periods.
YEAR ENDED MARCH 31, 1993
Net Sales for the year ended March 31, 1993 were $980.8 million. Gross
Margin was 45.5% of sales for the year ended March 31, 1993. A reserve against
merchandise inventory of approximately $43.0 million was provided in Cost of
Sales for estimated shrinkage, markdowns, damage or other loss in value caused
by closing approximately 175 locations. Excluding the reserve provision, Gross
Margin as a percentage of sales was 49.9%. Selling, General and Administrative
Expenses were 42.6% of sales for the year ended March 31, 1993.
The unusual items in the year ended March 31, 1993 relate to provisions
made to reduce the value of certain non-operating assets, including properties
held for sale and a large diamond held for investment, to their estimated net
realizable values. A provision was also made for the valuation of customer
receivables. See the note to the Consolidated Financial Statements "Unusual
Items -- Provisions for Valuation of Assets".
20
<PAGE> 22
Reorganization and Restructure Costs are segregated from normal operations
in the March 31, 1993 Consolidated Statement of Operations and reflect the costs
incurred by the Company in the implementation of its operational and financial
restructuring plan as well as costs related directly to the bankruptcy filing.
The major components are described in the notes to the Consolidated Financial
Statements "Reorganization and Basis of Presentation" and "Reorganization and
Restructure Costs".
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory
and receivables growth, capital expenditures primarily for renovations and new
store growth, and debt service. As of April 30, 1996, the Company had cash and
cash equivalents of $37.2 million, including $33.0 million restricted primarily
by the collateral requirements under the Receivables Securitization Facility
established by the Company in July 1994 (the "Receivables Securitization
Facility"). The retail jewelry business is highly seasonal, with a significant
proportion of sales and operating income being generated in November and
December of each year. Approximately 41.2 percent and 40.1 percent of the
Company's annual sales were made during the three months ended January 31, 1995
and 1994, respectively, which includes the Christmas selling season. The
Company's working capital requirements fluctuate during the year, increasing
substantially during the fall season as a result of higher planned seasonal
inventory levels.
Zale Funding Trust, a limited purpose Delaware business trust and an
indirect wholly-owned subsidiary of the Company formed to finance customer
accounts receivable, issued approximately $380.6 million, net of discount,
aggregate principal amount of Receivables Backed Notes ("ZFT Receivables Notes")
in July 1994 pursuant to the Receivables Securitization Facility. The ZFT
Receivables Notes are secured by a lien on all customer accounts receivable and
mature in July 1999.
On August 11, 1995, the Company entered into a new three-year revolving
credit agreement (the "Revolving Credit Agreement") which provides for revolving
credit loans in an aggregate amount of up to $150.0 million, with a $30.0
million sublimit for letters of credit. The Revolving Credit Agreement replaced
an earlier agreement entered into by the Company in July 1993. At no time may
the total amount of loans outstanding under the Revolving Credit Agreement
exceed the lesser of the total commitment of $150.0 million and a defined
borrowing base ($218.4 million at April 30, 1996, based on a fixed percentage of
eligible inventory, as defined).
The Revolving Credit Agreement was structured to increase the Company's
flexibility through less restrictive loan covenants, lower collateral
requirements and a lower fee and interest rate structure than its earlier
agreement. The increased flexibility allowed in the new Revolving Credit
Agreement combined with the increased liquidity from the Receivables
Securitization Facility enabled the Company to redeem its 11.0 percent notes,
redeem the Series B Warrants and continue to invest in its capital improvement
and store growth initiatives.
Approximately $60.0 million of Second Priority Senior Secured Notes due
2000 bearing interest at 11.0 percent per annum were issued by the Company upon
its emergence from bankruptcy. These notes were redeemed on September 11, 1995
utilizing cash on hand. Upon redemption, the Company paid an early redemption
premium and other costs associated with the redemption of approximately $1.7
million. An extraordinary charge of $1.1 million, net of an income tax benefit
of $0.6 million, was recorded in the first quarter of the current year. See the
note to the Consolidated Financial Statements "Working Capital Financing".
On August 31, 1995, Zale redeemed the Series B Warrants and acquired all
Swarovski International Holding, A.G. ("Swarovski") rights, title and interest
under the warrant agreement and paid $9.3 million to Swarovski in consideration
of the redemption. As a result of this, the Series B Warrants were canceled and
are no longer outstanding. See the note to the Consolidated Financial Statements
"Repurchase of Warrants".
21
<PAGE> 23
The Company is in the second year of a three year store remodeling and
refurbishment program. This program will enable the Company to enhance its
stores in certain key markets relative to its competition. Additionally, the
Company plans significant upgrades to its management information systems over
the next several years. The Company anticipates spending approximately $50.0
million on capital expenditures in fiscal year 1996. Capital expenditures are
typically scheduled for the late spring through early fall in order to have new
or renovated stores ready for the Christmas selling season. During the nine
months ended April 30, 1996, the Company made approximately $37.0 million in
capital expenditures, principally to enhance the appearance of 86 stores and to
open 33 new stores. In addition, on January 18, 1996, the Company acquired
Karten's Jewelers, Inc., a 20-store chain. The Company acquired all the
outstanding shares of common stock for $3.0 million in cash and assumption of
all liabilities. In fiscal years 1996, 1997 and 1998, the Company intends to add
approximately 250 new locations through new store openings or strategic
acquisitions.
There has been an increase of approximately $65 million, or 15.5 percent,
in owned merchandise inventories at April 30, 1996 compared to the balance at
April 30, 1995. The increase in inventory levels is primarily a result of an
increased number of stores, improving the depth and breadth of merchandise
available in the stores to accommodate increasing sales, as well as the Company
shifting its merchandise mix to reduce the amount of consigned merchandise. Of
the $65 million increase, approximately $24 million pertains to the reduction in
the level of consigned merchandise compared to last year. As a result of the
transactions discussed above and the change in mix between owned and consigned
merchandise, the Company had outstanding borrowings of $18.0 million under the
Revolving Credit Agreement at April 30, 1996, compared to no such borrowing at
April 30, 1995.
Future liquidity will also be enhanced to the extent that the Company is
able to realize the cash benefit from utilization of its NOL against current and
future tax liabilities. Guidelines regarding accounting for income taxes of
companies utilizing fresh-start reporting, require the Company to report
earnings on a fully-taxed basis even though it does not expect to pay any
significant income taxes for the near future. As of April 30, 1996, the Company
has a NOL (after limitations) of approximately $370 million which represents up
to $144 million in future tax benefits. The utilization of this asset is subject
to limitations. The most restrictive is the Internal Revenue Code Section 382
annual limitation. The NOL will begin to expire in fiscal year 2002 but can be
utilized through 2009.
Management believes that operating cash flow, amounts available under the
Revolving Credit Agreement 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.
INFLATION
In management's opinion, changes in Net Sales and Net Earnings (Loss) that
have resulted from inflation and changing prices have not been material. There
is no assurance, however, that inflation will not materially affect the Company
in the future.
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<PAGE> 24
BUSINESS
GENERAL
Zale Corporation is the largest specialty retailer of fine jewelry in the
United States in terms of both retail sales and number of stores. The Company
had sales of $1.04 billion for the fiscal year ended July 31, 1995 and 1,207
locations at April 30, 1996 throughout the U.S., Guam and Puerto Rico, primarily
in regional shopping malls. The Company conducts business through four distinct
divisions. The Zales(R) Division, with 571 stores, represents the Company's
national brand and is focused on a broad range of mainstream consumers. The
Gordon's(SM) Division operates 336 stores and is being positioned as a major
regional jeweler focusing on twelve regional markets and offering merchandise
that is more contemporary and targeted at regional tastes. The Guild Division
operates 118 upscale jewelry stores under the Bailey, Banks & Biddle(R) and
other locally established names. The Diamond Park Division manages 178 leased
fine jewelry departments in several major department store chains including
Marshall Field's, Dillard's and Mercantile. In addition, the Company operates
four outlet stores.
The Company believes that the jewelry retail sector is large and highly
fragmented, with total U.S. jewelry retail sales in 1995, based on publicly
available data, of approximately $32 billion. Management believes that the
Company's size, nationwide presence and market position are significant
competitive advantages, providing economies of scale in television and print
advertising, distribution and buying which are not available to smaller chains
and independents. The Company also enjoys significant brand name recognition,
with the Zales name in existence since 1924, Gordon's since 1905 and Bailey,
Banks & Biddle since 1832. The Company believes that name recognition is an
important advantage in jewelry retailing because jewelry is generally unbranded
by product and the consumer must trust in a retailer's reliability and
credibility.
The Company is incorporated in Delaware. Its principal executive offices
are located at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003, and its
telephone number at that address is (214) 580-4000.
HISTORY
The Company was founded in 1924 by Morris B. Zale. In 1986, Peoples
Jewellers Limited and Swarovski purchased the Company in a leveraged buyout. In
1989, the Company incurred additional debt to acquire Gordon's Jewelers. As a
result, the Company was severely over-leveraged and could not sustain the
downturn in jewelry sales in the early 1990s, causing the Company to default on
its interest payments and enter bankruptcy protection in January 1992. While in
bankruptcy, the Company was able to upgrade its store base by closing more than
700 poorly performing stores. In addition, the Company was able to renegotiate
more favorable terms on certain of its remaining leases. On July 30, 1993, the
Company emerged from bankruptcy protection after completing a comprehensive
restructuring of its capital structure through the implementation of its Plan of
Reorganization.
BUSINESS STRATEGY
In April 1994, Robert DiNicola joined the Company as Chairman and Chief
Executive Officer and began recruiting other experienced retailing executives to
build a new management team. This team undertook to revitalize the Company by
making it customer-focused and instituting back-to-basics retailing disciplines.
Management believes that, since April 1994, the following initiatives have
significantly improved the Company's operating performance:
Reestablished Brand Identities. Distinct brand identities have been
reemphasized for the Zales and Gordon's Divisions. Separate divisional
management and buying teams have been brought on board to create and implement
an individualized merchandising and marketing strategy.
23
<PAGE> 25
Refocused Merchandising. Merchandising has been refocused and strengthened.
In the Zales and Gordon's Divisions, management has developed a large selection
of key items from among the best selling products in the retail jewelry
industry, such as tennis bracelets, bridal sets and diamond stud earrings, and
made certain that these items are available in an appropriate variety of styles
and a range of competitive price points. At the same time, the Company has
structured inventory management systems to ensure that these items are
consistently in stock. The Company has more recently introduced a similar key
item approach in the Guild and Diamond Park Divisions.
Initiated Product and Event-Focused Marketing. The Company's marketing
effort has become more product and event-focused. Television, radio, newspaper
inserts, and direct mail advertising now feature selected key items at a variety
of price points. The Company has also broadened its marketing efforts beyond the
Christmas season to tie in with other gift-giving holidays, such as Valentines
Day and Mother's Day. In addition, advertising and in-store promotions have been
synchronized to take advantage of other periods of high mall traffic. These
strategies have helped to position Zales and Gordon's stores as gift-giving
centers.
Strengthened Buying Organization. The Company has recruited experienced
buyers and eliminated store-level buying to ensure consistency of quality and
cost. In addition, management believes that the Company is now leveraging its
size to achieve better terms with its suppliers for certain products.
Enhanced Price-Competitive Image. The Company's image as a provider of fine
jewelry at competitive prices has been enhanced by establishing price points for
merchandise that are perceived by customers as good values. These products are
labeled "Brilliant Buys", "Gordon's Gems" and "Best Buys" in the Zales, Gordon's
and Guild Division stores, respectively. These items are prominently displayed
throughout the store and prices are displayed as well, a practice that is
uncommon in the U.S. jewelry retailing industry and one that the Company
believes enhances its reputation for pricing integrity.
Improved Store Management and Environment. The Company has taken steps to
ensure that its most capable store managers are in its top stores and to provide
upgraded sales and product training to sales personnel company-wide. Staffing
schedules are now coordinated to better allocate employees during peak periods.
In addition, approximately 475 stores have received some level of physical
improvement over the last two years, ranging from major renovations to less
extensive remodeling.
Enhanced Credit Program. The Company has enhanced the approval process for
its private label credit cards, whereby those customers with a satisfactory
prior credit history can be approved rapidly. In addition, the Company refines
its credit standards on an ongoing basis and in June 1995 upgraded minimum
credit standards in the Gordon's Division. Private label credit cards are used
in approximately 50% of sales and the Company believes that its private label
credit cards increase sales, build customer loyalty and assist in providing a
customer database for direct marketing efforts.
These initiatives have contributed to significant improvements in operating
results. Average sales per store increased to $855,700 for the year ended July
31, 1995 from $738,300 for the year ended July 31, 1994, and increased to
$735,200 for the nine months ended April 30, 1996 from $677,400 for the nine
months ended April 30, 1995. Comparable store sales increased by 12.8% for the
year ended July 31, 1995 as compared to the year ended July 31, 1994, and
increased by 8.7% for the nine months ended April 30, 1996 as compared to the
nine months ended April 30, 1995.
In addition, selling, general and administrative expenses as a percentage
of sales decreased to 41.9% for the year ended July 31, 1995 from 43.7% for the
year ended July 31, 1994, and decreased to 38.9% for the nine months ended April
30, 1996 from 40.8% for the nine months ended April 30, 1995. Operating margin,
excluding unusual items, increased to 7.5% for the year ended July 31, 1995 from
6.8% for the year ended July 31, 1994, and to 9.9% for the nine months ended
April 30,
24
<PAGE> 26
1996 from 9.1% for the comparable prior-year period. (The nine-month periods
ended April 30 include the Christmas selling season. See "Risk
Factors -- Variability of Quarterly Results and Seasonality".)
Now that the Company has refocused its operating strategy, management
believes that further improvements in operating performance and growth can be
achieved through a number of additional initiatives under consideration,
including those set forth below.
Further Improve Store Productivity. Management believes that store
productivity and profitability at all divisions can be further improved. The
Zales and Gordon's Divisions together had average sales per store of
approximately $790,000 for the fiscal year ended July 31, 1995, which, based on
publicly available data, is still below the industry average of slightly more
than $1 million for comparable jewelry retailers. The Company believes it can
continue to increase store productivity and profitability by: (1) expanding key
item assortments to include more "better" and "best" classifications; (2)
tailoring its merchandise assortments to specific store locations in the
Gordon's and Guild Divisions; (3) fully implementing the back-to-basics
retailing strategy at the Guild Division, where the strategy was introduced
approximately one year later than at the Zales and Gordon's Divisions; (4)
relocating certain existing stores to more attractive sites within the malls
where they are currently located; (5) increasing advertising during
non-traditional gift-giving times and widening market coverage; (6) improving
store personnel hiring and retention and continuing to invest in focused
training of management and store personnel; (7) better utilizing customer buying
information gathered from its proprietary customer databases to tailor
merchandising and marketing; and (8) enhancing information systems to enable
buyers to interpret data more easily and make decisions more quickly.
