<PAGE>
- --------------------------------------------------------------------------------
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 October 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 November 25, 1997, 35,667,347 shares of the registrant's common stock
were outstanding.
- --------------------------------------------------------------------------------
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
Index
Part I. Financial Information: Page
----
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
October 31,
----------------------
1997 1996
-------- --------
Net Sales $252,526 $230,779
Cost of Sales 131,603 120,044
-------- --------
Gross Margin 120,923 110,735
Selling, General and Administrative Expenses 107,939 101,719
Depreciation and Amortization Expense 4,798 2,810
Unusual Item - Gain on Sale of Diamond Park Fine
Jewelers Division Assets (1,634) ---
-------- --------
Operating Earnings 9,820 6,206
Interest Expense, Net 8,155 7,998
-------- --------
Earnings (Loss) Before Income Taxes 1,665 (1,792)
Income Taxes 619 (654)
-------- --------
Net Earnings (Loss) $ 1,046 $ (1,138)
-------- --------
-------- --------
Earnings (Loss) Per Common Share:
Primary:
Net Earnings (Loss) $ 0.03 $ (0.03)
-------- --------
-------- --------
Assuming Full Dilution:
Net Earnings (Loss) $ 0.03 $ (0.03)
-------- --------
-------- --------
Weighted Average Number of Common
Shares Outstanding:
Primary 37,432 35,217
Assuming Full Dilution 37,486 35,217
See Notes to the Consolidated Financial Statements.
3
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
OCTOBER 31, JULY 31, OCTOBER 31,
1997 1997 1996
----------- ------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 114,429 $ 41,636 $ 55,973
Customer Receivables, Net 455,697 454,270 423,185
Merchandise Inventories 572,051 511,702 602,607
Other Current Assets 29,961 39,271 41,803
---------- ---------- ----------
Total Current Assets 1,172,138 1,046,879 1,123,568
Property and Equipment, Net 147,692 138,011 120,750
Other Assets 46,798 43,616 43,777
Deferred Tax Asset, Net 52,700 52,700 56,500
---------- ---------- ----------
Total Assets $1,419,328 $1,281,206 $1,344,595
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 12 $ 328 $ 10
Accounts Payable and Accrued Liabilities 248,160 145,721 242,891
Deferred Tax Liability, Net 23,700 23,700 32,000
---------- ---------- ----------
Total Current Liabilities 271,872 169,749 274,901
Non-current Liabilities 52,449 53,544 34,693
Long-term Debt 480,299 451,459 490,736
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 63,405 64,880 69,304
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- --- ---
Common Stock 374 350 353
Additional Paid-In Capital (Includes
Stock Warrants) 409,190 401,121 382,616
Unrealized Gains on Securities 2,291 2,182 1,279
Accumulated Earnings 143,450 142,404 90,713
---------- ---------- ----------
555,305 546,057 474,961
Treasury Stock (4,002) (4,483) ---
---------- ---------- ----------
Total Stockholders' Investment 551,303 541,574 474,961
---------- ---------- ----------
Total Liabilities and Stockholders'
Investment $1,419,328 $1,281,206 $1,344,595
---------- ---------- ----------
---------- ---------- ----------
See Notes to the Consolidated Financial Statements.
