<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1997
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 0-21526
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-0675400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 West Walnut Hill Lane, Irving, Texas 75038-1003
(Address of principal executive offices) (Zip Code)
(972) 580-4000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]. No [ ].
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X]. No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 28, 1997, 34,967,550 shares of the registrant's common stock
were outstanding.
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<PAGE> 2
ZALE CORPORATION AND SUBSIDIARIES
Index
Page
----
Part 1. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information: 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- ------------------------
1997 1996 1997 1996
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Net Sales $505,083 $451,962 $735,862 $666,236
Cost of Sales 256,771 226,010 376,815 336,180
-------- -------- -------- --------
Gross Margin 248,312 225,952 359,047 330,056
Selling, General and
Administrative Expenses 154,210 144,602 255,929 243,371
Depreciation and Amortization Expense 3,346 1,580 6,156 2,655
Unusual Items - Reorganization Recoveries --- --- --- (4,486)
-------- -------- -------- --------
Operating Earnings 90,756 79,770 96,962 88,516
Interest Expense, Net 9,501 8,036 17,499 14,942
-------- -------- -------- --------
Earnings Before Income Taxes and
Extraordinary Item 81,255 71,734 79,463 73,574
Income Taxes 29,740 25,500 29,086 26,153
-------- -------- -------- --------
Earnings Before Extraordinary Item 51,515 46,234 50,377 47,421
Extraordinary Item:
Loss on Early Extinguishment of Debt,
Net of Income Tax Benefit of $(603) --- --- --- (1,096)
-------- -------- -------- --------
Net Earnings $ 51,515 $ 46,234 $ 50,377 $ 46,325
======== ======== ========= ========
Earnings Per Common Share:
Primary:
Earnings Before Extraordinary Item $ 1.41 $ 1.27 $ 1.37 $ 1.31
Extraordinary Item --- --- --- (0.03)
-------- -------- -------- --------
Net Earnings $ 1.41 $ 1.27 $ 1.37 $ 1.28
======== ======== ======== ========
Assuming Full Dilution:
Earnings Before Extraordinary Item $ 1.41 $ 1.27 $ 1.37 $ 1.31
Extraordinary Item --- --- --- (0.03)
-------- -------- -------- --------
Net Earnings $ 1.41 $ 1.27 $ 1.37 $ 1.28
======== ======== ========= ========
Weighted Average Number of Common
Shares Outstanding:
Primary 36,606 36,336 36,781 36,320
Assuming Full Dilution 36,604 36,314 36,779 36,308
</TABLE>
See Notes to the Consolidated Financial Statements.
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<PAGE> 4
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, JULY 31, JANUARY 31,
1997 1996 1996
----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 26,918 $ 50,046 $ 41,373
Customer Receivables, Net 499,094 419,877 452,855
Merchandise Inventories 573,039 457,862 482,974
Other Current Assets 26,404 25,535 30,989
---------- ----------- -----------
Total Current Assets 1,125,455 953,320 1,008,191
Property and Equipment, Net 128,862 108,254 95,054
Other Assets 43,663 45,737 46,994
Deferred Tax Asset, Net 56,500 56,500 48,800
---------- ----------- -----------
Total Assets $1,354,480 $ 1,163,811 $ 1,199,039
=========== ============ ===========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 5 $ 26 $ 850
Accounts Payable and Accrued Liabilities 169,385 145,794 159,861
Deferred Tax Liability, Net 32,000 32,000 48,800
---------- ----------- -----------
Total Current Liabilities 201,390 177,820 209,511
Non-current Liabilities 53,557 34,627 34,683
Long-term Debt 495,549 404,328 425,763
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 67,829 70,778 73,727
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- --- ---
Common Stock 355 352 350
Additional Paid-In Capital (Includes
Stock Warrants) 396,090 383,042 358,998
Unrealized Gains on Securities 1,966 1,013 1,729
Accumulated Earnings 142,228 91,851 94,278
---------- ----------- -----------
540,639 476,258 455,355
Less Treasury Stock (4,484) --- ---
---------- ----------- -----------
Total Stockholders' Investment 536,155 476,258 455,355
---------- ----------- -----------
Total Liabilities and Stockholders' Investment $1,354,480 $ 1,163,811 $ 1,199,039
========== =========== ===========
</TABLE>
See Notes to the Consolidated Financial Statements.