Increase and Enhance Store Base. Over the next three years, the Company
plans to increase the number of stores in the Zales Division to approximately
750 from 571 at April 30, 1996, an increase of approximately 15% in the
Company's total store base. One of the objectives of the Company's expansion
strategy for the Zales Division is to add Zales stores in parts of the country
where the Division is currently underrepresented. The Company has identified
malls for this planned expansion which satisfy Zales' real estate criteria. In
the Gordon's Division, the Company plans to add a small number of stores to
increase concentration within that Division's targeted regional markets. In the
Guild Division, the Company intends to open a small number of additional stores
under the Bailey, Banks & Biddle name. The Company plans to reposition some of
the Guild Division's stores in more desirable locations in upscale malls to
capitalize on the current strength of the luxury retailing sector and to take
advantage of the upscale image projected by the Bailey, Banks & Biddle name. See
"Risk Factors -- Expansion Programs".
The Company believes that as opportunities arise acquisitions may be used
as part of its expansion strategy to increase penetration in a particular
market. For example, in January 1996 the Company acquired Karten's Jewelers, a
20-store chain, which immediately increased the Company's presence in the New
England market. The Company plans to operate these stores under the Zales name.
The Diamond Park Division recently began to operate leased jewelry departments
in 25 Parisian department stores in the Southeast.
Utilize Alternative Distribution Channels. Under its "direct fulfillment"
program, the Company is seeking to capitalize on the Zales name and national
reputation by experimenting with a series of direct marketing strategies to
complement its store-based operations. The Zales Division tested a program in
the fall of 1995 in which a 1-800 number and order forms were placed in a
sampling of the Division's newspaper and direct marketing inserts. The Company
also began testing home shopping during the 1995 Christmas season by including a
1-800 number in some of the Zales Division's television advertising. These
programs will be expanded on a selective basis during the 1996 holiday shopping
season. In addition, the Company is experimenting with marketing over the
Internet.
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<PAGE> 27
Leverage Costs. As increases in store productivity, an expanding store base
and new distribution channels increase sales, the Company expects to be able to
leverage its expenses, such as administrative, general corporate, and
advertising expenses, resulting in higher operating profit margins.
Explore Freestanding Store Concept. The Company, through the Zales
Division, plans to test the concept of freestanding stores located in or near
power strip centers with heavy customer traffic. It is expected that these
stores would be larger in size, 3,000 to 4,000 square feet (versus 1,400 square
feet in mall stores), with a much broader and deeper selection of merchandise.
If this test is successful, the Company may expand the freestanding store
program. However, there is no assurance that the Company will implement the
freestanding store program, and any pursuit of this program will follow
substantial completion of the mall-based expansion program.
ZALES DIVISION
The Zales Division is positioned as the Company's national flagship and is
a leading brand name in jewelry retailing in the United States. At April 30,
1996, the Zales Division had 571 mall-based stores in 49 states and Puerto Rico.
Average store size is approximately 1,400 square feet and the average purchase
is $241. Zales accounted for approximately 41% of the Company's sales in fiscal
1995.
Zales' customers represent a cross-section of mainstream America. The
product focus of the Zales Division is on bridal, diamond and gold jewelry.
Bridal merchandise, including gold wedding bands, diamond bridal sets, diamond
wedding bands and diamond solitaire rings, accounts for approximately 40% of the
Division's merchandise sales. The Company maintains strong bridal assortments
because it believes that bridal jewelry is often a customer's first major
jewelry purchase and is generally considered to be the most important factor in
establishing a long-term relationship with the customer. The remaining 60% of
merchandise sales principally comprises fashion jewelry with diamonds and other
precious stones, gold fashion jewelry and watches. The Company believes that the
prominence of diamond jewelry in the product selection fosters an image of
quality and trust among consumers.
Zales' merchandise selection is generally standardized across the nation.
The combination of Zales' national presence and standardized merchandise
selection allows it to use television advertising across the nation as its
primary advertising medium, supplemented by print and direct mail advertising.
The Company's back-to-basics retailing strategy was first introduced by the
Company in the Zales Division in 1994. The Company believes that it has
contributed to the improvement in the operations and results of the Zales
Division over the past two years. The following table sets forth total sales,
the approximate number of stores and average sales per store for the Zales
Division for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, YEAR ENDED JULY 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands)...... $404,609 $340,386 $428,794 $374,849 $370,981
Average sales per store......... 722,500 671,400 849,100 716,700 692,100
Stores opened during period..... 78(1) 6 8 2 10
Stores closed during period..... 6 29 30 4 43
Total stores at end of period... 571 498 499 521 523
</TABLE>
- ---------------
(1) Includes 35 stores transferred from the Gordon's Division effective August
1, 1995 and 20 Karten's stores acquired in January 1996.
26
<PAGE> 28
GORDON'S DIVISION
The Company is repositioning Gordon's as a major regional brand focusing on
twelve regional markets. At April 30, 1996, the Gordon's Division had 336 stores
in 40 states and Puerto Rico, substantially all of which operate under the trade
name Gordon's Jewelers. Average store size is 1,300 square feet and the average
sale is $239. Gordon's accounted for approximately 25% of the Company's sales in
fiscal 1995.
In fiscal 1995, Gordon's began to operate as a separate business unit with
its own management team, which developed a separate buying and merchandising
strategy. The Division's merchandising strategy was aimed at distinguishing
Gordon's stores from Zales stores by devoting a portion of store inventory to
products that seek to satisfy demand in each particular regional market and by
emphasizing a more contemporary look in its product line. A substantial portion
of the remaining merchandise sold by stores in the Gordon's Division overlaps
the Zales Division product line. Advertising for the Gordon's Division, which
uses radio and printed inserts, has been refocused to emphasize key items. The
Division also plans to shift a portion of its advertising to regional
television.
In addition to a back-to-basics retailing approach similar to that
initiated at the Zales Division, including product-oriented merchandising and
marketing focused on key items, Gordon's Division management: (1) upgraded and
changed product assortments with more distinctive, fashion-oriented merchandise;
(2) raised credit approval standards in an effort to improve the quality of the
receivables portfolio; (3) reduced the degree of promotional pricing; and (4)
improved in-store product displays. In addition, 35 stores which did not fit
with the regional strategy of the Gordon's Division were transferred to the
Zales Division. The reduction of promotions and implementation of more stringent
credit standards slowed the improvement in sales productivity in the Gordon's
Division in fiscal 1996 to date. The Company will reach the one-year anniversary
of these changes in July 1996.
The following table sets forth total sales, the approximate number of
stores and average sales per store for the Gordon's Division for the periods
indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED APRIL 30, YEAR ENDED JULY 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands)....... $204,773 $209,535 $262,540 $234,974 $221,549
Average sales per store.......... 611,300 567,800 711,500 624,900 580,000
Stores opened during period...... 10 4 5 4 5
Stores closed during period...... 41(1) 12 13 6 14
Total stores at end of period.... 336(2) 367 367 375 377
</TABLE>
- ---------------
(1) Includes 35 stores transferred to the Zales Division effective August 1,
1995.
(2) Includes 322 stores operating under the name Gordon's and 14 stores
operating under the name Daniel'sSM in Arizona.
27
<PAGE> 29
GUILD DIVISION
The Guild Division offers higher-end merchandise, more exclusive designs
and a prestigious shopping environment for the upscale customer. At April 30,
1996 the Guild Division operated 118 upscale jewelry stores in 26 states and
Guam. The Guild Division has an average sale of $430 and the average store is
approximately 2,600 square feet. The Guild Division accounted for approximately
19% of the Company's sales in fiscal 1995. The following table sets forth the
Guild Division's trade names and the approximate number of stores operating
under each of those names.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
TRADE NAMES STORES TRADE NAMES STORES
---------------------------- --------- ---------------------------- ---------
<S> <C> <C> <C>
Bailey, Banks & Biddle(R)... 82 Dobbins(R).................. 2
Corrigan's(R)............... 21 J. Herbert Hall(R).......... 2
Sweeney's(R)................ 4 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 a larger percentage of watches (approximately 19% of its sales) than the
Zales and Gordon's Divisions, is the Company's only Division that sells
giftware, and sells a much lower percentage of bridal merchandise than the Zales
and Gordon's Divisions. Guild stores also display arrangements of coordinated
jewelry designed to stimulate multiple purchases. Advertising at the Guild
Division principally consists of catalogs sent to the Division's existing
customers and potential customers identified through the use of purchased
mailing lists. The Company seeks to enhance direct marketing in the Division
using its credit card and customer databases and other purchased data.
The Company began to employ its back-to-basics retailing strategy and other
elements of its strategic refocus in the Guild Division in 1995, the year after
their initial introduction at the Zales Division. To date the Company's efforts
at the Guild Division have centered on replacing inconsistent operating
procedures and buying practices of individual stores with a centrally designed
and executed Division-wide approach and on reducing slow-moving inventory.
The Company believes that these steps have contributed to an improvement in
the performance of the Guild Division. The following table sets forth total
sales, the approximate number of stores, and average sales per store for the
Guild Division for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED APRIL 30, YEAR ENDED JULY 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands) $ 163,762 $ 156,155 $ 197,267 $ 182,278 $ 213,219
Average sales per
store................. 1,364,700 1,201,200 1,529,200 1,391,400 1,171,500
Stores opened during
period................ 1 4 4 4 4
Stores closed during
period................ 6 5 11 7 103
Total stores at end of
period................ 118 129 123 130 133
</TABLE>
28
<PAGE> 30
DIAMOND PARK DIVISION
The Diamond Park Division offers services for retailers that wish to use an
outside provider for specialized management and marketing skills in connection
with the sale of fine jewelry. At April 30, 1996, the Diamond Park Division
operated 178 leased locations in department stores including Dillard's(R)(62
locations), Mercantile(R) (67 locations), The Broadway(R) (26 locations) and
Marshall Field's(R) (23 locations) in 24 states. The Company has closed its
Broadway locations as a result of Broadway's sale to Federated Department
Stores, Inc. and the resulting conversion of the stores to Macy's, which
operates its own jewelry departments. Management believes that the Diamond Park
Division's opportunities for growth may be lessened by the current trend of
consolidation in the department store industry and a decreasing demand for
third-party owned jewelry departments by major department store chains. However,
this Division will seek to operate departments in additional regional department
stores as appropriate opportunities arise. The Diamond Park Division recently
began to operate leased jewelry departments in 25 Parisian department stores in
the Southeast.
The Diamond Park Division tailors its merchandising concept to that of the
host store as opposed to using one standard for all stores. Management considers
Diamond Park's primary product franchise areas to be watches, gold and diamond
fashion jewelry. Diamond Park coordinates its advertising with that of its host
department stores and principally utilizes inserts in four-color direct mail
catalogs and newspaper advertising of the host store groups. Diamond Park
accounted for approximately 13% of the Company's sales in fiscal 1995.
The following table sets forth total sales, the approximate number of
departments and average sales per department for the Diamond Park Division for
the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, YEAR ENDED JULY 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total sales (in thousands)....... $108,322 $110,835 $138,187 $127,761 $149,595
Average sales per department..... 588,700 554,200 701,500 591,500 577,600
Departments opened during
period......................... 9 14 18 19 1
Departments closed during
period......................... 19 33 35 46 94
Total departments at end of
period......................... 178 186 188 205 232
</TABLE>
PURCHASING AND INVENTORY
The Company purchases substantially all of its merchandise in finished form
from a network of established suppliers and manufacturers located primarily in
the United States, Southeast Asia, Hong Kong and Italy. The Company either
purchases merchandise from its vendors or acquires merchandise on consignment.
The Company has intentionally shifted its merchandising mix over the last year
to reduce the amount of consigned merchandise and increase its investment in
owned merchandise. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources". The
Company had approximately $76.3 million and $99.9 million of consignment
inventory on hand at April 30, 1996 and 1995, respectively. The Company is
subject to the risk of fluctuation in prices of diamonds, precious stones and
gold. The Company historically has not engaged in any substantial amount of
hedging activities with respect to merchandise held in inventory, since the
Company has been able to adjust retail prices to reflect significant price
fluctuations in the commodities that are used in the merchandise it sells. No
assurances, however, can be given that the Company will be able to adjust prices
to reflect commodity price fluctuations in the future. The Company is not
subject to substantial currency fluctuations because most purchases are dollar
denominated. During the years ended July 31, 1995 and 1994, the Company
purchased approximately 29% and 36%, respectively, of its merchandise from its
top five vendors.
29
<PAGE> 31
CREDIT OPERATIONS
The Company offers and grants credit through its private label credit card
program. See "Business -- Strategy". The credit programs help facilitate the
sale of merchandise to customers who wish to finance their purchases rather than
use cash or available credit limits on their major credit cards. Approximately
52% of the Company's retail sales during the fiscal year ended July 31, 1995
through its Zales, Gordon's and Guild Divisions were generated by credit sales
on the private label credit cards. The Company has more than 1.1 million active
charge customers who have a good credit history and available credit and more
than 1.9 million customer names on file that are not current charge customers.
The Company uses many of these customer names in its targeted marketing
programs.
Credit extension, customer service, payment processing and collections for
all the accounts are performed at one or more of the Company's servicing centers
located in Tempe, Arizona; Clearwater, Florida; Irving, Texas; San Marcos,
Texas; San Juan, Puerto Rico; and Guam. The Company has enhanced the approval
process for its private label credit card, whereby those customers with a
satisfactory prior credit history can be approved rapidly. Flexible payment
arrangements, typically twenty-eight to thirty-four months, are extended to
credit customers.
The following table presents certain data concerning sales, credit sales
and accounts receivable for the past two fiscal years and for the nine months
ended April 30, 1996 and 1995 (1):
<TABLE>
<CAPTION>
AS AT OR FOR THE AS AT OR FOR THE
NINE MONTHS ENDED FISCAL YEAR ENDED
APRIL 30, JULY 31,
--------------------- ---------------------
1996 1995 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales (thousands)............... $773,144 $706,076 $888,601 $792,101
Net credit sales (thousands)........ 383,064 362,972 458,664 413,305
Accounts receivable (thousands)..... 463,740 454,766 436,336 437,936
Credit sales as a percentage of net
sales............................. 49.5% 51.4% 51.6% 52.2%
Average number of active customer
accounts (thousands).............. 677 694 689 729
Average balance per customer
account........................... $ 675 $ 665 $ 668 $ 645
Average monthly collection
percentage........................ 9.3% 9.2% 9.1% 8.8%
Bad debt expense as a percentage of
credit sales...................... 10.5% 8.9% 9.1% 8.7%
Bad debt expense as a percentage of
net sales......................... 5.2% 4.6% 4.7% 4.6%
</TABLE>
- ---------------
(1) The table excludes the Diamond Park Division which does not have a
proprietary credit plan.
