<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1998
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 0-21526
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-0675400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 West Walnut Hill Lane, Irving, Texas 75038-1003
(Address of principal executive offices) (Zip Code)
(972) 580-4000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X]. No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 26, 1998, 35,696,372 shares of the registrant's common stock were
outstanding.
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<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
Index
Part I. Financial Information: Page
----
Item 1. Financial Statements
Consolidated Statements of Operations. . . . . . . . . . . . . 3
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 18
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 23
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 522,017 $ 505,083 $ 774,543 $ 735,862
Cost of Sales 270,576 256,771 402,179 376,815
--------- --------- --------- ---------
Gross Margin 251,441 248,312 372,364 359,047
Selling, General and Administrative Expenses 148,249 154,210 256,188 255,929
Depreciation and Amortization Expense 5,356 3,346 10,154 6,156
Unusual Item - Gain on Sale of Diamond Park Fine
Jewelers Division Assets --- --- (1,634) ---
Unusual Item - Gain on Sale of Land (4,720) --- (4,720) ---
--------- --------- --------- ---------
Operating Earnings 102,556 90,756 112,376 96,962
Interest Expense, Net 8,369 9,501 16,524 17,499
--------- --------- --------- ---------
Earnings Before Income Taxes 94,187 81,255 95,852 79,463
Income Taxes 35,250 29,740 35,869 29,086
--------- --------- --------- ---------
Net Earnings $ 58,937 $ 51,515 $ 59,983 $ 50,377
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings Per Common Share:
Basic $ 1.65 $ 1.47 $ 1.69 $ 1.43
Diluted $ 1.57 $ 1.41 $ 1.60 $ 1.37
Weighted Average Number of Common
Shares Outstanding:
Basic 35,669 35,032 35,450 35,124
Diluted 37,584 36,606 37,576 36,781
</TABLE>
See Notes to the Consolidated Financial Statements.
3
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
JANUARY 31, JULY 31, JANUARY 31,
1998 1997 1997
----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 113,708 $ 41,636 $ 26,918
Customer Receivables, Net 548,323 454,270 499,094
Merchandise Inventories 522,328 511,702 573,039
Other Current Assets 26,114 39,271 26,404
----------- ---------- ----------
Total Current Assets 1,210,473 1,046,879 1,125,455
Property and Equipment, Net 152,938 138,011 128,862
Other Assets 45,715 43,616 43,663
Deferred Tax Asset, Net 52,700 52,700 56,500
----------- ---------- ----------
Total Assets $ 1,461,826 $1,281,206 $1,354,480
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 12 $ 328 $ 5
Accounts Payable and Accrued Liabilities 198,300 145,721 169,385
Deferred Tax Liability, Net 23,700 23,700 32,000
----------- ---------- ----------
Total Current Liabilities 222,012 169,749 201,390
Non-current Liabilities 51,885 53,544 53,557
Long-term Debt 480,314 451,459 495,549
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 61,931 64,880 67,829
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- --- ---
Common Stock 363 350 355
Additional Paid-In Capital (Includes
Stock Warrants) 444,577 401,121 396,090
Unrealized Gains on Securities 2,359 2,182 1,966
Accumulated Earnings 202,387 142,404 142,228
----------- ---------- ----------
649,686 546,057 540,639
Treasury Stock (4,002) (4,483) (4,484)
----------- ---------- ----------
Total Stockholders' Investment 645,684 541,574 536,155
----------- ---------- ----------
Total Liabilities and Stockholders' Investment $ 1,461,826 $1,281,206 $1,354,480
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See Notes to the Consolidated Financial Statements.
4
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
SIX MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
1998 1997
----------- -----------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 59,983 $ 50,377
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization expense 10,654 6,849
Non-cash charge in lieu of tax expense 35,674 28,273
Unusual Item - Gain on Sale of Diamond Park
Fine Jewelers Division Assets (1,634) ---
Unusual Item - Gain on Sale of Land (4,720) ---
Changes in:
Customer receivables, net (94,053) (79,217)
Merchandise inventories (59,059) (115,177)
Other current assets 13,157 (869)
Other assets (1,127) 2,078
Accounts payable and accrued liabilities 53,520 23,591
Non-current liabilities (3,918) (570)
-------- ---------
Net Cash Provided by (Used in) Operating Activities 8,477 (84,665)
-------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (35,957) (32,044)
Dispositions of property and equipment 394 2,414
Net proceeds from Sale of Diamond Park Fine
Jewelers Division Assets 57,642 ---
Proceeds from Sale of Land 8,074 ---
Other --- 192
-------- ---------
Net Cash Provided by (Used in) Investing Activities 30,153 (29,438)
-------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (316) (19)
Net borrowings under (payments on) revolving credit agreement (70,700) 91,200
Proceeds from issuance of Senior Notes 99,530 ---
Debt issue and capitalized financing costs (2,400) ---
Proceeds from exercise of stock options 7,328 551
Purchase of treasury stock --- (757)
-------- ---------
Net Cash Provided by Financing Activities 33,442 90,975
-------- ---------
Net Increase in Cash and Cash Equivalents 72,072 (23,128)
-------- ---------
Cash and Cash Equivalents at Beginning of Period 41,636 50,046
-------- ---------
Cash and Cash Equivalents at End of Period $113,708 $ 26,918
-------- ---------
-------- ---------
</TABLE>
See Notes to the Consolidated Financial Statements.