4
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1997 1996
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,046 $ (1,138)
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization expense 5,190 3,155
Non-cash charge (benefit) in lieu of tax expense
(benefit) 533 (772)
Unusual Item - Gain on Sale of Diamond Park
Fine Jewelers Division Assets (1,634) ---
Changes in:
Customer receivables, net (1,427) (3,308)
Merchandise inventories (108,782) (144,745)
Other current assets 7,307 (16,268)
Other assets (109) (7)
Accounts payable and accrued liabilities 101,121 97,097
Non-current liabilities (1,095) 66
-------- --------
Net Cash Provided by (Used in) Operating Activities 2,150 (65,920)
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (20,230) (16,843)
Dispositions of property and equipment 35 14
Proceeds from Sale of Diamond Park Fine
Jewelers Division Assets 57,642 ---
Other --- 1,948
-------- --------
Net Cash Provided by (Used in) Investing Activities 37,447 (14,881)
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (316) (17)
Net borrowings under (payments on) revolving credit
agreement (70,700) 86,400
Proceeds from issuance of Senior Notes 99,530 ---
Debt issue and capitalized financing costs (2,400) ---
Proceeds from exercise of stock options 7,082 347
Purchase of treasury stock --- (2)
-------- --------
Net Cash Provided by Financing Activities 33,196 86,728
-------- --------
Net Increase in Cash and Cash Equivalents 72,793 5,927
-------- --------
Cash and Cash Equivalents at Beginning of Period 41,636 50,046
-------- --------
Cash and Cash Equivalents at End of Period $114,429 $ 55,973
-------- --------
-------- --------
See Notes to the Consolidated Financial Statements.
5
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1997 1996
----------- -----------
Supplemental cash flow information:
Interest paid $ 8,620 $ 7,869
Interest received $ 1,219 $ 480
Income taxes paid (net of refunds received) $ 156 $ 147
Restricted cash - at period end date $ 15,196 $ 35,439
See Notes to the Consolidated Financial Statements.
6
<PAGE>
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. At October 31, 1997, the Company operated 1,146 retail
jewelry stores located primarily in shopping malls throughout the United
States, Guam and Puerto Rico. The Company operates four well-differentiated
operating divisions: Zales-R- (661 stores), Gordon's-SM- (321 stores),
Bailey, Banks and Biddle-R- (113 stores), and Diamond Park Fine Jewelers (47
stores). The Zales Division is a nationally recognized chain which provides
more traditional, moderately priced jewelry to a broad range of customers.
The Gordon's Division is a regional jeweler which offers contemporary
merchandise targeted to regional preferences at somewhat higher price points
than Zales. The Bailey, Banks and Biddle Division operates upscale jewelry
stores which are considered among the pre-eminent jewelry stores in their
markets. In October 1997, the Company sold the majority of the assets of its
Diamond Park Fine Jewelers Division -- see "Sale of Diamond Park Assets"
below. In addition, the Company operates four outlet stores in four states.
The accompanying Consolidated Financial Statements are those of Zale
Corporation and its wholly-owned subsidiaries ("the Company") as of and for
the three month period ended October 31, 1997. The Company consolidates
substantially all its retail operations into Zale Delaware, Inc. ("ZDel"), a
wholly owned subsidiary of Zale Corporation. ZDel is the parent company for
several subsidiaries, including three that are engaged primarily in providing
credit insurance to credit customers of the Company. All significant
intercompany transactions have been eliminated. 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 Company's Form 10-K for the fiscal year ended July 31,
1997. The classifications in use at October 31, 1997 have been applied to the
financial statements for July 31, 1997 and October 31, 1996.
The results of operations for the three month period ended October 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.
SALE OF DIAMOND PARK ASSETS
On September 3, 1997, the Company signed a purchase agreement to sell the
majority of the assets of its Diamond Park Fine Jewelers Division (the
"Diamond Park Asset Sale"). The Diamond Park Fine Jewelers Division, which
manages leased fine jewelry departments in major department store chains
including Marshall Field's, Dillard's, Mercantile and Parisian, had net sales
of $125.3 million in fiscal 1997. At July 31, 1997, inventory and net
property and equipment of the Diamond Park Fine Jewelers Division were $54.5
million and $4.0 million, respectively. In connection with the Diamond Park
Asset Sale, the Company will receive cash consideration totaling
approximately $63 million. The Company will continue to operate 47 leased
fine jewelry departments in Dillard's stores through January 1998, the end of
the current license period, at which time the remaining inventory of such
operations will be sold to the purchaser.