Credit sales have decreased as a percentage of total sales, in part because
of an upgrading in minimum credit standards at the Gordon's Division and
increased competition from issuers of major credit cards. However, bad debt
expense as a percentage of credit sales and net sales increased in fiscal 1995
compared to fiscal 1994 and in the nine months ended April 30, 1996 compared to
the nine months ended April 30, 1995. The Company believes that these increases
have resulted from general economic conditions and previous credit policies at
the Gordon's Division and that its new credit policies should contribute to an
improvement in the receivables portfolio.
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
30
<PAGE> 32
as theft, credit insurance coverage provides protection to the creditor and
cardholder for losses associated with the disability, involuntary unemployment
or death of the cardholder. Credit insurance operations are dependent on the
Company's retail sales on its private label credit cards and are not significant
on a stand-alone basis.
COMPETITION
The jewelry retailing industry is highly competitive. The industry is
fragmented, and the Company competes with a large number of independent regional
and local jewelry retailers, as well as national jewelry chains. The Company
must also compete with other types of retailers who sell jewelry and gift items,
such as department stores, catalog showrooms, discounters, direct mail suppliers
and home shopping programs. The Company believes that it is also competing for
consumers' discretionary spending dollars. The Company must, therefore, also
compete with retailers who offer merchandise other than jewelry or giftware.
Notwithstanding the national or regional reputation of its competition, the
Company believes that it must compete on a mall-by-mall basis with other
retailers of jewelry as well as with retailers of other types of discretionary
items. Therefore, the Company competes primarily on the basis of reputation for
high-quality, store location, distinctive and value-priced merchandise, personal
service and its ability to offer private label credit card programs to customers
wishing to finance their purchases. The Company's success is also dependent on
its ability to react to and create customer demand for specific product lines.
The Company holds no material patents, licenses (other than its licenses to
operate its Diamond Park leased locations), franchises or concessions; however,
the established tradenames for stores and products in the Company's Zales,
Gordon's and Guild Divisions are important to the Company in maintaining its
competitive position in the jewelry retailing industry.
EMPLOYEES
As of May 29, 1996, the Company had approximately 9,900 employees, less
than 1% of whom were represented by unions. The Company considers its relations
with its employees to be good.
PROPERTIES
The Company occupies a corporate headquarters facility, completed in March
1984 with 430,000 square feet, under a lease extending through September 2008.
The facility is located on a 17-acre tract in Las Colinas, a planned business
development in Irving, Texas, near the Dallas/Fort Worth International Airport.
The Company owns 33 acres of land surrounding the corporate headquarters
facility and a 120,000 square foot warehouse in Dallas, Texas.
The Company also leases four servicing centers located in Clearwater,
Florida (30,000 square feet), Tempe, Arizona (24,200 square feet), San Juan,
Puerto Rico (2,900 square feet) and Guam (556 square feet) and one national
collections center located in San Marcos, Texas (9,000 square feet).
The Company rents all of its retail spaces, other than the Diamond Park
Division leased locations, under leases with terms ranging from five to fifteen
years. Most of the store leases provide for the payment of base rentals plus
real estate taxes, insurance, common area maintenance fees and merchants
association dues, as well as percentage rents based on the stores' gross sales.
31
<PAGE> 33
The following table indicates the expiration dates of the current terms of
the Company's leases as of May 21, 1996:
<TABLE>
<CAPTION>
DIAMOND
TERM EXPIRES ZALES GORDON'S GUILD PARK PERCENTAGE
IN CALENDAR YEARS DIVISION DIVISION DIVISION DIVISION TOTAL OF TOTAL
--------------------------- -------- -------- -------- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 and prior................................. 87 69 14 26 196 16%
1997........................................... 90 56 19 74 239 20%
1998........................................... 72 41 16 39 168 14%
1999........................................... 43 31 16 16 106 9%
2000 and thereafter............................ 280 139 53 22 494 41%
---- ---- ---- ---- ----- ----
Total number of leases......................... 572 336 118 177 1,203 100%
==== ==== ==== ==== ===== ====
</TABLE>
Management believes substantially all of the store leases expiring in 1996
that it wishes to renew (including leases which expired earlier and are on
month-to-month extensions) will be renewed on terms not materially less
favorable to the Company than the terms of the expiring leases.
LITIGATION
The Company has agreed to indemnify certain parties to litigation
settlements entered into by the Company in connection with the Plan of
Reorganization against certain cross-claims, similar third-party claims or costs
of defending such claims brought against such parties. At May 21, 1996, no
material claims had been asserted against the Company for such indemnification.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such litigation and
claims will be resolved without material effect on the Company's financial
position or results of operations.
32
<PAGE> 34
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,
and Chief Financial Officer
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
Glen Adams................... 57 Director
Peter P. Copses.............. 37 Director
Frank E. Grzelecki........... 59 Director
Andrea Jung.................. 37 Director
Richard C. Marcus............ 57 Director
Andrew H. Tisch.............. 46 Director
</TABLE>
The following is a brief description of the business experience of the
directors and executive officers of the Company for at least the past five
years.
Mr. Robert J. DiNicola has served as Chairman of the Board, Chief Executive
Officer and a director of the Company since April 18, 1994. For the three years
prior to joining the Company, Mr. DiNicola was a senior executive officer of The
Bon Marche Division of Federated Department Stores, Inc., having served as
Chairman and Chief Executive Officer of that Division from 1992 to 1994 and as
its President and Chief Operating Officer from 1991 to 1992. From 1989 to 1991,
Mr. DiNicola was a Senior Vice President of Rich's Department Store Division of
Federated. For seventeen years, prior to joining the Federated organization, Mr.
DiNicola was associated with Macy's, where he held various executive, management
and merchandising positions, except for a one-year period while he held a
division officer position with May Co.
Mr. Merrill J. Wertheimer was appointed Executive Vice President -- Finance
and Administration on January 27, 1995. On June 27, 1996, following Thomas E.
Whiddon's resignation as Senior Vice President and Chief Financial Officer, Mr.
Wertheimer was re-appointed Chief Financial Officer of the Company. From June
1991 through January 1995, he served as Senior Vice President and Controller of
the Company. From February 1990 to May 1991, Mr. Wertheimer served as President
and Chief Executive Officer of Henry Silverman Jewelers. Mr. Wertheimer served
as Senior Vice President of the Company from September 1987 to October 1989 and
also served as Chief Financial Officer of the Company from March 1987 to October
1989.
Mr. Max A. Brown has been President of the Company's Diamond Park Division
since January 11, 1993. From July 1989 to January 1993, Mr. Brown was Vice
President and General Manager of the Diamond Park Division. Prior to 1989, he
served as the Director of Stores for the Diamond Park Division.
Ms. Mary L. Forte joined the Company on July 18, 1994 as President of the
Gordon's Division. From January 1994 to July 1994, Ms. Forte served as Senior
Vice President of QVC -- Home
33
<PAGE> 35
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 13 years of
retailing and merchandising experience with Macy's, The May Company and
Federated Department stores.
Ms. Sue E. Gove was appointed Senior Vice President, Corporate Planning and
Analysis on January 17, 1996. From February 1989 through January 1996, she
served as Vice President, Corporate Planning and Analysis. Ms. Gove joined the
Company in 1980 and served in numerous assignments until her appointment to Vice
President in 1989.
Mr. Gregory Humenesky was appointed Senior Vice President, Human Resources
on April 15, 1996. From January 1995 to April 1996 he held the position of Vice
President, Personnel Development and Staffing for the Company. For eight years
prior to joining the Company, Mr. Humenesky was Senior Vice President, Human
Resources for Macy's West. From June 1973 to February 1987, Mr. Humenesky held
senior level Human Resources positions within the Macy's organization.
Mr. Paul D. Kanneman joined the Company on November 14, 1994 as Chief
Information Officer. From July 1993 to November 1994, Mr. Kanneman was an
Associate Partner with Andersen Consulting LLP. Mr. Kanneman was a Principal
from August 1991 to July 1993, and a Senior Associate from August 1989 to July
1991 with Booz, Allen & Hamilton, Inc.
Mr. Paul G. Leonard was appointed President of the Company's Fine Jewelers
Guild Division on January 27, 1995. From October 1994 to January 1995, Mr.
Leonard served as President of Corporate Merchandising for the Company. For
three years prior to joining the Company, Mr. Leonard held positions as General
Manager of Jewelry and then Senior Vice President of Soft Lines for Ames
Department Store. Prior to that, Mr. Leonard was a Merchandise Vice President
with The May Company. Mr. Leonard has more than 20 years of retailing and
merchandising experience with an emphasis in jewelry.
Mr. Ervin G. Polze was appointed Senior Vice President, Operations on
January 17, 1996. From February 1995 through January 1996, he served as Vice
President, Operations. He held the position of Vice President, Controller from
March 1988 through February 1995. Mr. Polze joined the Company in January 1983
and served in several assignments until his appointment to Vice President in
March 1988.
Ms. Beryl B. Raff joined the Company on November 21, 1994 as President of
the Zales Division. From March 1991 through October 1994, Ms. Raff served as
Senior Vice President of Macy's East with responsibilities for its jewelry
business in a twelve-state region. From April 1988 to March 1991, Ms. Raff
served as Group Vice President of Macy's South/Bullocks. Prior to 1988, Ms. Raff
had 17 years of retailing and merchandising experience with the Emporium and
Macy's department stores.
Mr. Alan P. Shor joined the Company on June 5, 1995 as Senior Vice
President, General Counsel and Secretary. For two years prior to joining the
Company, Mr. Shor was the managing partner of the Washington, D.C. office of the
Troutman Sanders law firm, whose principal office is based in Atlanta, Georgia.
Mr. Shor, a member of Troutman Sanders since 1983, was a partner of the firm
from 1990 to 1995.
Mr. 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
34
<PAGE> 36
Apollo Advisors, L.P., which, together with its affiliates, acts as the managing
general partner of Apollo Investment Fund, L.P., AIF II, L.P. and Apollo
Investment Fund III, L.P., private securities investment funds. AIF II, L.P. is
the general partner of the Selling Shareholder. Mr. Copses is a director of
Family Restaurants Inc., Dominick's Finer Foods, Inc., Food 4 Less Holdings,
Inc., and Forum Group, Inc.
Mr. Frank E. Grzelecki has served as a director of the Company since July
21, 1993. Since 1988, Mr. Grzelecki has served in several capacities with Handy
& Harman, including outside director and consultant from 1988 to 1989, Vice
Chairman of the Board from 1989 to 1992, and President, Chief Operating Officer
and director from 1992 to the present. In addition to Handy & Harman, Mr.
Grzelecki currently serves as a director of Chartwell Re Corporation.
Ms. Andrea Jung joined the board as a director on June 6, 1996. Ms. Jung is
President of the U.S. product marketing group for Avon Products, Inc. Prior to
joining Avon, Ms. Jung served as an Executive Vice President at Neiman Marcus
from 1991 to 1994. From 1987 to 1991, she served as Senior Vice President,
General Merchandising Manager for I. Magnin. Ms. Jung served as General
Merchandising Manager at J.W. Robinson's from 1985 to 1987 and was with
Bloomingdales from 1979 to 1985, her latest position being Vice President and
Merchandising Manager. Ms. Jung also serves as a director of the American
Management Association and as a trustee of the Fashion Institute of Technology.
Mr. Richard C. Marcus has served as a director of the Company since July
21, 1993. Mr. Marcus is a principal of InterSolve Group, Inc., a management
services firm he co-founded in 1991. Since September 1994, Mr. Marcus has served
in several capacities with Plaid Clothing Group, including as an outside
director from September to November 1994, Chief Executive Officer and director
from December 1994 through September 1995, and is presently an outside director.
From 1988 to 1991, Mr. Marcus was a private investor and consultant for
companies serving the retail industry. From 1979 to 1988, he served as Chairman
and Chief Executive Officer of Neiman Marcus in Dallas, Texas.
Mr. Andrew H. Tisch has served as a director of the Company since July 21,
1993. Mr. Tisch has been Chairman of the Management Committee of Loews
Corporation since June 1995 and a member of that committee since October 1994.
Mr. Tisch also served as Chairman of the Board and Chief Executive Officer of
Lorillard, Inc. from 1989 to June 1995. From 1980 to 1989, he served as
President of Bulova Corporation. From 1985 to 1989, Mr. Tisch served as a
director of Gordon Jewelry Corporation prior to its acquisition by the Company.
Mr. Tisch currently serves as a director of Loews Corporation, Bulova
Corporation and Vegan Development Company.
35
<PAGE> 37
SELLING SHAREHOLDER
This Prospectus relates to 2,500,000 shares of Common Stock, all of which
are being offered by Apollo Jewelry Partners, L.P. (the "Selling Shareholder").
This Prospectus also relates to an additional 250,000 shares of Common Stock
which may be offered by the Selling Shareholder solely to cover over-allotments.
Assuming the Selling Shareholder sells all of such 2,500,000 shares of Common
Stock (7.1% of the outstanding Common Stock) offered hereby and the Underwriters
exercise their over-allotment option in full, the Selling Shareholder will
thereafter beneficially own 2,125,854 shares of Common Stock (6.0% of the
outstanding Common Stock). Assuming the Underwriters do not exercise their
over-allotment option, the Selling Shareholder will beneficially own 2,375,854
shares of Common Stock (6.8% of the outstanding 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 at least $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 Selling Shareholder has 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 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........................................ 568,334
McDonald & Company Securities, Inc.......................... 568,333
PaineWebber Incorporated.................................... 568,333
Bear, Stearns & Co. Inc. ................................... 70,000
Dillon, Read & Co. Inc. .................................... 70,000
Goldman, Sachs & Co. ....................................... 70,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 70,000
Montgomery Securities....................................... 70,000
Wasserstein Perella Securities, Inc. ....................... 70,000
Furman Selz LLC............................................. 50,000
Principal Financial Securities, Inc. ....................... 50,000
Rauscher Pierce Refsnes, Inc. .............................. 50,000
Raymond James & Associates, Inc. ........................... 50,000
Equitable Securities Corporation............................ 35,000
Rodman & Renshaw, Inc. ..................................... 35,000
Southcoast Capital Corp. ................................... 35,000
Southwest Securities Inc. .................................. 35,000
Williams Mackay Jordan & Co., Inc. ......................... 35,000
-------------
Total..................................................... 2,500,000
=============
</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.
36
<PAGE> 38
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 $.46 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.10 per share to other dealers. After
the initial public offering, the public offering price and such concession may
be changed.