5
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
SIX MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
1998 1997
----------- -----------
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 17,736 $ 17,052
Interest received $ 4,576 $ 779
Income taxes paid (net of refunds received) $ 502 $ 1,029
Restricted cash - at period end date $ 11,117 $ 3,635
</TABLE>
See Notes to the Consolidated Financial Statements.
6
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
Zale Corporation is the largest specialty retailer of fine jewelry in the
United States. At January 31, 1998, the Company operated 1,100 retail jewelry
stores located primarily in shopping malls throughout the United States, Guam
and Puerto Rico. The Company operates three operating divisions:
Zales-Registered Trademark-, Gordon's-SM-, and Bailey, Banks and
Biddle-Registered Trademark-. The Zales Division provides more traditional,
moderately priced jewelry to a broad range of customers. The Gordon's Division
offers contemporary merchandise targeted to regional preferences at somewhat
higher price points than Zales. The Bailey, Banks and Biddle Division operates
upscale jewelry stores which are considered among the pre-eminent jewelry stores
in their markets. In October 1997, the Company sold the majority of the assets
of its Diamond Park Fine Jewelers Division -- see "Sale of Diamond Park Assets"
below. In addition, the Company operates four outlet stores in four states.
The accompanying Consolidated Financial Statements are those of Zale
Corporation and its wholly-owned subsidiaries ("the Company") as of and for the
three and six month periods ended January 31, 1998. The Company consolidates
substantially all its retail operations into Zale Delaware, Inc. ("ZDel"), a
wholly owned subsidiary of Zale Corporation. ZDel is the parent company for
several subsidiaries, including three that are engaged primarily in providing
credit insurance to credit customers of the Company. All significant
intercompany transactions have been eliminated. The Consolidated Financial
Statements are unaudited and have been prepared by the Company in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In management's opinion, all material adjustments and disclosures necessary for
a fair presentation have been made. The accompanying Consolidated Financial
Statements should be read in conjunction with the audited Consolidated Financial
Statements and related notes thereto included in the Company's Form 10-K for
the fiscal year ended July 31, 1997. The classifications in use at January 31,
1998 have been applied to the financial statements for July 31, 1997 and January
31, 1997.
The results of operations for the three and six month periods ended January
31, 1998 and 1997, are not indicative of the operating results for the full
fiscal year due to the seasonal nature of the Company's business. Seasonal
fluctuations in retail sales historically have resulted in higher earnings in
the quarter of the fiscal year which includes the Christmas selling season.
EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. As required, the Company adopted the
provisions of SFAS No. 128 in the quarter ended January 31, 1998. All prior
year weighted average and per share information has been restated in accordance
with SFAS No. 128. Outstanding stock options and warrants issued by the Company
represent the only dilutive effect reflected in diluted weighted average shares.
There were no common stock equivalents that would be antidilutive.
7
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED)
EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
Three Months Ended Six Months Ended
January 31, January 31, 1997
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings available to shareholders $58,937 $51,515 $59,983 $50,377
BASIC:
Weighted average number of common shares outstanding 35,669 35,032 35,450 35,124
Net earnings per common share - basic $ 1.65 $ 1.47 $ 1.69 $ 1.43
------- ------- ------- -------
------- ------- ------- -------
DILUTED:
Weighted average number of common shares outstanding 35,669 35,032 35,450 35,124
Effect of dilutive securities:
Stock options 795 701 974 759
Warrants 1,120 873 1,152 898
------- ------- ------- -------
Weighted average number of common shares outstanding
as adjusted 37,584 36,606 37,576 36,781
Net earnings per common share - diluted $ 1.57 $ 1.41 $ 1.60 $ 1.37
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
STOCK REPURCHASE PLAN
On February 19, 1998, the Company announced a stock repurchase program
pursuant to which the Company, from time to time and at management's discretion,
may purchase through the current calendar year up to an aggregate of $40 million
of the Company's Common Stock on the open market. The repurchase plan was
authorized in part to provide shares to offset the issuance of up to 1.9 million
shares of Common Stock upon exercise of the Series A Warrants, which expire on
July 30, 1998.
SALE OF DIAMOND PARK ASSETS
On September 3, 1997, the Company signed a purchase agreement to sell the
majority of the assets of its Diamond Park Fine Jewelers Division (the "Diamond
Park Asset Sale"). The Diamond Park Fine Jewelers Division, which managed
leased fine jewelry departments in major department store chains including
Marshall Field's, Dillard's, Mercantile and Parisian, had net sales of $125.3
million in fiscal 1997. At July 31, 1997, inventory and net property and
equipment of the Diamond Park Fine Jewelers Division were $54.5 million and $4.0
million, respectively. The Company continued to operate 47 leased fine jewelry
departments in Dillard's stores through January 1998, the end of the current
license period, following which time the remaining inventory of such operations
will be sold to the purchaser. On October 6, 1997, the Company closed the
Diamond Park Asset Sale. The Company received $58 million in October 1997 with
approximately $4.4 million to be received after January 1998, at which time the
remaining inventory of the Dillard's stores will be sold to the purchaser. The
net proceeds from the Diamond Park Asset Sale will be reinvested into the
Company's operations, or used for general corporate purposes, including the
Company's stock repurchase program.