On October 6, 1997, the Company closed the Diamond Park Asset Sale. The
Company received $58 million in October 1997 with approximately $5 million to
be received after January 1998, at which time the remaining inventory of the
Dillard's stores will be sold to the purchaser. The net proceeds from the
Diamond Park Asset Sale are being reinvested into the Company's operations.
7
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
ISSUANCE OF SENIOR NOTES
On September 23, 1997, the Company sold $100 million in aggregate
principal amount of 8 1/2% Senior Notes ("the Senior Notes") due 2007 by
means of an offering memorandum to qualified institutional buyers pursuant to
Rule 144A promulgated under the Securities Act of 1933. All proceeds from
the sale of the Senior Notes were used by the Company to repay outstanding
indebtedness under its Revolving Credit Agreement (as defined herein) and for
general corporate purposes. The Senior Notes are unsecured and are fully and
unconditionally guaranteed by ZDel. The Senior Notes are redeemable for cash
at any time on or after October 1, 2002, at the option of the Company, in
whole or in part, at redemption prices starting at 104.25% of the principal
amount.
The indenture relating to the Senior Notes contains certain restrictive
covenants including, but not limited to, limitations on indebtedness,
limitations on dividends and other restricted payments, limitation on
transactions with affiliates, limitations on liens and limitations on
disposition proceeds of asset sales, among others. Pursuant to a
registration rights agreement relating to the Senior Notes, the Company has
filed a registration statement with respect to an offer to exchange the
Senior Notes for new notes of the Company with terms identical in all
material respects to the Senior Notes. The Senior Notes are included in
Long-term Debt on the accompanying balance sheet.
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's payment obligations under the Senior Notes are guaranteed
by ZDel (the "Guarantor Subsidiary"). Such guarantee is full and
unconditional with respect to ZDel. Zale Funding Trust ("ZFT"), a limited
purpose Delaware business trust wholly owned by ZDel which owns the customer
accounts receivable of ZDel, is not a guarantor of the obligations under the
Senior Notes. Separate financial statements of the Guarantor Subsidiary are
not presented because the Company's management has determined that they would
not be material to investors. The following supplemental financial
information sets forth, on an unconsolidated basis, statements of operations,
balance sheets, and statements of cash flow information for the Company
("Parent Company Only"), for the Guarantor Subsidiary and for the Company's
other subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental
financial information reflects the investments of the Company and the
Guarantor Subsidiary in the Guarantor and Non-Guarantor Subsidiaries using
the equity method of accounting. Certain reclassifications have been made to
provide for uniform disclosure of all periods presented. These
reclassifications are not material.
8
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended October 31, 1997
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $248,236 $ 4,290 $ --- $252,526
Cost of Sales --- 129,450 2,153 --- 131,603
------- -------- ------- -------- --------
Gross Margin --- 118,786 2,137 --- 120,923
Selling, General, and
Administrative Expenses 38 115,024 (7,123) --- 107,939
Depreciation and Amortization
Expense --- 4,501 297 --- 4,798
Unusual Item - Gain on Sale of
Diamond Park Fine Jewelers
Division Assets --- (1,634) --- --- (1,634)
------- -------- ------- -------- --------
Operating Earnings (Loss) (38) 895 8,963 --- 9,820
Interest Expense, Net --- (597) 8,752 --- 8,155
------- -------- ------- -------- --------
Earnings (Loss) Before Income
Taxes (38) 1,492 211 --- 1,665
Income Taxes (14) 555 78 --- 619
------- -------- ------- -------- --------
Earnings (Loss) Before Equity
In Earnings of Subsidiaries (24) 937 133 --- 1,046
