<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 0-21526
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-0675400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 W. WALNUT HILL LANE
IRVING, TEXAS 75038-1003
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (972) 580-4000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<C> <C>
Common Stock, $.01 par value per share New York Stock Exchange
Warrants to Purchase Common Stock, Series A New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 5, 1997, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$889,878,539.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 [ ]
As of September 5, 1997, the registrant had outstanding 35,100,625 shares
of its common stock, $.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE.
Part III of this report incorporates information from the registrant's
definitive Proxy Statement relating to the registrant's annual meeting of
stockholders to be held on November 13, 1997.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Zale Corporation ("the Company") is the largest specialty retailer of fine
jewelry in the United States. At July 31, 1997, the Company operated 1,251
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) (638 stores), Gordon's(SM) (310 stores), Bailey,
Banks and Biddle(R) (113 stores), and Diamond Park (186 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. The Company has agreed to sell its
Diamond Park Division. See "Recent Development" below. In addition, the Company
operates four outlet stores in three states. During the fiscal year ended July
31, 1997, the Company generated $1.3 billion of net sales.
The Company is well-positioned to compete in the approximately $37 billion,
highly fragmented retail jewelry industry due to its established brand names,
economies of scale and geographic and demographic diversity. The Company enjoys
significant brand name recognition as a result of its long-standing presence in
the industry and its regional and national advertising campaigns. Zales has been
in existence since 1924 and is supported by national television advertising
campaigns while Gordon's and Bailey, Banks and Biddle have been in existence
since 1905 and 1832, respectively, and are supported by regional advertising
campaigns. The Company believes that name recognition is an important advantage
in jewelry retailing as products are generally unbranded and consumers must
trust in a retailer's reliability and credibility. In addition, as the largest
specialty retailer of fine jewelry in the United States, the Company believes it
realizes economies of scale in purchasing and distribution, real estate,
advertising and administrative costs. The Company also believes that the
geographic diversity of its retail distribution network through all 50 states
and the demographic breadth of its target customer groups may serve to mitigate
earnings volatility typically associated with local or regional economic
conditions or poor weather conditions.
The Company is incorporated in Delaware. On January 23, 1992, the Company
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. The Company emerged from bankruptcy on July 30, 1993. Its principal
executive offices are located at 901 W. Walnut Hill Lane, Irving, TX 75038-1003,
and its telephone number at that address is (972) 580-4000.
BUSINESS INITIATIVES AND STRATEGY
In April 1994, Robert J. DiNicola joined the Company as Chairman and Chief
Executive Officer and began recruiting other experienced retailing executives to
build a new management team. The new team revitalized the Company by
strengthening its merchandise and customer focus and instituting a highly
disciplined approach to the execution of the Company's merchandising strategy.
The Company, through separate divisional management and buying teams, has
created and implemented individualized merchandising and marketing strategies to
reestablish and promote distinct brand identities for its three divisions.
Target markets have been reemphasized for the Zales, Gordon's and Bailey, Banks
& Biddle Divisions.
The Company has refocused and strengthened its merchandising efforts.
Management has developed a large selection of key items from among the best
selling products in the retail jewelry industry, such as tennis bracelets,
bridal sets and diamond stud earrings, and made certain that these items are
available in an appropriate variety of styles at a range of competitive price
points. At the same time, the Company has adopted an aggressive approach to
inventory management to keep key items in stock and inventories more current.
This is achieved through enhancements to the merchandise system which provides
regular reporting to the Company's merchandise buyers on in stock position and
slow moving merchandise. Since 1994, the
1
<PAGE> 3
Company has employed a consistent methodology which provides better inventory
turnover and profitability information to identify slow moving merchandise and
determine appropriate merchandising actions on a more timely basis. Under this
methodology, inventory the Company considers to be slow moving decreased over
50% since fiscal 1994.
The Company's marketing efforts have become more product and event-focused.
Television, radio, newspaper inserts, and direct mail advertising now feature
selected key items at a variety of price points. The Company has also broadened
its marketing efforts beyond the Christmas season to tie in with other
gift-giving holidays, such as Valentine's Day and Mother's Day. In addition,
advertising and in-store promotions have been synchronized with mall marketing
efforts to take advantage of other periods of high mall traffic, such as Labor
Day, which are typically not considered jewelry oriented holidays.
The Company has recruited experienced buyers, centralized purchasing at a
divisional level and eliminated store-level buying to ensure consistency of
quality and cost. In addition, management believes that the Company is now
leveraging its size to achieve better prices, payment terms, return privileges
and cooperative advertising arrangements with its suppliers for certain
products.
The Company's image as a provider of fine jewelry at competitive prices has
been enhanced by establishing price points for merchandise that are perceived by
customers as good values. Certain items are labeled "Brilliant Buys," "Gordon's
Gems" and "Best Buys" in the Zales, Gordon's and Bailey, Banks & Biddle stores,
respectively. These items are prominently displayed along with their prices
throughout the store, a practice that is uncommon in the U.S. jewelry retailing
industry and one that the Company believes enhances its reputation for pricing
integrity.
Over the last three years, nearly 50% of the Company's store base has been
either refurbished or remodeled. Sales for refurbished or remodeled stores have
historically increased by over 10% in the year following refurbishment or
remodeling. The Company has taken steps to provide upgraded sales and product
training to sales personnel company-wide through employee and manager training
programs. Staffing schedules are now coordinated to better allocate employees
during peak periods.
The Company's strategy is to continue to increase store productivity and
profitability at all divisions by: (i) focusing on the core categories of
bridal, fashion and watches; (ii) using key item merchandise to drive volume;
(iii) remodeling and renovating all existing stores; (iv) enhancing
merchandising systems to assist buyer decision making; (v) executing tailored
staffing and training programs for store personnel; (vi) focusing advertising on
brand building and product distinction; and (vii) providing exclusive products
to develop brand distinction.
The Company plans to open approximately 220 new stores, principally in the
Zales Division, for which it will incur approximately $50 million in capital
expenditures during the combined fiscal years 1998 and 1999. These stores will
solidify the Company's core mall business by further penetrating markets where
the Company is underrepresented. The Company targets premier regional mall
locations throughout the country and selects sites based on a variety of
well-defined demographic and store expense characteristics. The Company has
identified the specific malls for this planned expansion which satisfy the
Company's real estate strategy. The Company also plans to refurbish, remodel or
relocate approximately 300 stores at a cost of approximately $50 million during
the same period.
The Company has instituted a focused effort to reduce selling, general and
administrative expenses by eliminating duplicative areas, streamlining processes
and leveraging technology where possible. Initiatives include: (i) improving the
return on credit operations, including establishing a credit card bank which
will allow greater flexibility in establishing finance charge rates to customers
and will simplify the regulatory requirements under which the Company operates;
(ii) outsourcing certain non-strategic functions, including certain aspects of
MIS operations, credit card remittance processing, and the internal audit
department among other areas; and (iii) streamlining corporate operations
through review and improvement of current processes and application of new
technology in areas such as merchandising, credit, store point of sale and
financial systems.
2
<PAGE> 4
The Company continues to apply a disciplined approach to its credit
policies, which are controlled centrally for all divisions. See
"Business -- Credit Operations."
RECENT DEVELOPMENT
On September 3, 1997, the Company signed a purchase agreement to sell the
majority of the assets of its Diamond Park Division (the "Diamond Park Asset
Sale"). The Diamond Park 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 during fiscal year
1997. In connection with the Diamond Park Asset Sale, the Company will receive
cash consideration totaling approximately $65 million. The Company will continue
to operate 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. The Company intends to reinvest net proceeds from the
Diamond Park Asset Sale into the Company's operations. The closing of the
Diamond Park Asset Sale is subject to regulatory approval and customary closing
conditions and is expected to occur on or about October 6, 1997.
INDUSTRY
The U.S. retail jewelry industry's sales exceeded $37 billion in 1996.
Specialty jewelry stores (such as the Company) account for almost half of the
industry, according to publicly available data. Historically, the retail jewelry
store sales have exhibited only limited effects of cyclicality. According to the
U.S. Bureau of the Census, retail jewelry store sales have increased every year
for the past 13 years with the exception of 1991 which included both the Persian
Gulf War and the introduction of the luxury tax. Other significant segments of
the industry include national chain department stores (such as J.C. Penney
Company, Inc. and Sears, Roebuck and Co.), mass merchant discount stores (such
as Wal-Mart Stores, Inc.), other general merchandise stores and apparel and
accessory stores. The remainder of the retail jewelry industry is composed
primarily of catalog and mail order houses, direct-selling establishments, TV
home shopping (such as QVC, Inc.) and computer on-line shopping.
The U.S. retail jewelry industry is highly fragmented with the 10 largest
companies accounting for less than 25% of the market. The largest jewelry
retailer is believed to be Wal-Mart Stores, Inc., followed by the Company and
Service Merchandise Company, Inc. The Company is the largest specialty jewelry
retail chain in the U.S., with approximately 3.4% of market share based on the
National Jeweler's estimate of 1996 U.S. Retail Jewelry and Watch Sales. Only
one other specialty jewelry retailer had greater than 2% market share.
DIVISIONAL OPERATIONS
The Company operates principally under four divisions. The following table
presents net sales for the Zales, Gordon's, Bailey, Banks & Biddle and Diamond
Park Divisions of the Company.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Zales Division................................. $607,677 $525,384 $428,794
Gordon's Division.............................. 282,271 264,298 262,540
Bailey, Banks & Biddle Division................ 226,323 205,418 197,267
Diamond Park Division.......................... 125,315 133,463 138,187
Other(a)....................................... 12,232 8,814 9,361
---------- ---------- ----------
Total Net Sales.............................. $1,253,818 $1,137,377 $1,036,149
========== ========== ==========
</TABLE>
3
<PAGE> 5
- ---------------
(a) Other net sales (i) includes sales from the Company's Outlet
stores which are being used to sell overstocked and other
merchandise no longer sold in the regular retail locations and
(ii) in 1997 includes sales from its direct mail operation.
Zales Division
The Zales Division is positioned as the Company's national flagship and is
a leading brand name in jewelry retailing in the United States. At July 31,
1997, the Zales Division had 638 stores in 49 states and Puerto Rico. Average
store size is approximately 1,400 square feet and the average selling price per
unit sold is $246. Zales accounted for approximately 48% of the Company's sales
in fiscal 1997.
Zales' merchandise selection is generally standardized across the nation
and targeted at customers representing a cross-section of mainstream America. In
fiscal 1997 bridal merchandise represented 36.1% of the Division's merchandise
sales, while fashion jewelry and watches comprised most of the remaining 63.9%.
The bridal merchandise category consists of solitaire engagement rings, various
bridal sets and diamond and gold anniversary bands. Fashion jewelry consists
generally of cocktail rings, earrings, chains, watches and various other items.
The Company believes that the prominence of diamond jewelry in its product
selection fosters an image of quality and trust among consumers. While
maintaining a strong focus on the bridal segment of the business, added emphasis
is being placed on the non-bridal merchandise and gift-giving aspects of the
business. New product lines, including Blue Lagoon cultured pearls by Mikimoto,
and Movado watches, have been added. The combination of Zales' national presence
and centralized merchandise selection allows it to use television advertising
across the nation as its primary advertising medium, supplemented by newspaper
inserts and direct mail.
Zales has recently entered the direct fulfillment business through its
direct mail catalog operations and Internet web site. These operations currently
account for less than 1% of the Company's sales.
The following table sets forth the number of stores and average sales per
store for the Zales Division for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Average sales per store(b)........................ $1,013,000 $974,000 $850,000
Stores opened during period....................... 65 89(a) 8
Stores closed during period....................... 9 6 30
Total stores...................................... 638 582 499
</TABLE>
- ---------------
(a) Includes 40 stores transferred from the Gordon's Division during fiscal
1996 and 20 Karten's stores acquired in January 1996.
(b) Based on sales per store open a full twelve months during the
respective fiscal year.
Gordon's Division
Since 1994, the Company has repositioned Gordon's as a major regional brand
with an upgraded product offering. At July 31, 1997, the Gordon's Division had
310 stores in 37 states and Puerto Rico, substantially all of which operate
under the trade name Gordon's Jewelers. Average store size is approximately
1,400 square feet and the average selling price per unit sold is $274, which
represents a 22% increase from the average selling price per unit sold two years
ago. Gordon's accounted for approximately 23% of the Company's net sales in
fiscal 1997.
Gordon's distinguishes itself from Zales by providing a more upscale,
contemporary product mix and tailoring a portion of store inventory to regional
tastes. A substantial portion of the remaining merchandise sold by stores in the
Gordon's Division overlaps the Zales Division product line. Regional television
advertising that emphasizes key items was introduced for Gordon's in fiscal
1997, complementing the Division's radio campaigns and printed inserts.
4
<PAGE> 6
The Gordon's Division will continue to emphasize its new image to match its
customer base and will further tailor key items to customer's regional
preferences. Steps to upgrade Gordon's have included store remodeling, a more
distinctive and fashion-oriented product assortment, improved displays, a
reduced degree of promotional pricing and the application of more stringent
credit-approval standards.
The following table sets forth the number of stores and average sales per
store for the Gordon's Division for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Average sales per store(b)......................... $888,000 $803,000 $711,000
Stores opened during period........................ 9 13 5
Stores closed during period........................ 22 57(a) 13
Total stores....................................... 310 323 367
</TABLE>
- ---------------
(a) Includes 40 stores transferred to the Zales Division during fiscal
1996.
(b) Based on sales per store open a full twelve months during the
respective fiscal year.
Bailey, Banks & Biddle Division
Since 1832, Bailey, Banks & Biddle has offered high-end merchandise,
exclusive designs and a prestigious shopping environment for the upscale
customer. The Division operates principally under the trade name Bailey, Banks &
Biddle, but also utilizes other trade names, including Corrigan's(R),
Sweeney's(R), Stifft's(R), Dobbins(R), Linz(R), and Zell Bros.(R) The Division's
stores are among the pre-eminent stores in their markets and carry exclusive
items to appeal to the more affluent customer. The Bailey, Banks & Biddle
merchandise selection emphasizes the classic and traditional look and focuses on
diamond, precious stone and gold jewelry, as well as watches and giftware. At
July 31, 1997, the Bailey, Banks & Biddle Division operated 113 upscale jewelry
stores in 28 states and Guam. The Division has an average selling price per unit
sold of $484, an average store size of approximately 3,000 square feet and
accounted for approximately 18% of the Company's net sales in fiscal 1997.
Bailey, Banks & Biddle Division stores rely heavily on upscale direct-mail
catalogs, enabling the stores to focus on specific products for specific
customers. In fiscal year 1997, the Bailey, Banks & Biddle Division expanded its
customer base in cross-promotional campaigns using upscale customer lists from
such companies as American Express Company, First USA, Inc. and American
Airlines, Inc. This initiative will help the Bailey, Banks & Biddle Division to
more accurately target prospective customers in a cost-efficient manner.
The following table sets forth the number of stores and average sales per
store for the Bailey, Banks & Biddle Division for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Average sales per store(a)..................... $1,990,000 $1,755,000 $1,556,000
Stores opened during period.................... 16 1 4
Stores closed during period.................... 15 12 11
Total stores................................... 113 112 123
</TABLE>
- ---------------
(a) Based on sales per store open a full twelve months during the
respective fiscal year.
Diamond Park Division
The Diamond Park Division offers services for retailers that wish to use an
outside provider for specialized management and marketing skills in connection
with the sale of fine jewelry. At July 31, 1997, the Diamond Park Division
operated 186 leased locations in department stores including Dillard's(R)(48
locations), Mercantile(R) (90 locations), Parisian (28 locations) and Marshall
Field's(R) (20 locations) in 23 states. The
5
<PAGE> 7
Diamond Park Division accounted for approximately 10% of the Company sales in
fiscal 1997 and had an average selling price per unit of $157. See "Recent
Development."
The following table sets forth the number of departments and average sales
per department for the Diamond Park Division for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Average sales per department(a).................... $707,000 $725,000 $707,000
Departments opened during period................... 27 34 18
Departments closed during period................... 15 48 35
Total departments.................................. 186 174 188
</TABLE>
- ---------------
(a) Based on sales per store open a full twelve months during the
respective fiscal year.
STORE OPERATIONS
The Company's stores are designed and managed to create an attractive
environment, maximize operating efficiencies and make shopping convenient and
enjoyable. The Company pays careful attention to store layout, particularly in
areas such as lighting, choice of materials and arrangement of display cases.
Promotional displays are changed periodically to provide variety, to reflect
seasonal events or to complement a particular mall's promotions.
Each of the Company's stores is operated under a store manager who is
responsible for certain store-level operations, including sales and personnel
matters. The Company has consolidated most non-sales administrative matters,
including purchasing, credit operations and payroll, at the divisional level in
an effort to maintain low operating costs at the store level. Each of the
Company's divisions also offers standard warranties and return policies as well
as providing extended warranty coverage which may be purchased at the customer's
option.
The Company has implemented inventory control systems, extensive security
systems and loss prevention procedures to maintain low inventory losses. The
Company screens employment applicants and provides all of its store personnel
with training in loss prevention. Despite such precautions, the Company
experiences losses from theft from time to time and maintains insurance to cover
such losses.
The Company believes it is important to provide knowledgeable and
responsive customer service. The Company has implemented employee training
programs, including training in sales techniques for new employees, on-the-job
training and manager training for store managers.
PURCHASING AND INVENTORY
The Company purchases substantially all of its merchandise in finished form
from a network of established suppliers and manufacturers located primarily in
the United States, Southeast Asia, and Italy. All purchasing is done through
divisional buying offices at the corporate headquarters. The Company either
purchases merchandise from its vendors or obtains merchandise on consignment.
The Company had approximately $135.0 million and $78.9 million of consignment
inventory on hand at July 31, 1997 and 1996, respectively. The increase in
consignment inventory results principally from further development of certain
watch lines carried on consignment, testing of new products, expansion of higher
risk fashion and solitaire product categories and other opportunities. The
Company historically has not engaged in any substantial amount of hedging
activities with respect to merchandise held in inventory, since the Company has
been able to adjust retail prices to reflect price fluctuations in the
commodities that are used in the merchandise it sells. The Company is not
subject to substantial currency fluctuations because most purchases are dollar
denominated. During fiscal 1997 and fiscal 1996, the Company purchased
approximately 27% and 29%, respectively, of its merchandise from its top five
vendors, including more than 10% from its top vendor.
6
<PAGE> 8
CREDIT OPERATIONS
The Company believes that its credit programs help facilitate the sale of
merchandise to customers who wish to finance their purchases rather than use
cash or available credit limits on their major credit cards. The Company offers
and grants credit through its private label credit card program. Approximately
50% of the Company's net sales (excluding the Diamond Park Division) were
generated by credit sales on the private label credit cards in fiscal 1997. The
Company believes that opening a credit account allows its sales personnel to
build relationships with customers that generate customer loyalty and facilitate
repeat purchases.
Credit extension, customer service, payment processing and collections for
all the accounts are performed by Jewelers Financial Services, Inc. ("JFS"), a
wholly owned subsidiary of ZDel, at credit centers located in Tempe, Arizona;
Clearwater, Florida; San Marcos, Texas; and San Juan, Puerto Rico. JFS has
credit approval, customer service and collection systems that management
considers to be sophisticated. The Company uses a behavioral point scoring model
to assess risk in extending credit to customers. All credit decisions are made
centrally at the Company's credit centers. The Company has tightened credit
standards, particularly in the Gordon's Division, where standards were increased
in 1995 in connection with its re-positioning as a more upscale regional brand.
The Company has enhanced the approval process for its private label credit
cards, whereby those customers with a satisfactory prior credit history can be
approved rapidly. Flexible payment arrangements are extended to credit
customers. As of July 31, 1997, the Company has 1.9 million promotable customer
names on file. The Company uses many of these customer names in its targeted
marketing programs.
The Company diligently follows up on delinquent accounts. Collectors are
trained with state of the art Computer Based Training programs ("CBT"). These
CBT programs are developed in-house by the credit organization. Collection
accounts are scored on a behavioral model at monthly billing. The statistical
analysis allows for optimum collection follow-up on delinquent accounts starting
at 15 days past due. Based on the behavioral score, the account is put into
priority queuing for letter or personal phone call follow-up. Early stage
delinquencies are handled with an approach which is sensitive to customer
goodwill. If accounts progress in delinquency, more assertive action is taken.
The Company expects that a downturn in general economic conditions may adversely
affect credit accounts receivable performance.
The Company is in the process of establishing a national bank for the
granting of credit under its private label credit cards. Preliminary approval
has been received from the OCC. 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.
The following table presents certain data concerning sales, credit sales
and accounts receivable for the past three fiscal years, excluding the Diamond
Park Division, outlet operations and direct mail operations:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Net sales (thousands)............................. $1,116,271 $995,100 $888,601
Net credit sales (thousands)...................... $ 556,771 $500,215 $458,664
Credit sales as percentage of net sales........... 49.9% 50.3% 51.6%
Average number of active customer accounts........ 715,000 678,000 689,000
Average balance per customer account.............. $719 $687 $668
Customer receivables (thousands).................. $ 508,885 $468,331 $436,336
Average monthly collection percentage............. 9.2% 9.2% 9.1%
Bad debt expense as a percentage of net credit
sales........................................... 10.0% 10.7% 9.1%
Accounts receivable greater than 90 days past
due............................................. 9.1% 9.1% 9.9%
</TABLE>
Credit sales have decreased as a percentage of net sales, in part because
of an upgrading in minimum credit standards at the Gordon's Division and
increased competition from issuers of major credit cards. Accounts are
automatically charged off when no full scheduled payment is made for a period of
seven consecutive billing cycles. Additionally, accounts are charged off if 12
contracted payments are missed.
7
<PAGE> 9
INSURANCE AFFILIATES
The Company, through Zale Indemnity Company, Zale Life Insurance Company
and Jewel Re-Insurance Ltd., provides various types of insurance coverage, which
typically are marketed to the Company's private label credit card customers.
Additionally, the Company promotes the sale of credit insurance products to
customers who use the private label credit card program. In fiscal 1997, over
50% of the Company's private label credit card purchasers purchased some form of
credit insurance. The three companies, which are wholly owned subsidiaries of
ZDel, are the insurers (either through direct written or reinsurance contracts)
of the Company's customer credit insurance coverages. In addition to providing
replacement property coverage for certain perils, such as theft, credit
insurance coverage provides protection to the creditor and cardholder for losses
associated with the disability, involuntary unemployment or death of the
cardholder. Zale Life Insurance Company also provides group life insurance
coverage for eligible employees of the Company. Zale Indemnity Company, in
addition to writing direct credit insurance contracts, also has certain
discontinued business that it continues to run off. Credit insurance operations
are dependent on the Company's retail sales on its private label credit cards
and are not significant on a stand-alone basis.
EMPLOYEES
As of July 31, 1997, the Company had approximately 10,000 employees, less
than 1% of whom were represented by unions. The Company usually hires a limited
number of temporary employees during each Christmas season. The Company
considers its relations with its employees to be good.
COMPETITION
The retailing industry is highly competitive. The industry is fragmented,
and the Company competes with a large number of independent regional and local
jewelry retailers, as well as national jewelry chains. The Company also competes
with other types of retailers who sell jewelry and gift items, such as
department stores, catalog showrooms, discounters, direct mail suppliers and
television home shopping programs. Certain of the Company's competitors are
non-speciality retailers which are larger and have greater financial resources
than the Company. The malls where the Company's stores are located typically
contain competing national chains, independent jewelry stores or department
store jewelry departments. The Company believes that it is also competing for
consumers' discretionary spending dollars and, therefore, competes with
retailers who offer merchandise other than jewelry or giftware.
Notwithstanding the national or regional reputation of its competition, the
Company believes that it must compete on a mall-by-mall basis with other
retailers of jewelry as well as with retailers of other types of discretionary
items. Therefore, the Company competes primarily on the basis of reputation for
high quality products, brand recognition, store location, distinctive and
value-priced merchandise, personalized customer service and its ability to offer
private label credit card programs to customers wishing to finance their
purchases. The Company's success is also dependent on its ability to react to
and create customer demand for specific merchandise categories.
The Company holds no material patents, licenses (other than its licenses to
operate its Diamond Park leased locations, which are being assigned to a third
party in connection with the Diamond Park Asset Sale), franchises or
concessions; however, the established trade names for stores and products in the
Zales, Gordon's and Bailey, Banks & Biddle Divisions are important to the
Company in maintaining its competitive position in the jewelry retailing
industry.
MANAGEMENT INFORMATION SYSTEMS
The Company's information systems provide information necessary for: (i)
management operating decisions; (ii) sales and margin management; (iii)
inventory control; (iv) profitability monitoring by many measures (merchandise
category, buyer, store, division); (v) and cost reduction programs. Data
processing systems include point-of-sale reporting, purchase order management,
receiving, merchandise planning and control, payroll, general ledger, credit
card administration, and accounts payable. Bar code ticketing is used, and
scanning is utilized at all point-of-sale terminals to ensure timely sales and
margin data compilation and to
8
<PAGE> 10
provide for inventory control monitoring. Information is made available on-line
to merchandising staff on a timely basis, thereby reducing the need for paper
reports. The Company uses electronic data interchange ("EDI") with certain of
its vendors to facilitate timely merchandise replenishment. The Company believes
that the further use of EDI with its vendors will lower the administrative costs
associated with invoice processing and settlement.
The Company's information systems allow management to monitor and control
the Company's credit operations, generating reports on a daily, monthly and
annual basis for each store and transaction. Senior management can therefore
review and analyze credit activity by store, amount of sale, terms of sale or
employees who approved the sale. The entire credit extension and collection
process is automated and the system maintains all customer data to facilitate
future credit transactions.
The information systems also facilitate repeat business by maintaining a
detailed file of all credit transactions with each customer. This enables credit
transactions with existing customers to be completed rapidly and allows sales
personnel to process a greater number of credit transactions. The Company's
customer database also includes historical purchasing patterns and demographic
data, allowing the Company to specifically segment customers receiving direct
marketing promotions.
The Company has entered into a five-year agreement with a third party for
the management of the Company's mainframe processing operations, client server
systems, LAN operations and desktop support. The Company believes that by
outsourcing this portion of its management information systems it will be able
to achieve additional efficiencies and allow the Company to focus its internal
information technology efforts on developing new systems to enhance the
performance of its core business.
The Company has historically upgraded, and expects to continue to upgrade,
its information systems to improve operations and support future growth. The
Company estimates it will make capital expenditures of approximately $25 million
to $30 million over the next two years for enhancements to its management
information systems. A portion of these expenditures will assist the Company in
maintaining Year 2000-compliant systems.
REGULATION
The Company's operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts and limitations on the maximum amount of
finance charges that may be charged by a credit provider. In addition to the
Company's private label credit cards, credit to the Company's customers is
provided primarily through bank cards such as Visa, MasterCard, and Discover,
without recourse to the Company based upon a customer's failure to pay. Any
change in the regulation of credit which would materially limit the availability
of credit to the Company's traditional customer base could adversely affect the
Company's results of operations or financial condition.
The sale of insurance products by the Company is also highly regulated.
State laws currently impose disclosure obligations with respect to the Company's
sale of credit and other insurance. The Company's and its competitors' practices
are also subject to review in the ordinary course of business by the Federal
Trade Commission, and the Company's and other retail company's credit cards will
be subject to regulation by the OCC after the Company's credit card bank
commences operations. See "Credit Operations." The Company believes that it is
currently in material compliance with all applicable state and federal
regulations.