8
<PAGE>
SALE OF LAND
On January 30, 1998, the Company closed on the sale of excess land
surrounding the corporate headquarters facility. The net proceeds of $8.1
million will be used for general corporate purposes, including the Company's
stock repurchase program.
ISSUANCE OF SENIOR NOTES
On September 23, 1997, the Company sold $100 million in aggregate principal
amount of 8 1/2% Senior Notes ("the Senior Notes") due 2007 by means of an
offering memorandum to qualified institutional buyers under to Rule 144A
promulgated under the Securities Act of 1933. All proceeds from the sale of the
Senior Notes were used by the Company to repay outstanding indebtedness under
its Revolving Credit Agreement and for general corporate purposes. The Senior
Notes are unsecured and are fully and unconditionally guaranteed by ZDel. The
Senior Notes are redeemable for cash at any time on or after October 1, 2002, at
the option of the Company, in whole or in part, at redemption prices starting at
104.25% of the principal amount.
The indenture relating to the Senior Notes contains certain restrictive
covenants including, but not limited to, limitations on indebtedness,
limitations on dividends and other restricted payments, limitation on
transactions with affiliates, limitations on liens and limitations on
disposition proceeds of asset sales, among others. Pursuant to a registration
rights agreement relating to the Senior Notes, the Company has filed a
registration statement with respect to an offer to exchange the Senior Notes for
new notes of the Company with terms identical in all material respects to the
Senior Notes. The Senior Notes are included in Long-term Debt on the
accompanying balance sheet.
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's payment obligations under the Senior Notes are guaranteed
by ZDel (the "Guarantor Subsidiary"). Such guarantee is full and
unconditional with respect to ZDel. Zale Funding Trust ("ZFT"), a limited
purpose Delaware business trust wholly owned by ZDel which owns the customer
accounts receivable of ZDel, is not a guarantor of the obligations under the
Senior Notes. Separate financial statements of the Guarantor Subsidiary are
not presented because the Company's management has determined that they would
not be material to investors. The following supplemental financial
information sets forth, on an unconsolidated basis, statements of operations,
balance sheets, and statements of cash flow information for the Company
("Parent Company Only"), for the Guarantor Subsidiary and for the Company's
other subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental
financial information reflects the investments of the Company and the
Guarantor Subsidiary in the Guarantor and Non-Guarantor Subsidiaries using
the equity method of accounting. Certain reclassifications have been made to
provide for uniform disclosure of all periods presented. These
reclassifications are not material.
9
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 1998
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $514,271 $ 7,746 $ --- $522,017
Cost of Sales --- 266,722 3,854 --- 270,576
------- -------- ------- -------- --------
Gross Margin --- 247,549 3,892 --- 251,441
Selling, General, and
Administrative Expenses (Income) 37 156,919 (8,707) --- 148,249
Depreciation and Amortization Expense --- 5,041 315 --- 5,356
Unusual Item - Gain on Sale of Land --- (4,720) --- --- (4,720)
------- -------- ------- -------- --------
Operating Earnings (Loss) (37) 90,309 12,284 --- 102,556
Interest (Income) Expense, Net --- (1,475) 9,844 --- 8,369
------- -------- ------- -------- --------
Earnings (Loss) Before Income Taxes (37) 91,784 2,440 --- 94,187
Income Taxes (14) 34,352 912 --- 35,250
------- -------- ------- -------- --------
Earnings (Loss) Before Equity
In Earnings of Subsidiaries (23) 57,432 1,528 --- 58,937
Equity in Earnings of Subsidiaries 58,960 1,401 --- (60,361) ---
------- -------- ------- -------- --------
Net Earnings $58,937 $ 58,833 $ 1,528 $(60,361) $ 58,937
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</TABLE>
10
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 1997
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $497,485 $ 7,598 $ --- $505,083
Cost of Sales --- 253,008 3,763 --- 256,771
------- -------- ------- -------- --------
Gross Margin --- 244,477 3,835 --- 248,312
Selling, General, and
Administrative Expenses (Income) 38 154,906 (734) --- 154,210
Depreciation and Amortization Expense --- 3,060 286 --- 3,346
------- -------- ------- -------- --------
Operating Earnings (Loss) (38) 86,511 4,283 --- 90,756
Interest Expense, Net --- 441 9,060 --- 9,501
------- -------- ------- -------- --------
Earnings (Loss) Before Income Taxes (38) 86,070 (4,777) --- 81,255
Income Taxes (13) 31,502 (1,749) --- 29,740
