<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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 May 22, 1998, 34,676,823 shares of the registrant's common stock were
outstanding.
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<PAGE> 2
ZALE CORPORATION AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Part I. Financial Information: Page
----
<S> <C>
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
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 258,300 $ 244,376 $ 1,032,843 $ 980,238
Cost of Sales 133,842 125,194 536,021 502,009
----------- ----------- ----------- -----------
Gross Margin 124,458 119,182 496,822 478,229
Selling, General and Administrative Expenses 108,064 108,002 364,262 363,931
Depreciation and Amortization Expense 5,903 3,789 16,057 9,924
Unusual Item - Gain on Sale of Diamond Park Fine
Jewelers Division Assets -- -- (1,634) --
Unusual Item - Gain on Sale of Land -- -- (4,720) --
----------- ----------- ----------- -----------
Operating Earnings 10,491 7,391 122,857 104,374
Interest Expense, Net 8,062 9,695 24,576 27,216
----------- ----------- ----------- -----------
Earnings (Loss) Before Income Taxes 2,429 (2,304) 98,281 77,158
Income Taxes 926 (860) 36,795 28,225
----------- ----------- ----------- -----------
Net Earnings (Loss) $ 1,503 $ (1,444) $ 61,486 $ 48,933
=========== =========== =========== ===========
Earnings (Loss) Per Common Share:
Basic $ .04 $ (.04) $ 1.74 $ 1.40
Diluted $ .04 $ (.04) $ 1.64 $ 1.34
Weighted Average Number of Common
Shares Outstanding:
Basic 35,255 34,969 35,387 35,074
Diluted 37,425 34,969 37,496 36,614
</TABLE>
See Notes to the Consolidated Financial Statements.
3
<PAGE> 4
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, JULY 31, APRIL 30,
1998 1997 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 128,408 $ 32,623 $ 17,118
Restricted Cash 5,261 9,013 3,544
Customer Receivables, Net 501,257 454,270 458,477
Merchandise Inventories 524,632 511,702 590,014
Other Current Assets 27,610 39,271 30,140
----------- ----------- -----------
Total Current Assets 1,187,168 1,046,879 1,099,293
Property and Equipment, Net 157,258 138,011 132,638
Other Assets 44,196 43,616 43,564
Deferred Tax Asset, Net 52,700 52,700 56,500
----------- ----------- -----------
Total Assets $ 1,441,322 $ 1,281,206 $ 1,331,995
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 12 $ 328 $ 327
Accounts Payable and Accrued Liabilities 209,156 145,721 180,392
Deferred Tax Liability, Net 23,700 23,700 32,000
----------- ----------- -----------
Total Current Liabilities 232,868 169,749 212,719
Non-current Liabilities 51,019 53,544 53,560
Long-term Debt 480,329 451,459 465,752
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 60,456 64,880 66,354
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock -- -- --
Common Stock 365 350 357
Additional Paid-In Capital (Includes
Stock Warrants) 447,274 401,121 395,289
Unrealized Gains on Securities 2,638 2,182 1,664
Accumulated Earnings 203,890 142,404 140,784
----------- ----------- -----------
654,167 546,057 538,094
Treasury Stock (37,517) (4,483) (4,484)
----------- ----------- -----------
Total Stockholders' Investment 616,650 541,574 533,610
----------- ----------- -----------
Total Liabilities and Stockholders' Investment $ 1,441,322 $ 1,281,206 $ 1,331,995
=========== =========== ===========
</TABLE>
See Notes to the Consolidated Financial Statements.
4
<PAGE> 5
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1998 1997
--------- ---------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 61,486 $ 48,933
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Depreciation and amortization expense 16,869 11,491
Non-cash charge in lieu of tax expense 36,417 27,382
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:
Restricted cash 3,752 27,967
Customer receivables, net (46,987) (38,600)
Merchandise inventories (61,363) (132,152)
Other current assets 11,661 (4,605)
Other assets 464 951
Accounts payable and accrued liabilities 64,376 34,598
Non-current liabilities (4,784) (567)
--------- ---------
Net Cash Provided by (Used in) Operating Activities 75,537 (24,602)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (47,807) (41,231)
Dispositions of property and equipment 679 2,648
Net proceeds from Sale of Diamond Park Fine
Jewelers Division Assets 57,642 --
Proceeds from Sale of Land 8,074 --
Other -- 187
--------- ---------
Net Cash Provided by (Used in) Investing Activities 18,588 (38,396)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (325) (21)
Short-term borrowing -- 316
Payments on revolving credit agreement (192,900) (793,500)
Borrowings under revolving credit agreement 122,200 854,900
Proceeds from issuance of Senior Notes 99,530 --
Debt issue and capitalized financing costs (2,621) --
Proceeds from exercise of stock options and warrants 9,291 643
Purchase of treasury stock (33,515) (757)
--------- ---------
Net Cash Provided by Financing Activities 1,660 61,581
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 95,785 (1,417)
--------- ---------
Cash and Cash Equivalents at Beginning of Period 32,623 18,535
--------- ---------
Cash and Cash Equivalents at End of Period $ 128,408 $ 17,118
========= =========
</TABLE>
See Notes to the Consolidated Financial Statements.