Equity in Earnings (Loss) of
Subsidiaries 1,070 133 --- (1,203) ---
------- -------- ------- -------- --------
Net Earnings (Loss) $1,046 $ 1,070 $ 133 $ (1,203) $ 1,046
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</TABLE>
9
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended October 31, 1996
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $226,870 $ 3,909 $ --- $230,779
Cost of Sales --- 118,116 1,928 --- 120,044
------- -------- ------- ----- --------
Gross Margin --- 108,754 1,981 --- 110,735
Selling, General, and
Administrative Expenses 37 106,214 (4,532) --- 101,719
Depreciation and Amortization
Expense --- 2,541 269 --- 2,810
------- -------- ------- ----- --------
Operating Earnings (Loss) (37) (1) 6,244 --- 6,206
Interest Expense, Net --- (23) 8,021 --- 7,998
------- -------- ------- ----- --------
Earnings (Loss) Before Income
Taxes (37) 22 (1,777) --- (1,792)
Income Taxes (13) 8 (649) --- (654)
------- -------- ------- ----- --------
Earnings (Loss) Before Equity
in Earnings of Subsidiaries (24) 14 (1,128) --- (1,138)
Equity in Loss of
Subsidiaries (1,114) (1,128) --- 2,242 ---
------- -------- ------- ----- --------
Net Earnings (Loss) $(1,138) $ (1,114) $(1,128) $2,242 $ (1,138)
------- -------- ------- ----- --------
------- -------- ------- ----- --------
</TABLE>
10
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
October 31, 1997
(unaudited)
(amounts in thousands)
<TABLE>
ASSETS
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ --- $ 92,527 $ 21,902 $ --- $ 114,429
Customer Receivables, Net --- --- 455,697 --- 455,697
Merchandise Inventories --- 562,672 9,379 --- 572,051
Other Current Assets --- 28,116 1,845 --- 29,961
-------- -------- -------- ---------- ----------
Total Current Assets --- 683,315 488,823 --- 1,172,138
Investment in Subsidiaries 546,488 10,778 --- (557,266) ---
Property and Equipment, Net --- 143,700 3,992 --- 147,692
Intercompany Receivable 105,593 86,050 --- (191,643) ---
Other Assets --- 12,463 34,335 --- 46,798
Deferred Tax Assets, Net 59 52,641 --- --- 52,700
-------- -------- -------- ---------- ----------
Total Assets $652,140 $988,947 $527,150 $(748,909) $1,419,328
-------- -------- -------- ---------- ----------
-------- -------- -------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term
Debt $ --- $ 12 $ --- $ --- $ 12
Accounts Payable and Accrued
Liabilities 659 237,674 9,827 --- 248,160
Deferred Tax Liability, Net 646 23,054 --- --- 23,700
-------- -------- -------- ---------- ----------
Total Current Liabilities 1,305 260,740 9,827 --- 271,872
Non-current Liabilities --- 39,522 12,927 --- 52,449
Intercompany Payable --- 86,557 105,086 (191,643) ---
Long-term Debt 99,532 79 380,688 --- 480,299
Excess of Revalued Net Assets
Over Stockholders'
Investment, Net --- 63,405 --- --- 63,405
Total Stockholders'
Investment 551,303 538,644 18,622 (557,266) 551,303
-------- -------- -------- ---------- ----------
Total Liabilities and
Stockholders'
Investment $652,140 $988,947 $527,150 $(748,909) $1,419,328
-------- -------- -------- ---------- ----------
-------- -------- -------- ---------- ----------
</TABLE>
11
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
July 31, 1997
(unaudited)
(amounts in thousands)
<TABLE>
ASSETS
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ --- $ 27,479 $ 14,157 $ --- $ 41,636
Customer Receivables, Net --- --- 454,270 --- 454,270
Merchandise Inventories --- 503,764 7,938 --- 511,702
Other Current Assets --- 38,901 370 --- 39,271
-------- -------- -------- --------- ----------
Total Current Assets --- 570,144 476,735 --- 1,046,879
Investment in Subsidiaries 543,686 10,172 --- (553,858) ---
Property and Equipment, Net --- 134,175 3,836 --- 138,011
Intercompany Receivable --- 94,726 --- (94,726) ---
Other Assets --- 8,972 34,644 --- 43,616
Deferred Tax Assets, Net 59 52,641 --- --- 52,700
-------- -------- -------- --------- ----------
Total Assets $543,745 $870,830 $515,215 $(648,584) $1,281,206
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term