A substantial amount of merchandise in the retail jewelry industry is
commonly sold at a discount to the "regular" or "original" price. A number of
states in which the Company operates have regulations which require that
retailers offering merchandise at discounted prices must offer the merchandise
at regular or original prices for stated periods of time. The Company believes
that it is in compliance with all applicable federal and state laws with respect
to such practices.
9
<PAGE> 11
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements,
including statements regarding, among other items, (i) expected capital
expenditures to be made in the future, (ii) expected significant upgrades to the
Company's management information systems over the next several years, (iii) the
addition of new locations through new store openings, (iv) the renovation and
remodeling of the Company's existing store locations, (v) the Company's efforts
to reduce costs, (vi) the adequacy of the Company's sources of cash to finance
its current and future operations, (vii) the terms of renewal of the Company's
store leases and (viii) resolution of litigation without material adverse effect
on the Company. This notice is intended to take advantage of the "safe harbor"
provided by the Private Securities Litigation Reform Act of 1995 with respect to
such forward-looking statements. These forward-looking statements involve a
number of risks and uncertainties. Among others, factors that could cause actual
results to differ materially are the following: development of 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 during
the three month period leading up to the Christmas season; the dependence on key
personnel who have been hired or retained by the Company; the changes in
regulatory requirements which are applicable to the Company's business;
management's decisions to pursue new distribution channels which may involve
additional costs; and the risk factors listed herein from time to time in the
Company's Securities and Exchange Commission reports, including but not limited
to, its Annual Reports on Form 10-K.
ITEM 2. PRINCIPAL PROPERTIES
The Company leases a 430,000 square foot corporate headquarters facility,
which lease extends through September 2008. The facility is located on a 17-acre
tract in Las Colinas, a planned business development in Irving, Texas, near the
Dallas/Fort Worth International Airport. The Company also owns 33 acres of land
surrounding the corporate headquarters facility and a 120,000 square foot
warehouse in Dallas, Texas.
The Company leases three credit centers located in Clearwater, Florida
(30,000 square feet), Tempe, Arizona (24,200 square feet), and San Juan, Puerto
Rico (2,900 square feet) and one national collections center located in San
Marcos, Texas (9,000 square feet).
The Company rents most of its retail spaces under leases that generally
range from five to ten years and may contain minimum rent escalations. Most of
the store leases provide for the payment of base rentals plus real estate taxes,
insurance, common area maintenance fees and merchants association dues, as well
as percentage rents based on the stores' gross sales.
The following table indicates the expiration dates of the current terms of
the Company's leases as of July 31, 1997:
<TABLE>
<CAPTION>
BAILEY
ZALES GORDON'S BANKS & BIDDLE DIAMOND PARK PERCENTAGE
TERM EXPIRES DIVISION DIVISION DIVISION DIVISION TOTAL OF TOTAL
------------ -------- -------- -------------- ------------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
1998 and prior............. 127 65 19 48 259 21%
1999....................... 69 39 15 0 123 10%
2000....................... 46 23 10 0 79 6%
2001....................... 65 22 16 48 151 12%
2002 and thereafter........ 331 161 53 90 635 51%
--- --- --- --- ----- ----
Total number of leases..... 638 310 113 186 1,247 100%
=== === === === ===== ====
</TABLE>
Management believes substantially all of the store leases expiring in
fiscal 1998 that it wishes to renew (including leases which expired earlier and
are on month-to-month extensions) will be renewed on terms not materially less
favorable to the Company than the terms of the expiring leases.
10
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. The Company believes that such litigation and
claims, both individually and in the aggregate, will be resolved without
material effect on the Company's financial position or results of operations.
See "Unusual Items -- Reorganization Recoveries" in Notes to Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the quarter ended July 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals serve as executive officers of the Company.
Officers are elected by the Board of Directors, each to serve until his
successor is elected and qualified, or until his earlier resignation, removal
from office or death.
<TABLE>
<CAPTION>
NAME(A) AGE POSITION
------- --- --------
<S> <C> <C>
Robert J. DiNicola................... 49 Chairman of the Board, Chief Executive Officer
and Director
Louis J. Grabowsky................... 45 Executive Vice President and Chief Financial
Officer
Beryl B. Raff........................ 46 Executive Vice President, Chief Operating
Officer
Alan P. Shor......................... 38 Executive Vice President, Chief Administrative
Officer
Mary L. Forte........................ 46 Senior Vice President and President, Gordon's
Division
Paul G. Leonard...................... 42 Senior Vice President and President, Bailey,
Banks & Biddle Division
Tom A. Carroll....................... 48 Senior Vice President, Real Estate
Sue E. Gove.......................... 39 Senior Vice President, Corporate Planning and
Analysis
David L. Holmberg.................... 38 Senior Vice President, Store Operations, Zale
Division
Gregory Humenesky.................... 46 Senior Vice President, Human Resources
Paul D. Kanneman..................... 40 Senior Vice President and Chief Information
Officer
Stephen C. Massanelli................ 41 Senior Vice President and Treasurer
Ervin G. Polze....................... 45 Senior Vice President, Support Operations
</TABLE>
- ---------------
(a) Ms. Pamela Romano has been appointed Senior Vice President and President of
the Zales Division. Prior to joining the Company, Ms. Romano spent the past
15 years with the Macy's organization, most recently as the Vice President
and Divisional Merchandising Manager with responsibility for fashion, bridge
and fine jewelry for Macy's East.
The following is a brief description of the business experience of the
executive officers of the Company for at least the past five years.
Mr. Robert J. DiNicola has served as Chairman of the Board, Chief Executive
Officer and a director of the Company since April 18, 1994. For the three years
prior to joining the Company, Mr. DiNicola was a senior executive officer of The
Bon Marche Division of Federated Department Stores, Inc., having served as
Chairman and Chief Executive Officer of that Division from 1992 to 1994 and as
its President and Chief Operating Officer from 1991 to 1992. From 1989 to 1991,
Mr. DiNicola was a Senior Vice President of Rich's Department Store Division of
Federated. For 17 years, prior to joining the Federated organization, Mr.
DiNicola was associated with Macy's, where he held various executive, management
and merchandising positions, except for a one-year period while he held a
division officer position with The May Department Stores Company, Inc.
11
<PAGE> 13
Mr. Louis J. Grabowsky joined the Company on March 1, 1997 as Executive
Vice President and Chief Financial Officer. From 1991 to 1997, Mr. Grabowsky
served as the partner in charge of the Audit and Business Advisory Practice for
Arthur Andersen LLP's Dallas/Fort Worth Office. For 18 years prior to that, Mr.
Grabowsky held numerous positions with Arthur Andersen where he concentrated on
the retail/ distribution industry, working almost exclusively with retailers.
Ms. Beryl B. Raff was appointed Executive Vice President and Chief
Operating Officer on July 23, 1997. From November 21, 1994 to July 1997, she
served as President of the Zales Division. From March 1991 through October 1994,
Ms. Raff served as Senior Vice President of Macy's East with responsibilities
for its jewelry business in a 12 state region. From April 1988 to March 1991,
Ms. Raff served as Group Vice President of Macy's South/Bullocks. Prior to 1988,
Ms. Raff had 17 years of retailing and merchandising experience with the
Emporium and Macy's department stores.
Mr. Alan P. Shor was appointed Executive Vice President and Chief
Administrative Officer on May 1, 1997 while retaining his position as General
Counsel and Secretary. From June 5, 1995 to May 1997, Mr. Shor served as Senior
Vice President, General Counsel and Secretary. For two years prior to joining
the Company, Mr. Shor was the managing partner of the Washington, D.C. office of
the Troutman Sanders law firm, whose principal office is based in Atlanta,
Georgia. Mr. Shor, a member of Troutman Sanders since 1983, was a partner of the
firm from 1990 to 1995.
Ms. Mary L. Forte joined the Company on July 18, 1994 as President of the
Gordon's Division. From January 1994 to July 1994, Ms. Forte served as Senior
Vice President of QVC - Home Shopping Network. From July 1991 through January
1994, Ms. Forte served as Senior Vice President of the Bon Marche, Home Division
of the Federated Department Store. From July 1989 to July 1991, Ms. Forte was
Vice President of Rich's Department Store, Housewares Division. In addition to
the above, Ms. Forte has an additional 13 years of retailing and merchandising
experience with Macy's, The May Department Stores Company, Inc. and Federated
Department Stores.
Mr. Paul G. Leonard was appointed President of the Company's Bailey, Banks
& Biddle Division on January 27, 1995. From October 1994 to January 1995, Mr.
Leonard served as President of Corporate Merchandising for the Company. For
three years prior to joining the Company, Mr. Leonard held positions as General
Manager of Jewelry and then Senior Vice President of Soft Lines for Ames
Department Store. Prior to that, Mr. Leonard was a Merchandise Vice President
with The May Department Stores Company, Inc. Mr. Leonard has more than 20 years
of retailing and merchandising experience with an emphasis on jewelry.
Mr. Tom A. Carroll joined the Company on April 1, 1997 as Senior Vice
President, Real Estate. From August 1992 to March 1997, Mr. Carroll was Vice
President of Real Estate with the Brookstone Company. From 1990 to 1992, he was
associated with Norsouth Corporation, a real estate development company, as
Executive Vice President. From 1978 to 1990, he held various positions with
Federated Department Stores, serving as Vice President, Operations of the
Rich's/Goldsmith's Division from August 1986 until February 1990.
Ms. Sue E. Gove was appointed Senior Vice President, Corporate Planning and
Analysis on January 17, 1996. From February 1989 through January 1996, she
served as Vice President, Corporate Planning and Analysis. Ms. Gove joined the
Company in 1980 and served in numerous assignments until her appointment to Vice
President in 1989.
Mr. David L. Holmberg joined the Company on May 2, 1994 as Senior Vice
President of Store Operations for the Zales Division. Prior to joining the
Company, Mr. Holmberg served as Vice President and head of store operations for
Reeds Jewelers from 1989 to 1995. Mr. Holmberg held numerous store operations
positions with Kay Jewelers and J.B. Robinson's Jewelers during the preceding 10
years.
Mr. Gregory Humenesky was appointed Senior Vice President, Human Resources
on April 15, 1996. From January 1995 to April 1996 he held the position of Vice
President, Personnel Development and Staffing for the Company. For eight years
prior to joining the Company, Mr. Humenesky was Senior Vice President, Human
Resources for Macy's West. From June 1973 to February 1987, Mr. Humenesky held
senior level Human Resources positions within the Macy's organization.
12
<PAGE> 14
Mr. Paul D. Kanneman joined the Company on November 14, 1994 as Senior Vice
President and Chief Information Officer. From July 1993 to November 1994, Mr.
Kanneman was an Associate Partner with Andersen Consulting LLP. Mr. Kanneman was
a Principal from August 1991 to July 1993, and a Senior Associate from August
1989 to July 1991 with Booz, Allen & Hamilton, Inc.
Mr. Stephen C. Massanelli joined the Company on June 10, 1997 as Senior
Vice President and Treasurer. From 1993 to 1997, Mr. Massanelli was a principal
and member of the Board of Directors of The Treadstone Group, Inc., a private
merchant banking organization in Dallas. Mr. Massanelli has more than 20 years
of financial and investment experience and has held positions with AMRESCO, Inc.
and NationsBank of Texas.
Mr. Ervin G. Polze was appointed Senior Vice President, Support Operations
on January 17, 1996. From February 1995 through January 1996, he served as Vice
President, Support Operations. He held the position of Vice President,
Controller from March 1988 through February 1995. Mr. Polze joined the Company
in January 1983 and served in several assignments until his appointment to Vice
President in March 1988.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is listed on the NYSE under the symbol ZLC. Prior to June
19, 1996, the Common Stock was listed on the National Association of Securities
Dealers, Inc.'s National Market ("NASDAQ") under the symbol ZALE. The following
table sets forth the high and low sale prices for the Common Stock for each
fiscal quarter during the two most recent fiscal years.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First...................................... $21 7/8 $17 1/4 $15 5/8 $13 5/8
Second..................................... 21 3/8 15 3/4 16 11/16 13 1/2
Third...................................... 19 3/8 15 7/8 18 5/8 13 11/16
Fourth..................................... 22 1/8 18 3/8 20 1/4 16 1/2
</TABLE>
As of September 5, 1997, the outstanding shares of Common Stock were held
by approximately 1,300 holders of record. The Company has not paid dividends on
the Common Stock since the issuance on July 30, 1993, and does not anticipate
paying dividends on the Common Stock in the forseeable future. In addition, the
terms on the Company's long-term indebtedness places certain restrictions on the
Company's ability to declare and pay dividends on its Common Stock.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by the
Consolidated Financial Statements of the Company (and the related Notes thereto)
contained elsewhere in this Form 10-K and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The income statement and balance sheet data for each of the years
ended July 31, 1997, 1996, 1995 and 1994, the four months ended July 31, 1993
and the year ended March 31, 1993 have been derived from the Company's audited
Consolidated Financial Statements. The information for the predecessor pro forma
year ended July 31, 1993 is derived from the Company's unaudited Consolidated
Financial Statements which, in the opinion of the Company, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such information. The results of operations for the four months
ended July 31, 1993 are not necessarily indicative of the results of operations
that may be expected for the full year due to the seasonal nature of the
Company's business. Also, as a result of the adoption of fresh-start financial
reporting upon emergence from bankruptcy in July 1993, the Company's results of
operations subsequent to July 31, 1993 are not comparable to results of
operations for the prior periods. Fresh-start reporting resulted in a
revaluation of the Company's assets and liabilities as of July 30, 1993 to
reflect allocation of the reorganization value based upon the estimated fair
market values of those assets and liabilities. The most significant effects of
fresh-start reporting on results of operations are the reduction in amortization
and depreciation expense from the write-off of substantially all the Company's
fixed assets and the amortization of the excess of revalued net assets over
stockholders' investment.
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------------
PRO FORMA(a)
------------ FOUR MONTHS YEAR
YEAR ENDED JULY 31, YEAR ENDED ENDED ENDED
------------------------------------------------- JULY 31, JULY 31, MARCH 31,
1997 1996 1995 1994 1993 1993 1993
---------- ---------- ---------- ---------- ------------ ----------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $1,253,818 $1,137,377 $1,036,149 $920,307 $956,447 $244,539 $980,832
Cost of sales..................... 643,318 576,764 524,010 460,060 533,080 127,484 534,420
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin...................... 610,500 560,613 512,139 460,247 423,367 117,055 446,412
Selling, general and
administrative expenses......... 480,522 457,371 434,101 401,744 402,116 119,786 418,133
Depreciation and amortization
expense (credit)................ 14,022 7,538 381 (4,385) 26,459 8,973 26,316
Unusual items(b).................. -- (4,486) -- -- 20,200 -- 20,200
Reorganization and restructure
costs........................... -- -- -- -- 143,690 47,879 137,937
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating earnings (loss)......... 115,956 100,190 77,657 62,888 (169,098) (59,583) (156,174)
Interest expense, net............. 36,098 30,102 29,837 28,142 23,508 6,623 24,829
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before fresh-start
revaluation, income taxes,
extraordinary items and
cumulative effect of accounting
charge.......................... 79,858 70,088 47,820 34,746 (192,606) (66,206) (181,003)
Fresh-start revaluation........... -- -- -- -- (246,236) (246,236) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes, extraordinary items and
cumulative effect of accounting
change.......................... 79,858 70,088 47,820 34,746 (438,842) (312,442) (181,003)
Income taxes...................... 29,305 25,094 16,350 11,621 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary items and
cumulative effect of accounting
change.......................... $50,553 $44,994 $31,470 $23,125 $(438,842) $(312,442) $(181,003)
========== ========== ========== ========== ========== ========== ==========
Net earnings (loss)............... $50,553 $43,898 $31,470 $21,557 $664,991 $791,391 $(181,003)
========== ========== ========== ========== ========== ========== ==========
Earnings per common share (c):
Primary:
Earnings before extraordinary
item.......................... $1.38 $1.23 $0.88 $0.66
Net earnings.................... 1.38 1.20 0.88 0.62
Assuming full dilution:
Earnings before extraordinary
item.......................... 1.37 1.23 0.86 0.66
Net earnings.................... 1.37 1.20 0.86 0.62
Weighted average number of common
shares outstanding (c):
Primary........................... 36,632 36,465 35,849 34,965
Assuming full dilution............ 36,853 36,618 36,565 34,965
BALANCE SHEET DATA:
Working capital................... $877,130 $775,500 $781,802 $763,216 $676,677 $676,677 $961,671
Total assets...................... 1,281,206 1,163,811 1,110,708 1,112,647 1,013,523 1,013,523 1,252,448
Total debt........................ 451,787 404,354 443,624 447,478 355,125 355,125 284,554
Total stockholders' investment
(deficit)....................... 541,574 476,258 391,890 342,740 311,070 311,070 (791,391)
</TABLE>
- ---------------
(a) Income statement data in this column represents historical income statement
data for the twelve months ended July 31, 1993, which includes the four
month period ended July 31, 1993 and the eight month period ended March 31,
1993. On December 13, 1993, the Company changed its fiscal year end to July
31, effective as of April 1, 1994.
(b) Unusual items consist of reorganization recoveries of ($4.5 million) for the
year ended July 31, 1996 and provisions for valuation of assets of $20.2
million as of the pro forma year ended July 31, 1993 and for the year ended
March 31, 1993.
(c) Earnings (loss) per share is not presented in the "Predecessor" columns
because such presentation would not be meaningful. The old stock, which was
not publicly traded, was canceled under the Plan of Reorganization and the
new stock was not issued until July 30, 1993 (the "Effective Date").
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
With respect to forward looking statements made in this Management's
Discussion and Analysis of Financial Condition and Results of Operations see
"Cautionary Notice Regarding Forward Looking Statements."
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's audited consolidated statements of operations expressed as a
percentage of net sales and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Sales............................................... 100.0% 100.0% 100.0%
Cost of Sales........................................... 51.3 50.7 50.6
------ ------ ------
Gross Margin............................................ 48.7 49.3 49.4
Selling, General and Administrative Expenses............ 38.3 40.2 41.9
Depreciation and Amortization Expense................... 1.2 0.7 --
Unusual Items -- Reorganization Recoveries.............. -- (0.4) --
------ ------ ------
Operating Earnings...................................... 9.2 8.8 7.5
Interest Expense, Net................................... 2.9 2.6 2.9
------ ------ ------
Earnings Before Income Taxes and Extraordinary Items.... 6.3 6.2 4.6
Income Taxes............................................ 2.3 2.2 1.6
------ ------ ------
Earnings Before Extraordinary Items..................... 4.0 4.0 3.0
Extraordinary Items:
Loss on Early Extinguishment of Debt, Net of Income
Taxes.............................................. -- (0.1) --
------ ------ ------
Net Earnings............................................ 4.0% 3.9% 3.0%
====== ====== ======
</TABLE>
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
Net Sales. Net Sales for the year ended July 31, 1997 increased by $116.4
million to $1,253.8 million, a 10.2% increase compared to the previous year. The
sales increase primarily resulted from a 5.5% increase in stores open for
comparable periods as well as sales from 117 new stores added during the year,
which was partially offset by 61 stores closed during the year. The Company
believes that the sales growth was influenced by enhanced merchandise
assortments, successful product promotions and strong store level execution.
Gross Margin. Gross Margin as a percentage of net sales was 48.7% for the
year ended July 31, 1997 compared to 49.3% for the year ended July 31, 1996, a
decrease of 0.6%. This decrease was primarily due to the Company's more
competitive stance with regard to pricing as well as the ongoing transition to a
higher priced, lower margin product mix at the Gordon's Division in connection
with its repositioning as a more upscale and contemporary retailer. The LIFO
provision was $3.7 million and $2.4 million for the years ended July 31, 1997
and 1996, respectively, having the effect of reducing gross margin by 0.1%.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses decreased to 38.3% of sales for the year ended July 31,
1997 from 40.2% for the year ended July 31, 1996, or 1.9% as a percentage of net
sales. Store expenses as a percentage of sales decreased by 0.6% principally due
to productivity improvement as a result of store payroll increasing at a lower
rate than sales. Corporate expenses decreased by 0.7% of net sales principally
as a result of lower costs for payroll. The current year demonstrated the
Company's ability to leverage its fixed store and corporate operating expenses
while increasing sales in the stores.
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
$130.0 million and $103.2 million for the years ended July 31, 1997 and 1996,
respectively, an increase of 26.0%.
15
<PAGE> 17
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $6.5 million, primarily as a result of the purchase of new
assets, principally for new store openings, renovation and refurbishment, since
the fresh start reporting write-off of substantially all fixed assets of the
Company effective July 31, 1993.
Interest Expense, Net. Interest Expense, Net was $36.1 million and $30.1
million for the years ended July 31, 1997 and 1996, respectively. The increase
in interest expense was primarily due to higher borrowings under the Revolving
Credit Agreement to fund new store growth, inventory, and remodels and
renovations and a reduction in interest income resulting from lower average
balances in short term investments.
Income Taxes. The income tax expense for the years ended July 31, 1997 and
1996 was $29.3 million and $24.5 million, respectively, reflecting an effective
tax rate of 36.7% and 35.8%, respectively. As a result of guidelines regarding
accounting for income taxes of companies utilizing fresh-start reporting, the
Company reports earnings on a fully-taxed basis even though it does not expect
to pay any significant income taxes for the near future. The Company will
realize a cash benefit from utilization of tax net operating loss carryforwards
("NOL") (after limitations) against current and future tax liabilities. As of
July 31, 1997, the Company had a remaining NOL (after limitations) of
approximately $254.2 million.
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
Net Sales. Net Sales for the year ended July 31, 1996 increased by $101.2
million to $1,137.4 million, a 9.8% increase compared to the previous year.
Sales for stores open for comparable periods increased by 9.9%. The sales
increase primarily resulted from improved merchandise assortments, successful
product promotions during the holiday and non-holiday periods and strong store
level execution.
Gross Margin. Gross Margin as a percentage of net sales was 49.3% for the
year ended July 31, 1996 compared to 49.4% for the year ended July 31, 1995, a
decrease of 0.1%. The Company achieved this result while adhering to its
merchandise strategy which included a transition in sales mix to more key item
merchandise as well as reducing slow moving merchandise inventory during the
current year. Key item merchandise produces higher sales volumes but has a
slightly lower gross margin rate, on average, than other merchandise. The LIFO
provision was $2.4 million and $2.8 million for the years ended July 31, 1996
and 1995, respectively.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses decreased to 40.2% of sales for the year ended July 31,
1996 from 41.9% for the year ended July 31, 1995, or 1.7% as a percentage of net
sales. Store payroll expense as a percentage of net sales decreased 1.0% as a
result of focused productivity measures. Other store expenses decreased by 0.9%
of net sales principally related to store occupancy costs, which increased at a
lower rate than net sales. Corporate expenses decreased by 0.9% of net sales
principally as a result of lower costs for payroll, outside services and
insurance. These improvements were partially offset by an increased provision
for chargeoffs of customer accounts resulting from general economic conditions.
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
$103.2 million and $78.0 million for the years ended July 31, 1996 and 1995,
respectively, an increase of 32.3%.
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $7.2 million, primarily as a result of the purchase of new
assets in connection with the Company's store expansion and remodeling plan.
Unusual Items -- Reorganization Recoveries. Unusual Items -- Reorganization
Recoveries were $4.5 million for the year ended July 31, 1996. See "Unusual
Items -- Reorganization Recoveries" in Notes to the Consolidated Financial
Statements.
Interest Expense, Net. Interest Expense, Net was $30.1 million and $29.8
million for the years ended July 31, 1996 and 1995, respectively. Interest
expense primarily remained constant due to the early
16
<PAGE> 18
redemption of the $60.0 million 11.0% Second Priority Senior Secured Notes on
September 11, 1995, partially offset by the increase in interest expense due to
higher borrowings under the Revolving Credit Agreement and a reduction in
interest income due to lower average balances in short-term investments. Also,
the prior year included $1.2 million of interest income on funds escrowed for
previous bankruptcy matters.
Income Taxes. The income tax expense for the years ended July 31, 1996 and
1995 was $24.5 million and $16.4 million, respectively, reflecting an effective
tax rate of 35.8% and 34.2%, respectively. As a result of guidelines regarding
accounting for income taxes of companies utilizing fresh-start reporting, the
Company reports earnings on a fully-taxed basis even though it does not expect
to pay any significant income taxes for the near future. The Company will
realize a cash benefit from utilization of NOLs (after limitations) against
current and future tax liabilities.
Extraordinary Item. The extraordinary charge of $1.1 million, net of an
income tax benefit of $0.6 million, for the year ended July 31, 1996 was the
result of the early redemption of the $60.0 million 11.0% Second Priority Senior
Secured Notes. See "Long-Term Debt" in Notes to the Consolidated Financial
Statements.
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 July 31, 1997, the Company had cash and cash equivalents of $41.6 million,
including $9.0 million restricted primarily by the collateral requirements under
the Receivables Securitization Facility established by the Company in July 1994
(the "Receivables Securitization Facility"). The retail jewelry business is
highly seasonal, with a significant proportion of sales and operating income
being generated in November and December of each year. Approximately 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.
Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------------------------------ ------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31, JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1997 1997 1997 1996 1996 1996 1996 1995
-------- --------- ----------- ----------- -------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $273,580 $244,376 $505,083 $230,779 $248,858 $222,283 $451,962 $214,274
Gross margin................ 132,271 119,182 248,312 110,735 122,760 107,797 225,952 104,104
Operating earnings.......... 11,613 7,381 90,756 6,206 7,851 3,823 79,770 8,746
Net earnings (loss)......... 1,620 (1,444) 51,515 (1,138) 12 (2,439) 46,234 91
</TABLE>
Net cash used in operating activities was $6.0 million in fiscal 1997 and
$1.4 million in fiscal 1996. In fiscal 1997 and 1996, net earnings, depreciation
and amortization charges and the non-cash charge in lieu of tax expense were
offset by additional working capital needs, principally for accounts receivable
and inventory growth. In fiscal 1995, net cash provided by operations was $45.9
million principally from the non-cash charge in lieu of tax expense and a
reduction in working capital needs.
Net cash used in investing activities was $49.1 million in fiscal 1997,
$50.8 million in fiscal 1996 and $40.5 million in 1995 principally related to
capital expenditures for new store growth and existing store remodeling and
refurbishment.
Net cash provided from financing activities was $46.8 million in fiscal
1997, principally for borrowings under the Company's Revolving Credit Agreement.
Net cash used for financing activities for fiscal 1996 was $52.6 million,
principally related to payments of long term debt retired during that year. Net
cash used in financing activities for fiscal 1995 was $4.2 million, principally
related to scheduled payments of long-term debt.
17
<PAGE> 19
The Company, through Zale Funding Trust ("ZFT"), a limited purpose Delaware
business trust wholly owned by 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 July 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.
In order to support the Company's growth plans, the Company and ZDel (the
"Borrowers") entered into a new 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. The Revolving Credit Agreement replaced a prior secured commitment
totaling $150.0 million.