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<PAGE> 5
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 50,377 $ 46,325
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization expense 6,849 3,333
Utilization of pre-emergence net operating loss 8,773 25,380
Deferred income taxes 19,500 ---
Extraordinary loss on early extinguishment of debt --- 1,699
Changes in:
Customer receivables, net (79,217) (55,301)
Merchandise inventories (115,177) (99,851)
Other current assets (869) (6,707)
Other assets 2,078 (327)
Accounts payable and accrued liabilities 23,591 32,083
Non-current liabilities (570) 2,013
---------- ----------
Net Cash Used in Operating Activities (84,665) (51,353)
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (32,044) (27,968)
Dispositions of property and equipment 2,414 481
Acquisition, net of cash acquired --- (2,547)
Other 192 (110)
---------- ----------
Net Cash Used in Investing Activities (29,438) (30,144)
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (19) (65,778)
Net borrowings under revolving credit agreement 91,200 45,050
Payment for redemption of Series B Warrants --- (9,264)
Payment of prepayment penalty and other related costs
on early extinguishment of debt --- (1,699)
Debt issue and capitalized financing costs --- (618)
Proceeds from exercise of stock options 551 274
Purchase of treasury stock (757) ---
---------- ----------
Net Cash Provided by (Used in) Financing Activities 90,975 (32,035)
---------- ----------
Net Decrease in Cash and Cash Equivalents (23,128) (113,532)
---------- ----------
Cash and Cash Equivalents at Beginning of Period 50,046 154,905
---------- ----------
Cash and Cash Equivalents at End of Period $ 26,918 $ 41,373
========== ==========
</TABLE>
See Notes to the Consolidated Financial Statements.
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<PAGE> 6
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 17,052 $ 19,679
Interest received $ 779 $ 2,419
Income taxes paid (net of refunds received) $ 1,029 $ 594
Restricted cash - at period end date $ 3,635 $ 24,582
</TABLE>
See Notes to the Consolidated Financial Statements.
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<PAGE> 7
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
Zale Corporation (the "Company"), founded in 1924, 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 $505.1 million and $735.9
million for the three and six months ended January 31, 1997, respectively,
and 1,249 locations at January 31, 1997 throughout the United States, Guam and
Puerto Rico, primarily in regional shopping malls. The Company conducts
business through four distinct divisions. The Zales(R) Division, with 618
stores, represents the Company's national brand and is focused on a broad range
of mainstream consumers. The Gordon's(SM) Division operates 325 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 Bailey, Banks & Biddle Division, formerly the Guild
Division, operates 120 upscale jewelry stores under the Bailey, Banks &
Biddle(R) and other locally established names. The Diamond Park Division
manages 182 leased fine jewelry departments in several major department store
chains including Marshall Field's, Dillard's, Mercantile and Parisian. In
addition, the Company operates 4 outlet stores.
The accompanying Consolidated Financial Statements are those of Zale
Corporation and its wholly-owned subsidiaries as of and for the three and six
month periods ended January 31, 1997. 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 management's 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 audited Consolidated
Financial Statements and related notes thereto included in the 1996 Annual
Report to Stockholders filed as an exhibit to the Company's Form 10-K for
the fiscal year ended July 31, 1996. The classifications in use at January 31,
1997 have been applied to the financial statements for July 31, 1996 and
January 31, 1996.
The results of operations for the three and six month periods ended
January 31, 1997 and 1996, 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.
TREASURY STOCK
In November 1996, the Company received approximately 191,000 shares of
common stock from Shawmut approved for distribution to pre-confirmation
creditors of the Company but not claimed by such pre-confirmation creditors
valued on the date of receipt at $19.50 per share. This resulted in a $3.7
million increase to additional paid-in capital offset by an equal increase in
treasury stock. The Company also received approximately 99,000 shares of
common stock as part of its settlement of remaining pre-bankruptcy litigation
for which the Company paid $0.8 million. The Company expects no additional
significant recoveries of stock in the future.
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<PAGE> 8
ITEM 2
ZALE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements of the Company (and the related
notes thereto) included elsewhere in this report.
RESULT OF OPERATIONS
The following table sets forth certain financial information from the
Company's unaudited Consolidated Statements of Operations expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ -----------------------
1997 1996 1997 1996
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 50.8 50.0 51.2 50.5
----- ----- ----- -----
Gross Margin 49.2 50.0 48.8 49.5
Selling, General and
Administrative Expenses 30.5 32.0 34.8 36.5
Depreciation and Amortization
Expense 0.7 0.4 0.8 0.4
Unusual Items - Reorganization
Recoveries --- --- --- 0.7
----- ----- ----- -----
Operating Earnings 18.0 17.6 13.2 13.3
Interest Expense, Net 1.9 1.8 2.4 2.2
----- ----- ----- -----
Earnings Before Income Taxes
and Extraordinary Item 16.1 15.8 10.8 11.1
Income Taxes 5.9 5.6 4.0 3.9
----- ----- ----- -----
Earnings Before Extraordinary Item 10.2 10.2 6.8 7.2
Extraordinary Item:
Loss on Early Extinguishment of
Debt, Net of Income Taxes --- --- --- (0.2)
----- ----- ----- -----
Net Earnings 10.2% 10.2% 6.8% 7.0%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1996
NET SALES. Net Sales for the three months ended January 31, 1997
increased by $53.1 million to $505.1 million, an 11.8 percent increase compared
to the previous year. The sales increase primarily resulted from a 6.6 percent
increase in stores open for comparable periods as well as sales from over 100
new stores added in the last twelve months. The Company believes that the sales
growth was influenced by enhanced merchandise assortments, successful product
promotions and strong execution of store programs.