------- -------- ------- -------- --------
Earnings (Loss) Before Equity
in Earnings of Subsidiaries (25) 54,568 (3,028) --- 51,515
Equity in Earnings (Loss) of Subsidiaries 51,540 (3,619) --- (47,921) ---
------- -------- ------- -------- --------
Net Earnings (Loss) $51,515 $ 50,949 $(3,028) $(47,921) $ 51,515
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</TABLE>
11
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended January 31, 1998
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $762,507 $ 12,036 $ --- $774,543
Cost of Sales --- 396,172 6,007 --- 402,179
------- -------- -------- -------- --------
Gross Margin --- 366,335 6,029 --- 372,364
Selling, General, and Administrative
Expenses (Income) 75 271,093 (14,980) --- 256,188
Depreciation and Amortization Expense --- 9,542 612 --- 10,154
Unusual Item - Gain on Sale of Diamond
Park Fine Jewelers Division Assets --- (1,634) --- --- (1,634)
Unusual Item - Gain on Sale of Land --- (4,720) --- --- (4,720)
------- -------- -------- -------- --------
Operating Earnings (Loss) (75) 92,054 20,397 --- 112,376
Interest Expense (Income), Net --- (2,072) 18,596 --- 16,524
------- -------- -------- -------- --------
Earnings (Loss) Before Income Taxes (75) 94,126 1,801 --- 95,852
Income Taxes (28) 35,223 674 --- 35,869
------- -------- -------- -------- --------
Earnings (Loss) Before Equity
in Earnings of Subsidiaries (47) 58,903 1,127 --- 59,983
Equity in Earnings of Subsidiaries 60,030 1,001 --- (61,031) ---
------- -------- -------- -------- --------
Net Earnings (Loss) $59,983 $ 59,904 $ 1,127 $(61,031) $ 59,983
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
12
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended January 31, 1997
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $724,355 $11,507 $ --- $735,862
Cost of Sales --- 371,124 5,691 --- 376,815
------- -------- ------- -------- --------
Gross Margin --- 353,231 5,816 --- 359,047
Selling, General, and Administrative
Expenses (Income) 75 262,620 (6,766) --- 255,929
Depreciation and Amortization Expense --- 5,590 566 --- 6,156
------- -------- ------- -------- --------
Operating Earnings (Loss) (75) 85,021 12,016 --- 96,962
Interest Expense, Net --- 418 17,081 --- 17,499
------- -------- ------- -------- --------
Earnings (Loss) Before Income Taxes (75) 84,603 (5,065) --- 79,463
Income Taxes (27) 30,967 (1,854) --- 29,086
------- -------- ------- -------- --------
Earnings (Loss) Before Equity
in Earnings of Subsidiaries (48) 53,636 (3,211) --- 50,377
Equity in Earnings (Loss) of
Subsidiaries 50,425 (3,841) --- (46,584) ---
------- -------- ------- -------- --------
Net Earnings (Loss) $50,377 $ 49,795 $(3,211) $(46,584) $ 50,377
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</TABLE>
13
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
January 31, 1998
(unaudited)
(amounts in thousands)
ASSETS
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ --- $ 94,724 $ 18,984 $ --- $ 113,708
Customer Receivables, Net --- --- 548,323 --- 548,323
Merchandise Inventories --- 512,247 10,081 --- 522,328
Other Current Assets --- 23,889 2,225 --- 26,114
-------- -------- -------- --------- ----------
Total Current Assets --- 630,860 579,613 --- 1,210,473
Investment in Subsidiaries 645,684 57,827 --- (703,511) ---
Property and Equipment, Net --- 149,084 3,854 --- 152,938
Intercompany Receivable 102,901 52,838 --- (155,739) ---
Other Assets --- 10,606 35,109 --- 45,715
Deferred Tax Assets, Net 59 52,641 --- --- 52,700
-------- -------- -------- --------- ----------
Total Assets $748,644 $953,856 $618,576 $(859,250) $1,461,826
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ --- $ 12 $ --- $ --- $ 12
Accounts Payable and Accrued
Liabilities 2,774 191,521 4,005 --- 198,300
Deferred Tax Liability, Net 646 23,054 --- --- 23,700
-------- -------- -------- --------- ----------
Total Current Liabilities 3,420 214,587 4,005 --- 222,012
Non-current Liabilities --- 39,690 12,195 --- 51,885
Intercompany Payable --- --- 155,739 (155,739) ---
Long-term Debt 99,540 75 380,699 --- 480,314
Excess of Revalued Net Assets
Over Stockholders' Investment, Net --- 61,931 --- --- 61,931
Total Stockholders' Investment 645,684 637,573 65,938 (703,511) 645,684
-------- -------- -------- --------- ----------
Total Liabilities and
Stockholders' Investment $748,644 $953,856 $618,576 $(859,250) $1,461,826
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
</TABLE>
14
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
July 31, 1997
(unaudited)
(amounts in thousands)
ASSETS
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ --- $ 27,479 $ 14,157 $ --- $ 41,636
Customer Receivables, Net --- --- 454,270 --- 454,270
Merchandise Inventories --- 503,764 7,938 --- 511,702
Other Current Assets --- 38,901 370 --- 39,271
-------- -------- -------- --------- ----------