The revolving credit loans bear interest at floating rates, currently (i)
LIBOR plus 1.5% or (ii) the agent bank's adjusted base rate or the Federal Funds
Rate plus 0.5%, at the Borrowers' option. The interest rate based on LIBOR and
letter of credit commission rates can be reduced or increased based on certain
future performance levels attained by the Borrowers. The Company pays a
commitment fee of 0.375% per annum (subject to reduction based on future
performance) on the preceding month's unused Revolving Credit Agreement
commitment. The Borrowers may repay the revolving credit loans at any time
without penalty prior to the maturity date. The interest rates and commitment
fee will also be reduced if the Company obtains an investment grade rating. The
Revolving Credit Agreement may be extended by the Borrowers for one year upon
obtaining appropriate consent. At July 31, 1997, there were $70.7 million in
loans outstanding under the Revolving Credit Agreement at a weighted-average
interest rate of 7.20%. In addition, letters of credit in the amount of
approximately $0.6 million were outstanding at July 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.
During the year ended July 31, 1997, the Company made approximately $54.0
million in capital expenditures, a significant portion of which was used to open
117 new stores. Under its continued growth strategy, the Company plans to open
approximately 220 new stores for which it will incur approximately $50 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 underrepresented. Since fiscal 1994,
the Company remodeled or refurbished nearly 50% of its store base. During the
combined fiscal years 1998 and 1999, the Company anticipates spending
approximately $50 million to remodel and refurbish approximately 300 additional
stores. The Company also estimates it will make capital expenditures of
approximately $25 million to $30 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. The Revolving
Credit Agreement limits the Company's capital expenditures to $80.0 million in
each of fiscal years 1998 and 1999.
There has been an increase of approximately $53.8 million, or 11.8%, in
owned merchandise inventories at July 31, 1997 compared to the balance at July
31, 1996. The increase in inventory levels is principally the result of new
store growth as well as improvements in 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 $70.7 million under the Revolving Credit Agreement at
July 31, 1997, compared to $23.6 million at July 31, 1996. The Company intends
to offer $100 million of Senior Notes due 2007 by means of an offering
memorandum to qualified institutional buyers pursuant to Rule 144A and
Regulation S under the Securities Act of 1933, which is expected to close in
early October ("the Offering"). The Offering is part of a plan to improve the
Company's capital structure by (i) allowing more flexibility for seasonal
financing needs and (ii) extending the average maturity of the Company's
indebtedness. The Company will apply the net proceeds from the issuance of the
Notes to repay outstanding borrowings under the Revolving Credit Agreement,
which amounts may be reborrowed from time to time.
18
<PAGE> 20
On September 3, 1997, the Company signed a purchase agreement relating to
the Diamond Park Asset Sale. The Diamond Park Division, which manages leased
fine jewelry departments in major department store chains including Marshall
Field's, Dillard's, Mercantile and Parisian, had annual sales of $125.3 million
in fiscal 1997. At July 31, 1997, inventories and net property and equipment of
the Diamond Park Division were $54.5 million and $4.0 million, respectively. In
connection with Diamond Park Asset Sale, the Company will receive consideration
totaling approximately $65 million in cash. The Company will continue to operate
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. The Company intends to reinvest net proceeds from the Diamond
Park Asset Sale into the Company's operations. The closing of the Diamond Park
Asset Sale is subject to certain conditions, including receipt of certain third
party consents, absence of a material adverse change in the business,
satisfactory completion by the purchaser of its due diligence, termination of
the Hart-Scott-Rodino waiting period, entering into of a services agreement and
a transfer agreement related to Dillard's, release of all liens on the assets to
be sold, accuracy of representations and warranties and compliance with
covenants and other standard closing conditions. The closing is expected to
occur on or about October 6, 1997.
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 July 31, 1997, the Company had a NOL (after
limitations) of approximately $254 million, which represents up to $99 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 Offering 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.
INFLATION
In management's opinion, changes in net sales and net earnings that have
resulted from inflation and changing prices have not been material during the
periods presented. There is no assurance, however, that inflation will not
materially affect the Company in the future.
NEW ACCOUNTING PRONOUNCEMENTS
Effective March 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share" ("EPS"). In accordance with the
provisions of SFAS No. 128, basic earnings per common share will be computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share will be
computed by dividing net income by the weighted average of common stock and
common stock equivalents outstanding during the period. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997 with footnote disclosure of pro forma EPS amounts
permitted prior to that date. The Company will adopt SFAS No. 128 in the quarter
ended January 31, 1998, and in accordance with SFAS No. 128, will restate all
prior-period EPS data.
Effective July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires the Company to report comprehensive
income in the financial statements. SFAS No. 131 requires the Company to
disclose revenues, profits and loss, and assets for certain business segments.
These statements are effective for fiscal years beginning after December 15,
1997, with earlier adoption permitted. The Company has not yet determined the
impact of these statements on its financial disclosures.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and
supplementary data are included as pages F-1 through F-20 at the end of this
Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
INDEX NUMBER
----- ------
<S> <C>
Management's Report......................................... F-2
Report of Independent Public Accountants.................... F-3
Consolidated Statements of Operations....................... F-4
Consolidated Balance Sheets................................. F-5
Consolidated Statements of Cash Flows....................... F-6
Consolidated Statements of Stockholder's Investment......... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 22
PART III
The information required to be included in Part III of this Annual Report
on Form 10-K is incorporated by reference to the Company's Proxy Statement for
the 1997 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report.
1. FINANCIAL STATEMENTS:
The list of financial statements required by this item is set forth in Item
8.
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Public Accountants.................... 25
Schedule II -- Valuation and Qualifying Accounts............ 26
</TABLE>
All other financial statements and financial statement schedules for which
provision is made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions, are not
material or are not applicable and, therefore, have been omitted or are included
in the consolidated financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
2.1 -- Disclosure Statement Pursuant to Section 1125 of the
Bankruptcy Code with Respect to Plan of Reorganization
under Chapter 11 of the Bankruptcy Code for Zale
Corporation and its Affiliated Debtors, dated March 22,
1993 (Exhibit T3E-1).(1)
2.2 -- Motion to Approve Amendments to the Plan of
Reorganization under Chapter 11 of the Bankruptcy Code of
Zale Corporation and its Affiliated Debtors, dated May
19, 1993 (Exhibit 2.6).(2)
2.3 -- Order Approving Amendments to the Plan of Reorganization
under Chapter 11 of the Bankruptcy Code of Zale
Corporation and its Affiliated Debtors, dated May 20,
1993 (Exhibit 2.7).(2)
3.1 -- Restated Certificate of Incorporation of Zale
Corporation, dated July 30, 1993.(3)
3.3 -- Amended Bylaws of Zale Corporation, dated November 1,
1996.(8)
4.1 -- Warrant Agreement, dated as of July 30, 1993, between
Zale Corporation and The First National Bank of Boston,
as warrant agent, governing the Warrants to Purchase
Common Stock, Series A.(3)
4.2 -- Indenture, dated as of July 1, 1994, among Zale Funding
Trust, as Issuer and Bankers Trust Company, as Indenture
Trustee.(6)
4.3 -- Purchase and Servicing Agreement, dated as of July 1,
1994, among Zale Funding Trust, Diamond Funding Corp.,
Zale Delaware, Inc., and Jewelers Financial Services,
Inc.(6)
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
<C> <S>
4.4 -- Revolving Credit Agreement, dated as of August 11, 1995,
among Zale Corporation, Zale Delaware, Inc., the lending
institutions set forth therein, and The First National
Bank of Boston, as Agent for such lenders.(6)
4.5 -- Amended and Restated Lender Security Agreement, dated as
of August 11, 1995, among Zale Delaware, Inc., Zale
Corporation, and The First National Bank of Boston, as
collateral agent.(6)
4.6 -- Revolving Credit Agreement dated March 31, 1997 among
Zale and ZDel and The First National Bank of Boston, as
agent for the lenders identified therein. The Schedules
attached to the Agreement, as identified in the list of
Schedules filed as a part of this exhibit, are omitted
from this filing, but will be provided supplementally to
the Commission upon request.(8)
*10.1 -- Indemnification agreement, dated as of July 21, 1993,
between Zale Corporation and certain present and former
directors thereof.(6)
10.2 -- Amended and Restated Agreement of Limited Partnership of
Jewel Recovery, L.P., dated as of July 30, 1993.(3)
*10.3 -- Zale Corporation Stock Option Plan.(3)
10.4 -- Trust Agreement, dated as of November 24, 1993, among
Zale Corporation, Zale Delaware, Inc. and United States
Trust Company of New York.(4)
10.5 -- Agreement for Systems Operations Services, dated as of
February 1, 1993, between Zale Corporation and Integrated
Systems Solutions Corporation.(3)
10.5a -- Amendment #1 to Agreement for Systems Operations
Services, dated as of August 1, 1994, between Zale
Corporation and Integrated Systems Solutions
Corporation.(6)
*10.6 -- Severance and Settlement Agreement, dated as of December
3, 1993, between Zale Corporation and E. Peter Healey.(4)
*10.7 -- Severance and Settlement Agreement, dated as of May 15,
1995, between Zale Corporation and Dolph B. Simon.(6)
*10.8 -- The Executive Severance Plan for Zale Corporation and Its
Affiliates, as amended and restated as of February 10,
1994.(4)
*10.8a -- Amendment to The Executive Severance Plan for Zale
Corporation and Its Affiliates effective May 20, 1995.(7)
*10.9 -- Employment Agreement, dated as of December 22, 1993,
between Zale Corporation and Larry Pollock.(4)
*10.10 -- Employment Agreement, dated as of March 14, 1994, between
Zale Corporation and Robert DiNicola.(5)
10.11 -- Lease Agreement Between Principal Mutual Life Insurance
Company, As Landlord, and Zale Corporation, as Debtor and
Debtor-In-Possession, As Tenant, dated as of September
17, 1992.(7)
10.11a -- First Lease Amendment and Agreement between Principal
Mutual Life Insurance Company and Zale Delaware, Inc.,
dated as of February 1, 1996.(7)
*10.12 -- Employment Agreement, approved by the Board of Directors
on October 30, 1996, and dated as of August 1, 1996,
between Zale Corporation and Robert DiNicola.(8)
10.13 -- Indemnification Agreement, executed on October 30, 1996,
and dated as of June 6, 1996, between Zale Corporation
and Andrea Jung.(8)
*10.14 -- Form Change of Control Agreement dated as of October 30,
1996, but executed thereafter, between Zale Corporation
and Key Employees.(9)
10.14a -- Modified list of parties to Change of Control
Agreement.(11)
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
<C> <S>
*10.15 -- Employment Agreement between Zale Corporation and Louis
J. Grabowsky.(8)
*10.16 -- Employment Agreement between Zale Corporation and Alan P.
Shor.(8)
10.17 -- Asset Purchase Agreement, dated September 3, 1997, by and
among Finlay Enterprises, Inc., Finlay Fine Jewelry
Corporation, Zale Corporation and Zale Delaware, Inc.(11)
11 -- Statement re computation of per share earnings.(11)
21 -- Subsidiaries of the registrant.(11)
23 -- Consent of Independent Public Accountants.(11)
27 -- Financial data schedule.(11)
</TABLE>
- ---------------
(1) Incorporated by reference from the exhibit shown in parenthesis to the
registrant's Form T-3 (No. 22-24-68) filed with the Commission on April 2,
1993.
(2) Incorporated by reference from the exhibit shown in parenthesis to the
registrant's Form 8-A/A (No. 02-21526) filed with the Commission on July
16, 1993.
(3) Previously filed as an exhibit to the registrant's Form 10-Q (No. 1-4129)
for the quarterly period ended September 30, 1993, and incorporated herein
by reference.
(4) Incorporated by reference to the corresponding exhibit to the registrant's
Registration Statement on Form S-1 (No. 33-73310) filed with the
Commissions on December 23, 1993, as amended.
(5) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended March 31, 1994, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1995, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1996, and incorporated herein by
reference.
(8) Previously filed as an exhibit to the registrant's Form 10-Q for the
quarterly period ended October 31, 1996, and incorporated herein by
reference.
(9) Previously filed as an exhibit to the registrant's Form 10-Q for the
quarterly period ended January 31, 1997, and incorporated herein by
reference.
(10) Previously filed as an exhibit to the registrant's Form 10-Q (No. 0-21526)
for the quarterly period ended April 30, 1997, and incorporated herein by
reference.
(11) Filed herewith.
* Management Contracts and Compensatory Plans.
4. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended July 31, 1997.
23
<PAGE> 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Report......................................... F-2
Report of Independent Public Accountants.................... F-3
Consolidated Statements of Operations....................... F-4
Consolidated Balance Sheets................................. F-5
Consolidated Statements of Cash Flows....................... F-6
Consolidated Statements of Stockholders' Investment......... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 26
MANAGEMENT'S REPORT
To the Stockholders of Zale Corporation:
The integrity and consistency of the consolidated financial statements of
Zale Corporation (the "Company"), which were prepared in accordance with
generally accepted accounting principles, are the responsibility of management
and properly include some amounts that are based upon estimates and judgments.
The Company maintains a system of internal accounting controls, to provide
reasonable assurance, at appropriate cost, that the Company's assets are
protected and transactions are properly recorded. Additionally, the integrity of
the financial accounting system is based on careful selection and training of
qualified personnel, organizational arrangements which provide for appropriate
division of responsibilities and communication of established written policies
and procedures.
The consolidated financial statements of the Company have been audited by
Arthur Andersen LLP, independent public accountants. Their report expresses
their opinion as to the fair presentation, in all material respects, of the
financial statements and is based upon their independent audit conducted in
accordance with generally accepted auditing standards.
The Audit Committee, composed solely of outside directors, meets
periodically with the independent public accountants and representatives of
management to discuss auditing and financial reporting matters. In addition, the
independent public accountants meet periodically with the Audit Committee
without management representatives present and have free access to the Audit
Committee at any time. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of the independent public accountants,
which is subject to stockholder approval, and the general oversight review of
management's discharge of its responsibilities with respect to the matters
referred to above.
<TABLE>
<S> <C>
Robert J. DiNicola Louis J. Grabowsky
Chairman of the Board and Executive Vice President -- Finance and
Chief Executive Officer Chief Financial Officer
</TABLE>
F-2
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Zale Corporation:
We have audited the accompanying consolidated balance sheets of Zale
Corporation (a Delaware corporation) and subsidiaries as of July 31, 1997 and
1996, and the related consolidated statements of operations, cash flows, and
stockholders' investment for each of the three years in the period ended July
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zale
Corporation and subsidiaries as of July 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended July 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
September 3, 1997
F-3
<PAGE> 28
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales.............................................. $1,253,818 $1,137,377 $1,036,149
Cost of Sales.......................................... 643,318 576,764 524,010
---------- ---------- ----------
Gross Margin........................................... 610,500 560,613 512,139
Selling, General and Administrative Expenses........... 480,522 457,371 434,101
Depreciation and Amortization Expense.................. 14,022 7,538 381
Unusual Items -- Reorganization Recoveries............. -- (4,486) --
---------- ---------- ----------
Operating Earnings..................................... 115,956 100,190 77,657
Interest Expense, Net.................................. 36,098 30,102 29,837
---------- ---------- ----------
Earnings Before Income Taxes and Extraordinary Item.... 79,858 70,088 47,820
Income Taxes........................................... 29,305 25,094 16,350
---------- ---------- ----------
Earnings Before Extraordinary Item..................... 50,553 44,994 31,470
Extraordinary Item:
Loss on Early Extinguishment of Debt, Net of Income
Taxes of $(603)................................... -- (1,096) --
---------- ---------- ----------
Net Earnings........................................... $ 50,553 $ 43,898 $ 31,470
========== ========== ==========
Earnings Per Common Share:
Primary:
Earnings Before Extraordinary Item................ $ 1.38 $ 1.23 $ 0.88
Extraordinary Items............................... -- (0.03) --
---------- ---------- ----------
Net Earnings...................................... $ 1.38 $ 1.20 $ 0.88
========== ========== ==========
Assuming full dilution:
Earnings Before Extraordinary Item................ $ 1.37 $ 1.23 $ 0.86
Extraordinary Items............................... -- (0.03) --
---------- ---------- ----------
Net Earnings...................................... $ 1.37 $ 1.20 $ 0.86
========== ========== ==========
Weighted Average Number of Common Shares Outstanding:
Primary.............................................. 36,632 36,465 35,849
Assuming full dilution............................... 36,853 36,618 36,565
</TABLE>
See Notes to the Consolidated Financial Statements.
F-4
<PAGE> 29
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996
---------- ----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents................................. $ 41,636 $ 50,046
Customer Receivables, Net................................. 454,270 419,877
Merchandise Inventories................................... 511,702 457,862
Other Current Assets...................................... 39,271 25,535
---------- ----------
Total Current Assets........................................ 1,046,879 953,320
Property and Equipment, Net................................. 138,011 108,254
Other Assets................................................ 43,616 45,737
Deferred Tax Asset, Net..................................... 52,700 56,500
---------- ----------
Total Assets................................................ $1,281,206 $1,163,811
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt......................... $ 328 $ 26
Accounts Payable and Accrued Liabilities.................. 145,721 145,794
Deferred Tax Liability, Net............................... 23,700 32,000
---------- ----------
Total Current Liabilities................................... 169,749 177,820
Non-current Liabilities..................................... 53,544 34,627
Long-term Debt.............................................. 451,459 404,328
Excess of Revalued Net Assets Over Stockholders' Investment,
Net....................................................... 64,880 70,778
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock........................................... -- --
Common Stock.............................................. 350 352
Additional Paid-In Capital (Includes Stock Warrants)...... 401,121 383,042
Unrealized Gains on Securities............................ 2,182 1,013
Accumulated Earnings...................................... 142,404 91,851
---------- ----------
546,057 476,258
Treasury Stock............................................ (4,483) --
---------- ----------
Total Stockholders' Investment.............................. 541,574 476,258
---------- ----------
Total Liabilities and Stockholders' Investment.............. $1,281,206 $1,163,811
========== ==========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-5
<PAGE> 30
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 50,553 $ 43,898 $ 31,470
Non-cash items:
Depreciation and amortization expense.................. 16,290 8,904 1,498
Non-cash charge in lieu of tax expense................. 28,280 23,208 16,204
Other adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt....... -- 1,699 --
Changes in:
Customer receivables, net.............................. (34,393) (22,323) 1,506
Merchandise inventories................................ (53,840) (74,739) 25,621
Other current assets................................... (13,736) (1,253) (2,385)
Other assets........................................... 1,467 (768) (55)
Accounts payable and accrued liabilities............... (73) 18,014 (27,752)
Non-current liabilities................................ (580) 1,957 (203)
-------- --------- --------
Net Cash Provided by (Used in) Operating Activities...... (6,032) (1,403) 45,904
-------- --------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment...................... (54,025) (48,790) (42,295)
Dispositions of property and equipment................... 4,887 829 1,987
Acquisition, net of cash acquired........................ -- (2,547) --
Other.................................................... -- (340) (205)
-------- --------- --------
Net Cash Used in Investing Activities.................... (49,138) (50,848) (40,513)
-------- --------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................. 291 (66,608) (3,896)
Net borrowings under revolving credit agreement.......... 47,100 23,600 --
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............... (945) (629) (461)
Proceeds from exercise of stock options.................. 1,073 1,992 171
Purchase of treasury stock............................... (759) -- --
-------- --------- --------
Net Cash Provided by (Used in) Financing Activities...... 46,760 (52,608) (4,186)
-------- --------- --------
Net Increase (Decrease) in Cash and Cash Equivalents..... (8,410) (104,859) 1,205
Cash and Cash Equivalents at Beginning of Period......... 50,046 154,905 153,700
-------- --------- --------
Cash and Cash Equivalents at End of Period............... $ 41,636 $ 50,046 $154,905
======== ========= ========
Supplemental cash flow information:
Interest paid.......................................... $ 34,914 $ 35,020 $ 36,443
Interest received...................................... $ 936 $ 3,233 $ 7,641
Income taxes paid (net of refunds received)............ $ 3,431 $ 1,653 $ 568
Restricted cash -- at period end date.................. $ 9,013 $ 31,510 $ 51,422
</TABLE>
See Notes to the Consolidated Financial Statements.
F-6
<PAGE> 31
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL UNREALIZED
COMMON SHARES PAID-IN GAINS(LOSSES) ACCUMULATED TREASURY
OUTSTANDING COMMON STOCK CAPITAL ON SECURITIES EARNINGS STOCK TOTAL
------------- ------------ ---------- ------------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1994............ 34,965 $350 $321,159 $ (326) $ 21,557 $ 0 $342,740
Net Earnings...................... -- -- -- -- 31,470 -- 31,470
Reduction of Tax Valuation
Allowance....................... -- -- 16,204 -- -- -- 16,204
Exercise of Stock Options and
Warrants........................ 19 -- 171 -- -- -- 171
Treasury Stock Acquired........... (1) -- -- -- -- -- --
Unrealized Gain on Securities..... -- -- -- 1,305 -- -- 1,305
------ ---- -------- ------ -------- ------- --------
Balance July 31, 1995............. 34,983 350 337,534 979 53,027 0 391,890
Net Earnings...................... -- -- -- -- 43,898 -- 43,898
Purchase of B Warrants............ -- -- (4,190) -- (5,074) -- (9,264)
Reduction of Tax Valuation
Allowance....................... -- -- 23,208 -- -- -- 23,208
Change in Estimate of Realization
of Deferred Income Tax Asset.... -- -- 24,500 -- -- -- 24,500
Exercise of Stock Options and
Warrants........................ 216 2 1,990 -- -- -- 1,992
Unrealized Gain on Securities..... -- -- -- 34 -- -- 34
------ ---- -------- ------ -------- ------- --------
Balance July 31, 1996............. 35,199 352 383,042 1,013 91,851 0 476,258
Net Earnings...................... -- -- -- -- 50,553 -- 50,553
Reduction of Tax Valuation
Allowance....................... -- -- 13,280 -- -- -- 13,280
Exercise of Stock Options......... 113 1 1,072 -- -- -- 1,073
Unrealized Gain on Securities..... -- -- -- 1,169 -- -- 1,169
Recoveries and purchase of Common
Stock........................... (290) (3) 3,727 -- -- (4,483) (759)
------ ---- -------- ------ -------- ------- --------
Balance, July 31, 1997............ 35,022 $350 $401,121 $2,182 $142,404 $(4,483) $541,574
====== ==== ======== ====== ======== ======= ========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-7
<PAGE> 32
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS include the accounts of
Zale Corporation and its wholly-owned subsidiaries (the "Company" or "Zale").
The Company consolidates substantially all its retail operations into Zale
Delaware, Inc. ("ZDel"). 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. On January 18, 1996, the Company acquired Karten's Jewelers,
Inc., ("Karten's") a privately owned chain of 20 fine jewelry stores. The
Company acquired all the outstanding shares of common stock for $3.0 million in
cash and assumption of all liabilities.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS includes cash on hand, deposits in banks and
short-term marketable securities at varying interest rates with maturities of
three months or less. The carrying amount approximates fair value because of the
short maturity of those instruments. At July 31, 1997, $9.0 million was
restricted of which $5.4 million was restricted based on collateral requirements
under the Receivables Securitization Facility.
CUSTOMER RECEIVABLES are classified as current assets, including amounts
which are due after one year, in accordance with industry practices. The
allowance for doubtful accounts was $57.8 million and $51.4 million at July 31,
1997 and 1996, respectively. Finance charge income and net earnings from credit
insurance subsidiaries of $101.0 million, $90.8 million and $89.6 million for
the years ended July 31, 1997, 1996 and 1995, respectively, has been reflected
as a reduction of Selling, General and Administrative Expenses.
MERCHANDISE INVENTORIES are stated at the lower of cost or market, which is
determined primarily in accordance with the retail inventory method.
Substantially all inventories represent finished goods which are valued using
the last-in, first-out ("LIFO") method.
DEPRECIATION AND AMORTIZATION are computed using the straight-line method
over the estimated useful lives of the assets or remaining lease life. Estimated
useful lives of the assets range from three to forty years. Original cost and
related accumulated depreciation or amortization are removed from the accounts
in the year assets are retired. Gains or losses on dispositions of property and
equipment are included in operations in the year of disposal. Computer software
costs related to the development of major systems are capitalized as incurred
and are amortized over their useful lives.
EXCESS OF REVALUED NET ASSETS OVER STOCKHOLDERS' INVESTMENT is being
amortized over fifteen years. Amortization was $5.9 million for each of the
years ended July 31, 1997, 1996 and 1995. Accumulated amortization was $23.6
million and $17.7 million at July 31, 1997 and 1996, respectively.
STORE PREOPENING COSTS are charged to results of operations in the period
in which the store is opened. Store closing costs are estimated and recognized
in the period in which the Company makes the decision that the store will close.
Such costs include the present value of estimated future rentals net of
anticipated sublease income, loss on retirement of property and equipment and
other related occupancy costs.
F-8
<PAGE> 33
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING EXPENSES are charged against operations when incurred. Amounts
charged against operations were $46.1 million, $37.6 million and $35.2 million
for the years ended July 31, 1997, 1996 and 1995, respectively. The amounts of
prepaid advertising at July 31, 1997 and 1996 are $3.4 million and $2.4 million,
respectively.
RECLASSIFICATIONS. The classifications in use at July 31, 1997 have been
applied to the financial statements for July 31, 1996 and 1995.
MERCHANDISE INVENTORIES
The Company uses the LIFO method of accounting for inventory, which results
in a matching of current costs with current revenues. The estimated cost of
replacing the Company's inventories exceeds its net LIFO cost by approximately
$16.0 million and $12.2 million at July 31, 1997 and 1996, respectively.
Inventories on a first-in, first-out ("FIFO") basis were $527.7 million and
$470.1 million at July 31, 1997 and 1996, respectively. The Company also
maintained consigned inventory at its retail locations of approximately $135.0
million and $78.9 million at July 31, 1997 and 1996, respectively. This
consigned inventory and related contingent obligation are not reflected in the
Company's financial statements. At the time of sale, the Company records the
purchase liability in accounts payable and the related cost of merchandise in
Cost of Sales.
PROPERTY AND EQUIPMENT
The Company's property and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31, 1997 JULY 31, 1996
------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Buildings and Leasehold Improvements............... $ 59,932 $ 39,439
Furniture and Fixtures............................. 101,767 64,569
Construction in Progress........................... 9,409 14,835
Property Held for Sale............................. 6,345 9,557
-------- --------
177,453 128,400
Less: Accumulated Amortization and Depreciation.... (39,442) (20,146)
-------- --------
Total Net Property and Equipment................... $138,011 $108,254
======== ========
</TABLE>
Property Held for Sale represents land and buildings which are being held
for future sale and are not being used in the Company's operations.
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES
The Company's accounts payable and accrued liabilities consist of the
following:
<TABLE>
<CAPTION>
JULY 31, 1997 JULY 31, 1996
------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts Payable................................... $ 59,321 $ 67,492
Accrued Payroll.................................... 18,280 19,759
Accrued Taxes...................................... 13,248 14,833
Extended Warranty.................................. 12,420 6,493
Other Accruals..................................... 42,452 37,217
-------- --------
Total Accounts Payable and Accrued Liabilities..... $145,721 $145,794
======== ========
</TABLE>
F-9
<PAGE> 34
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's non-current liabilities consist principally of the
accumulated obligation for postretirement benefits under Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," loss reserves for insurance subsidiaries and
reserves for tax contingencies.
POSTRETIREMENT BENEFITS. The Company provides medical and dental insurance
benefits for all eligible retirees and spouses with benefits to the latter
continuing after the death of the retiree for a maximum of thirty-six months.