The Selling Shareholder has granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 250,000 additional shares at the same price per share as the
initial 2,500,000 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, for a period of 90 days
from the date of the Underwriting Agreement without the prior written consent of
the Representatives, in the case of the Company, and without the prior written
consent of Salomon Brothers Inc and prior written notice to the other
Representatives, in the case of such executive officers of the Company
(provided, however, the Company may issue and sell shares issuable pursuant to
any employee stock option plan, employee stock purchase plan, stock ownership
plan or dividend reinvestment plan in effect on the date the Underwriting
Agreement is executed and may issue shares issuable upon the conversion of
securities or the exercise of warrants outstanding on the date the Underwriting
Agreement is executed). In addition, the Selling Shareholder has also 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
offered hereby (including the shares of Common Stock that may be sold upon
exercise of the Underwriters' over-allotment option), for a period of 90 days
from the date of the Underwriting Agreement without the prior written consent of
the Representatives.
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.
37
<PAGE> 39
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement on Form S-3 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), as well as such reports, proxy statements and other
information filed by the Company with the Commission, can be inspected and
copied at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C.; 500 West Madison Street, Suite 1400, Chicago,
Ill.; and 13th Floor, Seven World Trade Center, New York, N.Y. Copies of this
material can also be obtained at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common
Stock of the Company is listed on the NYSE and the aforementioned material can
also be inspected at the offices of the NYSE at 20 Broad Street, New York, New
York 10005.
The Company has filed a Registration Statement with the Commission in
Washington, D.C. with respect to the Common Stock offered hereby. This
Prospectus constitutes a part of the Registration Statement and does not contain
all the information set forth therein, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Any
statements contained herein concerning the provisions of any contract or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. For further
information regarding the Company and the securities offered hereby, reference
is made to the Registration Statement and to the exhibits thereto.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated and made a part of this Prospectus
by reference, except as superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the year ended July
31, 1995;
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
October 31, 1995, January 31, 1996, and April 30, 1996;
3. The Company's Current Reports on Form 8-K dated July 1, 1996 and
July 16, 1996; and
4. 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.
38
<PAGE> 40
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 above which
have been or may be incorporated by reference in this Prospectus, other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference into the information incorporated into this Prospectus. Requests for
such copies should be directed to Mr. Alan P. Shor, Senior Vice President,
General Counsel & Secretary, Zale Corporation, 901 W. Walnut Hill Lane, Irving,
Texas 75038-1003, (214) 580-4000.
39
<PAGE> 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Audited Consolidated Financial Statements
Reports of Independent Public Accountants.......................................... F-2
Consolidated Statements of Operations for the Years Ended July 31, 1995 and 1994,
the Four Months Ended July 31, 1993 and the Year Ended March 31, 1993........... F-4
Consolidated Balance Sheets as of July 31, 1995 and 1994........................... F-5
Consolidated Statements of Cash Flows for the Years Ended July 31, 1995 and 1994,
the Four Months Ended July 31, 1993 and the Year Ended March 31, 1993........... F-6
Consolidated Statements of Stockholders' Investment for the Years Ended July 31,
1995 and 1994, the Four Months Ended July 31, 1993 and the Year Ended March 31,
1993............................................................................ F-7
Notes to Consolidated Financial Statements......................................... F-8
Interim Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the Three and Nine Months Ended April 30,
1996 and 1995 (Unaudited)....................................................... F-23
Consolidated Balance Sheets as of April 30, 1996 (Unaudited) and July 31, 1995
(Audited)....................................................................... F-24
Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 1996 and
1995 (Unaudited)................................................................ F-25
Notes to Consolidated Financial Statements (Unaudited)............................. F-26
</TABLE>
F-1
<PAGE> 42
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Zale Corporation:
We have audited the accompanying consolidated balance sheets of Zale
Corporation (a Delaware corporation) and subsidiaries (subsequent to emergence
from bankruptcy -- See Notes to Consolidated Financial
Statements -- "Reorganization and Basis of Presentation" for discussion) as of
July 31, 1995 and 1994, and the related consolidated statements of operations,
cash flows, and stockholders' investment for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Zale Corporation and
subsidiaries as of July 31, 1995 and 1994, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 12, 1995
F-2
<PAGE> 43
To the Stockholders and Board of Directors of Zale Corporation:
We have audited the accompanying consolidated statements of operations,
cash flows, and stockholders' investment of Zale Corporation (a Delaware
corporation) and subsidiaries for the four month period ended July 31, 1993, and
for the year ended March 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in the Notes to Consolidated Financial
Statements -- "Reorganization and Basis of Presentation," the Company emerged
from bankruptcy on July 30, 1993, and adopted fresh-start reporting as of July
31, 1993. The effects resulting from the adoption of fresh-start reporting and
the forgiveness of debt have been reflected in the statement of operations for
the four month period ended July 31, 1993. As such, results of operations
through July 31, 1993, are not comparable with results of operations subsequent
to that date.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Zale
Corporation and subsidiaries for the four month period ended July 31, 1993, and
for the year ended March 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in the Notes to Consolidated Financial Statements, on April 1,
1993, the Company changed its method of accounting for post-retirement benefits
other than pensions and its method of accounting for income taxes.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 12, 1995
F-3
<PAGE> 44
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------
FOUR
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, MARCH 31,
1995 1994 1993 1993
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net Sales................................ $1,036,149 $920,307 $ 244,539 $ 980,832
Cost of Sales............................ 524,010 460,060 127,484 534,420
Selling, General and Administrative
Expenses............................... 434,101 401,744 119,786 418,133
Depreciation and Amortization Expense
(Credit)............................... 381 (4,385) 8,973 26,316
Unusual Items -- Provisions for Valuation
of Assets.............................. -- -- -- 20,200
Reorganization and Restructure Costs..... -- -- 47,879 137,937
Interest Expense, Net.................... 29,837 28,142 6,623 24,829
---------- -------- ---------- ----------
Earnings (Loss) Before Fresh-Start
Revaluation, Income Taxes,
Extraordinary Items and Cumulative
Effect of Accounting Change............ 47,820 34,746 (66,206) (181,003)
Fresh-Start Revaluation.................. -- -- (246,236) --
---------- -------- ---------- ----------
Earnings (Loss) Before Income Taxes,
Extraordinary Items and Cumulative
Effect of Accounting Change............ 47,820 34,746 (312,442) (181,003)
Income Taxes............................. 16,350 11,621 -- --
---------- -------- ---------- ----------
Earnings (Loss) Before Extraordinary
Items and Cumulative Effect of
Accounting Change...................... 31,470 23,125 (312,442) (181,003)
Extraordinary Items:
Loss on Early Extinguishment of Debt,
Net of Income Taxes of $(1,045)..... -- (1,568) -- --
Gain on Debt Discharge, Net of Income
Taxes of $-0-....................... -- -- 1,118,587 --
Cumulative Effect of Accounting Change:
Postretirement Benefits, Net of Income
Taxes of $-0-....................... -- -- (14,754) --
---------- -------- ---------- ----------
Net Earnings (Loss)...................... $ 31,470 $ 21,557 $ 791,391 $ (181,003)
========== ======== ========== ==========
Earnings Per Common Share(1):
Primary:
Earnings Before Extraordinary
Item.............................. $ 0.88 $ 0.66
Extraordinary Item.................. -- (0.04)
---------- --------
Net Earnings........................ $ 0.88 $ 0.62
========== ========
Assuming full dilution:
Earnings Before Extraordinary
Item.............................. $ 0.86 $ 0.66
Extraordinary Item.................. -- (0.04)
---------- --------
Net Earnings........................ $ 0.86 $ 0.62
========== ========
Weighted Average Number of Common Shares
Outstanding (1):
Primary............................. 35,849 34,965
Assuming full dilution.............. 36,565 34,965
</TABLE>
- ---------------
(1) Earnings (loss) per share is not presented in the four months ended July 31,
1993 or the year ended March 31, 1993 because such presentation would not be
meaningful. The shares of the Predecessor, which were not publicly traded,
were cancelled under the plan of reorganization and the new shares were not
issued until the Effective Date.
See Notes to the Consolidated Financial Statements.
F-4
<PAGE> 45
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
---------- ----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents......................................... $ 154,905 $ 153,700
Customer Receivables, Net......................................... 396,380 397,886
Merchandise Inventories........................................... 375,413 401,034
Other Current Assets.............................................. 23,859 21,474
---------- ----------
Total Current Assets...................................... 950,557 974,094
Property and Equipment, Net......................................... 71,487 37,211
Other Assets........................................................ 39,864 39,342
Deferred Tax Asset, Net............................................. 48,800 62,000
---------- ----------
Total Assets.............................................. $1,110,708 $1,112,647
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt................................. $ 2,907 $ 3,897
Accounts Payable and Accrued Liabilities.......................... 117,048 144,981
Deferred Tax Liability, Net....................................... 48,800 62,000
---------- ----------
Total Current Liabilities................................. 168,755 210,878
Non-current Liabilities............................................. 32,670 32,873
Long-term Debt...................................................... 440,717 443,581
Excess of Revalued Net Assets Over Stockholders' Investment, Net.... 76,676 82,575
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock................................................... -- --
Common Stock...................................................... 350 350
Additional Paid-In Capital (Includes Stock Warrants).............. 337,534 321,159
Unrealized Gains (Losses) on Securities........................... 979 (326)
Accumulated Earnings.............................................. 53,027 21,557
---------- ----------
Total Stockholders' Investment............................ 391,890 342,740
---------- ----------
Total Liabilities and Stockholders' Investment............ $1,110,708 $1,112,647
========== ==========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-5
<PAGE> 46
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------
FOUR
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, MARCH 31,
1995 1994 1993 1993
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................. $ 31,470 $ 21,557 $ 791,391 $(181,003)
Non cash expenses, gains and losses:
Depreciation and amortization expense (credit)..... 1,498 (4,186) 8,973 26,316
Increase in inventory restructure reserve.......... -- -- -- 42,988
Unusual items -- provisions for valuation of
assets........................................... -- -- -- 20,200
Reorganization and restructure costs, net of cash
payments......................................... -- -- 42,373 86,925
Utilization of pre-emergence net operating loss.... 16,204 10,439 -- --
Cumulative effect of change in accounting for
postretirement benefits.......................... -- -- 14,754 --
Fresh-start revaluation charge..................... -- -- 246,236 --
Extraordinary gain on debt discharge............... -- -- (1,118,587) --
Other adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
(Increase) decrease in:
Customer receivables, net........................ 1,506 27,214 37,216 75,927
Merchandise inventories.......................... 25,621 (19,609) 10,248 10,983
Other current assets............................. (2,385) 8,148 3,888 40,876
Other assets..................................... (55) 6,360 (2,325) (2,210)
Increase (decrease) in:
Accounts payable and accrued liabilities......... (27,752) (40,666) (8,284) 30,404
Non-current liabilities.......................... (203) 4,885 (191) (790)
Obligations subject to settlement under
reorganization proceedings..................... -- -- (2,396) (28,111)
--------- --------- ----------- ---------
Net Cash Provided by Operating Activities.............. 45,904 14,142 23,296 122,505
--------- --------- ----------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.................. (42,295) (27,838) (7,346) (10,177)
Dispositions of property and equipment............... 1,987 63 814 963
Other................................................ (205) 103 1,005 1,014
--------- --------- ----------- ---------
Net Cash Used in Investing Activities.................. (40,513) (27,672) (5,527) (8,200)
--------- --------- ----------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt........................... $ (3,896) $ (3,630) $ (1,410) $ (4,212)
Borrowings under accounts receivable securitization
facility........................................... -- 380,551 -- --
Borrowings (repayments) of prior accounts receivable
securitization facility............................ -- (284,700) -- 284,522
Payment of prepayment penalty on early extinguishment
of debt............................................ -- (2,613) -- --
Repurchase of Zale and Gordon customer receivables... -- -- -- (414,053)
Redemption of marketable security collateral for
Private Label Credit Card Program.................. -- -- -- 97,600
Debt issue and capitalized financing costs........... (461) (5,400) (4,565) (625)
Cash distributions at date of plan consummation...... -- -- (54,989) --
Proceeds from exercise of stock options and
warrants........................................... 171 -- -- --
Other................................................ -- (243) (27) (1,069)
--------- --------- ----------- ---------
Net Cash Provided by (Used in) Financing Activities.... (4,186) 83,965 (60,991) (37,837)
--------- --------- ----------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents... 1,205 70,435 (43,222) 76,468
Cash and Cash Equivalents at Beginning of Period....... 153,700 83,265 126,487 50,019
--------- --------- ----------- ---------
Cash and Cash Equivalents at End of Period............. $ 154,905 $ 153,700 $ 83,265 $ 126,487
========= ========= =========== =========
Supplemental cash flow information:
Interest paid........................................ $ 36,443 $ 27,278 $ 9,408 $ 27,257
Interest received.................................... $ 7,641 $ 1,724 $ 1,536 $ 3,577
Income taxes paid (net of refunds received).......... $ 568 $ 470 $ 368 $ (333)
Restricted cash -- at period end date.................. $ 51,422 $ 58,528 $ 15,988 $ 6,233
Noncash transaction:
Capital lease obligation incurred for acquisition of
equipment.......................................... $ -- $ -- $ 10,265 $ --
</TABLE>
See Notes to the Consolidated Financial Statements.
F-6
<PAGE> 47
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL UNREALIZED ACCUMULATED
COMMON SHARES COMMON PAID-IN GAINS (LOSSES) EARNINGS
OUTSTANDING STOCK CAPITAL ON SECURITIES (DEFICIT) TOTAL
------------- ------ ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR --
Balance, March 31, 1992....... 3 $ -- $ 404,127 $ -- $(1,014,515) $(610,388)
Net Loss...................... -- -- -- -- (181,003) (181,003)
---------- ----- --------- ------- ----------- ---------
Balance, March 31, 1993....... 3 -- 404,127 -- (1,195,518) (791,391)
Net Earnings................ -- -- -- -- 791,391 791,391
Elimination of Former Equity
Interests in Connection
with Emergence from
Bankruptcy................ (3) -- (404,127) -- 404,127 --
Issuance of New Equity
Interests in Connection
with Emergence from
Bankruptcy................ 34,972 350 310,720 -- -- 311,070
---------- ----- --------- ------- ----------- ---------
POST-EMERGENCE --
Balance, July 31, 1993 (Fresh-
Start Reporting Date)....... 34,972 350 310,720 -- -- 311,070
Net Earnings................ -- -- -- -- 21,557 21,557
Utilization of Pre-Emergence
Net Operating Loss........ -- -- 10,439 -- -- 10,439
Treasury Stock Acquired..... (7) -- -- -- -- --
Unrealized Holding Period
Loss...................... -- -- -- (326) -- (326)
---------- ----- --------- ------- ----------- --------
Balance, July 31, 1994........ 34,965 350 321,159 (326) 21,557 342,740
Net Earnings................ -- -- -- -- 31,470 31,470
Utilization of Pre-Emergence
Net Operating Loss........ -- -- 16,204 -- -- 16,204
Exercise of Stock Options
and Warrants.............. 19 -- 171 -- -- 171
Treasury Stock Acquired..... (1) -- -- -- -- --
Unrealized Holding Period
Gain...................... -- -- -- 1,305 -- 1,305
---------- ----- --------- ------- ----------- ---------
Balance, July 31, 1995........ 34,983 $350 $ 337,534 $ 979 $ 53,027 $ 391,890
========== ===== ========= ======= =========== =========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-7
<PAGE> 48
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REORGANIZATION AND BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements are those of Zale
Corporation and its wholly-owned subsidiaries (the "Company"). The
classifications in use at July 31, 1995 have been applied to the financial
statements for July 31, 1994, July 31, 1993 and March 31, 1993.