GROSS MARGIN. Gross Margin as a percentage of net sales decreased by
0.8 percent primarily due to the Company's more competitive stance with regards
to pricing as well as the transition to a higher quality, lower margin product
mix at the Gordon's division, in connection with its repositioning as a more
up-scale and contemporary retailer. The LIFO provision was $2.3 million and
$0.6 million for the three months ended January 31, 1997 and 1996,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.5 percent as a percentage of net sales.
Store expenses decreased by 0.4 percent principally due to productivity
improvement as a result of store payroll increasing at a slower rate than sales
and increased income from extended warranty contracts. Corporate office
expenses, principally payroll, were reduced resulting in a 0.5 percent
improvement. Bad debt expense improved 0.4 percent as a percentage of net
sales, as net chargeoffs decreased as a percentage of accounts receivable and
the Company refined its bad debt reserve in recognition of an improving
recovery trend. In addition, 0.2 percent of the improvement in selling,
general and administrative expenses was due to income from the sale of property
not being used in the Company's operations.
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<PAGE> 9
EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION AND AMORTIZATION
EXPENSE. As a result of the factors discussed above, Earnings Before Interest,
Taxes and Depreciation and Amortization Expense were $94.1 million and $81.4
million for the three months ended January 31, 1997 and 1996, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $1.8 million. Depreciation and amortization of property
and equipment increased from $3.0 million to $4.7 million primarily 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 $9.5 million and
$8.0 million for the three months ended January 31, 1997 and 1996,
respectively. The increase in interest expense is primarily due to higher
borrowings under the Revolving Credit Agreement, to fund new store growth as
well as remodels and renovations, and a reduction in interest income due to
lower average balances in short-term investments.
INCOME TAXES. The income tax expense for the three month periods
ended January 31, 1997 and 1996 was $29.7 million and $25.5 million,
respectively, reflecting an effective tax rate of 36.6 percent and 35.5
percent, respectively. As a result of guidelines regarding accounting for
income taxes of companies utilizing fresh-start reporting, the Company reports
earnings on a fully-taxed basis even though it does not expect to pay any
significant income taxes for the current year. The Company will realize the
cash benefit from utilization of the tax net operating loss carryforward
("NOL") against current and future tax liabilities. As of July 31, 1996, the
Company had a NOL carryforward (after limitations) of approximately $324
million.
SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1996
NET SALES. Net Sales for the six months ended January 31, 1997
increased by $69.6 million to $735.9 million, a 10.5 percent increase compared
to the previous year. The sales increase primarily resulted from a 5.7 percent
increase in stores open for comparable periods as well as sales from over 100
new stores added in the last twelve months. The Company believes that the sales
growth was influenced by enhanced merchandise assortments, successful product
promotions and strong execution of store programs.
GROSS MARGIN. Gross Margin as a percentage of net sales decreased by
0.7 percent primarily due to the Company's more competitive stance with regards
to pricing as well as the transition to a higher quality, lower margin product
mix at the Gordon's division, in connection with its repositioning as a more
up-scale and contemporary retailer. The LIFO provision was $2.6 million and
$0.9 million for the six months ended January 31, 1997 and 1996, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.7 percent as a percentage of net sales.
Store expenses decreased by 0.6 percent principally due to store payroll
expense increasing at a lower rate than sales. Corporate expenses decreased by
0.3 percent of sales principally as a result of lower payroll costs. Bad debt
expense was flat relative to sales resulting in a 0.5 percent improvement as a
percentage of net sales. In addition, 0.2 percent of the improvement was due
to income from the sale of property not being used in the Company's operations
and higher income from credit insurance operations principally as a result of
gains on sales of investments.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
EXPENSE, EXTRAORDINARY ITEM AND UNUSUAL ITEMS. Earnings Before Interest,
Taxes, Depreciation and Amortization Expense, Extraordinary Item and Unusual
Items were $103.1 million and $86.7 million for the six months ended January
31, 1997 and 1996, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $3.5 million. Depreciation and amortization of property
and equipment increased from $5.6 million to $8.8 million primarily 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.