Debt $ --- $ 328 $ --- $ --- $ 328
Accounts Payable and Accrued
Liabilities 141 135,330 10,250 --- 145,721
Deferred Tax Liability, Net 646 23,054 --- --- 23,700
-------- -------- -------- --------- ----------
Total Current Liabilities 787 158,712 10,250 --- 169,749
Non-current Liabilities --- 40,615 12,929 --- 53,544
Intercompany Payable 1,384 --- 93,342 (94,726) ---
Long-term Debt --- 70,782 380,677 --- 451,459
Excess of Revalued Net Assets
Over Stockholders'
Investment, Net --- 64,880 --- --- 64,880
Total Stockholders'
Investment 541,574 535,841 18,017 (553,858) 541,574
-------- -------- -------- --------- ----------
Total Liabilities and
Stockholders' Investment $543,745 $870,830 $515,215 $(648,584) $1,281,206
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
</TABLE>
12
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION --(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended October 31, 1997
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities $ (7,082) $ 3,831 $ 6,706 $(1,305) $ 2,150
Net Cash Flows from Investing
Activities:
Additions to property and
equipment --- (20,074) (156) --- (20,230)
Dispositions of property and
equipment --- 35 --- --- 35
Purchase of common stock --- (2,500) --- 2,500 ---
Proceeds from Sale of Diamond
Park Fine Jewelers Division
Assets --- 57,642 --- --- 57,642
-------- -------- ------- ------- --------
Net Cash Provided by (Used in)
Investing Activities --- 35,103 (156) 2,500 37,447
-------- -------- ------- ------- --------
Net Cash Flows from Financing
Activities:
Payments on long-term debt --- (316) --- --- (316)
Net borrowings under revolving
credit agreement --- (70,700) --- --- (70,700)
Proceeds from issuance of
Senior Notes 99,530 --- --- --- 99,530
Loan from Zale Corporation
to Zale Delaware (99,530) 99,530 --- --- ---
Debt issue and capitalized
financing costs --- (2,400) --- --- (2,400)
Proceeds from exercise of
stock options and warrants 7,082 --- --- --- 7,082
Proceeds from issuance of
common stock --- --- 2,500 (2,500) ---
Dividends paid --- --- (1,305) 1,305 ---
-------- -------- ------- ------- --------
Net Cash Provided by (Used in)
Financing Activities 7,082 26,114 1,195 (1,195) 33,196
-------- -------- ------- ------- --------
Net Increase in Cash
and Cash Equivalents --- 65,048 7,745 --- 72,793
Cash and Cash Equivalents at
Beginning of Period --- 27,479 14,157 --- 41,636
-------- -------- ------- ------- --------
Cash and Cash Equivalents at
End of Period $ --- $ 92,527 $21,902 $ --- $114,429
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
13
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION --(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended October 31, 1996
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities $ (347) $(70,088) $10,660 $(6,145) $(65,920)
Net Cash Flows from Investing
Activities:
Additions to property and
equipment --- (16,680) (163) --- (16,843)
Dispositions of property and
equipment --- 14 --- --- 14
Other --- 1,948 --- --- 1,948
------- -------- ------- ------- --------
Net Cash Used in Investing
Activities --- (14,718) (163) --- (14,881)
------- -------- ------- ------- --------
Net Cash Flows from Financing
Activities:
Payments on long-term debt --- (17) --- --- (17)
Net borrowings under revolving
credit agreement --- 86,400 --- --- 86,400
Proceeds from exercise of
stock options 347 --- --- ---- 347
Dividends paid --- --- (6,145) 6,145 ---
Other --- (2) --- --- (2)
------- -------- ------- ------- --------
Net Cash Provided by (Used in)
Financing Activities 347 86,381 (6,145) 6,145 86,728
------- -------- ------- ------- --------
Net Increase (Decrease) in Cash
and Cash Equivalents --- 1,575 4,352 --- 5,927
Cash and Cash Equivalents at
Beginning of Period --- 6,603 43,443 --- 50,046
------- -------- ------- ------- --------
Cash and Cash Equivalents at
End of Period $ --- $ 8,178 $47,795 $ --- $ 55,973
------- -------- ------- ------- --------
------- -------- ------- ------- --------
</TABLE>
14
<PAGE>
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.