5
<PAGE> 6
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1998 1997
----------- -----------
<S> <C> <C>
Supplemental cash flow information:
Interest paid $26,939 $26,085
Interest received $ 3,758 $ 808
Income taxes paid (net of refunds received) $ 1,205 $ 1,815
</TABLE>
See Notes to the Consolidated Financial Statements.
6
<PAGE> 7
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 April 30, 1998, the Company operated 1,107 retail jewelry
stores located primarily in shopping malls throughout the United States, Guam
and Puerto Rico. The Company operates three divisions: Zales(R), Gordon's(SM),
and Bailey, Banks and Biddle(R). 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 finest 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 three 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 nine month periods ended April 30, 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 April 30, 1998
have been applied to the financial statements for July 31, 1997 and April 30,
1997. Restricted cash amounts represent collateral requirements under the
Receivables Securitization Facility, Jewelers National Bank capital requirements
and vendor consignment arrangements.
The results of operations for the three and nine month periods ended
April 30, 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 reflect 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
periods' 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. For the three month period ended April 30, 1997, 1.4 million
common stock equivalents were not used in the calculation of adjusted weighted
average number of common shares outstanding, due to their antidilutive effect.
There were no common stock equivalents that would be antidilutive for the three
month period ended April 30, 1998, and the nine month periods ended April 30,
1998 and 1997.
7
<PAGE> 8
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net earnings (loss) available to shareholders $ 1,503 $ (1,444) $ 61,486 $ 48,933
BASIC:
Weighted average number of common shares outstanding 35,255 34,969 35,387 35,074
Net earnings (loss) per common share - basic $ 0.04 $ (0.04) $ 1.74 $ 1.40
======== ======== ======== ========
DILUTED:
Weighted average number of common shares outstanding 35,255 34,969 35,387 35,074
Effect of dilutive securities:
Stock options 945 -- 945 662
Warrants 1,225 -- 1,164 878
-------- -------- -------- --------
Weighted average number of common shares outstanding
as adjusted 37,425 34,969 37,496 36,614
Net earnings (loss) per common share - diluted $ 0.04 $ (0.04) $ 1.64 $ 1.34
======== ======== ======== ========
</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 potential dilutive impact of
the issuance of approximately 1.9 million shares of Common Stock upon exercise
of the Series A Warrants, which expire on July 30, 1998. As of April 30, 1998,
the Company had repurchased approximately 1.2 million shares at an aggregate
cost of $33.5 million.
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 license
period, following which time the remaining inventory of such operations was sold
to the purchaser. On October 6, 1997, the Company closed the Diamond Park Asset
Sale. The Company received $58 million in October 1997 and approximately $4.6
million was received in February 1998, at which time the remaining inventory of
the Dillard's stores was 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.
8
<PAGE> 9
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
SALE OF LAND
On January 30, 1998, the Company closed the sale of a portion of the
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 May 4, 1998, the Company received net
proceeds of $4.8 million for the sale of the remaining portion of the land.