Total Current Assets --- 570,144 476,735 --- 1,046,879
Investment in Subsidiaries 541,574 54,395 --- (595,969) ---
Property and Equipment, Net --- 134,175 3,836 --- 138,011
Intercompany Receivable 728 48,250 --- (48,978) ---
Other Assets --- 8,972 34,644 --- 43,616
Deferred Tax Assets, Net 59 52,641 --- --- 52,700
-------- -------- -------- --------- ----------
Total Assets $542,361 $868,577 $515,215 $(644,947) $1,281,206
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ --- $ 328 $ --- $ --- $ 328
Accounts Payable and Accrued
Liabilities 141 135,330 10,250 --- 145,721
Deferred Tax Liability, Net 646 23,054 --- --- 23,700
-------- -------- -------- --------- ----------
Total Current Liabilities 787 158,712 10,250 --- 169,749
Non-current Liabilities --- 40,614 12,930 --- 53,544
Intercompany Payable --- --- 48,978 (48,978) ---
Long-term Debt --- 70,782 380,677 --- 451,459
Excess of Revalued Net Assets
Over Stockholders' Investment, Net --- 64,880 --- --- 64,880
Total Stockholders' Investment 541,574 533,589 62,380 (595,969) 541,574
-------- -------- -------- --------- ----------
Total Liabilities and
Stockholders' Investment $542,361 $868,577 $515,215 $(644,947) $1,281,206
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
</TABLE>
15
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended January 31, 1998
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities $ (7,328) $ 10,368 $ 7,618 $(2,181) $ 8,477
Net Cash Flows from Investing
Activities:
Additions to property and
equipment --- (35,246) (711) --- (35,957)
Dispositions of property and
equipment --- 293 101 --- 394
Purchase of common stock
Proceeds from Sale of Diamond
Park Fine Jewelers Division
Assets --- 57,642 --- --- 57,642
Proceeds from Sale of Land --- 8,074 --- --- 8,074
-------- -------- -------- ------- --------
Net Cash Provided by (Used in)
Investing Activities --- 30,763 (610) --- 30,153
-------- -------- -------- ------- --------
Net Cash Flows from Financing
Activities:
Payments on long-term debt --- (316) --- --- (316)
Net payments under revolving
credit agreement --- (70,700) --- --- (70,700)
Proceeds from issuance of
Senior Notes 99,530 --- --- --- 99,530
Loan from Zale Corporation
to Zale Delaware (99,530) 99,530 --- --- ---
Debt issue and capitalized
financing costs --- (2,400) --- --- (2,400)
Proceeds from exercise of
stock options and warrants 7,328 --- --- --- 7,328
Proceeds from issuance of
common stock --- --- 2,500 (2,500) ---
Dividends paid --- --- (4,681) 4,681 ---
-------- -------- -------- ------- --------
Net Cash Provided by (Used in)
Financing Activities 7,328 26,114 (2,181) 2,181 33,442
-------- -------- -------- ------- --------
Net Increase in Cash
and Cash Equivalents --- 67,245 4,827 --- 72,072
Cash and Cash Equivalents at
Beginning of Period --- 27,479 14,157 --- 41,636
-------- -------- -------- ------- --------
Cash and Cash Equivalents at
End of Period $ --- $ 94,724 $ 18,984 $ --- $113,708
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
</TABLE>
16
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended January 31, 1997
(unaudited)
(amounts in thousands)
<TABLE>
Parent
Company Guarantor Non-Guarantor
Only Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities $ 206 $ (54,293) $ (28,191) $ (2,387) $(84,665)
Net Cash Flows from Investing
Activities:
Additions to property and
equipment --- (31,376) (668) --- (32,044)
Dispositions of property and
equipment --- 219 2,195 --- 2,414
Other --- 192 --- --- 192
------- --------- --------- -------- --------
Net Cash Used in Investing
Activities --- (30,965) 1,527 (29,438)
------- --------- --------- -------- --------
Net Cash Flows from Financing
Activities:
Payments on long-term debt --- (19) --- --- (19)
Net borrowings under revolving
credit agreement --- 91,200 --- --- 91,200
Proceeds from exercise of
stock options 551 --- --- --- 551
Purchase of treasury stock (757) --- --- --- (757)
Dividends paid --- --- (2,387) 2,387 ---
Other
------- --------- --------- -------- --------
Net Cash Provided by (Used in)
Financing Activities (206) 91,181 (2,387) 2,387 90,975
------- --------- --------- -------- --------
Net Increase (Decrease) in Cash
and Cash Equivalents --- 5,923 (29,051) --- (23,128)
Cash and Cash Equivalents at
Beginning of Period --- 6,603 43,443 --- 50,046
------- --------- --------- -------- --------
Cash and Cash Equivalents at
End of Period $ --- $ 12,526 $ 14,392 $ --- $ 26,918
------- --------- --------- -------- --------
------- --------- --------- -------- --------
</TABLE>
17
<PAGE>
ITEM 2
ZALE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements of the Company (and the related
notes thereto) included elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's unaudited Consolidated Statements of Operations expressed as a
percentage of net sales.