Chapter 11 Reorganization. On July 30, 1993 (the "Effective Date"), Zale
Corporation ("Zale") consummated its plan of reorganization under Chapter 11 of
the United States Bankruptcy Code (the "Plan") and emerged from bankruptcy. The
Plan terminated the former direct or indirect ownership of the Company by
Peoples Jewellers Limited and Swarovski International Holding, A.G.
("Swarovski"). See discussion of Swarovski warrants in the note to the
Consolidated Financial Statements "CAPITAL STOCK". On the Effective Date, the
Company consolidated substantially all its retail operations into Zale Delaware,
Inc. ("ZDel"), which is a wholly-owned subsidiary of Zale. ZDel, in turn, is the
parent company for several subsidiaries, including three that are engaged
primarily in providing credit insurance to credit customers of the Company. The
Plan resulted in the elimination, through merger or liquidation, of seventeen
former Zale subsidiaries.
In connection with the consummation of the Plan, the Company distributed
shares of its common stock to various classes of its pre-bankruptcy creditors.
The Plan provided for, among other things, cash payments of approximately $55.0
million (including $45.0 million paid in settlement of certain senior and
subordinated bondholder claims), the issuance of approximately $60.0 million of
secured notes and the distribution of the common stock of reorganized Zale.
The value of the cash, other assets, new debt and equity securities
distributed under the Plan was approximately $1.1 billion less in total value
than the allowed claims being settled, and the resulting gain was recorded as an
extraordinary item in the Consolidated Statement of Operations for the four
month period ended July 31, 1993.
Fresh-Start Reporting. Pursuant to the guidance provided by the American
Institute of Certified Public Accountants in Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), the Company adopted fresh-start reporting as of the close of
business on July 31, 1993. Fresh-start reporting resulted in a revaluation of
the Company's assets and liabilities as of the Effective Date to reflect
allocation of the reorganization value based upon the estimated fair market
values of those assets and liabilities.
The resulting charge of $246.2 million from all fresh-start adjustments,
including the write-off of most noncurrent assets, is presented as "Fresh-Start
Revaluation" in the Consolidated Statement of Operations for the four month
period ended July 31, 1993.
In accordance with fresh-start reporting guidelines, certain noncurrent
assets were reduced to zero because the fair value of the Company's assets
exceeded the fair value of its liability and stockholders' investment. After
reducing the value of certain noncurrent assets to zero, the excess of the fair
value of the remaining assets over the fair value of liabilities and
stockholders' investment was recorded as a deferred credit, "Excess of Revalued
Net Assets Over Stockholders' Investment". This balance is being amortized over
15 years.
In connection with the adoption of fresh-start reporting, the Company
adopted Statement of Financial Accounting Standards ("SFAS"), No. 109,
"Accounting for Income Taxes", which had no impact on the statement of
operations. See the note to the Consolidated Financial Statements "INCOME TAXES"
for further discussion.
As a result of fresh-start reporting being used to reflect the fair values
of assets, liabilities and stockholders' investment of the reorganized Company
at July 31, 1993, the Consolidated Statements of Operations, Consolidated
Statements of Cash Flows and Consolidated Statements of
F-8
<PAGE> 49
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stockholders' Investment for the fiscal years ended July 31, 1995 and 1994, are
not comparable in certain material respects to such predecessor statements for
any prior periods. The Consolidated Financial Statements for the periods after
July 31, 1993, are those of the reorganized entity.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's Business consists principally of the retail sale of fine
jewelry merchandise.
Consolidated Financial Statements include all subsidiaries including ZDel
and Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust,
wholly-owned by ZDel and formed in July 1994 to finance customer accounts
receivable, and the Company's insurance subsidiaries. All significant
intercompany transactions have been eliminated.
Cash and Cash Equivalents include cash on hand, deposits in banks and
short-term marketable securities at varying interest rates with maturities of
three months or less. The carrying amount approximates fair value because of the
short maturity of those instruments. At July 31, 1995, $51.4 million was
restricted of which $50.8 million was restricted based on collateral
requirements under the Receivables Securitization Facility.
Customer Receivables are classified as current assets, including amounts
which are due after one year, in accordance with industry practices. The
allowance for doubtful accounts was $42.6 million and $42.7 million at July 31,
1995 and 1994, respectively. Finance charge income of $79.3 million and $82.4
million for the years ended July 31, 1995 and 1994, respectively, $29.2 million
for the four months ended July 31, 1993 and $92.1 million for the year ended
March 31, 1993 has been reflected as a reduction of Selling, General and
Administrative Expenses.
Merchandise Inventories are stated at the lower of cost or market, which is
determined primarily in accordance with the retail inventory method.
Substantially all inventories represent finished goods which are valued using
the last-in, first-out ("LIFO") method. Since July 31, 1993 the Company has
employed a methodology which provides better inventory turnover and
profitability information in order to identify and determine the appropriate
merchandising action for problem merchandise on a more timely basis and ensure
that such inventory is valued at the lower of cost or market.
Depreciation and Amortization are computed using the straight-line method
over the estimated useful lives of the assets or remaining lease life. Estimated
useful lives of the assets range from three to forty years. Original cost and
related accumulated depreciation or amortization are removed from the accounts
in the year assets become retired. Gains or losses on dispositions of property
and equipment are included in operations in the year of disposal. Computer
software costs related to the development of major systems are capitalized as
incurred and are amortized over their useful lives.
Excess of Revalued Net Assets Over Stockholders' Investment is being
amortized over fifteen years. Amortization was $5.9 million for the years ended
July 31, 1995 and 1994. Accumulated amortization was $11.8 million and $5.9
million at July 31, 1995 and 1994, respectively.
Store Preopening Costs are charged to results of operations in the period
in which the store is opened. Store closing costs are estimated and recognized
in the period in which the Company makes the decision that the store will close.
Such costs include the present value of estimated future rentals net of
anticipated sublease income, loss on retirement of property and equipment and
other related occupancy costs.
Advertising Expenses are charged against operations when incurred. Amounts
charged against operations were $35.2 million and $36.9 million for the years
ended July 31, 1995 and 1994, respectively, $9.6 million for the four months
ended July 31, 1993 and $33.3 million for the year
F-9
<PAGE> 50
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended March 31, 1993. The amounts of prepaid advertising at July 31, 1995 and
1994 are $1.8 million and $0.3 million, respectively.
Year-End Change. On December 13, 1993, the Board of Directors of the
Company authorized the change in the Company's fiscal year end to July 31. Such
change was effective as of April 1, 1994. The Company's determination to change
its fiscal year was based on several considerations. By changing to a July 31
fiscal year end, the Company has established quarterly reporting periods that
are more consistent with other companies in the retail industry. Additionally, a
July 31 year end coincides with the Company's emergence from bankruptcy
proceedings, thereby providing for greater comparability of historical financial
data in the future, and, it makes the Company's planning process more effective.
MERCHANDISE INVENTORIES
The Company uses the last-in, first-out ("LIFO") method of accounting for
inventory, which results in a matching of current costs with current revenues.
The estimated cost of replacing the Company's inventories exceeds its net LIFO
cost by approximately $9.9 million and $7.1 million at July 31, 1995 and 1994,
respectively. Inventories on a first-in, first-out ("FIFO") basis were $385.3
million and $408.1 million at July 31, 1995 and 1994, respectively. The Company
also maintained consigned inventory at its retail locations of approximately
$85.9 million and $111.4 million at July 31, 1995 and 1994, respectively. This
consigned inventory and related contingent obligation are not reflected in the
Company's financial statements. At the time of sale, the Company records the
purchase liability in accounts payable and the related cost of merchandise in
Cost of Sales.
Upon implementation of fresh-start reporting, the LIFO reserve as of July
31, 1993 was eliminated for financial reporting purposes when merchandise
inventories were revalued at their fair market value. The Company began
reporting, for financial reporting purposes, its LIFO inventories using a new
base period starting July 31, 1993.
PROPERTY AND EQUIPMENT
The Company's property and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Buildings and Leasehold Improvements........................... $ 21,357 $ 8,240
Furniture and Fixtures......................................... 36,976 14,143
Construction in Progress....................................... 10,752 5,361
Property Held for Sale......................................... 9,896 10,894
-------- --------
78,981 38,638
Less: Accumulated Amortization and Depreciation................ (7,494) (1,427)
-------- --------
Total Net Property and Equipment.......................... $ 71,487 $ 37,211
======== ========
</TABLE>
Property Held for Sale represents land and buildings which are being held
for future sale and are not being used in the Company's operations.
F-10
<PAGE> 51
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES
The Company's accounts payable and accrued liabilities consists of the
following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
-------- --------
(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.
Postretirement Benefits. The Company provides medical and dental insurance
benefits for all eligible retirees and spouses with benefits to the latter
continuing after the death of the retiree for a maximum of thirty-six months.
Substantially all of the Company's full-time employees, who were hired on or
before November 14, 1994, become eligible for those benefits upon reaching age
55 while working for the Company and having ten years of continuous service. The
medical and dental benefits are provided under a single plan. The lifetime
maximum on medical benefits is $500,000 up to the age of 65 and $50,000
thereafter. These benefits include deductibles, retiree contributions and
co-insurance provisions that are assumed to grow with the health care cost trend
rate.
Effective April 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
This standard requires that the costs of the postretirement benefits described
in the preceding paragraph be recognized in the financial statements over an
employee's active working career on an accrual basis. In previous years, the
Company recognized the costs on a cash basis.
The accumulated postretirement benefits obligation ("APBO"), which
represents the actuarial present value of benefits attributed to employee
service rendered as of July 31, 1995 and 1994 for the unfunded plan, include the
following components (amounts in thousands):
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
-------- --------
<S> <C> <C>
Active Employees Under Retirement Age........................... $ 6,574 $ 5,945
Active Employees Eligible to Retire............................. 3,624 3,102
Current Retirees................................................ 10,488 9,825
-------- --------
Accumulated Benefit Obligation.................................. 20,686 18,872
Unrecognized Prior Service Cost................................. (406) --
Unrecognized Net Loss........................................... (1,607) (2,276)
-------- --------
Accrued Postretirement Benefit Liability................... $ 18,673 $ 16,596
======== ========
</TABLE>
F-11
<PAGE> 52
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The APBO of approximately $14.8 million was recognized as a cumulative
effect of an accounting change at April 1, 1993. In addition to the one-time
cumulative effect adjustment, the annual expense relating to postretirement
benefits is approximately $2.5 million. The components of such annual expense,
which are reflected in Selling, General and Administrative Expenses, are as
follows (amounts in thousands):
<TABLE>
<S> <C>
Service Cost on benefits earned during the year................... $1,035
Interest Cost on accumulated benefit obligation................... 1,465
Amortization...................................................... 16
------
Total................................................... $2,516
======
</TABLE>
This represents a $1.4 million increase over the annual expense that would
have been recognized under the old accounting method.
The weighted-average discount rate used in determining the APBO at July 31,
1994 was 8.0 percent. At July 31, 1995, this rate was lowered to 7.75 percent.
The weighted-average annual assumed rates of increase in the cost of covered
medical and dental benefits at July 31, 1994 are 14.0 percent and 8.75 percent,
respectively, and are assumed to decrease gradually to 7.0 percent in the year
2001 and remain at that level thereafter. At July 31, 1995, the initial medical
and dental trend rates are 13.0 percent and 8.5 percent, respectively, and are
assumed to gradually decrease to 6.0 percent in the year 2003. The effect of a
one percent increase in the health care cost trend rate on the APBO and the net
periodic expense would be an increase of approximately $1.0 million and $0.2
million, respectively.
CREDIT ARRANGEMENTS
Working Capital Financing. On July 30, 1993, ZDel, as borrower, and Zale
and certain of ZDel's subsidiaries, as guarantors, entered into a three-year
revolving credit and gold consignment agreement (the "Working Capital
Facility"). The Working Capital Facility provided for (a) revolving credit loans
in an aggregate amount of up to $100.0 million, with a $20.0 million sublimit
for letters of credit and (b) loans or advances ("Gold Loans") in an aggregate
amount of up to $50.0 million under a gold consignment facility. At July 31,
1995 and 1994, there were no loans outstanding under the Working Capital
Facility and no borrowings were made during the current year under this
facility. There were approximately $7.3 million and $5.9 million of letters of
credit outstanding at July 31, 1995 and 1994, respectively.
On August 11, 1995, Zale and ZDel (the "Borrowers") entered into a new
three-year revolving credit agreement (the "Revolving Credit Agreement") which
provides for revolving credit loans in an aggregate amount of up to $150.0
million, with a $30.0 million sublimit for letters of credit. At no time may the
total amount of revolving credit loans outstanding exceed a defined borrowing
base (based on a fixed percentage of eligible inventory, as defined).
The Borrowers' obligations under the Revolving Credit Agreement are
primarily secured by a first lien on and security interest in all inventory
(excluding inventory on consignment).
The revolving credit loans bear interest at floating rates, currently
LIBOR + 2.0 percent or the agent's adjusted base rate + 0.75 percent, at the
Borrowers' option, and can be adjusted based on certain future performance
levels attained by the Borrowers. The Borrowers incur letter of credit fees and
also pay a commitment fee of 3/8 percent per annum on the preceding month's
unused Revolving Credit Agreement commitment. The Borrowers may repay the
revolving credit loans at any time without penalty.
F-12
<PAGE> 53
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, keeps within certain limits the Borrowers ability to
pay dividends and make other restricted payments, incur additional indebtedness,
engage in certain transactions with affiliates, incur liens, make investments
and sell assets. The Revolving Credit Agreement also requires the Borrowers to
maintain certain financial ratios and specified levels of net worth.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Receivables Securitization Facility.................................. $380,593 $380,551
Second Priority Senior Secured Notes................................. 60,017 60,017
Capital Lease Obligations............................................ 2,499 5,922
Other (primarily mortgages).......................................... 515 988
-------- --------
443,624 447,478
Less Current Portion................................................. (2,907) (3,897)
-------- --------
$440,717 $443,581
======== ========
</TABLE>
Fiscal year scheduled maturities of long-term debt at July 31, 1995 were as
follows: 1996 -- $2.9 million; 1997 -- $-0- million; 1998 -- $-0- million;
1999 -- $380.6 million; 2000 -- $60.0 million; thereafter -- $0.1 million; for a
total of $443.6 million.