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 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 exchanged for the
Senior Notes new notes of the Company registered with the Securities and
Exchange Commission and 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> 10
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 APRIL 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ 253,572 $ 4,728 $ -- $ 258,300
Cost of Sales -- 131,559 2,283 -- 133,842
------------ ------------ ------------ ------------ ------------
Gross Margin -- 122,013 2,445 -- 124,458
Selling, General, and
Administrative Expenses (Income) 38 115,997 (7,971) -- 108,064
Depreciation and Amortization
Expense -- 5,667 236 -- 5,903
------------ ------------ ------------ ------------ ------------
Operating Earnings (Loss) (38) 349 10,180 -- 10,491
Interest (Income) Expense, Net -- (2,656) 10,718 -- 8,062
------------ ------------ ------------ ------------ ------------
Earnings (Loss) Before Income
Taxes (38) 3,005 (538) -- 2,429
Income Taxes (14) 1,141 (201) -- 926
------------ ------------ ------------ ------------ ------------
Earnings (Loss) Before Equity
in Earnings of Subsidiaries (24) 1,864 (337) -- 1,503
Equity in Earnings of
Subsidiaries 1,527 (336) -- (1,191) --
------------ ------------ ------------ ------------ ------------
Net Earnings (Loss) $ 1,503 $ 1,528 $ (337) $ (1,191) $ 1,503
============ ============ ============ ============ ============
</TABLE>
10
<PAGE> 11
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 APRIL 30, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ 240,271 $ 4,105 $ -- $ 244,376
Cost of Sales -- 123,174 2,020 -- 125,194
------------- ------------- ------------- ------------- -------------
Gross Margin -- 117,097 2,085 -- 119,182
Selling, General, and
Administrative Expenses (Income) 37 112,373 (4,408) -- 108,002
Depreciation and Amortization
Expense -- 3,459 330 -- 3,789
------------- ------------- ------------- ------------- -------------
Operating Earnings (Loss) (37) 1,265 6,163 -- 7,391
Interest Expense, Net -- 1,273 8,422 -- 9,695
------------- ------------- ------------- ------------- -------------
Loss Before Income Taxes (37) (8) (2,259) -- (2,304)
Income Taxes (14) (3) (843) -- (860)
------------- ------------- ------------- ------------- -------------
Earnings (Loss) Before Equity
in Earnings of Subsidiaries (23) (5) (1,416) -- (1,444)
Equity in Loss of Subsidiaries (1,421) (1,415) -- 2,836 --
------------- ------------- ------------- ------------- -------------
Net Loss $ (1,444) $ (1,420) $ (1,416) $ 2,836 $ (1,444)
============= ============= ============= ============= =============
</TABLE>
11
<PAGE> 12
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ 1,016,079 $ 16,764 $ -- $ 1,032,843
Cost of Sales -- 527,731 8,290 -- 536,021
------------- ------------- ------------- ------------- -------------
Gross Margin -- 488,348 8,474 -- 496,822
Selling, General, and
Administrative Expenses
(Income) 113 387,100 (22,951) -- 364,262
Depreciation and Amortization
Expense -- 15,209 848 -- 16,057
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) (113) 92,393 30,577 -- 122,857
Interest Expense (Income), Net -- (4,738) 29,314 -- 24,576
------------- ------------- ------------- ------------- -------------
Earnings (Loss) Before Income
Taxes (113) 97,131 1,263 -- 98,281
Income Taxes (42) 36,364 473 -- 36,795
------------- ------------- ------------- ------------- -------------
Earnings (Loss) Before Equity
in Earnings of Subsidiaries (71) 60,767 790 -- 61,486
Equity in Earnings of
Subsidiaries 61,557 665 -- (62,222) --
------------- ------------- ------------- ------------- -------------
Net Earnings $ 61,486 $ 61,432 $ 790 $ (62,222) $ 61,486
============= ============= ============= ============= =============
</TABLE>
12
<PAGE> 13
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ 964,626 $ 15,612 $ -- $ 980,238
Cost of Sales -- 494,298 7,711 -- 502,009
------------- ------------- ------------- ------------- -------------
Gross Margin -- 470,328 7,901 -- 478,229
Selling, General, and
Administrative Expenses
(Income) 112 374,993 (11,174) -- 363,931
Depreciation and Amortization
Expense -- 9,028 896 -- 9,924
------------- ------------- ------------- ------------- -------------
Operating Earnings (Loss) (112) 86,307 18,179 -- 104,374
Interest Expense, Net -- 1,713 25,503 -- 27,216
------------- ------------- ------------- ------------- -------------
Earnings (Loss) Before Income
Taxes (112) 84,594 (7,324) -- 77,158
Income Taxes (41) 30,963 (2,697) -- 28,225
------------- ------------- ------------- ------------- -------------
Earnings (Loss) Before Equity
in Earnings of Subsidiaries (71) 53,631 (4,627) -- 48,933
Equity in Earnings (Loss) of
Subsidiaries 49,004 (5,256) -- (43,748) --
------------- ------------- ------------- ------------- -------------
Net Earnings (Loss) $ 48,933 $ 48,375 $ (4,627) $ (43,748) $ 48,933
============= ============= ============= ============= =============
</TABLE>
13
<PAGE> 14
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ -- $ 80,206 $ 48,202 $ -- $ 128,408