Substantially all of the Company's full-time employees, who were hired on or
before November 14, 1994, become eligible for those benefits upon reaching age
55 while working for the Company and having ten years of continuous service. The
medical and dental benefits are provided under two plans. The lifetime maximum
on medical benefits is $500,000 up to the age of 65 and $50,000 thereafter.
These benefits include deductibles, retiree contributions and co-insurance
provisions that are assumed to grow with the health care cost trend rate. The
costs of the postretirement benefits are recognized in the financial statements
over an employee's active working career on an accrual basis.
The accumulated postretirement benefits obligation ("APBO"), which
represents the actuarial present value of benefits attributed to employee
service rendered as of July 31, 1997 and 1996, for the unfunded plan, include
the following components:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Active Employees Under Retirement Age.................... $ 3,453 $ 4,260
Active Employees Eligible to Retire...................... 1,884 2,161
Current Retirees......................................... 7,315 7,641
------- -------
Accumulated Benefit Obligation........................... 12,652 14,062
Unrecognized Prior Service Credit (Cost)................. 38 (348)
Unrecognized Net Gain.................................... 8,230 7,019
------- -------
Total Accrued Postretirement Benefit Liability........... $20,920 $20,733
======= =======
</TABLE>
The unrecognized gain of $8.2 million at July 31, 1997, results primarily
from changes in plan experience and actuarial assumptions, including a reduction
in average claim cost and a reduction in the number of eligible participants.
The gain will be amortized in accordance with SFAS No. 106.
The annual expense relating to postretirement benefits, which are reflected
in Selling, General and Administrative Expenses, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Service Cost..................................... $ 613 $1,130 $1,035
Interest Cost.................................... 1,112 1,557 1,465
Amortization..................................... (582) 58 16
------ ------ ------
Total Postretirement Benefit Cost................ $1,143 $2,745 $2,516
====== ====== ======
</TABLE>
The weighted-average discount rate used in determining the APBO at July 31,
1997 and 1996 was 7.5 and 7.75 percent, respectively. At July 31, 1997 and 1996,
the initial medical and dental trend rates were 12.0 percent and 8.25 percent,
respectively, and are assumed to gradually decrease to 6.0 percent in the year
2004. The effect of a one percent increase in the health care cost trend rate on
the APBO and the net periodic expense would be an increase of approximately $1.5
million and $0.2 million, respectively.
F-10
<PAGE> 35
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, 1997 JULY 31, 1996
------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Revolving Credit Agreement................. $ 70,700 $ 23,600
Receivables Securitization Facility........ 380,677 380,635
Other (primarily mortgages)................ 410 119
-------- --------
451,787 404,354
Less Current Portion....................... (328) (26)
-------- --------
Total Long-Term Debt....................... $451,459 $404,328
======== ========
</TABLE>
Fiscal year scheduled maturities of long-term debt at July 31, 1997 were as
follows: 1998 -- $0.3 million; 1999 -- $380.8 million; 2000 -- $70.7 million;
2001 -- $0 million; 2002 -- $0 million; thereafter -- $0 million; for a total of
$451.8 million.
REVOLVING CREDIT AGREEMENT. On March 31,1997, the Company and ZDel (the
"Borrowers") entered into a three year unsecured revolving credit agreement (the
"Revolving Credit Agreement") with a group of banks which 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. The Revolving Credit Agreement replaces
a prior secured commitment totaling $150.0 million.
The revolving credit loans bear interest at floating rates, currently LIBOR
plus 1.5% or the agent bank's adjusted base rate percent or the Federal Funds
Rate plus .5%, at the Borrowers' option. The interest rate based on LIBOR can be
reduced based on certain future performance levels attained by the Borrowers.
The Company pays a commitment fee of .375 percent per annum (subject to
reduction based on future performance) on the preceding month's unused Revolving
Credit Agreement commitment. The Borrowers may repay the revolving credit loans
at any time without penalty prior to the maturity date. At the Borrowers'
election, the Revolving Credit Agreement provides for a one year extension upon
obtaining appropriate consent. At July 31, 1997, there were $70.7 million in
loans outstanding under the Revolving Credit Agreement at a weighted average
interest rate of 7.20%. In addition, letters of credit in the amount of
approximately $0.6 million were outstanding at July 31, 1997.
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, restricts within certain limits the Borrowers'
ability to pay dividends and make other payments, incur additional indebtedness,
make capital expenditures, engage in certain transactions with affiliates, incur
liens, make investments and sell assets. The Revolving Credit Agreement also
requires the Borrowers to maintain certain financial ratios and specified levels
of net worth.
RECEIVABLES SECURITIZATION FACILITY. The Company formed Zale Funding Trust
("ZFT"), a limited purpose Delaware business trust, in 1994 to finance customer
accounts receivable. ZFT established an accounts receivable securitization
facility (the "ZFT Securitization"), pursuant to which it issued approximately
$380.7 million, net of discount, aggregate principal amount of Receivables
Backed Notes ("ZFT Receivables Notes"). The proceeds from the ZFT Receivables
Notes were used to buy the revolving credit card accounts receivable of ZDel and
other affiliates. Collections from those receivables are used in part to pay
interest on the ZFT Receivables Notes and to purchase daily ZDel's customer
accounts receivable. The ZFT Receivables Notes are secured by a lien on all
customer accounts receivable and are nonrecourse with regard to Zale and ZDel.
F-11
<PAGE> 36
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ZFT Receivables Notes bear interest at the following rates, payable
monthly in arrears (amounts in thousands):
<TABLE>
<CAPTION>
PRINCIPAL RATE
- --------- ----
<C> <S>
$ 37,620 LIBOR + .40%, not to exceed 12.0%
294,100 7.325%
28,600 7.50%
20,440 8.15%
- --------
$380,760
========
</TABLE>
The effective interest rate, based on a current LIBOR rate of 5.625
percent, including amortization of debt issuance costs, approximated 7.55
percent at July 31, 1997.
Jewelers Financial Services, Inc. (the "Servicer"), a subsidiary of ZDel,
is the servicing entity for the collection of the customer accounts receivable
and its servicing obligations are guaranteed by ZDel.
The ZFT Receivables Notes will be subject to redemption at the option of
ZFT in whole but not in part, on the scheduled redemption date of July 15, 1999,
at a redemption price equal to the outstanding principal amount of the ZFT
Receivables Notes together with accrued and unpaid interest thereon at the
applicable interest rates. If ZFT has not given notice by June 15, 1999 that it
will redeem the ZFT Receivables Notes in full on the scheduled payment date
occurring in July 1999, the Servicer will promptly solicit bids for the purchase
of all or a portion of the receivables. If the Servicer is unable to sell the
receivables for a price such that the proceeds of such sale, together with other
available funds, is sufficient to pay in full the outstanding principal amount
of the ZFT Receivables Notes and interest thereon to the Scheduled Redemption
Date, the ZFT Receivables Notes will remain outstanding and will begin
amortizing based on collections of customer accounts receivable beginning in
August 1999.
The ZFT Securitization imposes certain reporting obligations on the Company
and limits ZFT's ability, among other things, to grant liens, incur certain
indebtedness, or enter into other lines of business. Additionally, under certain
conditions as defined, including among other things, failure to pay principal or
interest when due, failure to cure a borrowing base deficiency and breach of any
covenant that is not cured, the ZFT Securitization is subject to an early
amortization whereby the ZFT Receivables Notes may be declared due and payable
immediately. The restricted cash balance shown on the Consolidated Statements of
Cash Flows as of July 31, 1997 and 1996 primarily represents the restricted cash
of ZFT which is based on the relationship between the ZFT Receivables Notes
outstanding and gross accounts receivable as of July 31, 1997 and 1996.
LEASE COMMITMENTS
The Company rents most of its retail space under leases that generally
range from five to ten years and may contain base rent escalations. The Company
amended and extended its corporate headquarters lease for effective at the
expiration of the current lease, which will continue to be treated as an
operating lease starting in September 1997. Lease incentives of approximately
$4.7 million for reimbursement of certain leasehold improvement expenditures
will be amortized against lease payments over the life of the lease. All
existing real estate leases are treated as operating leases. Sublease rental
income under noncancelable leases is not material.
F-12
<PAGE> 37
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Retail Space:
Minimum Rentals................................ $ 70,344 $61,724 $55,645
Rentals Based on Sales......................... 27,762 27,752 28,365
-------- ------- -------
98,106 89,476 84,010
Equipment and Corporate Headquarters............. 3,240 3,368 3,386
-------- ------- -------
Total Rent Expense............................... $101,346 $92,844 $87,396
======== ======= =======
</TABLE>
Contingent rentals paid to lessors of certain store facilities are
determined principally on the basis of a percentage of sales in excess of
contractual limits.
Future minimum rent commitments as of July 31, 1997, for all noncancellable
leases of ongoing operations were as follows: 1998 -- $65.3 million;
1999 -- $63.4 million; 2000 -- $58.5 million; 2001 -- $53.2 million;
2002 -- $47.6 million; thereafter -- $162.8 million; for a total of $450.8
million.
INTEREST
Interest expense for the years ended July 31, 1997, 1996 and 1995 was
approximately $36.9 million, $33.2 million and $37.5 million, respectively.
Interest income for the years ended July 31, 1997, 1996 and 1995 was $0.8
million, $3.1 million and $7.7 million, respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on estimated
future tax effects of the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates.
F-13
<PAGE> 38
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Currently, the Company files a consolidated income tax return. The
effective income tax rate varies from the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1997 1996 1995
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Federal Income Tax Expense at Statutory Rate..... $27,950 $24,531 $16,737
Amortization of Excess of Revalued Net Assets
Over Stockholders' Investment.................. (2,064) (2,064) (2,064)
State Income Taxes, Net of Federal Income Tax
Benefit........................................ 3,243 2,520 1,677
Other............................................ 176 107 --
------- ------- -------
Total Income Tax Expense......................... 29,305 25,094 16,350
Tax Benefit on Extraordinary Item................ -- (603) --
------- ------- -------
Total Income Tax Expense......................... $29,305 $24,491 $16,350
======= ======= =======
Effective Income Tax Rate........................ 36.7% 35.8% 34.2%
======= ======= =======
</TABLE>
Pursuant to the guidance provided by the American Institute of Certified
Public Accountants in Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company
adopted fresh-start reporting as of the close of business on July 31, 1993. In
connection with the adoption of fresh-start reporting, the net book values of
substantially all non-current assets existing at July 30, 1993 (the "Effective
Date") were eliminated. As a consequence, SFAS No. 109, in conjunction with SOP
90-7, requires that any tax benefits realized for book purposes after the
Effective Date, from the reduction of the valuation allowance existing as of the
Effective Date be reported as an increase to additional paid-in capital rather
than as a reduction in the tax provision in the Consolidated Statements of
Operations. However, the Company will realize the cash benefit from utilization
of its tax net operating loss ("NOL") against current and future tax
liabilities. The cash benefit realized was approximately $28 million, $23
million and $16 million for the years ended July 31, 1997, 1996 and 1995,
respectively.
As of July 31, 1997, the Company has a NOL carryforward (after limitations)
of approximately $254 million. A majority of the tax basis NOL carryforward,
which will be available to offset future taxable income of the Company, was
determined based upon the initial equity valuation of the Company as determined
upon the Effective Date. The utilization of this asset is subject to
limitations. The most restrictive is the Internal Revenue Code Section 382
annual limitation. The NOL carryforward will begin to expire in fiscal year 2002
but can be utilized through 2009.
As of July 31, 1997, all years through fiscal year 1989 have been settled
with the Internal Revenue Service ("IRS") and all income tax liabilities thereon
have been paid. In addition, the IRS did not file any income tax claims in the
bankruptcy case; therefore, the Company believes that under the bankruptcy laws
any potential income tax liabilities have been discharged through the Effective
Date.
F-14
<PAGE> 39
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at July 31,
1997 and 1996 are presented below.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1997 1996
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current Deferred Taxes:
Assets --
Customer receivables........................ $ 22,549 $ 20,046
Accrued liabilities......................... 17,374 13,919
State and local taxes....................... 1,950 1,950
Net operating loss carryforward............. 29,000 24,500
Other....................................... 120 --
-------- --------
Total Assets................................ 70,993 60,415
Less -- Valuation Allowance................. (32,353) (33,071)
-------- --------
38,640 27,344
Liabilities --
Merchandise inventories, principally due to
LIFO reserve.............................. (62,133) (59,326)
Other....................................... (207) (18)
-------- --------
Deferred Current Tax Liability, Net......... $(23,700) $(32,000)
======== ========
Non-Current Deferred Taxes:
Assets --
Property and equipment,..................... $ 16,031 $ 6,287
Net operating loss carryforward............. 70,143 101,878
Postretirement benefits..................... 9,960 9,886
Other....................................... 2,168 7,497
-------- --------
Total Assets................................ 98,302 125,548
Less -- Valuation Allowance................. (44,798) (68,586)
-------- --------
53,504 56,962
Liabilities --
Other....................................... (804) (462)
-------- --------
Deferred Non-Current Tax Asset, Net.............. $ 52,700 $ 56,500
======== ========
</TABLE>
Pursuant to the requirements of SFAS No. 109, a valuation allowance must be
provided when it is more likely than not that the deferred income tax asset will
not be realized. The valuation reserve was approximately $77.2 million and
$101.6 million as of July 31, 1997 and 1996, respectively. The Company believes
that, as of July 31, 1997, a sufficient history of earnings has been established
to make realization of a $29.0 million deferred income tax asset more likely
than not. The change in valuation allowance from July 31, 1996 to July 31, 1997
was $24.5 million.
CAPITAL STOCK
COMMON STOCK. At July 31, 1997 and 1996, 70,000,000 shares of Common Stock,
par value of $0.01 per share, were authorized and 35,021,900 shares and
35,199,383 shares, respectively, were outstanding. The Company held 326,250 and
35,942 treasury shares at July 31, 1997 and 1996, respectively.
PREFERRED STOCK. At July 31, 1997 and 1996, 5,000,000 shares of Preferred
Stock, par value of $0.01, were authorized. None are issued or outstanding.
F-15
<PAGE> 40
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTS. Pursuant to the plan of reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Plan"), Zale had authorized 2,000,000 Series
A Warrants to purchase common stock. At July 31, 1997 and 1996, 1,972,750 Series
A Warrants were outstanding. Each Series A Warrant entitles the holder to
purchase, for $10.368 per share, one share of Zale common stock (subject to
certain anti-dilution adjustments). The Series A Warrants are exercisable on or
before July 30, 1998, although their expiration date may be shortened if the
market value of Zale's common stock increases to at least 150.0 percent of the
warrant exercise price for a specified number of days and less than 5.0 percent
of the Series A Warrants originally issued under the Plan are outstanding on the
date on which Zale gives the acceleration notice.
As part of Zale's settlement of certain bankruptcy litigation in 1993 with
Swarovski International Holding, A.G. ("Swarovski"), Zale issued its Series B
Warrants to purchase common stock. Each Series B Warrant entitled the holder to
purchase for $10.368 per share, one share of Zale common stock (subject to
certain anti-dilution adjustments). The Series B Warrants were presently
exercisable and, if not previously exercised, would expire on September 9, 1998,
subject to the Company's right to accelerate the expiration date of the Series B
Warrants if certain conditions were met. At July 31, 1995, the Series B Warrants
issued entitled the holders to purchase an aggregate of 1,852,884 shares of Zale
common stock. On August 31, 1995, Zale redeemed the Series B Warrants and
acquired all Swarovski's rights, title and interest under the warrant agreement
and paid $9.3 million to Swarovski in consideration of the redemption. As a
result of this, the Series B Warrants were canceled and are no longer
outstanding. Additional Paid-In Capital decreased $4.2 million, whereas
Accumulated Earnings decreased $5.1 million due to this transaction.
TREASURY STOCK. In November 1996, the Company received approximately
191,000 shares of common stock valued on the date of receipt at $19.50 per share
which was approved for distribution to pre-confirmation creditors of the Company
but not claimed by such pre-confirmation creditors. 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.
STOCK OPTION PLANS. As of July 31, 1997 the Company had two stock option
plans. As of the Effective Date, the Company adopted a stock option plan (the
"Stock Option Plan") to enable the Company to attract, retain and motivate
officers and key employees by providing for proprietary interest of such
individuals in the Company. Options to purchase an aggregate of 3,555,000 shares
of Common Stock may be granted under the Stock Option Plan to eligible
employees. Options granted under the Stock Option Plan (i) must be granted at an
exercise price not less than the fair market value of the shares of Common Stock
into which such options are exercisable, (ii) vest ratably over a four-year
vesting period and (iii) expire ten years from the date of grant. The 1995
Outside Director Stock Option Plan, (the "Director Plan") authorizes the Company
to grant common stock to non-employee directors at fair market value of the
Company common stock on the date of grant. The options vest over a four year
period and expire ten years from the date of grant. The maximum number of shares
which may be granted under the Director Plan is 150,000 shares.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES GRANT PRICE EXERCISE PRICE
------------------------- --------------------------- -------------------------
FISCAL 1997 FISCAL 1996 FISCAL 1997 FISCAL 1996 FISCAL 1997 FISCAL 1996
----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............ 2,722,075 2,212,925 $ 8.68-19.00 $ 8.68-14.00 $13.60 $10.65
Granted................................... 615,700 1,103,100 17.56-21.81 13.75-19.00 21.37 17.71
Exercised................................. (112,825) (189,325) 8.73-17.69 8.77-11.81 11.67 8.92
Canceled.................................. (136,525) (404,625) 9.00-17.69 8.73-14.00 13.07 10.68
--------- --------- ------------ ------------ ------ ------
Outstanding, end of year.................. 3,088,425 2,722,075 $ 8.68-21.81 $ 8.68-19.00 $15.16 $13.60
========= ========= ============ ============ ====== ======
</TABLE>
F-16
<PAGE> 41
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of July 31, 1997 and 1996, 1,195,875 and 654,875, respectively, of
options outstanding were exercisable.
In fiscal 1997, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company accounts for the Stock Option Plan under
APB Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for this plan been determined pursuant to the provisions of
SFAS No. 123, the Company's pro-forma net earnings for fiscal 1997 and 1996
would have been $48,587 and $43,627, respectively, resulting in earnings per
share of $1.33 and $1.20, respectively. The fair value of each option grant is
estimated on the date of grant using the Black Scholes option pricing model with
the following weighted-average assumptions used for options granted in fiscal
1997 and 1996, respectively: risk-free interest rate of 6.0% and 6.5%, expected
dividend yield of zero, expected lives of 5 years, and expected volatility of
35.8% and 37.0%.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to August 1, 1996, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
UNUSUAL ITEMS -- REORGANIZATION RECOVERIES
Pursuant to the Plan, Zale assigned certain claims and causes of action and
advanced $3.0 million to Jewel Recovery, L.P., a limited partnership ("Jewel
Recovery") which was formed upon Zale's emergence from bankruptcy. The sole
purpose of Jewel Recovery is to prosecute and settle such assigned claims and
causes of action. The general partner of Jewel Recovery is Jewel Recovery, Inc.,
a subsidiary of the Company. Its limited partners are holders of various prior
unsecured claims against Zale. The $3.0 million advance was fully reserved as of
the Effective Date as its collectibility was uncertain.
Jewel Recovery has pursued certain claims and has been awarded significant
recoveries against third parties. During the first quarter of fiscal year 1996,
Zale was notified that it would recover its $3.0 million advance to Jewel
Recovery. The $3.0 million advance was repaid to Zale in December 1995.
Additionally, Shawmut Bank ("Shawmut") was elected as Disbursement Agent
and held all cash and common stock to be used in settlements of creditors
claims. During fiscal 1996, Shawmut provided Zale with information on creditors
whose claim rights have terminated. As a result, during the fiscal year 1996,
Zale recovered cash funds of approximately $1.5 million held by Shawmut related
to cash approved for distribution to pre-confirmation creditors of Zale but not
claimed by such pre-confirmation creditors. The $3.0 million and the $1.5
million recoveries were recorded as unusual items in the Company's first quarter
of fiscal year 1996 and are reflected on the Consolidated Statements of
Operations for the year ended July 31, 1996 and had an after-tax impact of $0.08
per share.
COMMITMENTS AND CONTINGENCIES
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such litigation and
claims will be resolved without material effect on the Company's financial
position or results of operations.
The Company has an operations services agreement for management information
systems with a third-party servicer. The agreement, which began in December 1996
requires fixed payments totaling $34.4 million over a 60 month term and a
variable amount based on usage.
F-17
<PAGE> 42
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BENEFIT PLANS
PROFIT SHARING PLAN
At July 31, 1997, the Company maintains The Zale Corporation Savings &
Investment Plan. Substantially all employees who are at least age 21 are
eligible to participate in the plan. Each employee can contribute from one
percent to fifteen percent of their annual salary. Under this plan, the Company
will match 50 cents in Zale stock for every dollar an employee contributes up to
two percent of annual earnings. In order for an employee to be eligible for the
Company match, the employee must have worked at least 1,000 hours during the
plan year and be employed on the last day of the plan year.
An employee is 33.3 percent vested in the Zale stock after one year of
service, 66.7 percent vested after two years of service and 100 percent vested
after three years of service. As of July 31, 1997, approximately 6,400 employees
participated in The Zale Corporation Savings & Investment Plan.
Also, under this plan, the Company may make a profit sharing cash
contribution at its sole discretion. To be eligible for such discretionary
profit sharing contributions, an employee must have at least twelve consecutive
months of service, have worked at least 1,000 hours during the plan year and be
employed on the last day of the plan year.
An employee is 20 percent vested in the profit sharing contributions after
three years of service, 40 percent vested after four years of service, 60
percent vested after five years of service, 80 percent vested after six years of
service and 100 percent vested after seven years of service. The Company's
contribution to the plan including matching contributions was $3.5 million, $3.9
million and $3.6 million for fiscal years 1997, 1996 and 1995, respectively.
RETIREMENT PLAN
On September 14, 1995, the Boards of Directors of Zale and ZDel approved
the preparation and implementation of the Zale Delaware, Inc. Supplemental
Executive Retirement Plan (the "Plan"), which was executed on behalf of the
Company February 23, 1996, to be effective as of September 15, 1995. The purpose
of the Plan is to provide eligible executives with the opportunity to receive
payments each year after retirement equal to a portion of their final average
pay as defined.
FINANCIAL INSTRUMENTS
The Company has adopted SFAS No. 107 "Disclosures about Fair Value of
Financial Instruments" which extends existing fair value disclosure practices by
requiring all entities to disclose the fair value of financial instruments, for
which it is practicable to estimate fair value.
As cash and short-term cash investments, customer receivables, trade
payables and certain other short-term financial instruments are all short-term
in nature, their carrying amount approximates fair value. The carrying amount of
the $380.7 million, net of discount, Receivables Securitization Facility also
approximates fair value.
The investments of the Company's insurance subsidiaries, primarily stocks
and bonds in the amount of $25.9 million, approximate market value at July 31,
1997 and are reflected in Other Assets on the Consolidated Balance Sheets.
Investments are classified as available for sale and are carried at fair value.
Changes in unrealized gains and losses are recorded directly to stockholders'
investment.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments and customer receivables. The Company maintains
cash and cash equivalents, short and long-term investments and certain other
financial instruments with various financial institutions. These financial
institutions are located throughout the country.
F-18
<PAGE> 43
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of credit risk with respect to customer receivables are limited
due to the Company's large number of customers and their dispersion across many
regions. As of July 31, 1997 and 1996, the Company had no significant
concentrations of credit risk.
RELATED-PARTY TRANSACTIONS
One of the Company's directors serves as a director of a company from which
the Company purchased approximately $3.4 million and $0.5 million of jewelry
merchandise during fiscal year 1997 and 1996, respectively. The Company believes
the terms were equivalent to those of unrelated parties.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which establishes accounting standards for the impairment of long-lived assets
and goodwill. The adoption of SFAS No. 121 did not have a material impact on the
consolidated financial statement of the Company in fiscal 1997.
In the second quarter of fiscal 1998, the Company will adopt SFAS No. 128,
"Earnings per Share." As a result, the Company's reported earnings per share for
fiscal 1997 and each of the quarter in fiscal 1997 will be restated. Upon the
adoption of SFAS No. 128, basic earnings per common share will be computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share will be
computed by dividing net income by the weighted average of common stock and
common stock equivalents outstanding during the period.
Effective July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires the Company to report comprehensive
income in the financial statements. SFAS No. 131 requires the Company to
disclose revenues, profits and loss, and assets for certain business segments.
These statements are effective for fiscal years beginning after December 15,
1997, with earlier adoption permitted. The Company has not yet determined the
impact of this statement on its financial disclosures.
SUBSEQUENT EVENTS
On September 3, 1997, the Company signed a purchase agreement to sell the
majority of the assets of its Diamond Park Division (the "Diamond Park Asset
Sale"). The Diamond Park 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 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 $65 million. The Company will continue to operate 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.
The Company intends to reinvest net proceeds from the Diamond Park Asset Sale
into the Company's operations. The closing of the Diamond Park Asset Sale is
subject to regulatory approval and customary closing conditions and is expected
to occur on or about October 6, 1997.
F-19
<PAGE> 44
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for the years ended July 31, 1997
and 1996 were as follows (amounts in thousands except per share data):
<TABLE>
<CAPTION>
FISCAL 1997
FOR THE THREE MONTHS ENDED
---------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1997 1997 1997 1996
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.............................. $273,580 $244,376 $505,083 $230,779
Gross margin........................... 132,271 119,182 248,312 110,735
Net earnings (loss).................... 1,620 (1,444) 51,515 (1,138)
Net earnings (loss) per primary common
share................................ 0.04 (0.04) 1.41 (0.03)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
FOR THE THREE MONTHS ENDED
---------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1996 1996 1996 1995
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.............................. $248,858 $222,283 $451,962 $214,274
Gross margin........................... 122,760 107,797 225,952 104,104
Net earnings (loss).................... 12 (2,439) 46,234 91
Net earnings (loss) per primary common
share................................ 0.00 (0.07) 1.27 0.00
</TABLE>
F-20
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 11th day of
September, 1997.
ZALE CORPORATION
By: /s/ ROBERT J. DINICOLA
----------------------------------
Robert J. DiNicola
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT J. DINICOLA Chairman of the Board and September 11, 1997
- -------------------------------------------------- Chief Executive Officer
Robert J. DiNicola (principal executive
officer of the registrant)
/s/ LOUIS J. GRABOWSKY Executive Vice President -- September 11, 1997
- -------------------------------------------------- Finance and Chief Financial
Louis J. Grabowsky Officer (principal
financial officer of the
registrant)
/s/ MARK R. LENZ Vice President and September 11, 1997
- -------------------------------------------------- Controller (principal
Mark R. Lenz accounting officer of the
registrant)
/s/ GLEN ADAMS Director September 11, 1997
- --------------------------------------------------
Glen Adams
/s/ A. DAVID BROWN Director September 11, 1997
- --------------------------------------------------
A. David Brown
/s/ PETER P. COPSES Director September 11, 1997
- --------------------------------------------------
Peter P. Copses
/s/ ANDREA JUNG Director September 11, 1997
- --------------------------------------------------
Andrea Jung
/s/ RICHARD C. MARCUS Director September 11, 1997
- --------------------------------------------------
Richard C. Marcus
/s/ CHARLES H. PISTOR, JR. Director September 11, 1997
- --------------------------------------------------
Charles H. Pistor, Jr.