Receivables Securitization Facilities. In November 1992, Diamond Funding
Corp. ("DFC") established an accounts receivable securitization facility (the
"DFC Securitization") pursuant to which it issued approximately $284.6 million,
net of discount, aggregate principal amount of 6.35 percent Receivables Backed
Notes ("DFC Receivables Notes"). The proceeds from the DFC Receivables Notes
were used to buy the revolving credit card accounts receivable of ZDel and other
Zale affiliates.
The Company refinanced its DFC Receivables Notes effective July 15, 1994
through a new securitization program discussed below. Upon consummation of the
new securitization program, the DFC Receivables Notes were redeemed. The Company
was required to pay a special redemption premium in the amount of approximately
$2.6 million upon early redemption of the DFC Receivables Notes. This amount,
net of an income tax benefit of $1.0 million, has been classified as an
extraordinary item on the Consolidated Statement of Operations as of July 31,
1994.
In connection with the refinancing, ZFT established an accounts receivable
securitization facility (the "ZFT Securitization"), pursuant to which it issued
approximately $380.6 million, net of discount, aggregate principal amount of
Receivables Backed Notes ("ZFT Receivables Notes"). The proceeds from the ZFT
Receivables Notes were used to buy the revolving credit card accounts receivable
of DFC, ZDel and other affiliates. Collections from those receivables are used
in part to pay interest on the ZFT Receivables Notes and to purchase daily
ZDel's customer accounts receivable. The ZFT Receivables Notes are secured by a
lien on all customer accounts receivable and are nonrecourse with regard to Zale
and ZDel.
F-13
<PAGE> 54
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ZFT Receivables Notes bear interest at the following rates, payable
monthly in arrears (amounts in thousands):
<TABLE>
<CAPTION>
PRINCIPAL RATE
- --------- -----------------------------------
<C> <S>
$37,620 LIBOR + .40%, not to exceed 12.0%
294,100 7.325%
28,600 7.50%
20,440 8.15%
--------
$380,760
========
</TABLE>
The effective interest rate, including amortization of debt issuance costs,
will approximate 7.6 percent based on the current LIBOR rate of 6.0 percent,
with a maximum of 8.1 percent.
Jewelers Financial Services, Inc. (the "Servicer"), a subsidiary of ZDel,
is the servicing entity for the collection of the customer accounts receivable
and its servicing obligations are guaranteed by ZDel.
The ZFT Receivables Notes will be subject to redemption at the option of
ZFT in whole but not in part, on the Scheduled Redemption Date of July 15, 1999
at a redemption price equal to the outstanding principal amount of the ZFT
Receivables Notes together with accrued and unpaid interest thereon at the
applicable interest rates. If ZFT has not given notice by June 15, 1999 that it
will redeem the ZFT Receivables Notes in full on the scheduled payment date
occurring in July 1999, the Servicer will promptly solicit bids for the purchase
of all or a portion of the receivables. If the Servicer is unable to sell the
receivables for a price such that the proceeds of such sale, together with other
available funds, is sufficient to pay in full the outstanding principal amount
of the ZFT Receivables Notes and interest thereon to the Scheduled Redemption
Date, the ZFT Receivables Notes will remain outstanding and will begin
amortizing based on collections of customer accounts receivable beginning in
August 1999.
The ZFT Securitization imposes certain reporting obligations on the Company
and limits ZFT's ability, among other things, to grant liens, incur certain
indebtedness, or enter into other lines of business. Additionally, under certain
conditions as defined, including among other things, failure to pay principal or
interest when due, failure to cure a borrowing base deficiency and breach of any
covenant that is not cured, the ZFT Securitization is subject to an early
amortization whereby the ZFT Receivables Notes may be declared due and payable
immediately. The restricted cash balance shown on the Consolidated Statements of
Cash Flows as of July 31, 1995 and 1994 primarily represents the restricted cash
of ZFT which is based on the relationship between the ZFT Receivables Notes
outstanding and gross accounts receivable as of July 31, 1995 and 1994.
11.0 Percent Second Priority Senior Secured Notes Due 2000. The 11.0
Percent Second Priority Senior Secured Notes due 2000 (the "Notes") were issued
by ZDel under an indenture dated as of July 30, 1993 among ZDel, as issuer,
Zale, as guarantor and IBJ Schroder Bank & Trust Company, as trustee. At July
31, 1995 and 1994, there was approximately $60.0 million principal amount of
Notes outstanding. The Notes were guaranteed by Zale and were secured by second
liens on substantially all the assets of Zale and ZDel.
The terms of the new Revolving Credit Agreement allowed the Company to
redeem the Notes on September 11, 1995 utilizing cash on hand. The Notes were
optionally redeemable by ZDel at a redemption price equal to 102 percent of
their principal amount together with accrued interest to the redemption date.
Upon redemption, the Company paid an early redemption premium and other costs
associated with the redemption of approximately $1.7 million. An extraordinary
item of
F-14
<PAGE> 55
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1.0 million, net of an income tax benefit of $0.7 million, will be recorded in
the first quarter of fiscal year 1996.
Capital Lease Obligation. The Company entered into a capital lease
effective April 1, 1993 for certain store point-of-sale equipment in the amount
of approximately $10.3 million with a borrowing rate of 11.0 percent. The
related debt is payable monthly over a three-year period.
LEASE COMMITMENTS
The Company rents most of its retail space under leases that generally
range from five to fifteen years and may contain minimum rent escalations and
renewal options for consecutive one-to-five year periods. In addition, the
corporate headquarters is leased under a five-year agreement that began on
August 1, 1992 after the original lease agreement was rejected in the
reorganization process. All existing real estate leases are treated as operating
leases. Sublease rental income under noncancellable leases is not material.
Rent expense, exclusive of lease rejection provisions which are recorded in
Reorganization and Restructure Costs in the year ended March 31, 1993, is as
follows:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------
FOUR
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31, MARCH 31,
1995 1994 1993 1993
---------- ---------- ------------ ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Retail Space:
Minimum Rentals.................. $ 55,645 $ 52,064 $ 16,737 $ 57,145
Rentals Based on Sales........... 28,365 25,346 6,387 29,174
-------- -------- -------- --------
84,010 77,410 23,124 86,319
Equipment and Corporate
Headquarters..................... 3,386 3,478 1,374 5,502
-------- -------- -------- --------
Total Rent Expense....... $ 87,396 $ 80,888 $ 24,498 $ 91,821
======== ======== ======== ========
</TABLE>
Contingent rentals paid to lessors of certain store facilities are
determined principally on the basis of a percentage of sales in excess of
contractual limits.
Future minimum rent commitments as of July 31, 1995, for all noncancellable
leases of ongoing operations were as follows: 1996 -- $54.3 million;
1997 -- $48.2 million; 1998 -- $39.4 million; 1999 -- $33.2 million;
2000 -- $28.1 million; thereafter -- $81.6 million; for a total of $284.8
million.
INTEREST
Interest expense for the years ended July 31, 1995 and 1994, for the four
months ended July 31, 1993 and for the year ended March 31, 1993 was
approximately $37.5 million, $30.3 million, $8.0 million and $25.7 million,
respectively.
Interest income for the years ended July 31, 1995 and 1994, for the four
months ended July 31, 1993 and for the year ended March 31, 1993 was $7.7
million, $2.1 million, $1.3 million and $0.8 million, respectively.
Generally, interest expense on prepetition debt did not accrue after the
commencement of bankruptcy. If the prepetition debts were secured by property
with a value that was greater than the amount of the debt, interest was accrued
up to the value of the collateral. For financial statement
F-15
<PAGE> 56
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes prior to the Effective Date, the Company accrued interest expense on
secured debt. The Company ceased accruing interest expense on its unsecured
prepetition debt.
INCOME TAXES
Effective April 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes". SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on
estimated future tax effects of the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect. There
was no cumulative effect on income taxes related to this change in method of
accounting.
Currently, the Company files a consolidated income tax return. The
effective income tax rate varies from the federal statutory rate as follows:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------
YEAR YEAR FOUR YEAR
ENDED ENDED MONTHS ENDED
JULY JULY ENDED MARCH
31, 31, JULY 31, 31,
1995 1994 1993 1993
------- ------- --------- --------
(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
F-16
<PAGE> 57
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
develops a longer term earnings record, the NOL carryover and other assets are
fully reserved to the extent there are no long-term deferred liabilities to
offset. The NOL carryforward will begin to expire in fiscal year 2002 but can be
utilized through 2009.
As of July 31, 1995, all years through fiscal year 1988 have been settled
with the Internal Revenue Service ("IRS") and all income tax liabilities thereon
have been paid. In addition, the IRS did not file any income tax claims in the
bankruptcy case; therefore, the Company believes that under the bankruptcy laws
any potential income tax liabilities have been discharged through the Effective
Date.
Tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at July
31,1995 and 1994 are presented below (amounts in thousands).
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994
--------- ---------
<S> <C> <C>
Current Deferred Taxes:
Assets --
Customer receivables..................................... $ 17,628 $ 17,083
Accrued liabilities...................................... 11,883 9,692
State and local taxes.................................... 2,194 2,780
Net operating loss carryforward.......................... 7,601 7,803
Other.................................................... 78 1,353
--------- ---------
Total Assets............................................. 39,384 38,711
Less -- Valuation Allowance.............................. (28,793) (26,181)
--------- ---------
10,591 12,530
Liabilities --
Merchandise inventories, principally due to LIFO
reserve............................................... (59,391) (74,530)
--------- ---------
Deferred Current Tax Liability, Net...................... $ (48,800) $ (62,000)
========= =========
Non-current Deferred Taxes:
Assets --
Property and equipment, principally due to fresh-start
adjustments........................................... $ 24,997 $ 37,250
Net operating loss carryforward.......................... 139,894 143,512
Postretirement benefits.................................. 9,333 6,833
Other.................................................... 7,402 4,994
--------- ---------
Total Assets............................................. 181,626 192,589
Less -- Valuation Allowance.............................. (132,641) (130,330)
--------- ---------
48,985 62,259
Liabilities --
Other.................................................... (185) (259)
--------- ---------
Deferred Non-current Tax Asset, Net........................ $ 48,800 $ 62,000
========= =========
</TABLE>
The valuation reserve of approximately $161.4 million and $156.5 million
recognizes that, as of July 31, 1995 and 1994, respectively, net deferred tax
assets are only realizable to the extent of net deferred tax liabilities.
F-17
<PAGE> 58
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net increase in the valuation allowance from July 31, 1994 to July 31,
1995 was $4.9 million. This amount was comprised of the following (amounts in
thousands):
<TABLE>
<S> <C>
Utilization of pre-emergence net deferred tax assets............. $(16,204)
Increase in net deferred tax assets resulting from identification
of additional temporary differences............................ 21,127
--------
Net change in valuation allowance account........................ $ 4,923
========
</TABLE>
CAPITAL STOCK
Common Stock. At July 31, 1995 and 1994, 70,000,000 shares of Common Stock,
par value of $0.01 per share, were authorized and 34,983,258 shares and
34,965,481 shares, respectively, were outstanding. The Company held 35,942 and
34,519 treasury shares at July 31, 1995 and 1994, respectively.
Preferred Stock. At July 31, 1995 and 1994, 5,000,000 shares of Preferred
Stock, par value of $0.01, were authorized. None are issued or outstanding.
Warrants. Pursuant to the Plan, Zale had authorized 2,000,000 Series A
Warrants to purchase common stock. At July 31, 1995 and 1994, 1,999,550 and
2,000,000 Series A Warrants, respectively, were outstanding. Each Series A
Warrant entitles the holder to purchase, for $10.368 per share, one share of
Zale common stock (subject to certain anti-dilution adjustments). The Series A
Warrants are exercisable on or before July 30, 1998, although their expiration
date may be shortened if the market value of Zale's common stock increases to at
least 150.0 percent of the warrant exercise price for a specified number of days
and less than 5.0 percent of the Series A Warrants originally issued under the
Plan are outstanding on the date on which Zale gives the acceleration notice.
As part of its settlement of certain litigation with Swarovski, Zale issued
its Series B Warrants to purchase common stock. Each Series B Warrant entitled
the holder to purchase for $10.368 per share, one share of Zale common stock
(subject to certain anti-dilution adjustments). The Series B Warrants were
presently exercisable and, if not previously exercised, would expire on
September 9, 1998, subject to the Company's right to accelerate the expiration
date of the Series B Warrants if certain conditions were met. At July 31, 1995,
the Series B Warrants issued entitled the holders to purchase an aggregate of
1,852,884 shares of Zale common stock. Zale, at its expense, filed and
maintained effective a shelf registration statement covering the resale of the
Series B Warrants and the issuance and sale of shares of common stock upon
exercise of the Series B Warrants (the "Shelf Registration").
On August 31, 1995, Zale redeemed the Series B Warrants and acquired all
Swarovski's rights, title and interest under the warrant agreement and paid $9.3
million to Swarovski in consideration of the redemption. As a result of this,
the Series B Warrants were cancelled and are no longer outstanding.
Stock Option Plan. As of the Effective Date, the Company adopted a stock
option plan (the "Stock Option Plan") to enable the Company to attract, retain
and motivate officers and key employees by providing for proprietary interest of
such individuals in the Company. Options to purchase an aggregate of 3,055,000
shares of Common Stock may be granted under the Stock Option Plan to eligible
employees. Options granted under the Stock Option Plan (i) must be granted at an
exercise price not less than the fair market value of the shares of Common Stock
into which such options are exercisable, (ii) vest over a four-year vesting
period and (iii) expire ten years from the date of grant.
F-18
<PAGE> 59
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
SHARES GRANT PRICE
------------------------- --------------------------
FISCAL 1995 FISCAL 1994 FISCAL 1995 FISCAL 1994
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year...... 1,629,200 -- $ 8.68- 9.74 $ --
Granted............................. 779,000 1,679,100 10.75-14.00 8.68-9.74
Exercised........................... (18,750) -- 8.87- 9.74 --
Cancelled........................... (176,525) (49,900) 8.87-13.19 9.74
--------- --------- ------------ -----------
Outstanding, end of year............ 2,212,925 1,629,200 $ 8.68-14.00 $ 8.68-9.74
========= ========= ============ ===========
</TABLE>
As of July 31, 1995 and 1994, 359,350 and 200, respectively, of options
outstanding were exercisable. The remaining options will become exercisable over
the next three years based on vesting percentages.