Three Months Ended
October 31,
-----------------------
1997 1996
------ ------
Net Sales 100.0% 100.0%
Cost of Sales 52.1 52.0
------ ------
Gross Margin 47.9 48.0
Selling, General and
Administrative Expenses 42.7 44.1
Depreciation and Amortization
Expense 1.9 1.2
Unusual Item - Gain on Sale of Diamond
Park Fine Jewelers Division Assets (0.6) ---
------ ------
Operating Earnings 3.9 2.7
Interest Expense, Net 3.2 3.5
------ ------
Earnings (Loss) Before Income Taxes 0.7 (0.8)
Income Taxes 0.3 (0.3)
------ ------
Net Earnings (Loss) 0.4 (0.5)
------ ------
------ ------
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO THREE MONTHS ENDED
OCTOBER 31, 1996
NET SALES. Net Sales for the three months ended October 31, 1997
increased by $21.7 million to $252.5 million, a 9.4 percent increase compared
to the previous year. The sales increase primarily resulted from a 5.9
percent increase in stores open for comparable periods as well as sales from
new stores added during the last twelve months. The Company believes that the
sales growth was influenced by continued improvement of merchandise
assortments, product promotions and execution of store programs.
GROSS MARGIN. Gross Margin as a percentage of net sales remained
relatively constant for both three month periods ending October 31, 1997 and
October 31, 1996. The LIFO provision was $0.7 million and $0.05 million for
the three months ended October 31, 1997 and 1996, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.4 percent as a percentage of net sales.
Store expenses decreased by 1.6 percent as a percent of sales principally
due to controlling the level of store payroll and warranty costs. Corporate
office expenses, principally payroll, were reduced resulting in a 0.4
percent improvement. These improvements were offset by an increase of net
credit expenses of 0.7 percent of sales which principally reflects a
provision for lower anticipated recoveries associated with customer accounts
previously charged-off.
UNUSUAL ITEM. The unusual item of $1.6 million represents the gain on
sale of Diamond Park assets, principally inventory and fixed assets, during
the first quarter. See Footnote "Sale of Diamond Park Assets."
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 $14.6 million
and $9.0 million for the three months ended October 31, 1997 and 1996,
respectively.
15
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $2.0 million. Depreciation and amortization of
property and equipment increased from $2.8 million to $4.8 million
principally due to new store growth and the remodeling and refurbishing of
existing stores.
INTEREST EXPENSE, NET. Interest Expense, Net was $8.1 million and $8.0
million for the three months ended October 31, 1997 and 1996, respectively.
INCOME TAXES. The income tax expense (benefit) for the three month
periods ended October 31, 1997 and 1996 was $0.6 million and $(0.7) million,
respectively, reflecting an effective tax rate of 37.2 percent and 36.5
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 October 31, 1997,
the Company had a NOL carryforward (after limitations) of approximately
$254.2 million.
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 October 31, 1997, the Company had cash and cash equivalents
of $114.4 million, including $15.2 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 40.3% and 39.7% of the
Company's annual sales were made during the three months ended January 31,
1997 and 1996, 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 and customer receivable balances.
The Company, through Zale Funding Trust ("ZFT"), a limited purpose
Delaware business trust wholly owned by Zale Delaware, Inc. ("ZDel") and
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 at October 31, 1997
pursuant to the Receivables Securitization Facility. The ZFT Receivables
Notes are secured by a lien on all customer accounts receivable and may be
optionally redeemed by ZFT in July 1999.