/s/ ANDREW H. TISCH Director September 11, 1997
- --------------------------------------------------
Andrew H. Tisch
</TABLE>
24
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Zale Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Zale Corporation (a Delaware corporation) and
subsidiaries' included in this Form 10-K, and have issued our report thereon
dated September 3, 1997. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. Schedule II is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 3, 1997
25
<PAGE> 47
SCHEDULE II
ZALE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BALANCE AT ADDITIONS -----------------------
BEGINNING CHARGED TO END
OF PERIOD EARNINGS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal year ended July 31, 1997
Allowance for doubtful accounts.............. $51,402 $55,850 $49,433(1) $57,819
Fiscal year ended July 31, 1996
Allowance for doubtful accounts.............. 42,596 53,508 44,702(1) 51,402
Fiscal year ended July 31, 1995
Allowance for doubtful accounts.............. 42,708 41,696 41,808(1) 42,596
</TABLE>
- ---------------
(1) Accounts written off, less recoveries and other adjustments.
26
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Disclosure Statement Pursuant to Section 1125 of the
Bankruptcy Code with Respect to Plan of Reorganization
under Chapter 11 of the Bankruptcy Code for Zale
Corporation and its Affiliated Debtors, dated March 22,
1993 (Exhibit T3E-1).(1)
2.2 -- Motion to Approve Amendments to the Plan of
Reorganization under Chapter 11 of the Bankruptcy Code of
Zale Corporation and its Affiliated Debtors, dated May
19, 1993 (Exhibit 2.6).(2)
2.3 -- Order Approving Amendments to the Plan of Reorganization
under Chapter 11 of the Bankruptcy Code of Zale
Corporation and its Affiliated Debtors, dated May 20,
1993 (Exhibit 2.7).(2)
3.1 -- Restated Certificate of Incorporation of Zale
Corporation, dated July 30, 1993.(3)
3.3 -- Amended Bylaws of Zale Corporation, dated November 1,
1996.(8)
4.1 -- Warrant Agreement, dated as of July 30, 1993, between
Zale Corporation and The First National Bank of Boston,
as warrant agent, governing the Warrants to Purchase
Common Stock, Series A.(3)
4.2 -- Indenture, dated as of July 1, 1994, among Zale Funding
Trust, as Issuer and Bankers Trust Company, as Indenture
Trustee.(6)
4.3 -- Purchase and Servicing Agreement, dated as of July 1,
1994, among Zale Funding Trust, Diamond Funding Corp.,
Zale Delaware, Inc., and Jewelers Financial Services,
Inc.(6)
4.4 -- Revolving Credit Agreement, dated as of August 11, 1995,
among Zale Corporation, Zale Delaware, Inc., the lending
institutions set forth therein, and The First National
Bank of Boston, as Agent for such lenders.(6)
4.5 -- Amended and Restated Lender Security Agreement, dated as
of August 11, 1995, among Zale Delaware, Inc., Zale
Corporation, and The First National Bank of Boston, as
collateral agent.(6)
4.6 -- Revolving Credit Agreement dated March 31, 1997 among
Zale and ZDel and The First National Bank of Boston, as
agent for the lenders identified therein. The Schedules
attached to the Agreement, as identified in the list of
Schedules filed as a part of this exhibit, are omitted
from this filing, but will be provided supplementally to
the Commission upon request.(8)
*10.1 -- Indemnification agreement, dated as of July 21, 1993,
between Zale Corporation and certain present and former
directors thereof.(6)
10.2 -- Amended and Restated Agreement of Limited Partnership of
Jewel Recovery, L.P., dated as of July 30, 1993.(3)
*10.3 -- Zale Corporation Stock Option Plan.(3)
10.4 -- Trust Agreement, dated as of November 24, 1993, among
Zale Corporation, Zale Delaware, Inc. and United States
Trust Company of New York.(4)
10.5 -- Agreement for Systems Operations Services, dated as of
February 1, 1993, between Zale Corporation and Integrated
Systems Solutions Corporation.(3)
10.5a -- Amendment #1 to Agreement for Systems Operations
Services, dated as of August 1, 1994, between Zale
Corporation and Integrated Systems Solutions
Corporation.(6)
*10.6 -- Severance and Settlement Agreement, dated as of December
3, 1993, between Zale Corporation and E. Peter Healey.(4)
*10.7 -- Severance and Settlement Agreement, dated as of May 15,
1995, between Zale Corporation and Dolph B. Simon.(6)
</TABLE>
27
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*10.8 -- The Executive Severance Plan for Zale Corporation and Its
Affiliates, as amended and restated as of February 10,
1994.(4)
*10.8a -- Amendment to The Executive Severance Plan for Zale
Corporation and Its Affiliates effective May 20, 1995.(7)
*10.9 -- Employment Agreement, dated as of December 22, 1993,
between Zale Corporation and Larry Pollock.(4)
*10.10 -- Employment Agreement, dated as of March 14, 1994, between
Zale Corporation and Robert DiNicola.(5)
10.11 -- Lease Agreement Between Principal Mutual Life Insurance
Company, As Landlord, and Zale Corporation, as Debtor and
Debtor-In-Possession, As Tenant, dated as of September
17, 1992.(7)
10.11a -- First Lease Amendment and Agreement between Principal
Mutual Life Insurance Company and Zale Delaware, Inc.,
dated as of February 1, 1996.(7)
*10.12 -- Employment Agreement, approved by the Board of Directors
on October 30, 1996, and dated as of August 1, 1996,
between Zale Corporation and Robert DiNicola.(8)
10.13 -- Indemnification Agreement, executed on October 30, 1996,
and dated as of June 6, 1996, between Zale Corporation
and Andrea Jung.(8)
*10.14 -- Form Change of Control Agreement dated as of October 30,
1996, but executed thereafter, between Zale Corporation
and Key Employees.(9)
10.14a -- Modified list of parties to Change of Control
Agreement.(11)
*10.15 -- Employment Agreement between Zale Corporation and Louis
J. Grabowsky.(8)
*10.16 -- Employment Agreement between Zale Corporation and Alan P.
Shor.(8)
10.17 -- Asset Purchase Agreement, dated September 3, 1997, by and
among Finlay Enterprises, Inc., Finlay Fine Jewelry
Corporation, Zale Corporation and Zale Delaware, Inc.(11)
11 -- Statement re computation of per share earnings.(11)
21 -- Subsidiaries of the registrant.(11)
23 -- Consent of Independent Public Accountants.(11)
27 -- Financial data schedule.(11)
</TABLE>
- ---------------
(1) Incorporated by reference from the exhibit shown in parenthesis to the
registrant's Form T-3 (No. 22-24-68) filed with the Commission on April 2,
1993.
(2) Incorporated by reference from the exhibit shown in parenthesis to the
registrant's Form 8-A/A (No. 02-21526) filed with the Commission on July 16,
1993.
(3) Previously filed as an exhibit to the registrant's Form 10-Q (No. 1-4129)
for the quarterly period ended September 30, 1993, and incorporated herein
by reference.
(4) Incorporated by reference to the corresponding exhibit to the registrant's
Registration Statement on Form S-1 (No. 33-73310) filed with the Commissions
on December 23, 1993, as amended.
(5) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended March 31, 1994, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1995, and incorporated herein by
reference.
28
<PAGE> 50
(7) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1996, and incorporated herein by
reference.
29
<PAGE> 51
(8) Previously filed as an exhibit to the registrant's Form 10-Q for the
quarterly period ended October 31, 1996, and incorporated herein by
reference.
(9) Previously filed as an exhibit to the registrant's Form 10-Q for the
quarterly period ended January 31, 1997, and incorporated herein by
reference.
(10) Previously filed as an exhibit to the registrant's Form 10-Q (No. 0-21526)
for the quarterly period ended April 30, 1997, and incorporated herein by
reference.
(11) Filed herewith.
* Management Contracts and Compensatory Plans.
29
<PAGE> 1
EXHIBIT 10.14
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) Beryl B. Raff
2) Alan P. Shor
3) Mary L. Forte
4) Paul G. Leonard
5) Tom A. Carroll
6) Sue E. Gove
7) David L. Holmberg
8) Gregory Humenesky
9) Paul D. Kanneman
10) Stephen C. Massanelli
11) Ervin G. Polze
<PAGE> 1
EXHIBIT 10.17
================================================================================
ASSET PURCHASE AGREEMENT
DATED September 3, 1997
By and Among
FINLAY ENTERPRISES, INC.,
FINLAY FINE JEWELRY CORPORATION,
ZALE CORPORATION
and
ZALE DELAWARE, INC.
================================================================================
<PAGE> 2
Table of Contents
<TABLE>
<S> <C> <C>
1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Sale and Purchase of Division Assets. . . . . . . . . . . . . . . . 8
3. Purchase Price for Division Assets and Dillard's Inventories . . . 15
(a) Division Assets . . . . . . . . . . . . . . . . . . . . . . 15
(b) Dillard's Inventories. . . . . . . . . . . . . . . . . . . . 19
(c) Allocation of Division Assets Purchase Price . . . . . . . . 22
4. Merchandise Returns; Repairs; Consignments . . . . . . . . . . . . 22
5. The Closing; Termination . . . . . . . . . . . . . . . . . . . . . . 25
6. Assumption of Liabilities; Consents . . . . . . . . . . . . . . . . 27
7. Representations, Warranties and Covenants of the Parent
and the Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
(a) Organization and Standing . . . . . . . . . . . . . . . . . 33
(b) Authorization . . . . . . . . . . . . . . . . . . . . . . . 34
(c) Financial Statements . . . . . . . . . . . . . . . . . . . . 36
(d) Title to Division Assets; Liens and
Encumbrances. . . . . . . . . . . . . . . . . . . . . . . . 36
(e) Computer System . . . . . . . . . . . . . . . . . . . . . . 38
(f) Contracts and Commitments . . . . . . . . . . . . . . . . . 38
(g) Compliance with Laws. . . . . . . . . . . . . . . . . . . . 39
(h) Litigation; Decrees . . . . . . . . . . . . . . . . . . . . 40
(i) Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(j) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 41
(k) No Adverse Changes. . . . . . . . . . . . . . . . . . . . . 42
(l) Employees . . . . . . . . . . . . . . . . . . . . . . . . . 43
(m) Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . 45
(n) Return Policies; Warranties; No Customer Special Orders;
Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
(o) Inventories . . . . . . . . . . . . . . . . . . . . . . . . 46
(p) Advertising . . . . . . . . . . . . . . . . . . . . . . . . 46
(q) Department Lease and License Agreements . . . . . . . . . . 47
(r) Capital Expenditure Commitments . . . . . . . . . . . . . . 47
(s) Assets Necessary to the Business . . . . . . . . . . . . . . 48
(t) Absence of Environmental Liabilities . . . . . . . . . . . . 48
(u) Updates . . . . . . . . . . . . . . . . . . . . . . . . . . 49
8. Representations, Warranties and Covenants of
Enterprises and the Buyer . . . . . . . . . . . . . . . . . . . . . 50
(a) Organization and Standing . . . . . . . . . . . . . . . . . 50
(b) Authorization . . . . . . . . . . . . . . . . . . . . . . . 50
(c) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 51
9. Certain Employment Matters . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
i
<PAGE> 3
Table of Contents
<TABLE>
<S> <C> <C>
10. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
11. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . 53
(a) Indemnification by Enterprises and the Buyer . . . . . . . . 53
(b) Indemnification by the Parent and the Seller . . . . . . . . 54
(c) Notice of Claim and Assumption of Defense . . . . . . . . . 58
(d) Settlement of Claim by an Indemnified Party . . . . . . . . 60
(e) Damages . . . . . . . . . . . . . . . . . . . . . . . . . . 61
(f) Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . 61
12. Closing Conditions of Enterprises and the Buyer . . . . . . . . . . 61
13. Closing Conditions of the Parent and the Seller . . . . . . . . . . 65
14. Deliveries by the Parent and the Seller on the Closing Date . . . . 68
15. Deliveries by the Buyer on the Closing Date . . . . . . . . . . . . 69
16. Obligations of the Parent and the Seller . . . . . . . . . . . . . 69
17. Confidentiality; Other Covenants . . . . . . . . . . . . . . . . . 75
18. Certain Payments . . . . . . . . . . . . . . . . . . . . . . . . . 76
19. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 77
20. Mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
21. Sales, Use and Similar Taxes . . . . . . . . . . . . . . . . . . . 79
22. Bulk Sales Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 79
23. Press Releases, Etc. . . . . . . . . . . . . . . . . . . . . . . . 79
24. Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . 80
(a) Survival. . . . . . . . . . . . . . . . . . . . . . . . . . 80
(b) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 80
(c) Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 81
(d) Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . 82
(e) Amendments. . . . . . . . . . . . . . . . . . . . . . . . . 82
(f) Execution in Counterparts. . . . . . . . . . . . . . . . . . 82
(g) Successors and Assigns. . . . . . . . . . . . . . . . . . . 82
(h) Governing Law. . . . . . . . . . . . . . . . . . . . . . . . 83
(i) Headings. . . . . . . . . . . . . . . . . . . . . . . . . . 83
(j) Severability. . . . . . . . . . . . . . . . . . . . . . . . 84
(k) Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 84
25. Special Re-apportionments . . . . . . . . . . . . . . . . . . 84
</TABLE>
ii
<PAGE> 4
Exhibits
<TABLE>
<S> <C>
Exhibit 3(b) - Form of Dillard's Transfer
Agreement
Exhibit 12(g) - Form of Services Agreement
Exhibit 12(i)(ii) - Form of Opinion of Troutman
Sanders LLP
Exhibit 12(i)(iii)(a) - Form of Bill of Sale
Exhibit 12(i)(iii)(b) - Form of Assumption Agreement
Exhibit 13(e)(iv) - Form of Opinion of Zimet, Haines,
Friedman & Kaplan
Exhibit 14(g) - Mercantile Assignment
</TABLE>
iii
<PAGE> 5
Schedules
<TABLE>
<S> <C>
Schedule 2(a)(i) - Marshall Field's Departments
Schedule 2(a)(ii) - Parisian Departments
Schedule 2(a)(iii) - Mercantile Departments
Schedule 2(a)(iv) - Certain Agreements
Schedule 2(a)(xiii) - Prepaids, Refunds and Deposits
Schedule 3(b) - Seller's Policy re Severance and Retention
Schedule 3(c) - Purchase Price Allocation
Schedule 7(b) - Consents re: Parent and Seller
Schedule 7(c) - Financial Statements
Schedule 7(d)(i) - Liens
Schedule 7(d)(ii) - Equipment, etc. Locations; Net book
and)(iii) value, etc.
Schedule 7(f) - Contracts and Commitments
Schedule 7(g) - Permits, Etc.
Schedule 7(h) - Litigation; Decrees
Schedule 7(j) - Insurance
Schedule 7(k) - No Adverse Changes
Schedule 7(l) - Employee Matters
Schedule 7(m) - Benefit Plans
Schedule 7(n) - Diamond Trade-up Policy
Schedule 7(o) - Policy re Outlets
Schedule 7(p) - Advertising
Schedule 7(q) - Locations of Acquired Departments
Schedule 7(r) - Capital Expenditures
Schedule 7(s) - Necessary Assets; Certain Services
Schedule 8(b) - Consents re: Enterprises and Buyer
Schedule 12(c) - Requisite Consents for Parent and Seller
Schedule 13(c) - Requisite Consents for Enterprises and
Buyer
Schedule 16(j) - Ad Valorem Tax Estimate
</TABLE>
i
<PAGE> 6
ASSET PURCHASE AGREEMENT
AGREEMENT made and entered into on this 3rd day of September, 1997, by
and among Finlay Enterprises, Inc., a Delaware corporation ("Enterprises"),
Finlay Fine Jewelry Corporation, a Delaware corporation which is a wholly-owned
subsidiary of Enterprises ("Buyer"), Zale Corporation, a Delaware corporation
("Parent"), and Zale Delaware, Inc., a Delaware corporation which is a wholly-
owned subsidiary of Parent ("Seller").
W I T N E S S E T H:
WHEREAS, the Seller currently owns certain assets which are operated as
its Diamond Park Fine Jewelers division (the "Division"); and
WHEREAS, the Division is engaged in the business (the "Business") of
operating leased fine jewelry departments (each a "Department" and
collectively, the "Departments") in department stores owned by Marshall Field &
Company ("Marshall Field's"), Parisian, Inc. ("Parisian"), Mercantile Stores
Company, Inc. ("Mercantile") and Dillard Department Stores, Inc. ("Dillard's");
WHEREAS, the Buyer desires to purchase, and the Seller desires to sell,
the "Division Assets" and the "Dillard's Inventories" (as such terms are
hereinafter defined), upon the terms and subject to the conditions hereinafter
set forth.
<PAGE> 7
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements hereinafter contained,
the parties hereby agree as follows:
1. Certain Definitions. The following terms, as used herein, have
the following meanings:
"AA" has the meaning set forth in Section 3(a)(iii).
"Acquired Business" has the meaning set forth in Section 2(a)(iv).
"Acquired Departments" has the meaning set forth in Section 2(a)(iii).
"Acquisition Proposal" has the meaning set forth in Section 16(h).
"Assumed Liabilities" has the meaning set forth in Section 6(a).
"Assumption Agreement" has the meaning set forth in Section 12(i)(iii).
"Bill of Sale" has the meaning set forth in Section 12(i)(iii).
2
<PAGE> 8
"Business" has the meaning set forth in the recitals hereto.
"Capital Payments" has the meaning set forth in Section 25.
"Closing" has the meaning set forth in Section 5(a).
"Closing Date" has the meaning set forth in Section 5(a).
"Closing Inventory Price" has the meaning set forth in Section 3(a)(i).
"Code" has the meaning set forth in Section 7(m).
"Damages" has the meaning set forth in Section 11(a)(i).
"Department Agreements" has the meaning set forth in Section 2(a)(iii).
"Department" and "Departments" have the meaning set forth in the
recitals hereto.
"Dillard's" has the meaning set forth in the recitals hereto.
3
<PAGE> 9
"Dillard's Agreement" has the meaning set forth in Section 2(a)(vii).
"Dillard's Departments" has the meaning set forth in Section 2(a)(vii).
"Dillard's Inventories" has the meaning set forth in Section 3(b).
"Dillard's Inventories Purchase Price" has the meaning set forth in
Section 3(b).
"Dillard's Transfer" has the meaning set forth in Section 3(b).
"Dillard's Transfer Agreement" has the meaning set forth in Section
3(b).
"Distribution Center" has the meaning set forth in Section 2(a)(vii).
"Division" has the meaning set forth in the recitals hereto.
"Division Agreements" has the meaning set forth in Section 2(a)(iv).
4
<PAGE> 10
"Division Assets" has the meaning set forth in Section 2(a).
"Division Assets Purchase Price" has the meaning set forth in Section
3(a)(i).
"Division Employees" has the meaning set forth in Section 7(l).
"Effective Date" has the meaning set forth in Section 7(u).
"Employee Plans" has the meaning set forth in Section 7(l).
"ERISA" has the meaning set forth in Section 7(l).
"Excluded Assets" has the meaning set forth in Section 2(b).
"Excluded Liabilities" has the meaning set forth in Section 6(b).
"Financial Statements" has the meaning set forth in Section 7(c).
5
<PAGE> 11
"GAAP" has the meaning set forth in Section 3(a)(i).
"Governmental Entities" has the meaning set forth in Section 7(b).
"HSR Act" has the meaning set forth in Section 12(f).
"Indemnified Party" has the meaning set forth in Section 11(c).
"Indemnifying Party" has the meaning set forth in Section 11(c).
"Inventories" has the meaning set forth in Section 2(a)(vii).
"Invoiced Cost" has the meaning set forth in Section 3(a)(iii).
"Liens" has the meaning set forth in Section 7(d).
"Marshall Field's" has the meaning set forth in the recital hereto.
"Marshall Field's Agreement" has the meaning set forth in Section
2(a)(i).
6
<PAGE> 12
"Marshall Field's Departments" has the meaning set forth in Section
2(a)(i).
"Maximum Inventory Amount" has the meaning set forth in Section 3(a)(i).
"Mercantile" has the meaning set forth in the recitals hereto.
"Mercantile Agreement" has the meaning set forth in Section 2(a)(iii).
"Mercantile Departments" has the meaning set forth in Section 2(a)(iii).
"Parent" has the meaning set forth at the head of this Agreement.
"Parisian" has the meaning set forth in the recitals hereto.
"Parisian Agreement" has the meaning set forth in Section 2(a)(ii).
"Parisian Departments" has the meaning set forth in Section 2(a)(ii).
7
<PAGE> 13
"Purchase Price" has the meaning set forth in Section 3(b).
"Seller's Warehouse" has the meaning set forth in Section 2(a)(viii).
"Services Agreement" has the meaning set forth in Section 12(g).
"Supplement" has the meaning set forth in Section 7(u).
"Taxes" has the meaning set forth in Section 6(b)(vii).
"Tax Returns" has the meaning set forth in Section 7(i).
"Unassigned Asset" has the meaning set forth in Section 6(c).
2. Sale and Purchase of Division Assets.
(a) Subject to the terms and conditions of this Agreement, at the
"Closing" (as hereinafter defined), the Seller shall sell, convey, transfer and
assign to the Buyer, and the Buyer shall purchase and acquire from the Seller,
all of the Seller's right, title and interest to the following assets owned by
the Seller as of the Closing (collectively, the "Division Assets"):
8
<PAGE> 14
(i) that certain Licensed Department Agreement, dated as of
January 25, 1994, between the Seller and Marshall Field's, as
amended on July 5, 1996 and modified on October 2, 1996 (the
"Marshall Field's Agreement"), relating to the operation of the
Departments listed on Schedule 2(a)(i) (collectively, the
"Marshall Field's Departments");
(ii) that certain Concession and License Agreement, dated June
10, 1996, between the Seller and Parisian (the "Parisian
Agreement"), relating to the operation of the Departments listed
on Schedule 2(a)(ii) (collectively, the "Parisian Departments");
(iii) that certain Concession and License Agreement, dated as of
February 2, 1997, between the Seller and Mercantile (the
"Mercantile Agreement"), relating to the operation of the
Departments listed on Schedule 2(a)(iii) (collectively, the
"Mercantile Departments") (the Marshall Field's Agreement, the
Parisian Agreement and the Mercantile Agreement are hereinafter
collectively referred to as the "Department Agreements" and the
Marshall Field's Departments, the Parisian Departments and the
Mercantile
9
<PAGE> 15
Departments are hereinafter collectively referred to as the
"Acquired Departments");
(iv) the other contracts, distribution arrangements, vendor,
sales, purchase, advertising and similar agreements, equipment
leases, other agreements and business arrangements to which the
Seller is a party and which are used primarily in connection with
the operation of the Business relating to the Acquired
Departments or Division Assets (the "Acquired Business") and
which are listed on Schedule 2(a)(iv) hereof (collectively with
the Department Agreements, the "Division Agreements"), except
that the Buyer will succeed only to agreements and arrangements
for the purchase of merchandise on order (excluding consignment
merchandise) as at the Closing Date having an "Invoiced Cost" (as
hereinafter defined) of no more than $17,000,000 in the
aggregate, subject to the terms of Section 25(b) hereof, provided
that the scheduled delivery date therefor is on or before
November 30, 1997;
(v) all equipment, fixtures, furniture, leasehold improvements
and personal property owned by the Seller and related exclusively
to, used solely by,
10
<PAGE> 16
or located in the Acquired Departments, including without
limitation, all counters, countertops, tables, chairs, shelving,
countertop fixtures, showcases, ringholders, display equipment,
jewelry fixtures, mirrors, floors, floor coverings, signholders
and signs, lamps, chandeliers and special lighting fixtures, wall
coverings, diamond/cz checkers, safes, locks and associated keys
(including, without limitation, department keys, core keys and
system-wide keys), alarm system equipment, telephone equipment,
calculators, photocopy and facsimile equipment, repair and other
tools, other movable personal property and special decor, but
excluding computer equipment;
(vi) to the extent assignable, all permits, certifications,
franchises, licenses, approvals and other authorizations held by
the Seller which relate primarily to the operation of the
Acquired Business;
(vii) subject to the provisions of Section 3(a) relating to the
Maximum Inventory Amount, all finished goods inventories,
comprised of fine jewelry and watches, which relate primarily to
the operation of the Acquired Business and are located
11
<PAGE> 17
in the Seller's distribution center in Irving, Texas (the
"Distribution Center"), and in the Acquired Departments
(collectively, the "Inventories"), but excluding (A) all
inventories held on consignment, (B) all inventories located, or
to be utilized, at the leased fine jewelry departments in
department stores owned or operated, pursuant to that certain
Master License Agreement, dated as of November 4, 1993, as
amended effective February 1, 1995 and February 1, 1997, between
the Seller and Dillard's (the "Dillard's Agreement"), by the
Seller (the "Dillard's Departments"), which inventories are not
to be transferred pursuant to this Section 2(a) but shall be
subject to the terms and conditions of Section 3(b) below, (C)
all inventories which are damaged (whether or not under repair)
and not saleable in the ordinary course of business of the
Acquired Business, (D) all inventories at locations owned,
operated or otherwise controlled by or for any of the Division's
vendors and (E) all goods in transit from any vendor to the
Seller on the Closing Date;
(viii) all supplies, spare and replacement parts, findings,
batteries, watch straps and bands, product attachments
(including, without limitation,
12
<PAGE> 18
watch bezels), bags, watch and jewelry boxes, supplies furnished
by host stores, cases, packing materials, watch warranty and
instruction booklets for each watch included in Inventories,
sales checks and other forms, business cards and thank you notes,
cleaning and polishing materials and cloths located in the
Acquired Departments and in the Seller's warehouse in Irving,
Texas ("Seller's Warehouse") which are used primarily in
connection with the operation of the Acquired Business;
(ix) all of the Seller's data, trade secrets and confidential
information exclusively related to the operation of the Acquired
Business, if any;
(x) all goodwill relating to the operation of the Acquired
Business, if any, and all advertising and promotional materials
and all other printed or written materials primarily used in
connection with the operation of the Acquired Business;
(xi) all of Seller's books and records relating solely to the
operation of the Acquired Business, including inventory records
and lists (including, without limitation, all diamond count books
in respect of the Division), price lists, marketing
13
<PAGE> 19
information, sales records, records (if any) pertaining to
customers and accounts, tax records, lists and records pertaining
to suppliers and copies of all books, ledgers, files and business
records relating solely to the operation of the Acquired
Business;
(xii) to the extent assignable, dedicated telephone lines in
respect of equipment at the Acquired Departments;
(xiii) all prepayments and prepaid expenses, refunds and
deposits, relating primarily to the operation of the Acquired
Business and of the type set forth on Schedule 2(a)(xiii); and
(xiv) all petty cash on hand at the Acquired Departments as at
the Closing.
(b) Notwithstanding the provisions of Section 2(a) above, the parties
agree that the Division Assets shall not include any of the following assets
(the "Excluded Assets"):
(i) cash and cash equivalent items and bank accounts, except
petty cash on hand at the Acquired Departments as at the Closing;
14
<PAGE> 20
(ii) accounts receivable or other receivables;
(iii) any assets located in the Dillard's Departments, or used
primarily in connection with the operation of the Dillard's
Departments;
(iv) any computer equipment or computer software used in
connection with the operation of the Business;
(v) Seller's rights under or pursuant to this Agreement;
(vi) Seller's employee files and records;
(vii) Seller's employee and operating manuals; and
(viii) any of Seller's assets which are not specifically listed
in Section 2(a) above.