UNUSUAL ITEMS - REORGANIZATION RECOVERIES. Unusual Items -
Reorganization Recoveries were $4.5 million for the six month period ended
January 31, 1996. There were no unusual items for the current year.
INTEREST EXPENSE, NET. Interest Expense, Net was $17.5 million and
$14.9 million for the six months ended January 31, 1997 and 1996,
respectively. The increase in interest expense is primarily due to higher
borrowings under the Revolving Credit Agreement, to fund new store growth as
well as remodels and renovations, and a reduction in interest income due to
lower average balances in short-term investments.
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<PAGE> 10
INCOME TAXES. The income tax expense for the six month periods ended
January 31, 1997 and 1996 was $29.1 million and $26.2 million, respectively,
reflecting an effective tax rate of 36.6 percent and 35.5 percent,
respectively. As a result of guidelines regarding accounting for income taxes
of companies utilizing fresh-start reporting, the Company reports earnings on a
fully-taxed basis even though it does not expect to pay any significant income
taxes for the current year. The Company will realize the cash benefit from
utilization of the tax net operating loss carryforward ("NOL") against current
and future tax liabilities. As of July 31, 1996, the Company had a NOL
carryforward (after limitations) of approximately $324 million.
EXTRAORDINARY ITEM. The extraordinary charge of $1.1 million, net of
an income tax benefit of $0.6 million, for the six month period ended January
31, 1996 was the result of the early redemption of the $60.0 million 11.0
Percent Second Priority Senior Secured Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding
inventory and receivables growth, capital expenditures primarily for new store
growth and renovations, upgrading its management information systems and debt
service. As of January 31, 1997, the Company had cash and cash equivalents
of $26.9 million, including $3.6 million restricted primarily by the
collateral requirements under the Receivables Securitization Facility
established by the Company in July 1994 (the "Receivables Securitization
Facility"). The retail jewelry business is highly seasonal, with a significant
proportion of sales and operating income being generated in November and
December of each year. Approximately 39.7 percent and 41.2 percent of the
Company's annual sales were made during the three months ended January 31, 1996
and 1995, respectively, which includes the Christmas selling season. The
decrease in 1996 versus 1995 is due to the Company's emphasis in developing and
promoting other gift giving occasions throughout the year. 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.
The Company, through Zale Funding Trust, a limited purpose Delaware
business trust formed to finance customer accounts receivable, has
approximately $380.6 million, net of discount, aggregate principal amount of
Receivables Backed Notes ("ZFT Receivables Notes") issued and outstanding
pursuant to a Receivables Securitization Facility. The ZFT Receivables Notes
are secured by a lien on all customer accounts receivable and mature in July
1999.
The Company has a 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 loans outstanding under
the Revolving Credit Agreement exceed the lesser of the total commitment of
$150.0 million and a defined borrowing base ($251.0 million at January 31,
1997, based on a fixed percentage of eligible inventory, as defined).
Under its growth strategy, the Company plans to open approximately 200
new stores during fiscal 1997 and 1998. These stores are expected to solidify
the Company's core mall business by filling in markets where the Company is
currently under-represented. The Company has opened 73 new stores in the first
six months of fiscal 1997. This growth strategy follows a period where the
Company remodeled or refurbished over 500 of its key existing locations.
Additionally, the Company plans significant upgrades to its management
information systems over the next several years. The Company anticipates
spending approximately $60.0 million on capital expenditures in fiscal year
1997, a 25 percent increase over fiscal 1996. During the six months ended
January 31, 1997, the Company made approximately $32.0 million in capital
expenditures, a significant portion of which was used to open new stores.
There has been an increase of approximately $90 million, or 19
percent, in owned merchandise inventories at January 31, 1997 compared to the
balance at January 31, 1996. The increase in inventory levels is principally
the result of new store growth as well as improving the depth and breadth of
merchandise available in the stores to accommodate increasing sales. As a
result of the inventory position and increased capital expenditures, the
Company had outstanding borrowings of $114.8 million under the Revolving Credit
Agreement at January 31, 1997, compared to $45.1 million at January 31, 1996.
The Company is in the process of evaluating its financing requirements for the
next several years for store capital expenditure, accounts receivable and
inventory growth.
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.
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<PAGE> 11
Future liquidity will 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. The cash benefit realized in fiscal 1996 was
approximately $23 million. 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 current year. As of July 31, 1996, the
Company had an NOL (after limitations) of approximately $324 million, which
represents up to $126 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.