Restricted Cash -- 1,026 4,235 -- 5,261
Customer Receivables, Net -- -- 501,257 -- 501,257
Merchandise Inventories -- 514,255 10,377 -- 524,632
Other Current Assets -- 25,642 1,968 -- 27,610
------------- ------------- ------------- ------------- -------------
Total Current Assets -- 621,129 566,039 -- 1,187,168
Investment in Subsidiaries 616,721 50,244 -- (666,965) --
Property and Equipment, Net -- 153,202 4,056 -- 157,258
Intercompany Receivable 100,750 48,939 -- (149,689) --
Other Assets -- 10,700 33,496 -- 44,196
Deferred Tax Assets, Net 59 52,641 -- -- 52,700
------------- ------------- ------------- ------------- -------------
Total Assets $ 717,530 $ 936,855 $ 603,591 $ (816,654) $ 1,441,322
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term
Debt $ -- $ 12 $ -- $ -- $ 12
Accounts Payable and Accrued
Liabilities 686 205,500 2,970 -- 209,156
Deferred Tax Liability, Net 646 23,054 -- -- 23,700
------------- ------------- ------------- ------------- -------------
Total Current Liabilities 1,332 228,566 2,970 -- 232,868
Non-current Liabilities -- 39,150 11,869 -- 51,019
Intercompany Payable -- -- 149,689 (149,689) --
Long-term Debt 99,548 72 380,709 -- 480,329
Excess of Revalued Net Assets
Over Stockholders'
Investment, Net -- 60,456 -- -- 60,456
Total Stockholders'
Investment 616,650 608,611 58,354 (666,965) 616,650
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Stockholders'
Investment $ 717,530 $ 936,855 $ 603,591 $ (816,654) $ 1,441,322
============= ============= ============= ============= =============
</TABLE>
14
<PAGE> 15
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ -- $ 24,014 $ 8,609 $ -- $ 32,623
Restricted Cash -- 3,465 5,548 -- 9,013
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> 16
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION --(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities $ 24,224 $ 10,603 $ 52,427 $ (11,717) $ 75,537
Net Cash Flows from Investing
Activities:
Additions to property and
equipment -- (46,589) (1,218) -- (47,807)
Dispositions of property and
equipment -- 578 101 -- 679
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 -- 19,705 (1,117) -- 18,588
------------- ------------- ------------- ------------- -------------
Net Cash Flows from Financing
Activities:
Payments from long-term debt -- (325) -- -- (325)
Payments on revolving
credit agreement -- (192,900) -- -- (192,900)
Borrowings under revolving
credit agreement -- 122,200 -- -- 122,200
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 -- (2,621) -- -- (2,621)
Proceeds from exercise of
stock options 9,291 -- -- -- 9,291
Purchase of treasury stock (33,515) -- -- -- (33,515)
Proceeds from issuance of
common stock -- -- 2,500 (2,500) --
Dividends paid -- -- (14,217) 14,217 --
------------- ------------- ------------- ------------- -------------
Net Cash Provided by (Used in)
Financing Activities (24,224) 25,884 (11,717) 11,717 1,660
------------- ------------- ------------- ------------- -------------
Net Increase in
Cash and Cash Equivalents -- 56,192 39,593 -- 95,785
Cash and Cash Equivalents at
Beginning of Period -- 24,014 8,609 -- 32,623
------------- ------------- ------------- ------------- -------------
Cash and Cash Equivalents at
End of Period $ -- $ 80,206 $ 48,202 $ -- $ 128,408
============= ============= ============= ============= =============
</TABLE>
16
<PAGE> 17
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION --(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities $ 114 $ (16,709) $ (1,089) $ (6,918) $ (24,602)
Net Cash Flows from Investing
Activities:
Additions to property and
equipment -- (40,530) (701) -- (41,231)
Dispositions of property and
equipment -- 453 2,195 -- 2,648
Other -- 187 -- -- 187
------------- ------------- ------------- ------------- -------------
Net Cash Provided by (Used in)
Investing Activities -- (39,890) 1,494 -- (38,396)
------------- ------------- ------------- ------------- -------------
Net Cash Flows from Financing
Activities:
Proceeds from long-term debt -- (21) -- -- (21)
Short-term borrowing -- 316 -- -- 316
Payments on revolving credit
agreement -- (793,500) -- -- (793,500)
Borrowings under revolving
credit agreement -- 854,900 -- -- 854,900
Proceeds from exercise of
stock options 643 -- -- -- 643
Purchase of treasury stock (757) -- -- -- (757)
Dividends paid -- -- (6,918) 6,918 --
Other -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Net Cash Provided by (Used in)
Financing Activities (114) 61,695 (6,918) 6,918 61,581
------------- ------------- ------------- ------------- -------------
Net (Decrease) Increase in Cash
and Cash Equivalents -- 5,096 (6,513) -- (1,417)
Cash and Cash Equivalents at
Beginning of Period -- 5,551 12,984 -- 18,535
------------- ------------- ------------- ------------- -------------
Cash and Cash Equivalents at
End of Period $ -- $ 10,647 $ 6,471 $ -- $ 17,118
============= ============= ============= ============= =============
</TABLE>
17
<PAGE> 18
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>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------ -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 51.8 51.2 51.9 51.2