3. Purchase Price for Division Assets and Dillard's Inventories.
(a) Division Assets. (i) The purchase price for the sale and transfer of the
Division Assets (in addition to the assumption by the Buyer of the Assumed
Liabilities) shall be the sum of: (A) the "Closing Inventory Price" (determined
in the manner set forth in subsection (iii) below), such amount not to exceed
15
<PAGE> 21
$53,200,000 in the aggregate (the "Maximum Inventory Amount"); (B) the
amortized/depreciated cost of fixed or capital assets located in the Acquired
Departments, as reflected on the books and records of the Seller as of the
Closing Date and determined in accordance with generally accepted accounting
principles, consistently applied ("GAAP"), such amount not to exceed $4,348,347
in the aggregate, subject to the provisions of Section 25(a) hereof; (C) the
aggregate amount of petty cash at the Acquired Departments, the amount thereof
to be determined by the parties at the time the Inventories are counted and
reconciled in accordance with Section 3(a)(iii); (D) the aggregate amount of
prepayments, prepaid expenses, refunds and deposits assigned to the Buyer
pursuant to Section 2(a)(xiii) as reflected on the books and records of the
Seller as of the Closing Date and determined in accordance with GAAP; (E) the
aggregate amount of the items sold to the Buyer pursuant to Section 2(a)(viii)
hereof which are located at the Seller's Warehouse, as reflected on the books
and records of the Seller as of the Closing Date and determined in accordance
with GAAP, such amount not to exceed $125,000 in the aggregate; and (F)
$2,400,000 (collectively, the "Division Assets Purchase Price").
(ii) Subject to the terms and conditions hereof, the Buyer will pay
and deliver the Division Assets Purchase Price, and any amount to be paid by
the Buyer pursuant to Section 4(b) hereof, to the Seller at the Closing by a
wire transfer of immediately available funds to such bank account as the Seller
will direct.
16
<PAGE> 22
(iii) Buyer and Seller shall in good faith calculate the Division
Assets Purchase Price in accordance herewith. The Closing Inventory Price
shall be based on a physical count of the Inventories ("Inventories Count") to
be conducted by representatives of the Buyer and the Seller and may be
supervised or observed, if requested by either Buyer or Seller (and at the
requesting party's sole expense), by Arthur Andersen LLP ("AA"), as brought
forward and adjusted (utilizing perpetual inventory records) through the close
of business on the day before the Closing to reflect sales of merchandise by
the Division at the Acquired Departments. It is acknowledged and agreed that
all expenses incurred by and all sales made by the Acquired Business on and
after the Closing Date shall be for the account and benefit of the Buyer. The
Closing Inventory Price shall be determined based on the Seller's cost for such
Inventories using the retail method FIFO and in accordance with GAAP as
reflected on the Seller's books and records (including capitalized freight in
and freight out and advertising and other loads) ("Invoiced Cost"). With
respect to such advertising and other loads excluding freight in and freight
out (collectively, the "Loads"), the amount by which such Loads exceed
$1,100,000 (the "Excess Costs") will be excluded from the inventory valuation,
and, therefore, the Closing Inventory Price. In connection with the
calculation of the Closing Inventory Price, the Buyer and AA, if requested by
the Buyer, will have reasonable access to all requisite accounting and other
records of Seller and to the Acquired Departments, the Distribution Center and
Seller's
17
<PAGE> 23
Warehouse, if necessary. The parties will commence taking the Inventories
Count no later than 14 days prior to the scheduled Closing Date and will use
their respective best efforts to complete said count by no later than 72 hours
prior to Closing. In any event, the actual Inventory Count shall be completed
prior to Closing. During the taking of the Inventories Count, the parties
shall exclude any damaged merchandise, and such damaged merchandise shall not
be included in the Inventories transferred hereunder. During the period after
commencement of the Inventories Count and ending on the Closing Date, the
parties' representatives at the Acquired Departments shall endeavor to agree
upon which merchandise is damaged and if such representatives cannot agree on
whether particular merchandise is damaged, the merchandise in question shall be
forwarded to the Distribution Center where representatives of the parties will
again analyze said merchandise and endeavor to agree upon which merchandise is
damaged prior to the Closing. If the parties cannot agree upon which
merchandise is damaged at least twenty-four (24) hours prior to the Closing,
the parties shall submit such matter to John James of Lone Star Liquidators (or
such other third party as may be mutually agreed upon by the parties) for
review and resolution, with the fees and expenses thereof to be shared equally
by the parties; and any determination by John James (or such other party) shall
be final and binding upon the parties. The parties agree that the Closing
shall occur only after the Inventory Count has been completed and all matters
in respect of damaged merchandise are resolved in accordance herewith. In the
18
<PAGE> 24
event the Closing Inventory Price is determined to be in excess of the Maximum
Inventory Amount, then, for purposes of this Agreement, the most recently
acquired Inventories having an aggregate Invoiced Cost equal to the Maximum
Inventory Amount, as determined pursuant to this subparagraph, shall be the
only Inventories included in the Division Assets; provided, however, that Buyer
shall have the option of purchasing any such excess Inventories pursuant hereto
by increasing the Division Assets Purchase Price by an amount equal to the
Invoiced Cost of such excess Inventories (in which case the excess Inventories
purchased by Buyer shall be included in the Division Assets).
(b) Dillard's Inventories. The Seller will continue to operate all
of the Dillard's Departments until the expiration of the Dillard's Agreement on
January 31, 1998. Subject to the terms and conditions contained herein, the
Seller agrees to sell, convey, transfer, assign and deliver to the Buyer, and
the Buyer agrees to purchase and acquire from the Seller (the "Dillard's
Transfer"), on February 27, 1998 (or on such other date as the Buyer and the
Seller shall mutually agree), all finished goods inventories, comprised of fine
jewelry and watches, of the Division located at the Dillard's Departments as of
January 31, 1998 (the "Dillard's Inventories"), but excluding (i) all
inventories held on consignment, (ii) all inventories which are damaged
(whether or not under repair) and not saleable in the ordinary course of
business (iii) all inventories at locations owned, operated or otherwise
19
<PAGE> 25
controlled by or for any of the Division's vendors and (iv) all goods in
transit from any vendor to the Seller on the date of closing of the Dillard's
Transfer. No other assets shall be the subject of the Dillard's Transfer. The
purchase price for the sale and transfer of the Dillard's Inventories (the
"Dillard's Inventories Purchase Price" and when referred to collectively with
the Division Assets Purchase Price, the "Purchase Price") shall be the Invoiced
Cost (such amount not to exceed $4,950,000 in the aggregate) thereof (as
reflected on the Seller's books and records based on the retail method FIFO and
in accordance with GAAP), and the Buyer shall pay and deliver the Dillard's
Inventories Purchase Price to the Seller at the closing of the Dillard's
Transfer by a wire transfer of immediately available funds to such bank account
as the Seller will direct; provided, however, that, the Invoiced Cost of the
Dillard's Inventories shall include only Loads in respect thereof up to the
amount, if any, by which Loads for the Inventories transferred pursuant to
Section 2(a)(vii) hereof is less than $1,100,000. The Seller shall arrange to
have all of the Dillard's Inventories from said departments moved to, and
organized for inspection at, the Distribution Center by February 15, 1998; such
merchandise shall be sorted by category/class (for example, diamonds, watches,
gold and gemstones) and a corresponding list thereof shall be provided to the
Buyer not later than such date. Not later than three days before the closing
of the Dillard's Transfer (or at such other time as Buyer and Seller may
agree), Buyer and Seller shall in good faith calculate the Dillard's
Inventories Purchase Price in
20
<PAGE> 26
accordance herewith. The Dillard's Inventories Purchase Price shall be based
on a physical count of the Dillard's Inventories as of such date to be
conducted by representatives of the Buyer and the Seller and as may be
supervised or observed, if requested by either Buyer or Seller (and at the
requesting party's sole expense), by AA, in a manner consistent with the
procedures (including matters concerning damaged merchandise) set forth in
Section 3(a)(iii). In connection with the calculation of the Dillard's
Inventories Purchase Price, the Buyer and AA, if requested by the Buyer will
have reasonable access to all requisite accounting and other records of Seller
and to the Distribution Center, if necessary. In the event Dillard's
Inventories Purchase Price is determined to be in excess of $4,950,000, then,
for purposes of this Agreement, the most recently acquired Dillard's
Inventories having an aggregate Invoiced Cost of $4,950,000 shall be the only
Dillard's Inventories sold to Buyer hereunder; provided, however, that Buyer
shall have the option of purchasing any such excess Dillard's Inventories
pursuant hereto by increasing the Dillard's Inventories Purchase Price by an
amount equal to the Invoiced Cost of such excess Dillard's Inventories (in
which case the excess merchandise purchased by Buyer shall be included in the
Dillard's Inventories). In addition, the Buyer agrees to reimburse the Seller,
subject to the terms hereof, for severance pay and "retention pay" for group
and regional managers and field personnel of the Seller employed at or in
respect of the Dillard's Departments at any time between the Closing Date and
the date of
21
<PAGE> 27
closing of the Dillard's Transfer; provided, however, that the
amount of such reimbursement shall not exceed the sum of $900,000 in the
aggregate. The severance and retention amounts to be reimbursed hereunder
shall be paid in accordance with the Seller's policy described on Schedule
3(b). At the Closing, the parties shall execute and deliver to each other an
agreement substantially in the form of Exhibit 3(b) attached hereto (the
"Dillard's Transfer Agreement").
(c) Allocation of Division Assets Purchase Price. The parties hereto
shall allocate the Division Assets Purchase Price in accordance with Schedule
3(c). Buyer and Seller agree to file Form 8594 and all required federal,
state, local and foreign Tax Returns (as hereinafter defined) in accordance
with such allocation schedule. The parties also agree that the Dillard's
Inventories Purchase Price shall be allocated in respect of the Dillard's
Inventories in accordance with the Seller's Invoiced Cost therefor (and that
they will file all applicable Tax Returns in accordance therewith).
4. Merchandise Returns; Repairs; Consignments. (a) With respect to
any merchandise sold at the Acquired Departments prior to the Closing, the
Buyer agrees to follow and adhere to the corresponding Department's policy
regarding returns, credits and refunds. The Parent and the Seller shall have
no obligation to reimburse Buyer for any credits or refunds given by Buyer with
22
<PAGE> 28
respect to any such returned merchandise, and Buyer shall be entitled to resell
such returned merchandise without paying any additional consideration therefor
to Parent or Seller.
(b) Without limiting the generality of any other provisions of this
Agreement, it is acknowledged and agreed that the Division Assets do not
include any damaged merchandise, regardless of whether any such merchandise is
under repair (or to be repaired). With respect to any customer property
delivered to an Acquired Department prior to the Closing for repair, the
parties agree as follows. The repair of such customer property shall be at the
cost and expense of the Seller. On the Closing Date, the Seller shall deliver
to the Buyer a list of all customer items under repair (or to be repaired),
which were received by the Seller during the 90-day period prior to the Closing
Date, including information regarding the original date the merchandise was
received by the Seller and the sales dollar amount expected by the Seller to be
realized from such repairs. With respect to any of such items being repaired
(or delivered to a third party for repair) by the Seller as of the Closing, the
Buyer shall pay to the Seller at the Closing an amount equal to fifty percent
(50%) of the aggregate sales dollar amount so specified, it being agreed that
Buyer shall not be required to pay any amounts in respect of items repaired by
or for the Buyer. The Seller shall transfer to the Buyer at Closing all of the
Seller's right, title and interest in and to all customer items under repair or
to be repaired. It is
23
<PAGE> 29
agreed that the Buyer shall not be required to pay to the Seller any amount
with respect to any customer items under repair (or to be repaired) which were
received by the Seller prior to the commencement of the aforementioned 90-day
period, however, the Seller shall transfer to the Buyer at Closing all of the
Seller's right, title and interest in and to all such customer items. Promptly
after the Closing, the Seller shall deliver to Buyer all of the customer items
held by it on behalf of the Acquired Business for repair, together with a list
thereof. As to any items not repaired by or for the Seller, the Buyer shall
make or arrange for the repair thereof in the ordinary course of business of
the Acquired Business.
(c) Seller will return all merchandise located in the Acquired
Departments and held on consignment to the appropriate owner thereof prior to
the Closing, unless Buyer notifies Seller, by September 17, 1997, that it wants
to retain any such merchandise on a consignment basis and the owner of the
merchandise consents thereto, in which case such specified merchandise shall
remain in the corresponding Acquired Department after the Closing (with Buyer
to be named as replacement consignee in respect thereof).
24
<PAGE> 30
5. The Closing; Termination.
(a) Provided that all of the conditions contained in Sections 12 and
13 hereof have been satisfied or waived in accordance therewith, the closing of
the transactions contemplated hereby involving the transfer of the Division
Assets (the "Closing") shall take place at the offices of Zimet, Haines,
Friedman & Kaplan, at 10:00 a.m. local time on October 6, 1997 or at such other
time and on such date as the parties hereto shall agree. The date on which the
Closing occurs shall be the "Closing Date".
In the event that at any time after the Closing any further actions are
deemed necessary by either Buyer or Seller in its reasonable discretion to
carry out the purposes of this Agreement, the appropriate party shall take all
such actions, without receiving any additional consideration therefor.
(b) Anything contained herein to the contrary notwithstanding, this
Agreement may be terminated and the transactions contemplated hereby abandoned
at any time prior to the Closing, as follows:
(i) by mutual written consent of all the parties hereto;
25
<PAGE> 31
(ii) by written notice of Enterprises or the Buyer, if there
shall have been a material breach of any covenant, representation
or warranty hereunder by the Seller or the Parent, and such
breach shall not have been remedied within ten business days
after receipt of a notice in writing from Enterprises or the
Buyer specifying the breach and requesting such be remedied;
(iii) by written notice of the Parent or the Seller, if there
shall have been a material breach of any covenant, representation
or warranty hereunder by Enterprises or the Buyer, and such
breach shall not have been remedied within ten business days
after receipt of a notice in writing from Parent or the Seller
specifying the breach and requesting such be remedied;
(iv) by any party hereto, if the Closing does not occur on or
prior to October 6, 1997; or
(v) by Enterprises or the Buyer at any time on or before
September 10, 1997, by delivering a written termination notice to
the Parent or the Seller in the event Enterprises or the Buyer is
not satisfied
26
<PAGE> 32
with its due diligence review of the Division, the Business and
the Division Assets.
If this Agreement is terminated and the transactions contemplated hereby are
abandoned as described in this Section 5, this Agreement shall become void and
of no further force and effect, except for the provisions of Sections 18 and 24
(including, without limitation, the requirement that each party shall bear its
own fees and expenses, except as otherwise expressly set forth herein), but
excluding Section 24(a) (regarding survival of representations).
6. Assumption of Liabilities; Consents.
(a) Subject to the conditions specified in this Agreement, the Buyer
hereby agrees to assume at the Closing and to thereafter fully pay and
discharge in a timely manner the following liabilities and obligations of
Seller (all of which relate primarily to the operation of the Acquired Business
and are hereinafter referred to as the "Assumed Liabilities"):
(i) the Seller's liabilities and obligations under the
Division Agreements; provided, however, that Buyer shall have no
liability or responsibility for, and the Assumed Liabilities
shall not include, any liability or obligation arising under any
Division Agreement arising or resulting from any
27
<PAGE> 33
breach thereof by the Seller or other failure to perform as
required thereunder on or prior to the Closing, and provided,
further, that in the event the Buyer elects, in its sole
discretion, to assume any liabilities and obligations with
respect to "on order" merchandise, if any, in excess of the
$17,000,000 aggregate amount assigned pursuant to Section
2(a)(iv) (as such amount may be adjusted pursuant to Section
25(b) hereof), then, upon notice thereof from the Buyer to the
Seller, such liabilities and obligations shall be deemed to be
Assumed Liabilities hereunder; and
(ii) the Seller's liabilities and obligations for capital
expenditures and other costs to be paid after the date hereof for
the acquisition, renovation or repair of fixed or capital assets
of the Acquired Business; provided, however, that the maximum
amount of such liabilities and obligations incurred prior to the
Closing but to be paid after the Closing shall not exceed
$639,518 in the aggregate.
(b) Except as and to the extent otherwise expressly provided in this
Agreement, the Buyer has not agreed to pay, shall not be required to assume and
shall not have any liability or
28
<PAGE> 34
obligation, direct or indirect, absolute or contingent, known or unknown, of
the Seller or the Division or any other person or entity, the assumption of
which by the Buyer is not expressly provided for in this Agreement ("Excluded
Liabilities"), including without limitation;
(i) all accounts payable, accrued expenses and liabilities for
inventories and services, owed by the Seller in connection with
the Business arising prior to the Closing, including, without
limitation, any and all charges from, or other costs and expenses
payable to, host stores (reflected on store statements or
otherwise) in respect of the operation of the Business by the
Seller prior to the Closing;
(ii) all liabilities relating to the Business from or in respect
of merchandise sold on or before the Closing Date, except for
returns of merchandise to the extent provided in Section 4;
(iii) all liabilities relating to the Dillard's Departments
(except as otherwise expressly set forth herein with respect to
severance pay);
29
<PAGE> 35
(iv) any claims relating to periods prior to the Closing Date
relating to or arising under any Employee Plan (as hereinafter
defined), including, without limitation, accrued vacation
benefits, severance benefits (except as otherwise set forth in
Section 3(b)), medical costs, reimbursement plans and the like,
any claims relating to the termination of any employee benefits
or Employee Plan of any type or nature on or prior to the Closing
Date or claims relating to the termination of employment of any
employee of the Acquired Departments on or prior to the Closing
Date, including, without limitation, (A) claims arising under any
applicable law in connection with payments to terminated
employees and judgments and penalties in respect thereof, and (B)
any obligations to any employees or former employees of the
Acquired Business under The Consolidated Omnibus Budget
Reconciliation Act of 1985;
(v) any claims made by any employee or former employee of Seller
relating to: employment prior to the Closing; any incident or
event occurring during the term of employment by Seller of any
employee or former employee, whether or not such employee is
later employed by the Buyer; or any injury suffered
30
<PAGE> 36
or illness contracted or any exposure to any substance or
condition by any such employee or former employee while so
employed;
(vi) any liability or obligation arising out of any other cause
of action or judicial or administrative action, suit, proceeding
or investigation relating to an event occurring prior to the
Closing Date;
(vii) any liability or obligation of Seller (and other persons
(excluding Enterprises and the Buyer), if Seller is liable by law
or contract for Taxes owed by such other persons) in respect of
any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp,
occupation, premium, customs duties, franchise, profits,
withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use,
transfer, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not (a "Tax" or
collectively "Taxes");
31
<PAGE> 37
(viii) any liability or obligation of Parent or Seller under
this Agreement; and
(ix) all other liabilities or obligations of Parent or Seller
not acquired or assumed by the Buyer pursuant to this Agreement.
(c) The parties shall use their reasonable efforts to obtain any
necessary consent in respect of the transactions contemplated by this
Agreement. To the extent that any contract (other than a Department
Agreement), permit, license or other asset included in the Division Assets is
not capable of being assigned or transferred without the consent or waiver of a
third party (whether or not a Governmental Entity), and the parties agree to
close the transactions contemplated hereby without such consent or waiver, this
Agreement (and any related documents delivered at the Closing) shall not
constitute an actual or attempted assignment or transfer thereof unless and
until such consent or waiver of such third party has been duly obtained or such
assignment or transfer has otherwise become lawful (any lease, contract,
permit, license or other asset otherwise included in the Division Assets and
not assigned or transferred as a result of this Section 6(c) is hereinafter
referred to as an "Unassigned Asset").
To the extent that the consents and waivers referred to in this
Section 6(c) are not obtained prior to the Closing, or
32
<PAGE> 38
until the impracticalities of transfer referred to therein are resolved, Seller
shall, upon Buyer's request and at Buyer's sole expense, use its reasonable
efforts to (A) provide or cause to be provided to the Buyer the benefits of any
Unassigned Asset, (B) cooperate in any arrangement, reasonable and lawful as to
both the Seller and the Buyer, designed to provide such benefits to the Buyer
and (C) enforce for the account of the Buyer any rights of the Seller arising
from such Unassigned Asset, including all rights to indemnification, insurance
and the right to elect to terminate in accordance with the terms thereof, in
each case after consulting with and upon the advice and direction of the Buyer.
To the extent necessary to effect the foregoing, the Seller agrees to make its
personnel, and applicable books and records, reasonably available to the Buyer
in order to effect all actions reasonably required to be taken by the Sellers
under this Section 6(c).
7. Representations, Warranties and Covenants of the Parent and the
Seller. The Parent and the Seller jointly and severally represent and warrant
to, and covenant with, Enterprises and the Buyer as follows:
(a) Organization and Standing. The Division is owned and operated by
the Seller. Each of the Parent and the Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Seller has full corporate power and authority necessary to enable it to
own, lease
33
<PAGE> 39
or otherwise hold its properties and assets and to carry on its business as
presently conducted consistent with past practice. The Seller is in good
standing and duly qualified to do business in each jurisdiction in which the
nature of the Acquired Business or the ownership, leasing or holding of the
Division Assets makes such qualification necessary.
(b) Authorization. Each of the Parent and the Seller has full right,
power and authority to enter into this Agreement and to perform its obligations
hereunder. All corporate acts and other proceedings required to be taken by
the Parent and the Seller to authorize the execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and properly taken. This Agreement has been duly and validly
executed and delivered by each of the Parent and the Seller and constitutes a
legal, valid and binding obligation of such party, enforceable in accordance
with its terms (except as limited by bankruptcy, insolvency and other laws of
general application relating to the enforcement of creditors' rights and by
general equitable principles). Except as set forth in Schedule 7(b) hereto, no
consent of any lender, trustee, security holder or any other person or entity
is required to be obtained by the Parent or the Seller in connection with the
execution, delivery and performance of this Agreement by the Parent and the
Seller and the consummation of the transactions contemplated hereby, except
where the failure to obtain such consent would not have a material
34
<PAGE> 40
adverse effect on the Acquired Business. Except as set forth in Schedule 7(b)
hereto, the execution, delivery and performance of this Agreement by the Parent
and the Seller: (i) does not violate or constitute a breach of or default
under any contract, agreement or commitment to which the Parent or the Seller
is a party, under which it is obligated or to which it or any of the Division
Assets are subject, except where such breach or default would not have a
material adverse effect on the Acquired Business; (ii) does not violate any
judgment, order, statute, rule or regulation to which the Parent, the Seller or
the Division Assets is subject, or the certificate of incorporation or by-laws
of the Parent or the Seller; and (iii) will not result in the creation of any
lien, charge or encumbrance on any of the Division Assets other than a
"Permitted Lien" (as hereinafter defined). Except as set forth on Schedule
7(b), no consent, approval, license, permit, or authorization of, or
registration, declaration or filing with, any federal, state, local or foreign
court, administrative or regulatory agency or commission or other governmental
authority or instrumentality, or any arbitral tribunal (collectively,
"Governmental Entities") or any other third party is required to be obtained or
made by or with respect to the Parent or the Seller in connection with the
execution and delivery of this Agreement or the consummation by the Parent and
the Seller of the transactions contemplated hereby.
35
<PAGE> 41
(c) Financial Statements. Attached hereto as Schedule 7(c) are true
and correct copies of the following (collectively, the "Financial Statements"):
the unaudited balance sheet of the Division as at July 31, 1996 and the related
statement of operations of the Division for the year ended July 31, 1996 and
the unaudited balance sheets of the Division as at July 31, 1997 and the
related statement of operations for the year ended July 31, 1997. The
Financial Statements fairly present in all material respects the financial
condition of the Division at the dates thereof and the results of operations of
the Division for the fiscal periods reported upon thereon, and were prepared in
accordance with generally accepted accounting principles in a manner consistent
with past practices in respect of the Division. The Parent and the Seller will
use all reasonable efforts to provide in a timely manner all financial
information requested by the Buyer which the Buyer deems necessary, in its
reasonable discretion, in connection with the preparation of its financial
statements and supplemental information with respect thereto for GAAP and
regulatory purposes, including without limitation Securities and Exchange
Commission purposes; such information will be provided only if it is available.
The expense of providing such financial information will be borne solely by the
Buyer.
(d) Title to Division Assets; Liens and Encumbrances. (i) The Seller
has, or on the Closing Date will have, good and marketable title to and is the
sole owner of (or has valid and
36
<PAGE> 42
enforceable leases for) the Division Assets. Except as set forth on Schedule
7(d)(i), all of the Division Assets are free and clear of any and all claims,
liens, encumbrances, security interests, judgments, and charges of every nature
whatsoever (collectively, "Liens"). At the Closing, the Buyer shall acquire
all the Division Assets free and clear of all Liens, except for liens for Taxes
which have been accrued but are not yet due and payable (it being agreed that
Seller shall maintain appropriate reserves therefor and shall pay such Taxes
when due) and security interests arising by law in favor of vendors in respect
of the purchase of inventory (it being agreed that all invoices of such vendors
in respect thereof shall be paid by the Seller in the ordinary course of
business) (collectively, the "Permitted Liens").
(ii) No assets of the Division have been disposed of since July 31,
1996, except in the ordinary course of business of the Division. Schedule
7(d)(ii) sets forth the locations of all of the equipment, furniture, fixtures
and other tangible personal property and leasehold improvements of the Seller
relating to the Acquired Departments. All of such tangible personal property
(other than the Inventories which are addressed in Section 7(o) hereof) are
being sold "AS IS, WHERE IS." Schedule 7(d)(iii) sets forth the net book
value, and estimated useful life, of the fixtures located in the Acquired
Departments as reflected on the books and records of the Seller as of the date
hereof, determined in accordance with GAAP; provided, however, that no
representation
37
<PAGE> 43
or warranty as to the accuracy of such estimated useful life is made hereby.
True and correct copies of the purchase records in respect of such property (to
the extent the Seller has such records) have been provided to the Buyer. Any
leased personal property included in the Division Assets is in all material
respects in the condition required of such property by the terms of the leases
applicable thereto. All cash register equipment used in Acquired Departments
are provided by Marshall Field's, Parisian and Mercantile pursuant to the
Department Agreements.
(e) Computer System. The Division utilizes the Seller's central
system computer hardware and software programs, data and related materials.
(f) Contracts and Commitments. Except as set forth in Schedule 7(f)
hereto, neither the Parent nor the Seller, primarily in respect of the
Division, is a party to any written (i) lease or license agreement or
arrangement; (ii) agreement with any vendor or other supplier; (iii) royalty,
distribution, agency, territorial or license agreement; (iv) contract or
agreement (for employment or otherwise) with any officer, employee, director,
professional person or firm, independent contractor or advertising firm or
agency which is not terminable at will by Seller on not more than 30 days'
notice without payment or other penalty; (v) contract or collective bargaining
agreement with any labor union or representative of employees; (vi) commitment,
contract or agreement
38
<PAGE> 44
guaranteeing the payment or performance of the obligations of any other person
or entity; or (vii) material commitment, contract or agreement not made in the
ordinary course of business of the Division. Except as set forth on Schedule
7(f), there are no oral understandings, arrangements or agreements to which the
Parent or the Seller in respect of the Division is bound or which modify any of
the Division Agreements, except to the extent such understandings, arrangements
or agreements do not have a material adverse effect on such Division Agreement
or the Acquired Business. Each of the Division Agreements is a valid and
subsisting contract in full force and effect without modification and each of
the Parent and the Seller has performed in all material respects all of its
obligations thereunder and, to the knowledge of the Parent and the Seller, each
other party thereto has performed in all material respects all obligations
required to be performed by it and, to the knowledge of the Parent and the
Seller, no default or event of default has occurred and is continuing
thereunder. A true and complete copy of each Division Agreement has been
provided to the Buyer.