This Management's Discussion and Analysis contains forward-looking
statements, including statements concerning expected capital expenditures to be
made in the future, expected significant upgrades to its management information
systems over the next several years, the addition of new locations through new
store openings, and the adequacy of the Company's sources of cash to finance
its current and future operations. These forward-looking statements involve a
number of risks and uncertainties. In addition to the factors discussed above,
among other factors that could cause actual results to differ materially are
the following: development of trends in the general economy; competition in the
jewelry business which is fragmented; the variability of quarterly results and
seasonality of the retail business; the ability to improve productivity in
existing stores and to increase comparable store sales; the availability of
alternate sources of merchandise supply in the case of an abrupt loss of any
significant supplier during the three month period leading up to the Christmas
season; the dependence on key personnel who have been hired or retained since
bankruptcy; the changes in regulatory requirements which are applicable to the
Company's business; management's decisions to pursue new product lines which
may involve additional costs; and the risk factors listed from time to time in
the Company's Securities and Exchange Commission reports, including but not
limited to, its Annual Report on Form 10-K for the year ended July 31, 1996.
INFLATION
In management's opinion, changes in Net Sales and Net Earnings 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> 12
Part II. - Other Information:
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits -
11 Statement re computation of per share earnings.
27 Financial data schedule.
Part II Exhibits -
* 10 Form of Change of Control Agreement dated as of October 30, 1996,
but executed thereafter, between Zale Corporation and Key
Employees.
* Management Contracts and Compensatory Plans.
(b) Form 8-K-
None.
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<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zale Corporation
-----------------------------
(Registrant)
Date March 10, 1997 /s/ MARK R. LENZ
----------------- -----------------------------
Mark R. Lenz
Vice-President and Controller
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<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number
- --------------
<S> <C>
10 Form of Change of Control Agreement dated as of October 30, 1996, but
executed thereafter, between Zale Corporation and Key Employees.
11 Statement re computation of per share earnings.
27 Financial data schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10
ZALE CORPORATION
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement ("Agreement") dated as of this 30th
day of October, 1996 between Zale Corporation (the "Company"), and
_______________ (the "Key Employee").
WHEREAS, the Company's Board of Directors has determined that it is in
the best interests of the Company to provide certain benefits to the Key
Employee upon termination of employment as a result of a Change of Control of
the Company; and
WHEREAS, the severance benefits payable by the Company to the Key
Employee as provided herein are intended to ensure that the Key Employee
receives reasonable compensation given the specific circumstances of the Key
Employee's employment history with the Company;
NOW, THEREFORE, the Company adopts this Agreement to evidence the
Company's commitment to pay severance benefits to the Key Employee if the Key
Employee's employment with the Company terminates under the circumstances
described herein.
1. Effect on Other Plans Sponsored by the Company. The benefits
payable under this Agreement are in addition to the coverage and benefits
generally afforded to the Key Employee upon termination from the service of the
Company and any other programs sponsored by the Company including, but not
limited to, the Company's severance and stock option plans.
2. Definitions. The capitalized terms used in this Agreement shall
have the meaning set forth below.
(a) "Annual Compensation" shall mean the Key Employee's rate of base
salary paid or payable for the Company's fiscal year by the Company and any
incentive or bonus award paid or payable to the Key Employee for such fiscal
year.
(b) "Board" shall mean the Board of Directors of Zale Corporation.
(c) "Cause" shall mean (i) if the Key Employee is a party to a
written employment agreement with the Company, or any parent corporation or
subsidiary corporation thereof, which agreement contains a definition of "for
good cause" or "for cause" (or words of like import) for purposes of
termination of employment thereunder by the Company, or such parent corporation
or subsidiary corporation of the Company, "for
<PAGE> 2
good cause" or "for cause" as defined therein; or (ii) in all other cases: (A)
the wanton or willful commission by the Key Employee of an act, or the wanton
or willful omission or failure to act, that causes substantial damage (by
reason, without limitation, of financial exposure or loss, or damage to
reputation or goodwill) to the Company, or any parent corporation or subsidiary
corporation thereof; (B) the commission by the Key Employee of an act of fraud,
intentional misrepresentation, embezzlement, misappropriation or conversion in
the performance of such Key Employee's duties on behalf of the Company, or any
parent corporation or subsidiary corporation thereof; and (C) conviction of the
Key Employee for commission of a felony.