The Company established a national bank in October 1997 for the granting
of credit under its private label credit cards. The creation of a national
bank will allow the Company greater flexibility in establishing rates charged
to customers and will simplify the regulatory requirements under which the
Company operates.
In order to support the Company's seasonal financing needs, the Company
and ZDel (the "Borrowers") entered into a three year unsecured revolving
credit agreement (the "Revolving Credit Agreement") with a group of banks on
March 31, 1997. The Revolving Credit Agreement provides for revolving
credit loans in an aggregate amount of up to $225.0 million, including a
$30.0 million sublimit for letters of credit. At October 31, 1997, there
were no loans outstanding under the Revolving Credit. Letters of credit in
the amount of approximately $3.3 million were outstanding at October 31,
1997. The Company is currently in compliance with all of its covenant
obligations under the Revolving Credit Agreement and the instruments
governing its other indebtedness.
In order to support the Company's longer term capital financing
requirements, the Company issued $100 million of Senior Notes ("the Senior
Notes") on September 23, 1997. These notes bear interest at 8 1/2% and are
due in 2007. The Senior Notes are unsecured and are fully and
unconditionally guaranteed by ZDel. The proceeds were utilized to repay
indebtedness under the Company's Revolving Credit Agreement and for general
corporate purposes.
Under its growth strategy, the Company plans to open approximately 220
new stores for which it will incur approximately $50.0 million in capital
expenditures during the combined fiscal years 1998 and 1999. These stores
are expected to solidify the Company's core mall business by further
penetrating markets where the Company is under-represented. In the first
quarter of fiscal 1998 the Company opened 38 new stores.
16
<PAGE>
Since fiscal 1994, the Company has remodeled or refurbished nearly 50% of
its store base. During the combined fiscal years 1998 and 1999, the Company
anticipates spending approximately an additional $50.0 million to remodel and
refurbish approximately 300 more stores. The Company also estimates it will
make capital expenditures of approximately $25.0 million to $30.0 million
during the combined fiscal years 1998 and 1999 for enhancements to its
management information systems. In total, the Company anticipates spending
approximately $160.0 million on capital expenditures during the combined
fiscal years 1998 and 1999.
There has been an increase of approximately $60.3 million, or 11.8%, in
owned merchandise inventories at October 31, 1997 compared to the balance at
July 31, 1997. The increase in inventory levels is principally the result of
seasonality and new store growth as well as expansion in the depth and
breadth of merchandise available in the stores to accommodate increasing
sales.
On October 6, 1997, the Company consummated the sale of the majority of
the assets of its Diamond Park Fine Jewelers division ("the Diamond Park
Asset Sale"). The Company received $58 million on October 6, 1997. The
Company will continue to operate 47 leased fine jewelry departments in the
Dillard's stores through January 1998, the end of the current license period,
at which time the remaining inventory of such operations will be sold to the
purchaser for approximately $5 million. The net proceeds from the Diamond
Park asset sale are being invested into the Company's operations.
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 year 1997 was
approximately $28 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 October 31, 1997, the
Company had a NOL (after limitations) of approximately $254.0 million, which
represents up to $99.0 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, the Receivables Securitization Facility, net
proceeds from the Senior Notes, and net proceeds from the Diamond Park Asset
Sale should be sufficient to fund the Company's current operations, debt
service and currently anticipated capital expenditure requirements for the
foreseeable future.
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 the Company's
management information systems over the next several years, the addition of
new locations through either new store openings or strategic acquisitions,
the renovation and remodeling of the Company's existing store locations, 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: the impact of general economic conditions due to the fact that
jewelry purchases are discretionary for consumers and may be affected by
adverse trends in the general economy; competition in the fragmented retail
jewelry business; 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 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, 1997.
17
<PAGE>
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.