<TABLE>
Three Months Ended Six Months Ended
January 31, January 31,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 51.8 50.8 51.9 51.2
----- ----- ----- -----
Gross Margin 48.2 49.2 48.1 48.8
Selling, General and Administrative Expenses 28.4 30.5 33.1 34.8
Depreciation and Amortization Expense 1.0 0.7 1.3 0.8
Unusual Item - Gain on Sale of Diamond Park Fine
Jewelers Division Assets --- --- (0.2) ---
Unusual Item - Gain on Sale of Land (0.9) --- (0.6) ---
----- ----- ----- -----
Operating Earnings 19.7 18.0 14.5 13.2
Interest Expense, Net 1.6 1.9 2.1 2.4
----- ----- ----- -----
Earnings Before Income Taxes 18.1 16.1 12.4 10.8
Income Taxes 6.8 5.9 4.6 4.0
----- ----- ----- -----
Net Earnings 11.3 10.2 7.8 6.8
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1997
NET SALES. Net Sales for the three months ended January 31, 1998 increased
by $16.9 million to $522.0 million, a 3.4% percent increase compared to the
previous year. The previous year's quarter included sales of 182 Diamond Park
Fine Jewelry stores operated by the Company, whereas only 47 Diamond Park stores
were operated by the Company in the current year's quarter. The sales increase
primarily resulted from a 9.4 percent increase in stores open for comparable
periods as well as sales from new stores added during the last twelve months.
The Company believes that the sales growth was influenced by continued
improvement of merchandise assortments, product promotions and execution of
store programs.
GROSS MARGIN. Gross Margin as a percentage of net sales decreased by 1.0
percent for the three month period ending January 31, 1998, compared to the same
period last year, due to a shift in mix to more diamond solitaire merchandise
and the Company's planned competitive stance with regard to pricing in the
current year. The LIFO provision was $0.0 million and $2.3 million for the
three months ended January 31, 1998 and 1997, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 2.1 percent as a percentage of net sales.
Store expenses decreased by 1.5 percent as a percentage of sales, principally
due to productivity improvement as a result of store payroll increasing at a
slower rate than sales, a decrease in store rent, and increased income from
extended warranties. The decrease in store rent resulted principally from the
divestiture of the Diamond Park operations which had significantly higher rent
costs as a percentage of sales. There was also a slight improvement in net
credit income and corporate expenses as a percent of sales during the current
period.
UNUSUAL ITEM - GAIN ON SALE OF LAND. The unusual item of $4.7 million
primarily represents the gain on sale of excess land surrounding the Company's
corporate headquarters facility, during the second quarter. See Footnote "Sale
of Land."
18
<PAGE>
EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION AND AMORTIZATION EXPENSE,
AND UNUSUAL ITEMS. As a result of the factors discussed above, Earnings Before
Interest, Taxes and Depreciation and Amortization Expense, and Unusual Items
were $103.2 million and $94.1 million for the three months ended January 31,
1998 and 1997, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $2.0 million. Depreciation and amortization of property
and equipment increased from $4.7 million to $6.7 million principally due to
new store growth and the remodeling and refurbishing of existing stores.
INTEREST EXPENSE, NET. Interest Expense, Net was $8.4 million and $9.5
million for the three months ended January 31, 1998 and 1997, respectively. The
decrease is due to an increase in interest income from investments.
INCOME TAXES. The income tax expense for the three month periods ended
January 31, 1998 and 1997 was $35.3 million and $29.7 million, respectively,
reflecting an effective tax rate of 37.4 percent and 36.6 percent, respectively.
As a result of guidelines regarding accounting for income taxes of companies
utilizing fresh-start reporting, the Company reports earnings on a fully-taxed
basis even though it does not expect to pay any significant income taxes for the
current year. The Company will realize the cash benefit from utilization of the
tax net operating loss carryforward ("NOL") against current and future tax
liabilities. As of July 31, 1997, the Company had a NOL carryforward (after
limitations) of approximately $254.2 million.
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1997
NET SALES. Net Sales for the six months ended January 31, 1998 increased
by $38.7 million to $774.5 million, a 5.3 percent increase compared to the
previous year. The previous year's period included sales of Diamond Park Fine
Jewelry stores, which the Company had divested before the current period end.
The sales increase primarily resulted from a 8.3 percent increase in stores open
for comparable period as well as new stores added in the last twelve months.
The Company believes that the sales growth was influenced by enhanced
merchandise assortments, successful product promotions and strong execution of
store programs.
GROSS MARGIN. Gross Margin as a percentage of net sales decreased by 0.7
percent primarily due to a shift in mix to more diamond solitaire merchandise
and the Company's planned competitive stance with regard to pricing in the
current year. The LIFO provision was $0.7 million and $2.6 million for the six
months ended January 31, 1998 and 1997, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.7 percent as a percentage of net sales.
Store expenses decreased by 1.4 percent as a percentage of sales principally due
to productivity improvement as a result of store payroll increasing at a slower
rate than sales, a decrease in store rent, and increased income from extended
warranties. The decrease in store rent resulted principally from the
divestiture of the Diamond Park operations which had significantly higher rent
costs as a percentage of sales. There were also slight improvements in
corporate expenses as a percent of sales during the current period.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION EXPENSE, AND
UNUSUAL ITEMS. Earnings Before Interest Taxes, Depreciation and Amortization
Expense and Unusual Items were $116.2 million and $103.1 million for the six
months ended January 31, 1998 and 1997, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $4.0 million. Depreciation and amortization of property
and equipment increased from $8.8 million to $12.8 million primarily as new
assets have been purchased in connection with the Company's store expansion and
remodeling program.