(d) "Change of Control" shall mean the date as of which: (i) there
shall be consummated (A) any consolidation or merger of the Company in which
the Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's common stock would be converted into cash, securities
or other property, other than a merger of the Company in which the holders of
the Company's common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (B) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company; or (ii) the stockholders of
the Company approve any plan or proposal for the liquidation or dissolution of
the Company; or (iii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), shall become the beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act) of 30% of the Company's outstanding common stock; or
(iv) during any period of two consecutive years, individuals who at the
beginning of such period constitute the entire board of directors of the
Company shall cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the Company's stockholders, of each
new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Disability" shall mean termination of the Key Employee's
employment by the Company as a result of the Key Employee's incapacity due to
physical or mental illness or injury, provided that the Key Employee shall have
been absent from his duties with the Company on a full-time basis for at least
six consecutive months. The Compensation Committee of the Board shall make any
such determination with respect to a Key Employee hereunder.
-2-
<PAGE> 3
(g) "Good Reason" shall mean any of the following actions taken by
the Company without the Key Employee's written consent after a Change of
Control:
(i) the assignment to the Key Employee by the Company of
duties inconsistent with, or the reduction of the powers and functions
associated with, the Key Employee's position, duties, responsibilities
and status with the Company immediately prior to a Change of Control
or Potential Change of Control (as defined below), or an adverse
change in the Key Employee's titles or offices as in effect
immediately prior to a Change of Control or Potential Change of
Control, or any removal of the Key Employee from or any failure to
re-elect the Key Employee to any of such positions, except in
connection with the termination of his employment for Disability or
Cause or as a result of the Key Employee's death or by the Key
Employee other than for Good Reason;
(ii) A reduction by the Company in the Key Employee's base
salary as in effect on the date of a Change of Control or Potential
Change of Control, or as the same may be increased from time to time
during the term of his Agreement, or the Company's failure to increase
(within 12 months of the Key Employee's last increase in base salary)
the Key Employee's base salary after a Change of Control or Potential
Change of Control, unless such failure is the result of (A) a hiring
or salary freeze uniformly applied to all employees or (B) the Key
Employee's failure to meet preestablished and objective performance
criteria;
(iii) Company's principal executive offices shall be moved
to a location outside Dallas County, Texas.
(iv) Company shall require the Key Employee to be based
anywhere other than at the Company's principal executive offices or
the location where the Key Employee is based on the date of a Change
of Control or Potential Change of Control, or if the Key Employee
agrees to such relocation, the Company fails to reimburse the Key
Employee for moving and all other expenses incurred with such move;
(v) The Company shall fail to continue in effect any
Company-sponsored plan or benefit that is in effect on the date of a
Change of Control or Potential Change of Control, and provides (A)
incentive or bonus compensation, (B) fringe benefits such as vacation,
medical benefits, life insurance and accident insurance, (C)
reimbursement for reasonable expenses incurred by the Key
-3-
<PAGE> 4
Employee in connection with the performance of duties with the
Company, and (D) pension benefits such as a Code Section 401(k) plan;
(vi) Any material breach by the Company of any provision
of this Agreement; and
(vii) Any failure by the Company to obtain the assumption
of this Agreement by any successor or assign of the Company effected
in accordance with the provisions of Section 6.
(h) "Potential Change of Control" shall mean the date as of which (1)
the Company enters into an agreement the consummation of which, or the approval
by shareholders of which, would constitute a Change of Control; (ii) proxies
for the election of Directors of the Company are solicited by anyone other than
the Company; (iii) any person (including, but not limited to, any individual,
partnership, joint venture, corporation, association or trust) publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change of Control; or (iv) any other event
occurs which is deemed to be a Potential Change of Control by the Board and the
Board adopts a resolution to the effect that a Potential Change of Control has
occurred.
3. Term. The term of this Agreement shall be for the one-year
period commencing on the date of this Agreement and shall continue in effect
for each successive one-year period thereafter unless terminated in accordance
with this paragraph. This Agreement shall terminate upon the earliest of (a)
the date of termination of the Key Employee's employment by the Company if no
benefits are payable hereunder; (b) the date the Company satisfies its
obligation, if any, to make payments and provide benefits to the Key Employee
pursuant to this Agreement; and (c) the termination of this Agreement in
accordance with the provisions of Section 12 prior to the date the Key Employee
terminates employment with the Company.