(g) Compliance with Laws. To the knowledge of each of the Parent and
the Seller, it has fully complied with, and is not in default under, any laws,
regulations or orders applicable to the Division Assets or the Acquired
Business, except to the extent that any such noncompliance or default would not
have a material adverse effect on the Acquired Business. Schedule 7(g) lists
the material
39
<PAGE> 45
permits, licenses, consents and authorizations, whether federal, state, or
local, held by the Seller primarily relating to the operation of the Acquired
Business.
(h) Litigation; Decrees. Except as set forth on Schedule 7(h), there
are no actions, suits, proceedings or investigations pending (or, to the
knowledge of the Parent and the Seller, threatened) against the Parent or
Seller or, to the knowledge of the Parent and the Seller, any of its officers,
directors, employees, agents or affiliates in their capacities as such in
respect of the operation of the Division, in any court or before any
Governmental Entity. Except as set forth in Schedule 7(h), there are no
outstanding judgments, orders, consents, agreements or decrees with, of or by
any Governmental Entity against Parent or Seller relating to the Acquired
Business or the Division Assets; a summary description of each of said
judgments, orders, consents, agreements or decrees is included on Schedule
7(h).
(i) Taxes. Seller (and other persons (excluding Enterprises and the
Buyer), if Seller is liable by law or contract for Taxes owed by such other
persons), with respect to the Division, have filed all federal, state, county
and local tax returns and other returns and reports which were required to be
filed in respect of all Taxes, levies, license, registration and permit fees,
charges or withholding of any nature whatsoever ("Tax
40
<PAGE> 46
Returns"), and have withheld and paid all applicable Taxes, levies and
assessments relating to the Division, except for Taxes accrued but not yet due
and payable. All such Tax Returns were correct and complete in all material
respects. The Seller, with respect to the Division, is not in default in the
payment of Taxes due or payable or any assessments received in respect thereof.
There are no unpaid assessments or proposals for additional federal, state or
local Taxes relating to the Division for which the Seller does not have
adequate reserves. Seller (and other persons (excluding Enterprises and the
Buyer), if Seller is liable by law or contract for Taxes owed by such other
persons) have filed all required federal, state, county and local Tax Returns
and has withheld and paid all required Taxes, levies and assessments (other
than Taxes accrued but not yet due and payable), except to the extent the
failure to do any of the foregoing would not have a material adverse affect on
Parent. Seller (and other persons (excluding Enterprises and the Buyer), if
Seller is liable by law or contract for Taxes owed by such other persons), with
respect to the Division, will file all required federal, state, county and
local Tax Returns and will withhold and pay all applicable Taxes, levies and
assessments relating to the Division (other than Taxes accrued but not yet due
and payable, which Seller will pay when due), with respect to any period of
time up to the Closing Date.
(j) Insurance. All premiums on all insurance policies held by the
Seller with respect to the Division have been paid in
41
<PAGE> 47
full, and a list of all such policies is set forth on Schedule 7(j) hereto.
From the date hereof until the Closing, such insurance will be maintained in
full force and effect.
(k) No Adverse Changes. Since July 31, 1996, there has not been: (i)
any material adverse change in the financial condition, assets, liabilities,
business or results of operations of the Division; (ii) any damage, destruction
or loss, whether or not covered by insurance, materially and adversely
affecting the Division Assets in the aggregate; (iii) except in the ordinary
course of the business of the Acquired Business: (A) except as set forth on
Schedule 7(k), any increase in the rate of compensation or commission payable
or to become payable to any Division Employee, distributor, commission salesman
or agent, or any employee hired at an annual salary in excess of 150% of the
applicable Acquired Department average; or (B) or any payment of any bonus,
profit sharing or other extraordinary compensation to any Division Employee,
except pursuant to contract; (iv) any material change in the accounting methods
or practices followed by the Seller with respect to the Division or any
material change in amortization policies or rates theretofore applied; (v) any
sale, lease, abandonment or other disposition of any material asset of the
Division (other than in the ordinary course of business of the Division); or
(vii) any cancellation of the debts owed to or claims held by the Seller with
respect to the Division, except in the ordinary course of business of the
Division.
42
<PAGE> 48
(l) Employees. Each of the Parent and the Seller with respect to the
Division has no outstanding liability for payment of wages, salaries, bonuses,
pensions, or contributions under any Employee Plans under any written labor or
employment contracts, based upon or accruing with respect to those services of
the Division Employees performed prior to the date of this Agreement, except
for any payments due for the current payment period or not yet due and payable.
For purposes of this Agreement, "Employee Plans" means all plans, practices and
arrangements, written or unwritten, formal or informal, whether applicable to a
group of individuals or a single individual, and whether active, frozen or
terminated, providing compensation (other than salary or wages) or other
benefits of any type or nature with respect to Division Employees, including
but not limited to all plans providing benefits for such employees that are
employee benefit plans as defined in section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). Schedule 7(l) contains a
true, complete and accurate list of the names, titles, whether full-time or
part-time, Acquired Department locations, and current salary for all group and
regional managers and field personnel employed by, for or in respect of the
Division with respect to the Acquired Business ("Division Employees"), it being
acknowledged and agreed that the term "Division Employees" shall not include
any corporate office personnel other than any such managers. Complete
personnel files (excluding medical records) in respect of the Division
Employees have been made available to the Buyer for its inspection.
43
<PAGE> 49
There is no, and during the past two years there has been no, labor strike,
picketing, dispute, slow-down, work stoppage, union organization effort,
grievance filing or proceeding, or other labor difficulty actually pending or,
to the knowledge of the Parent and the Seller, threatened against or involving
the Parent or Seller relating to the Division. Neither the Parent nor the
Seller is a party to any collective bargaining agreement relating to the
Division and no such agreement determines the terms and conditions of the
employment of Division Employees. No collective bargaining agent has been
certified as a representative of any of employees of Parent or Seller relating
to the Division and, to the knowledge of the Parent and the Seller, no
representation campaign or election is now in progress with respect to any such
employees of Seller. Each of the Parent and the Seller is in full compliance
with its obligations, if any, pursuant to the Worker Adjustment and Retraining
Notification Act of 1988 ("WARN") and all other obligations arising under any
other law, rule or regulation relating to the termination of employees, except
to the extent that any such non-compliance would not have a material adverse
effect on the Acquired Business. The Parent and the Seller have not taken and
will not take any action which could be reasonably expected to result in a
"plant closing" or "mass layoff" (as those terms are defined in WARN) with
respect to the operations or business of the Division prior to the Closing
Date. The Parent and the Seller have not been informed, by any of the Division
Employees that such Division Employee intends to terminate his employment with
Seller
44
<PAGE> 50
prior to the Closing or would not be willing to work for Buyer thereafter.
(m) Benefit Plans. Schedule 7(m) lists all group health or life
insurance, death benefits, pension, severance, profit sharing, retirement,
supplemental unemployment, disability, medical, dental, vision, employee
assistance, retiree health care and insurance, bonus, incentive, stock option
or purchase or other benefit plans, arrangements and practices maintained for
or on behalf of the Division Employees, including plans qualified under Section
401 of the Internal Revenue Code of 1986, as amended (the "Code") (including
pension, savings and profit sharing plans and employee stock ownership plans),
excess benefit plans, deferred compensation arrangements, employee discounts
and matching gift programs. The Seller has provided to the Buyer copies of all
summary plan descriptions provided to Division Employees, with respect to all
plans referred to in Schedule 7(m), which have such summary descriptions.
(n) Return Policies; Warranties; No Customer Special Orders; Etc.
Except as required pursuant to the Department Agreements, the Seller has made
no warranties or guaranties relating to merchandise sold by or through the
Acquired Business and has no separate return policy. There are no "club plan"
or similar deferred sales plans, lay-a-way plans or similar arrangements with
respect to the Acquired Departments. Schedule
45
<PAGE> 51
7(n) sets forth a summary description of the Division's diamond trade-up
policy. The Division does not accept, and prior to the Closing will not
accept, any customer special orders for merchandise.
(o) Inventories. The Inventories included in the Division Assets
will have been acquired in the ordinary course of business of the Division,
will not be damaged and will be saleable in the ordinary course of business of
the Acquired Business. All watches included in the Inventories include the
warranty and instruction booklets therefor and, where specific boxes are
utilized for particular watch styles, the boxes therefor. For purposes hereof,
merchandise shall be deemed "damaged" if not saleable in the ordinary course of
business of the Acquired Business. Appropriate price tickets are, and will be
on the Closing Date, attached to the Inventories, indicating SKU, style and
retail price. All of the Inventories of the Seller are fairly reflected in the
inventory accounts on the balance sheet included in the Financial Statements
and are valued at the retail method FIFO, all in accordance with GAAP. Also
included on Schedule 7(o) is a statement setting forth the Seller's policy
regarding how and when merchandise is transferred to Seller's outlet
facilities.
(p) Advertising. Schedule 7(p) hereto sets forth (to the extent each
has been determined as of the date hereof and to the extent each relates solely
to the Acquired Business): (i) a
46
<PAGE> 52
schedule of all merchandise (identified by SKU number) to be advertised by
Seller for the Fall 1997 season, indicating whether such merchandise is owned
or held on consignment; (ii) Seller's anticipated advertising plans for fiscal
year 1998 (including details regarding co-op advertising); (iii) Seller's Fall
1997 advertising calendar; and (iv) Seller's net advertising expense summary
for its fiscal years ended July 31, 1997, 1996 and 1995, expressed as a
percentage of the Seller's annual sales for such periods in the Marshall
Field's Departments, the Parisian Departments and the Mercantile Departments.
(q) Department Lease and License Agreements. Set forth on Schedule
7(q) hereto is a list of the locations of each of the Acquired Departments.
Except for the Department Agreements (true and correct copies of which have
been delivered to the Buyer), there are no agreements between the Seller and
Marshall Field's, Parisian or Mercantile, as the case may be, relating to the
operation of the Acquired Departments. From and after the date hereof, no
modification of any Department Agreement shall be made without the Buyer's
prior written consent (which consent shall not be unreasonably withheld).
There are and will be no charges from the Division's host stores, for which the
Buyer shall be responsible, for the period through and including the Closing
Date.
(r) Capital Expenditure Commitments. Set forth on Schedule 7(r) is a
list and summary of all expenditures and other
47
<PAGE> 53
costs incurred prior to the date hereof and to be paid after the date hereof
for the acquisition, maintenance, renovation or repair of fixed or capital
assets of the Division. The Seller has provided to the Buyer true and correct
copies of all related plans, drawings and expense agreements (if any) in
respect thereof.
(s) Assets Necessary to the Business. The Division Assets, together
with the Excluded Assets, include all of the properties, assets and rights
which are used in, or are necessary to carry on the Business as currently
conducted. Set forth on Schedule 7(s) is a list of all of the material
services presently rendered by the Seller and/or any affiliate thereof to the
Division, irrespective of whether an intercompany charge is reflected on any
financial statements of the Seller.
(t) Absence of Environmental Liabilities. To the knowledge of the
Parent and the Seller, the Seller with respect to the Acquired Business has
complied with, and at all times prior to the Closing Date will comply with, all
applicable environmental laws, orders, regulations, rules and ordinances
adopted, imposed or promulgated by any Governmental Entity relating to the
Departments, except to the extent that such noncompliance would not have a
material adverse effect on the Acquired Business. To the knowledge of the
Parent and the Seller, Seller with respect to the Acquired Business or any of
the Acquired Departments is not in violation of any federal, state or local
law, ordinance or regulation relating
48
<PAGE> 54
to industrial hygiene, worker safety, environmental hazardous materials or
waste or toxic materials on, under or about any of the properties, except to
the extent that such violation would not have a material adverse effect on the
Acquired Business.
(u) Updates. From the date hereof, until the Closing, the Parent and
the Seller will promptly notify the Buyer by written update to its
representations and warranties contained herein (including the Schedules
hereto) of any matter occurring after the Effective Date (as hereinafter
defined) which, if existing or occurring on the Effective Date would have been
required to be set forth on a Schedule to this Agreement or which would render
inaccurate any of the representations, warranties or statements of the Parent
or Seller set forth in this Agreement (each, a "Supplement"). For purposes
hereof, the "Effective Date" shall mean, generally, the date hereof, except
that if a particular representation is qualified as of a certain date, the
Effective Date shall be such date with respect to such representation and
warranty. Upon Buyer's receipt of such Supplement, such representations and
warranties will be deemed to be automatically updated as set forth therein;
provided, however, that no Supplement provided pursuant to this section shall
be deemed to cure any breach of any representation, warranty or covenant in
this Agreement existing as of the date hereof.
49
<PAGE> 55
8. Representations, Warranties and Covenants of Enterprises and the
Buyer. Enterprises and the Buyer, jointly and severally, represent and warrant
to, and covenant with, the Parent and the Seller as follows:
(a) Organization and Standing. Each of Enterprises and the Buyer is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware.
(b) Authorization. Each of Enterprises and the Buyer has full right,
power and authority to enter into this Agreement and to perform its obligations
hereunder. All corporate and other proceedings required to be taken by
Enterprises and the Buyer to authorize the execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and properly taken. This Agreement has been duly and validly
executed and delivered by each of Enterprises and the Buyer and constitutes a
legal, valid and binding obligation of such party, enforceable in accordance
with its terms (except as limited by bankruptcy, insolvency and other laws of
general application relating to the enforcement of creditors' rights and by
general equitable principles). Except as set forth in Schedule 8(b) hereto, no
consent of any lender, trustee, security holder or any other person or entity
is required to be obtained by Enterprises or the Buyer in connection with the
execution, delivery and performance of this Agreement by Enterprises and the
Buyer and the
50
<PAGE> 56
consummation of the transaction contemplated hereby. Except as set forth in
Schedule 8(b) hereto, the execution, delivery and performance of this Agreement
by Enterprises and the Buyer: (i) does not violate or constitute a breach of
or default under any contract, agreement or commitment to which Enterprises or
the Buyer is a party, under which it is obligated or to which Enterprises or
the Buyer is subject; and (ii) does not violate any judgment, order, statute,
rule or regulation to which Enterprises or the Buyer is subject or the
certificate of incorporation or by-laws of Enterprises or the Buyer. Except as
set forth on Schedule 8(b), no consent, approval, license, permit or
authorization of, or registration, declaration or filing with, any Governmental
Entity or any third party is required to be obtained or made by or with respect
to Enterprises or the Buyer in connection with the execution and delivery of
this Agreement or the consummation by Enterprises and the Buyer of the
transactions contemplated hereby.
(c) Litigation. There are no actions, suits, proceedings or
investigations pending in any court or before any Governmental Entity (or, to
the knowledge of Enterprises or the Buyer, threatened) which might adversely
affect its performance under this Agreement.
9. Certain Employment Matters. Buyer shall offer employment to all
Division Employees (other than (i) such individuals who have committed or
otherwise been involved in a
51
<PAGE> 57
theft or embezzlement from the Seller (or a host store) and (ii) subject to
Section 3(b) hereof, any group and regional managers and field personnel of the
Seller employed at or in respect of the Dillard's Departments), at comparable
salary levels, hours and locations and on other terms and conditions to be
determined in the Buyer's sole discretion, and the Buyer shall be afforded the
opportunity to discuss the terms of any prospective employment or other
arrangements with any Division Employees from and after the date on which a
public announcement of the transactions contemplated by this Agreement is made.
The Buyer is not assuming and the Parent and the Seller agree that the Buyer
shall have no liability for accrued wages (including salaries, commissions and
bonuses), severance pay, vacation pay, sick leave or other benefits (including
options to purchase shares of stock of the Parent or Seller), on account of
Seller's employment of or termination of such employees arising on or before
the Closing Date, or under any Employee Plans. Buyer will waive any and all
applicable waiting periods which would otherwise not permit such Division
Employees who accept a job with the Buyer to participate immediately in the
Buyer's group medical plan or group life insurance plan, and such Division
Employees will be given full credit for all time worked with the Seller for
purposes of determining their benefits with the Buyer.
10. Brokers. Each party hereto hereby represents and warrants to the
other that, except for Financo, Inc., no broker,
52
<PAGE> 58
finder, or investment banker is entitled to any brokerage, finder's or other
fee or commission in connection with the transactions contemplated by this
Agreement. The Seller shall be solely responsible for the payment of any and
all fees and expenses of Financo, Inc. Except as otherwise expressly set forth
herein, each party hereto shall pay its own fees and expenses incurred in
connection with this Agreement and the transactions contemplated hereby.
11. Indemnification.
(a) Indemnification by Enterprises and the Buyer. Subject to Section
24(a), Enterprises and the Buyer shall jointly and severally indemnify and hold
the Parent, the Seller and their respective directors, employees, shareholders,
affiliates and agents harmless from and against the following:
(i) any and all liabilities, losses, damages, claims, costs and
expenses, including without limitation reasonable attorneys' fees
("Damages") resulting from any misrepresentation, breach of any
warranty, or nonfulfillment of any agreement or covenant on the
part of Enterprises or the Buyer (including Buyer's obligation to
pay, discharge or perform the Assumed Liabilities), whether
contained in this Agreement or in any exhibit or schedule
53
<PAGE> 59
hereto or any certificate furnished to the Seller pursuant to
this Agreement; and
(ii) any and all Damages in respect of any actions, suits,
proceedings, demands, assessments, judgments, costs and expenses
incident to any of the foregoing, including without limitation
reasonable attorneys' fees.
(b) Indemnification by the Parent and the Seller. Subject to Section
24(a), the Parent and the Seller shall jointly and severally indemnify and hold
Enterprises and the Buyer and their respective directors, employees,
shareholders, affiliates and agents harmless from and against the following:
(i) any and all Damages resulting from any misrepresentation,
breach of any representation or warranty, or nonfulfillment of
any agreement or covenant on the part of the Parent or the Seller
(including Parent's and Seller's obligation to pay, discharge and
perform the Excluded Liabilities), whether contained in this
Agreement or in any exhibit or schedule hereto or any certificate
furnished to Enterprises or the Buyer pursuant to this Agreement;
54
<PAGE> 60
(ii) any and all Damages arising by reason of any obligations
(A) relating to or affecting the Business or relating to the
Division Assets or the Dillard's Inventories, which obligations
arise from any event, occurrence or action occurring prior to the
Closing or from any failure of the Parent or Seller to act prior
to the Closing (including, without limitation, charges from any
host stores in respect of periods up to and including the Closing
Date) and (B) which are not included in the Assumed Liabilities;
(iii) any and all Damages arising by reason of any obligations
to any customer or other third party for merchandise delivered,
prior to the Closing, to the Seller for repair, which
merchandise is subsequently damaged, lost or stolen or is
otherwise not in the condition specified by the customer, except
to the extent such Damages occur after the Closing as a result of
any action or omission of any employee or other representative of
Enterprises or the Buyer;
(iv) any and all Damages relating to Taxes of the Seller (and
other persons (excluding Enterprises and the Buyer), if Seller is
liable by law or
55
<PAGE> 61
contract for Taxes owed by such other persons) with respect to
periods up to the Closing Date, and Taxes of the Seller (and
other persons (excluding Enterprises and the Buyer), if Seller is
liable by law or contract for Taxes owed by such other persons)
that may result from the transactions provided for under this
Agreement;
(v) any Damages suffered, sustained, incurred or required to
be paid by reason of the Parent's or Seller's failure to comply
with any applicable bulk sales or similar laws and/or its failure
to discharge any claims of the Parent's or Seller's creditors in
respect of the operation of the Business (other than the Assumed
Liabilities);
(vi) any and all Damages arising out of any claims for accrued
wages, severance pay (except as otherwise expressly set forth
herein), vacation pay, sick leave or other benefits of any type
or nature, or any other claims, arising from the Seller's
employment, or termination of employment, of any of the Division
Employees prior to the Closing Date;
56
<PAGE> 62
(vii) any and all Damages arising out of any Employee Plans
(except as otherwise expressly set forth herein with respect to
severance pay); and
(viii) any and all Damages in respect of any actions, suits,
proceedings, demands, assessments, judgments, costs and expenses
incident to any of the foregoing, including without limitation
reasonable attorneys' fees.
Notwithstanding anything else in this Section 11(b) to the contrary, the
Parent and the Seller shall have no liability to Enterprises and the Buyer
pursuant to this Section 11 except to the extent the aggregate amount of
Enterprises' and Buyer's Damages recoverable pursuant hereto exceed $200,000,
provided that the foregoing limitation shall not apply to Damages arising out
of (a) any breaches of the representations, warranties and covenants set forth
in Section 7(d)(i) and Section 7(i) and (b) any failure by the Seller or Parent
to pay the costs of construction and remodeling of the Marshall Field's Old
Orchard, Northbrook, Galleria and Oak Brook Departments as shown on Schedule C
to Schedules 7(d)(ii) and (iii) hereof; and the maximum aggregate amount of
liability of the Parent and the Seller to Enterprises and the Buyer for all
claims hereunder shall be $2,400,000 (less any other Damages theretofore
recovered by Enterprises and the Buyer pursuant to this Agreement), provided
that the foregoing limitation
57
<PAGE> 63
shall not apply to Damages arising out of any breaches of the representations,
warranties and covenants set forth in Section 7(d)(i) (the maximum aggregate
liability of the Parent and the Seller pursuant thereto to be an amount equal
to the sum of the Closing Inventory Price plus the amount of the
amortized/depreciated cost of fixtures referred to in Section 3(a)(i)(B), less
any other Damages theretofore recovered by Enterprises and the Buyer pursuant
to this Agreement), and Section 7(i) and the matters relating to the Parent's
and Seller's obligation to pay, discharge and perform the Excluded Liabilities
and the matters relating to the Seller's failure to comply with any applicable
bulk sales or similar laws and/or any failure thereof to discharge any claims
of the Seller's creditors in respect of the operation of the Business (other
than the Assumed Liabilities).
(c) Notice of Claim and Assumption of Defense. A party indemnified
hereunder (an "Indemnified Party") shall give notice to each party extending
indemnification hereunder (an "Indemnifying Party") promptly after the
Indemnified Party has knowledge of any claim against the Indemnified Party or
any Indemnifying Party as to which recovery may be sought against the
Indemnifying Party because of the indemnity set forth in this Section 11, or of
the commencement of any legal proceedings against the Indemnified Party as to
such claim after the Indemnified Party has knowledge of such proceedings,
whichever shall first occur, and shall permit the Indemnifying Party to assume
the defense of any such claim or any
58
<PAGE> 64
litigation resulting from such claim. Failure by the Indemnified Party to so
notify the Indemnifying Party promptly of a demand for indemnification pursuant
to this Section 11 shall not preclude it from seeking indemnification pursuant
to this Section 11 with respect to such claim unless such failure materially
and adversely affects the Indemnifying Party. Failure by the Indemnifying
Party to notify the Indemnified Party of its election to defend such action
within twenty days after notice thereof shall have been given to the
Indemnifying Party shall be deemed a waiver by the Indemnifying Party of its
right to defend such action. If the Indemnifying Party assumes the defense of
any such claim or litigation resulting therefrom, the Indemnified Party shall
give to the Indemnifying Party information and assistance reasonably necessary
to defend or settle such claim and any litigation arising therefrom. The
Indemnifying Party shall not, in the defense of such claim or any litigation
resulting therefrom, consent to entry of any judgment against the Indemnified
Party (or settle any claim involving an admission of fault on the part of the
Indemnified Party), except with the consent of the Indemnified Party (which
consent shall not be unreasonably withheld).
In any case where the Indemnifying Party has assumed the defense
thereof, the Indemnified Party shall have the right to employ its own counsel
and such counsel may participate in such action, but the fees and expenses of
such counsel shall be at the expense of such Indemnified Party.
59
<PAGE> 65
(d) Settlement of Claim by an Indemnified Party. If the Indemnifying
Party shall not assume the defense of any such claim or litigation resulting
therefrom, the Indemnified Party may defend against such claim or litigation in
such manner as it may deem appropriate and the Indemnified Party may settle
such claim or litigation on such terms as it may deem appropriate (and to which
the Indemnifying Party has consented, such consent not to be unreasonably
withheld) and the Indemnifying Party shall promptly reimburse the Indemnified
Party for the amount of such settlement and all expenses, legal or otherwise,
incurred by the Indemnified Party in connection with the defense against or
settlement of such claim or litigation. If no settlement of such claim or
litigation is made, the Indemnifying Party shall pay or, at the option of the
Indemnified Party, promptly reimburse the Indemnified Party for the amount of
any judgment rendered with respect to such claim or in such litigation and of
all expenses, legal or otherwise, incurred by the Indemnified Party in the
defense against such claim or litigation. If the Indemnifying Party shall
assume the defense of any such claim or litigation resulting therefrom, and if
the Indemnified Party shall settle such claim or litigation on terms which were
not approved in writing by the Indemnifying Party, the Indemnified Party shall
be deemed to have waived its right to indemnification from the Indemnifying
Party pursuant to the terms of this Agreement.
60
<PAGE> 66
(e) Damages. Neither party shall be liable to the other party or
parties hereto or to any other person or entity for any consequential or
indirect damages, including, without limitation, loss of profit, loss of use or
business stoppage.
(f) Exclusive Remedy. Except as set forth in Section 18 hereof, or in
the case of injunctive relief available to remedy any breach of Section 16(g)
or 17, the rights of indemnification provided in this Section 11 shall be the
exclusive remedy of the parties hereto for any breach of this Agreement.
12. Closing Conditions of Enterprises and the Buyer. All of the
obligations of Enterprises and the Buyer under this Agreement are subject to
the fulfillment of each of the following conditions at or prior to the Closing,
any or all of which may be waived (in whole or in part) by Enterprises and the
Buyer:
(a) The representations and warranties of the Parent and the Seller
contained herein or in any certificate, exhibit or other document delivered
pursuant to the provisions hereof, or in connection herewith, shall be true in
all material respects as of the date when made (without regard to any schedule
updates delivered by the Seller to the Buyer) and, except to the extent such
representations and warranties speak of an earlier date (other than the date of
this Agreement), shall be deemed to be made again (as updated pursuant hereto
by Seller) at and as of the Closing
61
<PAGE> 67
Date and shall be true in all material respects at and as of such time, and
none of such updated representations or warranties have a material adverse
effect on the Acquired Business or the operation thereof.
(b) The Parent and the Seller shall have substantially performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or on the Closing Date.
(c) The Parent and the Seller shall have provided to Enterprises and
the Buyer those consents, in form reasonably satisfactory to Enterprises and
the Buyer, set forth on Schedule 12(c) and Enterprises and the Buyer shall have
obtained the consents set forth on Schedule 13(c).
(d) Since August 1, 1996, there shall have been no material adverse
change in the assets, liabilities, business, financial condition, or results of
operations or prospects of the Division, and the Division shall not have
suffered any material loss (whether or not insured) by reason of physical
damage caused by fire, earthquake, accident or other calamity which materially
and adversely affects the value of the Business or the Division Assets.