UNUSUAL ITEM - GAIN ON SALE OF DIAMOND PARK FINE JEWELERS DIVISION ASSETS.
Unusual Item - Gain on Sale of Diamond Park Fine Jewelers Division Assets was
$1.6 million for the six month period ended January 31, 1998. There were no
unusual items for the previous period. See Footnote "Sale of Diamond Park
Assets."
19
<PAGE>
UNUSUAL ITEM - GAIN ON SALE OF LAND. The unusual item of $4.7 million
primarily represents the gain on sale of excess land surrounding the Company's
corporate headquarter facility, during the second quarter. See Footnote "Sale
of Land."
INTEREST EXPENSE, NET. Interest Expense, Net was $16.5 million and $17.5
million for the six months ended January 31, 1998 and 1997, respectively. The
decrease is due to an increase in interest income from investments.
INCOME TAXES. The income tax expense for the six month periods ended
January 31, 1998 and 1997 was $35.9 million and $29.1 million, respectively,
reflecting an effective tax rate of 37.4 percent and 36.6 percent,
respectively. As a result of guidelines regarding accounting for income taxes
of companies utilizing fresh-start reporting, the Company reports earnings on a
fully-taxed basis even though it does not expect to pay any significant income
taxes for the current year. The Company will realize the cash benefit from
utilization of the tax net operating loss carryforward ("NOL") against current
and future tax liabilities. As of July 31, 1997, the Company had a NOL
carryforward (after limitations) of approximately $254.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory
and receivables growth, capital expenditures primarily for new store growth and
renovations, upgrading its management information systems and debt service. As
of January 31, 1998, the Company had cash and cash equivalents of $113.7
million, of which $11.1 million was restricted. The retail jewelry business is
highly seasonal, with a significant proportion of sales and operating income
being generated in November and December of each year. Approximately 40.3% and
39.7% of the Company's annual sales were made during the three months ended
January 31, 1997 and 1996, respectively, which includes the Christmas selling
season. The Company's working capital requirements fluctuate during the year,
increasing substantially during the fall season as a result of higher planned
seasonal inventory levels and customer receivable balances.
The Company, through Zale Funding Trust ("ZFT"), a limited purpose Delaware
business trust wholly owned by Zale Delaware, Inc. ("ZDel") and formed to
finance customer accounts receivable, has approximately $380.6 million, net of
discount, aggregate principal amount of Receivables Backed Notes ("ZFT
Receivables Notes") issued and outstanding at January 31, 1998 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 seasonal financing needs, the Company
and ZDel (the "Borrowers") entered into a three year unsecured revolving credit
agreement (the "Revolving Credit Agreement") with a group of banks on March 31,
1997. The Revolving Credit Agreement provides for revolving credit loans in an
aggregate amount of up to $225.0 million, including a $30.0 million sublimit for
letters of credit. At January 31, 1998, there were no loans outstanding under
the Revolving Credit Agreement. Letters of credit in the amount of
approximately $0.7 million were outstanding at January 31, 1998. The Company is
currently in compliance with all of its covenant obligations under the Revolving
Credit Agreement and the instruments governing its other indebtedness.
In order to support the Company's longer term capital financing
requirements, the Company issued $100 million of Senior Notes ("the Senior
Notes") on September 23, 1997. These notes bear interest at 8 1/2% and are due
in 2007. The Senior Notes are unsecured and are fully and unconditionally
guaranteed by ZDel. The proceeds were utilized to repay indebtedness under the
Company's Revolving Credit Agreement and for general corporate purposes.
The Company established a national bank in October 1997 for the granting of
credit under its private label credit cards. The creation of a national bank
allows the Company greater flexibility in establishing rates charged to
customers and will simplify the regulatory requirements under which the Company
operates.
Under its growth strategy, the Company plans to open approximately 160 new
stores for which it will incur approximately $40.0 million in capital
expenditures during the combined fiscal years 1998 and 1999. These stores are
expected to solidify the Company's core mall business by further penetrating
markets where the Company is under-represented. In the first six months of
fiscal 1998 the Company opened 52 new stores.
20
<PAGE>
Since fiscal 1994, the Company has opened, remodeled or refurbished nearly
71% of its store base. During the combined fiscal years 1998 and 1999, the
Company anticipates spending approximately an additional $50.0 million to
remodel and refurbish approximately 300 more stores. The Company also estimates
it will make capital expenditures of approximately $25.0 million to $30.0
million during the combined fiscal years 1998 and 1999 for enhancements to its
management information systems. In total, the Company anticipates spending
approximately $150.0 million on capital expenditures during the combined fiscal
years 1998 and 1999.
There has been an increase of approximately $10.7 million, or 2.1%, in
owned merchandise inventories at January 31, 1998 compared to the balance at
July 31, 1997. The increase in inventory levels is principally the result of
new store growth.