4. Termination of Employment Following Change of Control. (a)
Except as otherwise provided under Section 4(b), below, if within two years
following a Change of Control the Key Employee terminates his employment with
the Company for Good Reason or the Company terminates the Key Employee's
employment for any reason other than Cause or Disability, the Company shall pay
or provide to the Key Employee the following benefits:
-4-
<PAGE> 5
(i) an amount equal to three times the Key Employee's
average Annual Compensation for any fiscal year
beginning with or within the three-year period
terminating on the date of termination of the Key
Employee's employment, which amount shall be paid to
the Key Employee in cash on or before the fifth day
following the date of termination;
(ii) for a period of three years following the date of
termination of employment, the Key Employee and
anyone entitled to claim under or through the Key
Employee shall be entitled to all benefits under the
group health care plan, dental care plan, life or
other insurance or death benefit plan, or other
present or future similar group employee benefit plan
or program of the Company for which key executives
are eligible at the date of a Change of Control, to
the same extent as if the Key Employee had continued
to be an employee of the Company during such period
and such benefits shall, to the extent not fully paid
under any such plan or program, be paid by the
Company; and
(iii) a lump sum payment equal to the actuarial equivalent
(determined by the Company in good faith with the
assistance of its accountants or actuaries) of the
Benefit that would have accrued under the Zale
Delaware, Inc. Supplemental Executive Retirement Plan
("SERP") if (A) the Key Employee remained a
participant in the SERP for the three-year period
commencing on the first day of the SERP's plan year
("Plan Year") in which the Key Employee's employment
with the Company terminated ("Measurement Period"),
(B) during each Plan Year in the Measurement Period
the Key Employee earned Benefit Points equal to the
highest number of Benefit Points earned by such Key
Employee in a Plan Year during the three-year period
ending on the last day of the Plan Year immediately
preceding the Plan Year in which his employment with
the Company terminated, and (C) the Key Employee's
Final Average Pay during the Measurement Period is
the greater of his monthly Base Salary on the date of
(1) a Potential Change of Control, (2) the Change of
Control or (3) the date of his termination of
employment.
-5-
<PAGE> 6
(b) In the event that (i) the Key Employee would otherwise be
entitled to the compensation and benefits described in Section 4(a) hereof
("Compensation Payments"), and (ii) the Company determines, based upon the
advice of tax counsel selected by the Company's independent auditors and
acceptable to the Key Employee, that, as a result of such Compensation Payments
and any other benefits or payments required to be taken into account under Code
Section 280G(b)(2) ("Parachute Payments"), any of such Parachute Payments would
be reportable by the Company as "excess parachute payments", such Compensation
Payments shall be reduced to the extent necessary to cause the Key Employee's
Parachute Payments to equal 2.99 times the "base amount" as defined in Code
Section 280G(b)(3) with respect to such Key Employee. However, such reduction
in the Compensation Payments shall be made only if, in the opinion of such tax
counsel, it would result in a larger Parachute Payment to the Key Employee than
payment of the unreduced Parachute Payments after deduction of the tax imposed
on and payable by the Key Employee under Section 4999 of the Code ("Excise
Tax"). The value of any non-cash benefits or any deferred payment or benefit
for purposes of this paragraph shall be determined by the Company's independent
auditors.
(c) The parties hereto agree that the payments provided under Section
4(a) or (b) above, as the case may be, are reasonable compensation in light of
the Key Employee's services rendered to the Company and that neither party
shall contest the payment of such benefits as constituting an "excess parachute
payment" within the meaning of Section 280G(b)(1) of the Code.
(d) Unless the Company determines that any Parachute Payments made
hereunder must be reported as "excess parachute payments" in accordance with
Section 4(b) above, neither party shall file any return taking the position
that the payment of such benefits constitutes an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code.
5. No Obligation to Mitigate Damages. The Key Employee shall not be
required to mitigate damages or the amount of any payment provided for under
this Agreement by seeking other employment or otherwise, nor shall the amount
of any payment provided for under this Agreement be reduced by any compensation
earned by the Key Employee as the result of employment by another employer
after his termination, or otherwise.
6. Successor to the Company. The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to
-6-
<PAGE> 7
all or substantially all of the business and/or assets of the Company,
expressly, absolutely and unconditionally to assume and agree to perform the
obligations of the Company under the Plan and this Agreement in the same manner
and to the same extent that the Company would be required to perform such
obligations if no such succession or assignment had taken place.
7. Miscellaneous. No provisions of this Agreement may be waived
unless such waiver or modification is agreed to in a writing signed by the Key
Employee and the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
This Agreement shall be governed by and construed in accordance with the laws
of the State of Delaware.
8. Validity. The invalidity or unenforceability of any provisions
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
10. Agreement Not an Employment Contract. This Agreement shall not
be deemed to constitute an employment contract between the Company and the Key
Employee, and nothing herein shall be deemed to give the Key Employee the right
to continue in the employ of the Company or interfere with the right of the
Company to discharge the Key Employee at any time.
11. Legal Fees and Expenses. The Company shall pay all legal fees,
expenses and damages which the Key Employee may incur as a result of the Key
Employee's instituting legal action to enforce his rights hereunder, or in the
event the Company contests the validity, enforceability or the Key Employee's
interpretation of, or determinations under, this Agreement. If the Key
Employee is the prevailing party or recovers any damages in such action, the
Key Employee shall be entitled to receive in addition thereto pre-judgment and
post-judgment interest on the amount of such damages.