COMMITMENTS AND CONTINGENCIES
Jewel Recovery, L.P. Pursuant to the Plan, Zale assigned certain claims and
causes of action and advanced $3.0 million to Jewel Recovery, L.P., a limited
partnership ("Jewel Recovery") which was formed upon Zale's emergence from
bankruptcy. The sole purpose of Jewel Recovery is to prosecute and settle such
assigned claims and causes of action. The general partner of Jewel Recovery is
Jewel Recovery, Inc., a subsidiary of the Company. Its limited partners are
holders of various prior unsecured claims against Zale.
There is a possibility that the Company may recover the $3.0 million
advance made to Jewel Recovery as well as other amounts related to the
finalization of the Chapter 11 claims settlement process. It is likely that
these matters will be resolved by the end of the second quarter of fiscal 1996.
The Company does not expect these recoveries to be material to its financial
position or recurring operations.
In addition, the Company and ZDel have agreed to indemnify certain parties
to litigation settlements entered into by the Company in connection with the
Plan against cross-claims, similar third-party claims or costs of defending such
claims brought against such parties as a result of litigation instigated by the
Company, ZDel or Jewel Recovery. At September 12, 1995, no material claims had
been asserted against the Company or ZDel for such indemnification.
Other. The Company is involved in certain other legal actions and claims
arising in the ordinary course of business. Management believes that such
litigation and claims will be resolved without material effect on the Company's
financial position or results of operations.
The Company has an operations services agreement for management information
systems with a third-party servicer. The agreement, which originally began in
February 1993, was amended on August 1, 1994 and, requires payments totaling
$31.5 million over a thirty-six month term and is paid monthly on a
straight-line basis.
PROFIT SHARING PLAN
At July 31, 1995, the Company maintains The Zale Corporation Savings &
Investment Plan. Substantially all employees who are at least age 21 are
eligible to participate in the plan. Each employee can contribute from one
percent to fifteen percent of their annual salary. Under this plan, the Company
will match 50 cents in Zale stock for every dollar an employee contributes up to
two percent of annual earnings. In order for an employee to be eligible for the
Company match, the
F-19
<PAGE> 60
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee must have worked at least 1,000 hours during the plan year and be
employed on the last day of the plan year.
An employee is 33.3 percent vested in the Zale stock after one year of
service, 66.7 percent vested after two years of service and 100 percent vested
after three years of service. As of July 31, 1995 approximately 2,100 employees
participated in The Zale Corporation Savings & Investment Plan.
Also, under this plan, the Company may make a profit sharing contribution
at its sole discretion. To be eligible for such discretionary profit sharing
contributions, an employee must have at least twelve consecutive months of
service, have worked at least 1,000 hours during the plan year and be employed
on the last day of the plan year.
An employee is 20 percent vested in the profit sharing contributions after
three years of service, 40 percent vested after four years of service, 60
percent vested after five years of service, 80 percent vested after six years of
service and 100 percent vested after seven years of service. The Company's
contribution to the plan was $2.5 million and $2.2 million for fiscal years 1995
and 1994, respectively.
ACCOUNTING CHANGES
Effective April 1, 1994, the Company adopted the provisions of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" and SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Debt and equity securities are classified as
available for sale under SFAS No. 115. The effects of these standards on the
consolidated financial position and results of operations are not material.
FINANCIAL INSTRUMENTS
In fiscal 1993, the Company adopted SFAS No. 107 "Disclosures about Fair
Value of Financial Instruments" which extends existing fair value disclosure
practices by requiring all entities to disclose the fair value of financial
instruments, for which it is practicable to estimate fair value.
As cash and short-term cash investments, customer receivables, trade
payables and certain other short-term financial instruments are all short-term
in nature, their carrying amount approximates fair value. The carrying amount of
the $380.6 million, net of discount, Receivables Securitization Facility also
approximates fair value. The carrying amount of the $60.0 million 11.0 Percent
Second Priority Senior Secured Notes which were secured by second liens on
substantially all the assets of Zale and ZDel were redeemed on September 11,
1995 for 102 percent of face value. The investments of the Company's insurance
subsidiaries, primarily stocks and bonds in the amount of $28.8 million,
approximate market value at July 31, 1995 and are reflected in Other Assets on
the Consolidated Balance Sheets.
Concentrations of Credit Risk. Financial instruments which potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments and customer receivables. The Company maintains
cash and cash equivalents, short and long-term investments and certain other
financial instruments with various financial institutions. These financial
institutions are located throughout the country. Concentrations of credit risk
with respect to customer receivables are limited due to the Company's large
number of customers and their dispersion across many regions. As of July 31,
1995 and 1994, the Company had no significant concentrations of credit risk.
F-20
<PAGE> 61
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RELATED PARTY TRANSACTIONS
One of the Company's directors serves as a director of a company from which
the Company purchased approximately $0.4 million and $0.2 million of jewelry
merchandise during fiscal year 1995 and 1994, respectively. The Company believes
the terms were equivalent to those of unrelated parties.
REORGANIZATION AND RESTRUCTURE COSTS
Reorganization and Restructure Costs are shown on a separate line item in
the Consolidated Statements of Operations and reflect the costs incurred by the
Company in the implementation of its restructuring plan as well as costs related
directly to its bankruptcy case. No Reorganization and Restructure Costs, for
which the Company had not previously provided, were incurred in the years ended
July 31, 1995 and 1994. During January through March 1993, the Company closed
approximately 130 under-performing store locations as it continued to focus
operations in its most profitable locations. These store closings were primarily
in the Company's Guild division. In addition, approximately 45 of the Company's
leased locations with one landlord in its Diamond Park division were closed at
the end of January 1993 in department stores that no longer carry fine jewelry.
UNUSUAL ITEMS -- PROVISIONS FOR VALUATION OF ASSETS
There were no unusual items recognized during the years ended July 31, 1995
and 1994 or the four months ended July 31, 1993. The unusual items recognized
during the year ended March 31, 1993 were as follows (amounts in thousands):
<TABLE>
<S> <C>
Write-off of favorable lease rights and property.................. $ 4,200
Provision for valuation of customer receivables................... 12,500
Provision for valuation of diamond held for investment............ 3,500
-------
$20,200
=======
</TABLE>
The Company determined during the March 31, 1993 year-end closing process
that the methodology used to calculate its allowance for doubtful customer
receivables, which had been applied consistently since the early 1980's, did not
provide a sufficient allowance for doubtful accounts. The $12.5 million
shortfall was an accumulation of individual amounts during certain prior years,
none of which was material to a specific prior year, and, accordingly, the
cumulative effect has been reflected as an unusual item in the year ended March
31, 1993. There was no material effect to the March 31, 1993 operating results.
Additionally, the Company made provisions to reduce the value of certain
non-operating assets, including properties held for sale and a large diamond
held for investment, to their estimated net realizable values.
F-21
<PAGE> 62
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for the years ended July 31, 1995
and 1994 were as follows (amounts in thousands except per share data):
<TABLE>
<CAPTION>
FISCAL 1995
FOR THE THREE MONTHS ENDED
------------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1995 1995 1995 1994
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................... $211,400 $ 192,083 $ 427,194 $ 205,472
Gross profit....................... 100,708 94,871 214,675 101,885
Net earnings (loss)................ (3,132) (3,994) 41,771 (3,175)
Net earnings (loss) per primary
common share..................... (0.09) (0.11) 1.19 (0.09)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1994
FOR THE THREE MONTHS ENDED
------------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1994 1994 1994 1993
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................... $199,885 $ 167,078 $ 368,596 $ 184,748
Gross profit....................... 99,345 85,608 183,439 91,855
Net earnings (loss) (5,380) (4,458) 37,542 (6,147)
Net earnings (loss) per primary
common share..................... (0.15) (0.13) 1.07 (0.18)
</TABLE>
F-22
<PAGE> 63
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales...................................... $222,283 $192,083 $888,519 $824,749
Cost of Sales.................................. 114,435 97,212 450,615 413,318
-------- -------- -------- --------
Gross Margin................................. 107,848 94,871 437,904 411,431
Selling, General and Administrative Expenses... 101,924 93,618 345,295 336,891
Depreciation and Amortization Expense
(Credit)..................................... 2,101 344 4,756 (206)
Unusual Items -- Reorganization Recoveries..... -- -- (4,486) --
-------- -------- -------- --------
Operating Earnings............................. 3,823 909 92,339 74,746
Interest Expense, Net.......................... 7,662 6,653 22,604 22,594
-------- -------- -------- --------
Earnings (Loss) Before Income Taxes and
Extraordinary Item........................... (3,839) (5,744) 69,735 52,152
Income Taxes................................... (1,400) (1,750) 24,753 17,550
-------- -------- -------- --------
Earnings (Loss) Before Extraordinary Item...... (2,439) (3,994) 44,982 34,602
Extraordinary Item:
Loss on Early Extinguishment of Debt, Net of
Income Tax Benefit of $(603).............. -- -- (1,096) --
-------- -------- -------- --------
Net Earnings (Loss)............................ $ (2,439) $ (3,994) $ 43,886 $ 34,602
======== ======== ======== ========
Earnings (Loss) Per Common Share:
Primary:
Earnings (Loss) Before Extraordinary
Item.................................... $ (0.07) $ (0.11) $ 1.24 $ 0.99
Extraordinary Item........................ -- -- (0.03) --
-------- -------- -------- --------
Net Earnings (Loss)....................... $ (0.07) $ (0.11) $ 1.21 $ 0.99
======== ======== ======== ========
Assuming Full Dilution:
Earnings (Loss) Before Extraordinary
Item.................................... $ (0.07) $ (0.11) $ 1.22 $ 0.99
Extraordinary Item........................ -- -- (0.03) --
-------- -------- -------- --------
Net Earnings (Loss)....................... $ (0.07) $ (0.11) $ 1.19 $ 0.99
======== ======== ======== ========
Weighted Average Number of Common Shares
Outstanding:
Primary................................... 35,106 34,964 36,349 34,964
Assuming Full Dilution.................... 35,106 34,964 36,956 34,964
</TABLE>
See Notes to the Consolidated Financial Statements.
F-23
<PAGE> 64
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents........................................ $ 37,204 $ 154,905
Customer Receivables, Net........................................ 417,810 396,380
Merchandise Inventories.......................................... 487,714 375,413
Other Current Assets............................................. 27,075 23,859
----------- -----------
Total Current Assets..................................... 969,803 950,557
Property and Equipment, Net........................................ 100,686 71,487
Other Assets....................................................... 45,367 39,864
Deferred Tax Asset, Net............................................ 48,800 48,800
----------- -----------
Total Assets............................................. $ 1,164,656 $ 1,110,708
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt................................ $ 194 $ 2,907
Notes Payable.................................................... 18,000 --
Accounts Payable and Accrued Liabilities......................... 156,306 117,048
Deferred Tax Liability, Net...................................... 48,800 48,800
----------- -----------
Total Current Liabilities................................ 223,300 168,755
Non-current Liabilities............................................ 35,767 32,670
Long-term Debt..................................................... 380,721 440,717
Excess of Revalued Net Assets Over Stockholders' Investment, Net... 72,253 76,676
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock.................................................. -- --
Common Stock..................................................... 352 350
Additional Paid-In Capital (Includes Stock Warrants)............. 358,898 337,534
Unrealized Gains on Securities................................... 1,526 979
Accumulated Earnings............................................. 91,839 53,027
----------- -----------
Total Stockholders' Investment........................... 452,615 391,890
----------- -----------
Total Liabilities and Stockholders' Investment........... $ 1,164,656 $ 1,110,708
=========== ===========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-24
<PAGE> 65
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1996 1995
----------- -----------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings...................................................... $ 43,886 $ 34,602
Non cash expenses, gains and losses:
Depreciation and amortization expense.......................... 5,780 635
Utilization of pre-emergence net operating loss................ 23,757 17,480
Other adjustments to reconcile net earnings to net cash used in
operating activities:
Extraordinary loss on early extinguishment of debt................ 1,699 --
(Increase) decrease in:
Customer receivables, net...................................... (20,256) (14,957)
Merchandise inventories........................................ (104,591) (21,295)
Other current assets........................................... (2,793) (4,763)
Other assets................................................... 642 (2,175)
Increase (decrease) in:
Accounts payable and accrued liabilities....................... 28,759 (11,422)
Non-current liabilities........................................ 3,097 787
--------- ---------
Net Cash Used in Operating Activities............................... (20,020) (1,108)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................... (37,036) (29,867)
Dispositions of property and equipment............................ 590 1,340
Acquisition, net of cash acquired................................. (2,547) --
Other............................................................. (238) 28
--------- ---------
Net Cash Used in Investing Activities............................... (39,231) (28,499)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt........................................ (66,437) (2,883)
Net borrowings under revolving credit agreement................... 18,000 --
Payment for redemption of Series B Warrants....................... (9,264) --
Payment of prepayment penalty and other related costs on early
extinguishment of debt......................................... (1,699) --
Debt issue and capitalized financing costs........................ (618) --
Proceeds from exercise of stock options........................... 1,568 --
--------- ---------
Net Cash Used in Financing Activities............................... (58,450) (2,883)
--------- ---------
Net Decrease in Cash and Cash Equivalents........................... (117,701) (32,490)
Cash and Cash Equivalents at Beginning of Period.................... 154,905 153,700
--------- ---------
Cash and Cash Equivalents at End of Period.......................... $ 37,204 $ 121,210
========= =========
Supplemental cash flow information:
Interest paid..................................................... $ 27,413 $ 28,993
Interest received................................................. $ 2,802 $ 4,442
Income taxes paid (net of refunds received)....................... $ 883 $ 302
Restricted cash -- at period end date............................. $ 33,019 $ 36,567
</TABLE>
See Notes to the Consolidated Financial Statements.
F-25
<PAGE> 66
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
Zale Corporation is the largest specialty retailer of fine jewelry in the
United States in terms of both retail sales and number of stores. The Company
had 1,207 retail locations at April 30, 1996 throughout the U.S., Guam and
Puerto Rico, primarily in regional shopping malls. The Company conducts business
through four distinct divisions consisting of the Zales Division, with 571
stores, the Gordon's Division, with 336 stores, the Fine Jewelers Guild
Division, with 118 stores and the Diamond Park Fine Jewelers Division, with 178
leased fine jewelry departments. In addition, the Company operates four outlet
stores. On January 18, 1996, the Company acquired Karten's Jewelers, Inc.,
("Karten's") a privately owned chain of 20 fine jewelry stores. The Company
acquired all the outstanding shares of common stock for $3.0 million in cash and
assumption of all liabilities. The addition of Karten's significantly increased
the Company's presence in the Northeast. These stores will initially keep the
Karten's trade name and will change to the Zales' name prior to the 1996
Christmas selling season.