On October 6, 1997, the Company consummated the sale of the majority of the
assets of its Diamond Park Fine Jewelers division ("the Diamond Park Asset
Sale") for $58 million. The Company continued to operate 47 leased fine jewelry
departments in the Dillard's stores through January 1998, the end of the
current license period, following which time the remaining inventory of such
operations will be sold to the purchaser for approximately $4.4 million. The
net proceeds from the Diamond Park asset sale are being invested into the
Company's operations and will be used for general corporate purposes, including
the Company's stock repurchase program.
On January 30, 1998, the Company closed on the sale of excess land
surrounding the corporate headquarters facility. The net proceeds of $8.1
million will be used for general corporate purposes, including the Company's
stock repurchase program.
On February 19, 1998, the Company announced a stock repurchase program
pursuant to which the Company, from time to time and at management's discretion,
may purchase through the current calendar year, up to an aggregate of $40
million of the Company's common stock on the open market. The repurchase plan
was authorized in part to provide shares to offset the issuance of up to 1.9
million shares of Common Stock upon exercise of the Series A Warrants, which
expire on July 30, 1998.
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 $254.2 million, which represents up to
$99.0 million in future tax benefits. The utilization of this asset is subject
to limitations. The most restrictive is the Internal Revenue Code Section 382
annual limitation. The NOL will begin to expire in fiscal year 2002 but can be
utilized through 2009.
Management believes that operating cash flow, amounts available under the
Revolving Credit Agreement, the Receivables Securitization Facility, net
proceeds from the Senior Notes, net proceeds from the Diamond Park Asset Sale,
and proceeds from the Sale of Land should be sufficient to fund the Company's
current operations, debt service, currently anticipated capital expenditure and
stock repurchase program requirements for the foreseeable future.
YEAR 2000
The Company has reviewed its computer and other operating systems to
identify those which could be affected by the "Year 2000" issue. In certain
areas, the Company has begun and will continue to upgrade certain information
systems to improve operations and support future growth as well as address the
"Year 2000" issue. Systems not upgraded will be renovated in order to comply
with the "Year 2000" issue. Management believes that all new system
implementation upgrades and renovations will be made in a timely fashion and
that the "Year 2000" issue will not pose significant operational problems or
result in costs that have a material adverse impact on its financial condition
or results of operations. However, there can be no assurance that the systems
of other companies on which the Company's systems also rely will be timely
converted or that any such failure to convert by another company would not have
an adverse affect on the Company's systems.
21
<PAGE>
INFLATION
In management's opinion, changes in Net Sales and Net Earnings that have
resulted from inflation and changing prices have not been material. There is no
assurance, however, that inflation will not materially affect the Company in the
future.
This Management's Discussion and Analysis contains forward-looking
statements, including statements concerning expected capital expenditures to be
made in the future, expected significant upgrades to the Company's management
information systems over the next several years, the addition of new locations
through either new store openings or strategic acquisitions, the renovation and
remodeling of the Company's existing store locations, the expected impact of the
"Year 2000" issue, and the adequacy of the Company's sources of cash to finance
its current and future operations. These forward-looking statements involve a
number of risks and uncertainties. In addition to the factors discussed above,
among other factors that could cause actual results to differ materially are the
following: the impact of general economic conditions due to the fact that
jewelry purchases are discretionary for consumers and may be affected by adverse
trends in the general economy; competition in the fragmented retail jewelry
business; the variability of quarterly results and seasonality of the retail
business; the ability to improve productivity in existing stores and to increase
comparable store sales; the availability of alternate sources of merchandise
supply in the case of an abrupt loss of any significant supplier during the
three month period leading up to the Christmas season; the dependence on key
personnel who have been hired or retained since bankruptcy; the changes in
regulatory requirements which are applicable to the Company's business;
management decisions to pursue new product lines which may involve additional
costs; and the risk factors listed from time to time in the Company's Securities
and Exchange Commission reports, including but not limited to, its Annual Report
on Form 10-K for the year ended July 31, 1997.
22
<PAGE>
Part II. - Other Information:
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits -
27 Financial data schedule.
Part II Exhibits -
None.
(b) Form 8-K-
99 Press Release issued by the Company on February 19, 1998.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zale Corporation
---------------------------------
(Registrant)
Date March 9, 1998 /s/ MARK R. LENZ
----------------- ---------------------------------
Mark R. Lenz
Senior Vice-President, Controller
(principal accounting officer
of the registrant)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JANUARY 31, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BE REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 113,708
<SECURITIES> 0
<RECEIVABLES> 548,323<F1>
<ALLOWANCES> 0
<INVENTORY> 522,328
<CURRENT-ASSETS> 1,210,473
<PP&E> 152,938<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,461,826
<CURRENT-LIABILITIES> 222,012
<BONDS> 480,314
0
0
<COMMON> 363
<OTHER-SE> 645,321
<TOTAL-LIABILITY-AND-EQUITY> 1,461,826
<SALES> 774,543
<TOTAL-REVENUES> 774,543
<CGS> 402,179
<TOTAL-COSTS> 402,179
<OTHER-EXPENSES> 259,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,524
<INCOME-PRETAX> 95,852
<INCOME-TAX> 35,869
<INCOME-CONTINUING> 59,983
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,983
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.60
<FN>
<F1>THIS ASSET VALUE REPRESENTS A NET AMOUNT.
</FN>
</TABLE>