-7-
<PAGE> 8
12. Amendment and Termination. This Agreement may be amended or
terminated at any time by the Company, or by resolution of the Board; provided
that without the written consent of the Key Employee, no termination or
amendment reducing the severance benefits provided hereunder shall be effective
prior to the expiration of the applicable one-year term of this Agreement
described in Section 3 during which the Board resolution is adopted. Further,
no amendment or termination shall be effective during a one-year term
commencing on the date of a Potential Change of Control of the Company without
the consent of the Key Employee or the two-year term of this Agreement
commencing on the date of a Change of Control of the Company without the
consent of the Key Employee. No amendment or termination shall affect any
rights of the Key Employee if he is entitled to benefits hereunder at the time
of such amendment or termination.
13. Funding of Benefits. The benefits payable to the Key Employee
hereunder shall not be funded in any manner and shall be paid by the Company
out of its general assets, which assets are subject to the claims of the
Company's creditors.
14. Withholding. There shall be deducted from the payment of any
benefit due under the Plan (a) the amount of any uncontested indebtedness,
obligation, or liability which the Key Employee has acknowledged in writing as
owing to the Company or any subsidiary of the Company, which has been agreed to
by the Key Employee, and (b) the amount of any tax required by any governmental
authority to be withheld and paid over by the Company to such governmental
authority for the account of the Key Employee entitled to such payment.
15. Assignment. Unless required by court order, the Key Employee
shall not have any rights to sell, assign, transfer, encumber, or otherwise
convey the right to receive the payment of any benefit due hereunder, which
payment and the rights thereto are expressly declared to be nonassignable and
nontransferable. Any attempt to do so shall be null and void and of no effect.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ZALE CORPORATION
By:
-----------------------------
For the Company
KEY EMPLOYEE
--------------------------------
-9-
<PAGE> 10
ADDENDUM TO FORM OF CHANGE OF CONTROL AGREEMENT
The following agreements are substantially identical to the Form of Change of
Control Agreement shown here, except for the names and therefore are not filed
as separate documents in accordance with Exchange Act Rule 12b-31.
Form of Change of Control Agreement dated as of October 30, 1996 between Zale
Corporation (the "Company"), and the following "Key Employees":
1) Max Brown
2) Mary Forte
3) Sue Gove
4) Gregory Humenesky
5) Paul Kanneman
6) Paul Leonard
7) Ervin Polze
8) Beryl Raff
9) Alan P. Shor
10) Merrill Wertheimer
<PAGE> 1
EXHIBIT 11
ZALE CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
(unaudited)
(amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months Ended Six Months Ended
January 31, January 31,
--------------------- ------------------------
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Primary:
Net earnings applicable to common stock $51,515 $46,234 $50,377 $46,325
======= ======= ======= =======
Shares
Weighted average number of common shares
outstanding 35,032 34,996 35,124 34,991
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 701 683 759 636
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 873 657 898 693
------- ------- ------- -------
Weighted average number of common shares
outstanding as adjusted 36,606 36,336 36,781 36,320
======= ======= ======= =======
Net earnings per common share $ 1.41 $ 1.27 $ 1.37 $ 1.28
======= ======= ======= =======
Fully Diluted:
Net earnings applicable to common stock $51,515 $46,234 $50,377 $46,325
======= ======= ======= =======
Shares
Weighted average number of common shares
outstanding 35,032 34,996 35,124 34,991
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 699 661 757 621
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 873 657 898 696
------- ------- ------- -------
Weighted average number of common shares
outstanding as adjusted 36,604 36,314 36,779 36,308
======= ======= ======= =======
Net earnings per common share $ 1.41 $ 1.27 $ 1.37 $ 1.28
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JANUARY
31, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 26,918
<SECURITIES> 0
<RECEIVABLES> 499,094<F1>
<ALLOWANCES> 0
<INVENTORY> 573,039
<CURRENT-ASSETS> 1,125,455
<PP&E> 128,862<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,354,480
<CURRENT-LIABILITIES> 201,390
<BONDS> 495,549
0
0
<COMMON> 355
<OTHER-SE> 535,800
<TOTAL-LIABILITY-AND-EQUITY> 1,354,480
<SALES> 735,862
<TOTAL-REVENUES> 735,862
<CGS> 376,815
<TOTAL-COSTS> 376,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,499
<INCOME-PRETAX> 79,463
<INCOME-TAX> 29,086
<INCOME-CONTINUING> 50,377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,377
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<FN>
<F1>THIS ASSET VALUE REPRESENTS A NET AMOUNT.
</FN>
</TABLE>