The accompanying Consolidated Financial Statements are those of Zale
Corporation and its wholly-owned subsidiaries (the "Company" or "Zale") as of
and for the three and nine month periods ended April 30, 1996. The Consolidated
Financial Statements are unaudited and have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In managements' opinion, all material adjustments and
disclosures necessary for a fair presentation have been made. The accompanying
Consolidated Financial Statements should be read in conjunction with the January
31, 1996 and October 31, 1995 Consolidated Financial Statements and related
notes of Zale included in Zale's financial statements filed with the Securities
and Exchange Commission in a Form 10-Q on March 15, 1996, and December 8, 1995,
respectively, and the audited Consolidated Financial Statements and related
notes thereto included in the 1995 Annual Report to Stockholders filed as an
exhibit to the Company's Form 10-K for the fiscal year ended July 31, 1995. The
classifications in use at April 30, 1996 have been applied to the financial
statements for July 31, 1995 and April 30, 1995.
The results of operations for the three and nine month periods ended April
30, 1996 and 1995, are not indicative of the operating results for the full
fiscal year due to the seasonal nature of the Company's business. Seasonal
fluctuations in retail sales historically have resulted in higher earnings in
the quarter of the fiscal year which includes the Christmas selling season.
WORKING CAPITAL FINANCING
On August 11, 1995, Zale and Zale Delaware, Inc. ("ZDel") a wholly-owned
subsidiary of Zale, (the "Borrowers") entered into a new three-year revolving
credit agreement (the "Revolving Credit Agreement") which provides for revolving
credit loans in an aggregate amount of up to $150.0 million, with a $30.0
million sublimit for letters of credit. At no time may the total amount of
revolving credit loans outstanding under the Revolving Credit Agreement exceed
the lesser of the total commitment of $150.0 million and a defined borrowing
base ($218.4 million at April 30, 1996, based on a fixed percentage of eligible
inventory, as defined).
The Borrowers' obligations under the Revolving Credit Agreement are
primarily secured by a first lien on and security interest in all inventory
(excluding inventory on consignment).
The revolving credit loans bear interest at floating rates, currently LIBOR
+ 2.0 percent or the agent's adjusted base rate + 0.75 percent, at the
Borrowers' option, and can be adjusted based on certain future performance
levels attained by the Borrowers. The Company pays a commitment fee
F-26
<PAGE> 67
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
of 3/8 percent per annum on the preceding month's unused Revolving Credit
Agreement commitment. The Borrowers may repay the revolving credit loans at any
time without penalty. At April 30, 1996, there were $18.0 million in loans
outstanding under the Revolving Credit Agreement. There were approximately $0.6
million in letters of credit outstanding at April 30, 1996.
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, keeps within certain limits the Borrowers ability to
pay dividends and make other restricted payments, incur additional indebtedness,
engage in certain transactions with affiliates, incur liens, make investments
and sell assets. The Revolving Credit Agreement also requires the Borrowers to
maintain certain financial ratios and specified levels of net worth.
The increased flexibility allowed in the new Revolving Credit Agreement
enabled the Company to redeem early the $60.0 million 11.0 Percent Second
Priority Senior Secured Notes (the "Notes") on September 11, 1995 utilizing cash
on hand. The Notes were optionally redeemable by ZDel at a redemption price
equal to 102 percent of their principal amount together with accrued interest to
the redemption date. Upon redemption, the Company paid an early redemption
premium and other costs associated with the redemption of approximately $1.7
million resulting in an extraordinary charge of $1.1 million, net of an income
tax benefit of $0.6 million, being recorded in the first quarter of the current
year.
REPURCHASE OF WARRANTS
As part of Zale's settlement of certain bankruptcy litigation in 1993 with
Swarovski International Holding, A.G. ("Swarovski"), Zale issued its Series B
Warrants to purchase common stock. The Series B Warrants were presently
exercisable and, if not previously exercised, would expire on September 9, 1998,
subject to the Company's right to accelerate the expiration date of the Series B
Warrants if certain conditions were met. On August 31, 1995, Zale redeemed the
Series B Warrants and acquired all Swarovski's rights, title and interest under
the warrant agreement and paid $9.3 million to Swarovski in consideration of the
redemption. As a result of this, the Series B Warrants were canceled and are no
longer outstanding. Additional Paid-In Capital decreased $4.2 million, whereas
Accumulated Earnings decreased $5.1 million due to this transaction.
UNUSUAL ITEMS -- REORGANIZATION RECOVERIES
On July 30, 1993 (the "Effective Date"), Zale consummated its plan of
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Plan") and emerged from bankruptcy. Pursuant to the Plan, Zale assigned certain
claims and causes of action and advanced $3.0 million to Jewel Recovery, L.P., a
limited partnership ("Jewel Recovery") which was formed upon Zale's emergence
from bankruptcy. The sole purpose of Jewel Recovery is to prosecute and settle
such assigned claims and causes of action. The general partner of Jewel Recovery
is Jewel Recovery, Inc., a subsidiary of the Company. Its limited partners are
holders of various prior unsecured claims against Zale. The $3.0 million advance
was fully reserved as of the Effective Date as its collectibility was uncertain.
Jewel Recovery has pursued certain claims and has been awarded significant
recoveries against third parties. During the first quarter, Zale was notified
that it would recover its $3.0 million advance to Jewel Recovery. The $3.0
million advance was repaid to Zale in December 1995.
Additionally, Shawmut Bank ("Shawmut") was elected as Disbursement Agent
and held all cash and common stock to be used in settlements of creditors
claims. Shawmut recently provided Zale with information on creditors whose claim
rights have terminated. As a result, during the current year, Zale recovered
cash funds of approximately $1.5 million held by Shawmut related to
F-27
<PAGE> 68
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
cash approved for distribution to pre-confirmation creditors of Zale but not
claimed by such pre-confirmation creditors. The $3.0 million and the $1.5
million recoveries were recorded as unusual items in the Company's first quarter
and are reflected on the Consolidated Statements of Operations for the nine
month period ended April 30, 1996 and had an after-tax impact of $0.08 per
share.
F-28
<PAGE> 69
INSIDE BACK COVER
[The page is divided into four horizontal sections each including a
divisional logo, a divisional description, and a picture of jewelry]
Section 1 - Zales - The Diamond Store [LOGO]
Zales offers a wide assortment of traditional fine jewelry at
affordable prices. Its customers represent a cross-section of
mainstream America.
Picture 1 - A ladies gold and diamond wedding band with diamond
solitaire
Section 2 - Gordon's Jewelers - Since 1905 [LOGO]
Gordon's offers a contemporary selection of merchandise, appealing
to fashion-oriented consumers. Because Gordon's is strategically
positioned in 12 major regions across the country, the stores also
reflect local trends and styles.
Picture 2 - A ladies gold, ruby, and diamond fashion ring.
Section 3 - Fine Jewelers Guild [LOGO]
Fine Jewelers Guild offers higher-end merchandise, more exclusive
designs and a prestigious shopping environment for the upscale
customer. These stores operate under locally established names
that are synonymous with quality and tradition.
Picture 3 - Watch
Section 4 - Diamond Park Fine Jewelers [LOGO]
The leased jewelry departments operated by the Diamond Park Fine
Jewelers Division custom design merchandising concepts to blend in
with the host store and complement buying patterns in other
departments.
Picture 4 - A gold and diamond ensemble with a heart pendant,
bracelet, and earrings
<PAGE> 70
NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDER OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 9
Use of Proceeds...................... 12
Price Range of Common Stock.......... 12
Dividend Policy...................... 13
Selected Consolidated Financial
Information........................ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 16
Business............................. 23
Management........................... 33
Selling Shareholder.................. 36
Underwriting......................... 36
Legal Matters........................ 37
Experts.............................. 37
Available Information................ 38
Incorporation of Certain Information
by Reference....................... 38
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
2,500,000 SHARES
[ZALE CORPORATION LOGO]
COMMON STOCK
($.01 PAR VALUE)
SALOMON BROTHERS INC
MCDONALD & COMPANY
SECURITIES, INC.
PAINEWEBBER INCORPORATED
PROSPECTUS
DATED JULY 24, 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 at least $275,000 of which will be paid by the Selling
Shareholder with any excess being paid 50% by the Selling Shareholder and 50% by
the Company) are as follows:
<TABLE>
<S> <C>
SEC registration fee............................................. $ 53,561
Blue sky fees and expenses....................................... 15,000
NASD filing fee.................................................. 16,033
Printing and engraving expenses.................................. 75,000
Legal fees and expenses.......................................... 100,000
Accountants fees and expenses.................................... 50,000
Miscellaneous, including telephone charges and
traveling expenses............................................. 65,000
--------
Total.................................................. $374,594
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of Title 8 of the Delaware Code gives a corporation power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The same Section also
gives a corporation power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper. Also, the Section states that, to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any such action, suit or proceeding, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
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<PAGE> 72
The Restated Certificate of Incorporation ("Certificate") of the Company
provides in substance that no director will be personally liable either to the
Company or any stockholder for monetary damages for breach of fiduciary duty as
a director except (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of the law, (iii) for
any matter in respect of which such director will be liable under the General
Corporation Law of the State of Delaware or (iv) for any transaction from which
the director has derived an improper personal benefit.
The Certificate further provides as follows:
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to, or testifies in, any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative in nature, by reason of (i) the fact that
such person is or was a director, officer, employee or agent of the
Corporation at any time after the Commencement Time (as defined below), or
is or was serving at any time after the Commencement Time at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise and (ii) any acts or omissions by such person in such
capacity that occurred after the Commencement Time, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding to the full extent permitted by law,
so long as such person acted or omitted to act in good faith and in a
manner that such person (x) reasonably believed to be in or not opposed to
the best interests of the Corporation and (y) with respect to any criminal
action or proceeding, had reasonable cause to believe was lawful; provided,
however, that if a court of competent jurisdiction, after exhaustion of all
appeals therefrom, adjudges such person to be liable to the Corporation for
any amount or if such person pays an amount in settlement to the
Corporation, the Corporation may indemnify such person for such amount only
with the approval of such court. The Corporation may adopt Bylaws or enter
into agreements with any such person for the purpose of providing for such
indemnification. "Commencement Time" means 8:00 a.m., C.S.T., on July 21,
1993.
The Company has an insurance policy covering its liabilities and expenses
which might arise in connection with its lawful indemnification of its directors
and officers for certain of their liabilities and expenses and also covering its
officers and directors against certain other liabilities.
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<PAGE> 73
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
1.2 -- Letter Agreement between the Company, the Selling Shareholder and AIF
II, LP as of May 31, 1996.*
2.1 -- Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code
with Respect to Plan of Reorganization under Chapter 11 of the
Bankruptcy Code for Zale Corporation and its Affiliated Debtors,
dated March 22, 1993 (Exhibit T3E-1), incorporated by reference from
the exhibit shown in parenthesis to the registrant's Form T-3 (No.
22-24-68) filed with the Commission on April 2, 1993.
2.2 -- Motion to Approve Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 19, 1993 (Exhibit 2.6), incorporated by
reference from the exhibit shown in parenthesis to the registrant's
Form 8-A/A (No. 02-21526) filed with the Commission on July 16, 1993.
2.3 -- Order Approving Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 20, 1993 (Exhibit 2.7), incorporated by
reference from the exhibit shown in parenthesis to the registrant's
Form 8-A/A (No. 02-21526) filed with the Commission on July 16, 1993.
5 -- Opinion of Troutman Sanders, LLP.*
23.1 -- Consent of Troutman Sanders LLP (contained in the opinion filed as
Exhibit 5).*
23.2 -- Consent of Arthur Andersen LLP.
</TABLE>
- ---------------
* Previously filed.
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<PAGE> 74
ITEM 17. UNDERTAKINGS.
(b) Filings Incorporating Subsequent Exchange Act Documents by Reference:
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(h) Request For Acceleration of Effective Date or Filing of Registration
Statement on Form S-8:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(i) Include the Following in a Registration Statement Permitted by Rule
430A Under the Securities Act of 1933:
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of Prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be initial bona fide offering
thereof.
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<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on the 23rd day of July,
1996.
ZALE CORPORATION
By: /s/ ALAN P. SHOR
----------------------------------
Alan P. Shor
Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------------------------
<C> <S> <C>
* Chairman of the Board, July 23, 1996
- --------------------------------------------- President and Chief
Robert J. DiNicola Executive Officer (principal
executive officer of the
registrant)
* Executive Vice President, July 23, 1996
- --------------------------------------------- Finance and Administration,
Merrill J. Wertheimer Chief Financial Officer
(principal financial officer
of the registrant)
* Vice President and July 23, 1996
- --------------------------------------------- Controller (principal
Mark R. Lenz accounting officer of the
registrant)
* Director July 23, 1996
- ---------------------------------------------
Glen Adams
* Director July 23, 1996
- ---------------------------------------------
Peter P. Copses
* Director July 23, 1996
- ---------------------------------------------
Frank E. Grzelecki
* Director July 23, 1996
- ---------------------------------------------
Richard C. Marcus
* Director July 23, 1996
- ---------------------------------------------
Andrew H. Tisch
*By: /s/ ALAN P. SHOR
- ---------------------------------------------
Alan P. Shor
Attorney-in-Fact
</TABLE>
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<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------- -----------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.*
1.2 -- Letter Agreement between the Company, the Selling Shareholder and
AIF II, LP as of May 31, 1996.*
2.1 -- Disclosure Statement Pursuant to Section 1125 of the Bankruptcy
Code with Respect to Plan of Reorganization under Chapter 11 of the
Bankruptcy Code for Zale Corporation and its Affiliated Debtors,
dated March 22, 1993 (Exhibit T3E-1), incorporated by reference
from the exhibit shown in parenthesis to the registrant's Form T-3
(No. 22-24-68) filed with the Commission on April 2, 1993.
2.2 -- Motion to Approve Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 19, 1993 (Exhibit 2.6), incorporated
by reference from the exhibit shown in parenthesis to the
registrant's Form 8-A/A (No. 02-21526) filed with the Commission on
July 16, 1993.
2.3 -- Order Approving Amendments to the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of Zale Corporation and its
Affiliated Debtors, dated May 20, 1993 (Exhibit 2.7), incorporated
by reference from the exhibit shown in parenthesis to the
registrant's Form 8-A/A (No. 02-21526) filed with the Commission on
July 16, 1993.
5 -- Opinion of Troutman Sanders, LLP.*
23.1 -- Consent of Troutman Sanders LLP (contained in the opinion filed as
Exhibit 5).*
23.2 -- Consent of Arthur Andersen LLP.
</TABLE>
- ---------------
* Previously filed.
<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
July 23, 1996