62
<PAGE> 68
(e) Each of Enterprises and the Buyer shall have completed, to its
satisfaction, its due diligence with respect to the Division, the Business and
the Division Assets; provided, however, that this condition shall be deemed to
be satisfied unless Enterprises or the Buyer notifies the Seller in writing on
or before September 10, 1997, that Enterprises and the Buyer are terminating
this Agreement pursuant to Section 5(b)(v) hereof.
(f) The waiting periods (and any extensions thereof) or necessary
approvals with respect to any filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), shall have expired, been
terminated or received, as the case may be, and the Closing shall be permitted
to occur without violation thereof.
(g) A services agreement in the form of Exhibit 12(g) hereto (the
"Services Agreement"), shall have been entered into by the Seller.
(h) The Seller shall have obtained a release of all Liens on the
Division Assets (except Permitted Liens) and shall have provided Buyer with
evidence reasonably satisfactory to it thereof, including Uniform Commercial
Code termination statements for all jurisdictions where financing statements
have been filed in connection with such Liens.
63
<PAGE> 69
(i) The Parent and the Seller shall have delivered to Enterprises and
the Buyer:
(i) A certificate executed by the Chief Executive Officer and
the Chief Financial Officer of each of the Parent and the Seller,
dated the Closing Date, certifying the fulfillment of the
conditions specified in subsections (a) and (b) above;
(ii) An opinion of Troutman Sanders LLP, or other or additional
counsel for Seller reasonably acceptable to Enterprises and the
Buyer, dated the Closing Date, substantially in the form of
Exhibit 12(i)(ii) hereto;
(iii) Separate assignments to the Buyer of each of the
Department Agreements; and a Bill of Sale and Assignment (the
"Bill of Sale") and Instrument of Assumption of Liabilities (the
"Assumption Agreement") in substantially the forms of Exhibit
12(i)(iii)(a) and (b), respectively, hereto; and
(iv) The Dillard's Transfer Agreement.
(j) No action, suit or proceeding shall be pending in any court or
before any Governmental Entity in which it is sought
64
<PAGE> 70
to restrain or prohibit the consummation of the transaction contemplated
hereby.
(k) The Parent and the Seller shall have provided such other
documents or instruments which in the reasonable opinion of counsel for
Enterprises and the Buyer are necessary or desirable to effectuate the
transaction contemplated hereby.
All of the instruments and documents to be furnished by the Parent and
the Seller at the Closing shall be in form and substance reasonably
satisfactory to counsel for Enterprises and the Buyer.
13. Closing Conditions of the Parent and the Seller. All of the
obligations of the Parent and the Seller under this Agreement are subject to
the fulfillment of each of the following conditions at or prior to the Closing,
any or all of which may be waived (in whole or in part) by the Parent and the
Seller:
(a) The representations and warranties of Enterprises and the Buyer
contained herein or in any certificate, exhibit or other document delivered
pursuant to the provisions hereof, or in connection herewith, shall be true in
all material respects as of the date when made and, except to the extent such
representations and warranties speak of an earlier date (other than the date of
this Agreement), shall be deemed to be made again at and as of the
65
<PAGE> 71
Closing Date and shall be true in all material respects at and as of such time.
(b) Enterprises and the Buyer shall have substantially performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or on the Closing Date.
(c) Enterprises and the Buyer shall have provided to the Seller those
consents, in form reasonably satisfactory to the Seller set forth on Schedule
13(c) and the Parent and the Seller shall have obtained the consents set forth
on Schedule 12(c).
(d) The waiting periods (and any extensions thereof) or necessary
approvals with respect to any filings under the HSR Act shall have expired,
been terminated or received, as the case may be, and the Closing shall be
permitted to occur without violation thereof.
(e) The Buyer shall have delivered to the Seller:
(i) The Division Assets Purchase Price in the manner set forth
in Section 3(a)(i) hereof;
(ii) A certificate executed by the President of Enterprises and
the Chairman of the Buyer dated the
66
<PAGE> 72
Closing Date, certifying the fulfillment of the conditions
specified in subsections (a) and (b) above;
(iii) The Assumption Agreement;
(iv) An opinion of Zimet, Haines, Friedman & Kaplan, counsel for
the Buyer, dated the Closing Date, substantially in the form of
Exhibit 13(e)(iv); and
(v) The Dillard's Transfer Agreement.
(f) No action, suit or proceeding shall be pending in any court or
before any Governmental Entity in which it is sought to restrain or prohibit
the consummation of the transaction contemplated hereby.
(g) Enterprises and the Buyer shall have provided such other
documents or instruments which in the reasonable opinion of counsel for the
Seller are necessary or desirable to effectuate the transactions provided for
hereby.
All of the instruments and documents to be furnished by Enterprises and
the Buyer at the Closing shall be in form and substance reasonably satisfactory
to counsel for the Seller.
67
<PAGE> 73
14. Deliveries by the Parent and the Seller on the Closing Date. The
Parent and the Seller agree to deliver to Enterprises and the Buyer on the
Closing Date:
(a) The certificate of the Seller referred to in Section 12(i)(i)
hereof.
(b) The opinion of counsel to the Seller referred to in Section
12(i)(ii) hereof.
(c) The assignments referred to in Section 12(i)(iii) hereof,
together with the Bill of Sale and Assumption Agreement.
(d) The Services Agreement.
(e) A true and correct list of all merchandise "on order" as at the
Closing Date for delivery on or prior to November 30, 1997.
(f) The Dillard's Transfer Agreement.
(g) An Assignment and Assumption of Contract and Contract Amendment
in the form of Exhibit 14(g) with Mercantile ("Mercantile Assignment"), which
has been duly executed by the Seller.
68
<PAGE> 74
15. Deliveries by the Buyer on the Closing Date. The Buyer agrees to
deliver to the Seller on the Closing Date:
(a) The Division Assets Purchase Price to be delivered pursuant to
Section 3(a)(i) hereof.
(b) The certificate of Enterprises and the Buyer referred to in
Section 13(e)(ii) hereof.
(c) The Assumption Agreement.
(d) The opinion of counsel to the Buyer referred to in Section
13(e)(iv).
(e) The Services Agreement.
(f) The Dillard's Transfer Agreement.
(g) The Mercantile Assignment, which has been duly executed by the
Buyer.
16. Obligations of the Parent and the Seller. The Parent and the
Seller jointly and severally covenant that from the date of this Agreement
until the Closing:
(a) The Buyer and its counsel, accountants, and other representatives
(including representatives of its' financing
69
<PAGE> 75
sources) shall have, upon advance notice to Seller, all reasonable access
during normal business hours to all properties, books, accounts, records,
contracts and documents of or relating to the Division Assets and the Assumed
Liabilities. The Seller shall make available upon reasonable notice or cause
to be made available to the Buyer and its representatives all data and
information concerning the Division Assets and the Assumed Liabilities that may
reasonably be requested by the Buyer or its representatives. The Seller shall
further cause the Division's officers, employees and agents to cooperate fully
with and will request Seller's independent accountants and legal counsel to
cooperate fully with, the Buyer and its financing sources in connection with
their examination of the Division. Notwithstanding the foregoing, the Buyer
agrees not to contact any stores or their respective representatives, or any
competitors of Seller, without the prior written consent of the Seller in each
instance.
(b) The Parent and the Seller will cause the Division to carry on its
business and activities in substantially the same manner as it previously has
been carried on, and the Parent and the Seller shall ensure that the Division
does not make or institute any methods of purchase (including without
limitation policies, procedures and practices relating to merchandise orders),
sale, lease, management, accounting, advertising, or operation that will vary
materially from those methods used by the Division as of the date of this
Agreement.
70
<PAGE> 76
(c) The Parent and the Seller will use their respective reasonable
efforts to preserve the business organization of the Division intact, to keep
available its present Division Employees (and, except for any group and
regional managers and field personnel of the Seller employed at or in respect
of the Dillard's Departments, not transfer or solicit or arrange for the
transfer thereof to another division or affiliate of the Seller), and to
preserve its present relationships with suppliers, customers, and others having
business relationships with the Division.
(d) The Parent and the Seller will cause the Division to continue to
carry its existing insurance insuring its assets and business, subject to
variations in amounts required by the ordinary operations of its business.
(e) The Parent and the Seller will not do, or agree to do, or permit
the Division to do, any of the following acts other than in the ordinary course
of business of the Division: (i) except as previously agreed or contracted
for, grant any increase in salaries, including any increase in commissions,
payable or to become payable by the Seller to any officer, employee, class of
employees, sales agent, or representative of the Business; (ii) except as
previously agreed or contracted for, increase the benefits payable by the
Seller to any officer, key employee, sales agent, or representative of the
Business under any bonus or pension plan or other contract or commitment; or
(iii) enter into or modify
71
<PAGE> 77
any collective bargaining agreement to which the Seller on behalf of the
Business is or will be a party or by which it is or will be bound.
(f) With respect to transactions affecting the Division, the Parent
and the Seller will not, without the Buyer's written consent, enter into any
contract, commitment, or transaction other than in the ordinary course of
business of the Division.
(g) For a period of seven years following the Closing Date, neither
the Parent nor any entity controlled by the Parent (including, without
limitation, Seller) will engage, directly or indirectly, in any state in the
United States, in the third party retail leased jewelry department business in
any traditional department store; provided, however, this restriction shall not
apply to any business conducted by Parent (or any entity controlled by Parent)
in a traditional department store if the owner or operator of such department
store, directly or indirectly, controls, is controlled by or is under common
control with the Parent or any entity controlled by the Parent (including,
without limitation, the Seller).
(h) Prior to the Closing, the Parent and the Seller shall not (and
shall instruct their respective officers, directors, agents and other
representatives to not), directly or indirectly, encourage, solicit, initiate
or participate in discussions or
72
<PAGE> 78
negotiations with, or provide any information or assistance to, any
corporation, partnership, person, or other entity or group (other than the
Buyer and its representatives) concerning any merger or sale or disposition of
securities or assets (other than sales of inventory in the ordinary course of
business consistent with past practice) or similar transaction involving the
sale of all or a material portion (excluding any outlet business) of the
Division (each, an "Acquisition Proposal"), or assist or participate in,
facilitate or encourage any effort or attempt by any other person to do or seek
to do any of the foregoing.
(i) Prior to the Closing, the Seller shall maintain a consistent
inventory mix (by merchandise category/class, vendor and vendor style
classifications, portion deemed "clearance" merchandise, and allocation of
merchandise among the Departments) in accordance with the ordinary course of
business of the Acquired Business on a year-to-year basis and on a season-to-
season basis.
(j) (i) For purposes of determining Excluded Liabilities and the
rights and obligations of the parties under Section 11 hereof,
those Ad Valorem taxes which have been assessed prior to the
Closing Date but are not due and payable prior to the Closing
Date will be allocated between the Seller and Buyer on a pro rata
basis based on the lien date for each taxing authority, excluding
states
73
<PAGE> 79
where the tax values are based on an average on-going value. The
Seller will remit to the Buyer copies of the tax bills upon
receipt from the appropriate taxing authorities with detail of
the Buyer's pro rata share of the tax liability. The Buyer shall
remit to the Seller its pro rata share within thirty (30) days
after receipt of the detail from the Seller. The Seller shall be
responsible for timely remittance of the full tax liability to
each taxing authority. For illustration purposes only, Schedule
16(j) details a current estimate as of the Closing Date of such
Ad Valorem tax liability and allocation between the Buyer and
Seller.
(ii) With respect to any Division Agreement, the parties agree
that as to any amounts paid or received by either Buyer or
Seller, which relate to any period of time beginning prior to and
ending after the Closing Date, the Buyer and Seller shall in good
faith allocate such amounts between themselves on a pro rata,
daily basis for such period (with Buyer responsible for the
Closing Date) and promptly pay to the other any amounts required
in connection therewith.
74
<PAGE> 80
17. Confidentiality; Other Covenants. The Parent and the Seller, on
the one hand, and Enterprises and the Buyer, on the other hand, each agree
that, unless acting with the prior written consent of the other (excluding
necessary accounting disclosures and disclosures required by law), it will not
at any time hereafter disclose or use, directly or indirectly, except for the
purposes of the transactions hereunder, on behalf of itself or any other person
or business entity, any confidential and propriety information or data or trade
secrets concerning the business or activities of the other or the other's
subsidiaries or affiliates, which is divulged or discovered during the
negotiations which led to this Agreement or the pursuit or consummation of the
transactions hereunder. Such data or information shall include, but not be
limited to, customer lists, supplier lists, price lists, manufacturing and
purchasing practices and techniques, wage scales and sales policies.
Notwithstanding the foregoing, information or data concerning the Parent or the
Seller, on the one hand, or Enterprises or the Buyer, on the other hand, shall
not include information or data which: (a) at the time of disclosure is in the
public domain or thereafter enters the public domain through no wrongful act or
omission of the receiving party (or any of its affiliates), (b) is already
known by the receiving party at the time of disclosure and such information is
not otherwise subject to confidentiality obligations of the receiving party, or
(c) is available to the receiving party at the time of disclosure from a third
party who, to the receiving party's knowledge, may disclose such information
without violation of any
75
<PAGE> 81
confidentiality obligation. During the two (2) year period commencing on the
date hereof, each of the Parent and the Seller further agrees that it will not
directly or indirectly solicit for employment any Division Employee employed by
the Buyer pursuant hereto. The obligations of the parties under this Section
17 shall survive the Closing Date.
18. Certain Payments. If, notwithstanding the satisfaction of all
the conditions set forth in Section 12 hereof, (a) the Parent and the Seller
are prepared to close the transactions contemplated hereby, Enterprises' and
the Buyer's conditions to close have all been satisfied or waived by
Enterprises and/or the Buyer, and Enterprises and the Buyer fail to so close on
or before October 6, 1997; or (b) the Seller terminates this Agreement because
of a material breach hereof by the Buyer (which is not cured during any
applicable grace period), then the Buyer shall thereafter, within five business
days after demand by the Seller, pay to the Seller the sum of $3,000,000 in
cash.
If, notwithstanding the satisfaction of all the conditions set forth in
Section 13 hereof, (a) Enterprises and the Buyer are prepared to close the
transactions contemplated hereby, the Parent's and Seller's conditions to close
have all been satisfied or waived by the Parent and/or Seller, and the Parent
and Seller fail to so close on or before October 6, 1997; or (b) the Buyer
terminates this Agreement because of a material breach hereof
76
<PAGE> 82
by Parent and/or Seller (which is not cured during any applicable grace
period), then the Parent and Seller shall thereafter, within five business days
after demand by the Buyer, reimburse the Buyer for all out-of-pocket expenses
incurred by the Buyer in connection with the transactions contemplated hereby
(up to a maximum aggregate amount of $600,000).
The parties hereto acknowledge and agree that in the event one of the
foregoing events occurs, then the sole and exclusive remedy of the party
prepared to close or the terminating party, as the case may be, for monetary
damages or otherwise, with respect to or arising out of this Agreement shall be
pursuant to this Section 18.
Notwithstanding the foregoing, it is acknowledged and agreed that,
except as otherwise expressly set forth herein, each party shall bear its own
fees and expenses in accordance with the terms of Section 24(k) hereof.
The parties acknowledge and agree that this Section 18 shall not apply
in respect of any termination of this Agreement pursuant to Sections 5(b)(i),
(iv), or (v).
19. Further Assurances. Enterprises, the Buyer, the Parent and the
Seller will each (a) execute and deliver such
77
<PAGE> 83
instruments and take such other actions as the other may reasonably require in
order to carry out the intent of this Agreement; (b) use its reasonable efforts
to obtain the consents of all third parties, governmental authorities or others
necessary for the consummation of the transactions contemplated by this
Agreement; and (c) use its reasonable efforts so that the conditions precedent
to the obligations of the other are satisfied. Each of the Parent and the
Seller, on the one hand, and Enterprises and the Buyer, on the other hand,
agrees to use its reasonable efforts to cooperate with the other in connection
with the defense of any lawsuits or claims by third parties relating to the
operation of the Division prior to the Closing. Without limitation of the
foregoing sentence, Enterprises and the Buyer, on the one hand, and the Parent
and the Seller, on the other hand, shall provide to each other reasonable
access to their respective records relating to the Business prior to the
Closing and to their respective employees which are necessary or appropriate
for the defense of any lawsuits or claims. The Parent and the Seller, on the
one hand, and Enterprises and the Buyer, on the other hand, will reimburse the
other for out-of-pocket expenses incurred in connection with its cooperation in
any such matter. Following the Closing Date, the Parent and the Seller shall
provide to Enterprises and the Buyer reasonable access to the personnel records
(excluding medical records) of the Seller relating to the Division Employees
actually hired by Buyer.
78
<PAGE> 84
20. Mail. From and after the Closing Date, (a) the Parent and the
Seller will promptly forward to Enterprises and the Buyer all mail, including
checks, which the Parent or the Seller may receive and which relate to the
operation of the Acquired Business, including Division Assets and Assumed
Liabilities and (b) the Buyer will promptly forward to the Seller all mail,
including checks, which the Buyer may receive and which relate to the Excluded
Assets or Excluded Liabilities.
21. Sales, Use and Similar Taxes. All sales, use and transfer and
similar taxes arising in respect of the transactions provided for under this
Agreement shall be paid by the Seller.
22. Bulk Sales Laws. The parties hereto waive compliance with the
"bulk sales" provisions of the Uniform Commercial Code as it is in effect in
any jurisdiction in connection with the sale of the Division Assets and
Dillard's Inventories. The Parent and the Seller, jointly and severally,
warrant and agree to pay and discharge, when due, all claims of creditors which
could be asserted against any party by reason of such non-compliance (other
than the Assumed Liabilities).
23. Press Releases, Etc. No press release relating to this
Agreement, or the transactions contemplated hereby, or other announcement to
the employees, customers or suppliers of the Division, or to any other third
person or entity, will be issued or
79
<PAGE> 85
made without the written approval of the Seller and the Buyer, except any
public disclosure which the Seller or the Buyer, as the case may be, in good
faith believes is required by law (in which case the parties will use all
reasonable efforts to consult prior to making such disclosure).
24. Miscellaneous Provisions.
(a) Survival. All representations and warranties made herein or in
any certificate or other instrument delivered by or on behalf of any of the
parties pursuant hereto shall survive the Closing Date, and shall continue
until March 30, 1999, provided that such time limitation shall not apply to the
matters referred to in Section 7(i) (such representations and warranties to
survive until the expiration of the statute of limitations applicable to the
Taxes in question, taking into account any extensions of such statute of
limitations). All covenants and agreements contained in this Agreement (to the
extent not required to be performed prior to Closing) shall survive the
Closing.
(b) Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered by personal delivery, reputable overnight courier
service or certified mail (postage pre-paid, return receipt requested), as
follows:
80
<PAGE> 86
If to the Parent or Seller: If to Enterprises or the Buyer:
- -------------------------- ------------------------------
Zale Corporation Finlay Enterprises, Inc.
901 W. Walnut Hill Lane 521 Fifth Avenue
Irving, Texas 75038-1003 New York, New York 10175
Attn: Chairman Attn: President
-and-
Finlay Fine Jewelry Corporation
521 Fifth Avenue
New York, New York 10175
Attn: Chairman
With a copy to: With a copy to:
Alan P. Shor, Esq. Zimet, Haines Friedman & Kaplan
Executive Vice President 460 Park Avenue; 9th Floor
and Chief Administrative New York, New York 10022
Officer Attn: James Martin Kaplan, Esq.
Zale Corporation
901 W. Walnut Hill Lane
Irving, Texas 75038-1003
Any party may change the address to which notices, requests, demands and other
communications to such party shall be delivered personally or mailed by giving
notice thereof to the other parties hereto in the manner herein provided.
Notices shall be deemed given at the time they are delivered personally; if by
overnight courier, the next business day following the delivery thereof to such
courier (or such later date as is demonstrated by a bona fide receipt
therefor); or if given by certified mail (postage pre-paid, return receipt
requested), three days after deposit in the mail.
(c) Entire Agreement. This Agreement and the instruments,
agreements, exhibits, schedules and other documents contemplated hereby
supersede all prior discussions and agreements between the parties with respect
to the matters contained herein,
81
<PAGE> 87
and this Agreement and the instruments, agreements and other documents
contemplated hereby contain the entire agreement between the parties hereto
with respect to the transactions contemplated hereby; provided, however, that
the terms of the confidentiality agreement dated February 13, 1997 between the
Buyer and the Seller shall apply to the subject matter thereof in the event
this Agreement is terminated.
(d) Waiver. Any term or condition of this Agreement may be waived at
any time by the party thereto which is entitled to the benefit thereof, but
such waiver shall only be effective if evidenced by a writing signed by such
party. A waiver on one occasion shall not be deemed to be a waiver of the same
or of any other breach on a future occasion.
(e) Amendments. This Agreement may be amended only by a writing
signed by all of the parties hereto.
(f) Execution in Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the same
instrument.
(g) Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns. This
82
<PAGE> 88
Agreement may not be assigned by any party, without the prior written consent
of the other parties hereto. This Agreement is not made for the benefit of,
and there shall be no, third party beneficiaries hereof.
(h) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts made and performed entirely within such State. Each of the parties
hereto hereby agrees that any suit, action or proceeding for the enforcement of
the award of an arbitrator pursuant to this Agreement shall be brought only in
the state courts of or federal courts sitting in the State of Delaware. Each
party hereto irrevocably consents to the jurisdiction of the state courts of
and the federal courts sitting in the State of Delaware and to service of
process in any such suit, action or proceeding being made upon such party by
registered or certified mail at the address specified for notices herein. Each
party hereto hereby waives any objection it may now or hereafter have to the
venue of any such suit, action or proceeding or any such court or that such
action or proceeding is brought in an inconvenient forum.
(i) Headings. The headings in this Agreement are for convenience of
reference only and shall not be deemed a part of this Agreement.
83
<PAGE> 89
(j) Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions of this Agreement.
(k) Expenses. Except as otherwise expressly set forth herein, each
party hereto shall bear its own fees and expenses (including without
limitation, legal, accounting, investment banking and broker's fees),
regardless of whether or not this Agreement is terminated.
25. Special Re-apportionments. Notwithstanding anything else contained
herein to the contrary:
(a) In the event Seller pays any amounts ("Capital Payments") for
capital expenditures or any other costs for the acquisition,
renovation or repair of fixed or capital assets of the Acquired
Business between the date hereof and the Closing, then the
$639,518 maximum amount contained in Section 6(a)(ii) hereof
shall be reduced by an amount equal to such Capital Payments and
the $4,348,347 maximum
84
<PAGE> 90
amount contained in Section 3(a)(i)(B) hereof shall be increased
by an amount equal to such Capital Payments (up to $639,518 in
the aggregate).
(b) In the event Buyer delivers a written request to Seller that the
delivery of all or any portion of the on-order finished goods
merchandise relating to the Acquired Business which is scheduled
to be delivered to Seller during the month of September 1997 be
deferred from September 1997 until October 1997, then (i) the
Buyer shall have the right to address such matter with the
Seller's vendors directly, and the Seller shall use all
reasonable efforts to effect such request, and (ii) the Maximum
Inventory Amount shall be reduced by an amount (the "Deferred
Invoiced Cost") equal to the Invoiced Cost of all such
merchandise for which the parties are able to defer delivery and
the Maximum Amount contained in Section 2(a)(iv) hereof shall be
increased by such Deferred Invoiced Cost.
85
<PAGE> 91
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
ZALE CORPORATION
By: /s/Alan P. Shor
---------------------------------
Name: Alan P. Shor
Title: Executive Vice-President
and CAO
ZALE DELAWARE, INC.
By: /s/Alan P. Shor
---------------------------------
Name: Alan P. Shor
Title: Executive Vice-President
and CAO
FINLAY ENTERPRISES, INC.
By: /s/Arthur E. Reiner
-----------------------------------
Name: Arthur E. Reiner
Title: President and Chief
Executive Officer
FINLAY FINE JEWELRY CORPORATION
By: /s/Arthur E. Reiner
-----------------------------------
Name: Arthur E. Reiner
Title: Chairman and Chief
Executive Officer
86
<PAGE> 1
EXHIBIT 11
ZALE CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
(amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Primary:
Net earnings applicable to common stock $50,553 $43,989 $31,470
======= ======== =======
Shares
Weighted average number of common shares
outstanding 35,054 35,068 34,969
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 675 648 382
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 903 749 498
------- ------- -------
Weighted average number of common shares
outstanding as adjusted 36,632 36,465 35,849
======= ======= =======
Net earnings per common share $ 1.38 $ 1.20 $ 0.88
======= ======= =======
Fully Diluted:
Net earnings applicable to common stock $50,553 $43,898 $31,470
======= ======= =======
Shares
Weighted average number of common shares
outstanding 35,054 35,068 34,969
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 773 720 559
Assuming exercise of warrants reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such warrants 1,026 830 1,037
------- ------- -------
Weighted average number of common shares
outstanding as adjusted 36,853 36,618 36,565
======= ======= =======
Net earnings per common share $ 1.37 $ 1.20 $ 0.86
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Company -
The following companies are subsidiaries of Zale Corporation:
Zale Delaware, Inc.
Diamond Funding Corp. (iv)
Zale Acquisition Corporation (iv)
Jewel Recovery, Inc.
JHC Holding Corporation (i)(iv)
Zale Holding Corporation (ii)(iv)
ZHCL Corporation (iii)(iv)
Jewel Recovery, L.P.
The following companies are subsidiaries of Zale Delaware, Inc.:
Zale Puerto Rico, Inc.
Dobbins Jewelers, Inc.
Jewelers Financial Services, Inc.
Zale Life Insurance Company
Zale Indemnity Company
Diamond Guaranty Insurance Company (iv)
Jewel Re-Insurance Ltd.
Zale Employees Child Care Association, Inc.
Jewelers Credit Corporation (iv)
(i) Jewelers Holding Corporation, former parent company of Zale Holding
Corporation, merged into JHC Holding Corporation, which was formed on
July 30, 1993 (the "Effective Date") for purposes of the merger.
(ii) Former parent company of Zale Corporation and currently a subsidiary of
JHC Holding Corporation.
(iii) Former sister company of Zale Corporation and currently a subsidiary of
JHC Holding Corporation.
Through reorganization, all of these companies became subsidiaries of Zale
Corporation on the Effective Date.
(iv) Currently an inactive corporation.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Form S-8 Registration Statements File No. 333-01789, File No. 333-20673, and
File No. 33-87782.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the July 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> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 41,636
<SECURITIES> 0
<RECEIVABLES> 512,089
<ALLOWANCES> 57,819
<INVENTORY> 511,702
<CURRENT-ASSETS> 1,046,879
<PP&E> 177,453
<DEPRECIATION> 39,442
<TOTAL-ASSETS> 1,281,206
<CURRENT-LIABILITIES> 169,749
<BONDS> 451,459
0
0
<COMMON> 350
<OTHER-SE> 541,224
<TOTAL-LIABILITY-AND-EQUITY> 1,281,206
<SALES> 1,253,818
<TOTAL-REVENUES> 1,253,818
<CGS> 643,318
<TOTAL-COSTS> 643,318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 55,850
<INTEREST-EXPENSE> 36,098
<INCOME-PRETAX> 79,858
<INCOME-TAX> 29,305
<INCOME-CONTINUING> 50,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,553
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.37
</TABLE>