18
<PAGE>
Part II. - Other Information:
Item 4. Submission of Matters to a Vote of Security Holders
(a) On November 13, 1997, the Annual Meeting of Stockholders of
the Company was held at the ITT Sheraton Luxury Collection
Hotel - Houston, Texas. There were 35,221,275 shares of common
stock outstanding on the record date and entitled to vote at the
Annual Meeting.
(b) The following directors were elected:
Name of Nominee Votes For Votes Withheld
Robert J. DiNicola 31,352,862 640,736
Glen Adams 31,363,537 630,061
Peter P. Copses 31,362,377 631,221
A. David Brown 31,219,481 774,117
Andrea Jung 31,359,133 634,465
Richard C. Marcus 31,360,848 632,750
Charles H. Pistor, Jr. 31,352,694 640,904
Andrew H. Tisch 31,362,267 631,331
(c) The adoption of the amendment to the Zale Corporation
Omnibus Stock Incentive Plan was ratified with 20,963,209 votes
for, 7,614,875 votes against, 91,440 abstentions and 3,324,074
broker non-votes.
(d) The appointment of Arthur Andersen LLP as Independent Public
Accountants for the fiscal year ending July 31, 1998 was ratified
with 31,953,343 votes for, 8,955 votes against and 31,300
abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits -
11 Statement re computation of per share earnings.
27 Financial data schedule.
(b) Part II Exhibits -
Form 8-K-
99.1 Press Release issued by the Company on September 10, 1997.
19
<PAGE>
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 December 15, 1997 /s/ MARK R. LENZ
- ----------------------- -----------------------------------
Mark R. Lenz
Senior Vice-President
and Controller
(principal accounting officer
of the registrant)
20
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
- --------------
11 Statement re computation of per share earnings.
27 Financial data schedule.
<PAGE>
EXHIBIT 11
ZALE CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
(unaudited)
(amounts in thousands except per share amounts)
<TABLE>
Three Months Ended
October 31,
----------------------
1997 1996
------- ---------
<S> <C> <C>
Primary:
Net earnings (loss) applicable to common stock $ 1,046 $(1,138)
------- --------
------- --------
Shares
Weighted average number of common shares
outstanding 35,230 35,217
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 1,065 ---(1)
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 1,136 ---(1)
------- --------
Weighted average number of common shares
outstanding as adjusted 37,431 35,217
------- --------
------- --------
Net earnings (loss) per common share $ 0.03 $ (0.03)
------- --------
------- --------
Fully Diluted:
Net earnings (loss) applicable to common stock $ 1,046 $(1,138)
------- --------
------- --------
Shares
Weighted average number of common shares
outstanding 35,230 35,217
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 1,104 ---(1)
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 1,151 ---(1)
------- --------
Weighted average number of common shares
outstanding as adjusted 37,485 35,217
------- --------
------- --------
Net earnings (loss) per common share $ 0.03 $ (0.03)
------- --------
------- --------
</TABLE>
(1) NOT USED IN THE CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DUE TO THE ANTIDILUTIVE EFFECT OF THE COMMON STOCK EQUIVALENTS.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OCTOBER
31, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000109156
<NAME> ZALE CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 114,429
<SECURITIES> 0
<RECEIVABLES> 455,697<F1>
<ALLOWANCES> 0
<INVENTORY> 572,051
<CURRENT-ASSETS> 1,172,138
<PP&E> 147,692<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,419,328
<CURRENT-LIABILITIES> 271,872
<BONDS> 480,299
0
0
<COMMON> 374
<OTHER-SE> 550,929
<TOTAL-LIABILITY-AND-EQUITY> 1,419,328
<SALES> 252,526
<TOTAL-REVENUES> 252,526
<CGS> 131,603
<TOTAL-COSTS> 131,603
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,155
<INCOME-PRETAX> 1,665
<INCOME-TAX> 619
<INCOME-CONTINUING> 1,046
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,046
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<FN>
<F1>THIS ASSET VALUE REPRESENTS A NET AMOUNT.
</FN>
</TABLE>