------ ------ ------ ------
Gross Margin 48.2 48.8 48.1 48.8
Selling, General and Administrative Expenses 41.8 44.2 35.3 37.1
Depreciation and Amortization Expense 2.3 1.6 1.6 1.0
Unusual Item - Gain on Sale of Diamond Park Fine
Jewelers Division Assets -- -- (0.2) --
Unusual Item - Gain on Sale of Land -- -- (0.5) --
------ ------ ------ ------
Operating Earnings 4.1 3.0 11.9 10.7
Interest Expense, Net 3.1 4.0 2.4 2.8
------ ------ ------ ------
Earnings (Loss) Before Income Taxes 1.0 (1.0) 9.5 7.9
Income Taxes 0.4 (0.4) 3.5 2.9
------ ------ ------ ------
Net Earnings (Loss) 0.6 (0.6) 6.0 5.0
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
NET SALES. Net Sales for the three months ended April 30, 1998
increased by $13.9 million to $258.3 million, a 5.7 percent increase compared to
the previous year. The previous year's quarter included sales of 185 Diamond
Park Fine Jewelry stores operated by the Company, which the Company had divested
prior to the quarter ended April 30, 1998. The sales increase primarily resulted
from a 11.9 percent increase in sales from 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
0.6 percent for the three month period ending April 30, 1998, compared to the
same period last year, 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 (benefit) provision was $(0.7) million
and $0.1 million for the three months ended April 30, 1998 and 1997,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 2.4 percent as a percentage of net sales,
principally due to a decrease in store payroll and store rent. These decreases
resulted from productivity improvements and the divestiture of the Diamond Park
operations which had significantly higher payroll and rent costs as a percentage
of sales. There was also a slight improvement in net credit income as a percent
of sales during the current period, as a result of higher finance charge and
late fee income.
EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION AND AMORTIZATION
EXPENSE. As a result of the factors discussed above, Earnings Before Interest,
Taxes and Depreciation and Amortization Expense, were $16.4 million and $11.2
million for the three months ended April 30, 1998 and 1997, respectively.
18
<PAGE> 19
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $2.1 million. Depreciation and amortization of property and
equipment increased from $5.2 million to $7.3 million principally due to new
store growth and the remodeling and refurbishing of existing stores, 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 $8.1 million and $9.7
million for the three months ended April 30, 1998 and 1997, respectively. The
decrease is a result of higher interest income from investments due to an
increase in cash and cash equivalents.
INCOME TAXES. The income tax provision (benefit) for the three month
periods ended April 30, 1998 and 1997 was $0.9 million and $(0.9) million,
respectively, reflecting an effective tax rate of 38.1 percent and 37.3 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.
NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997
NET SALES. Net Sales for the nine months ended April 30, 1998 increased
by $52.6 million to $1,032.8 million, a 5.4 percent increase compared to the
previous year. The previous year's period included sales of Diamond Park Fine
Jewelry stores, which the Company had fully divested by the end of January,
1998. The sales increase primarily resulted from a 9.2 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. There was no LIFO provision required for the nine months
ended April 30, 1998. The LIFO provision was $2.3 million for the nine months
ended April 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.8 percent as a percentage of net sales,
principally due to a decrease in store payroll and store rent. These decreases
resulted from productivity improvements and the divestiture of the Diamond Park
operations which had significantly higher payroll and rent costs as a percentage
of sales. There was also a slight improvement in net credit income as a percent
of sales during the current period, as a result of higher finance charge and
late fee income.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION EXPENSE,
AND UNUSUAL ITEMS. Earnings Before Interest, Taxes, Depreciation and
Amortization Expense and Unusual Items were $132.6 million and $114.3 million
for the nine months ended April 30, 1998 and 1997, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $6.1 million. Depreciation and amortization of property and
equipment increased from $14.0 million to $20.2 million primarily as new assets
have been purchased in connection with the Company's store expansion and
remodeling program, since the fresh start reporting write-off of substantially
all fixed assets of the Company effective July 31, 1993.
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 nine month period ended April 30, 1998. There
were no unusual items for the previous period. See Footnote "Sale of Diamond
Park Assets."
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."
INTEREST EXPENSE, NET. Interest Expense, Net was $24.6 million and
$27.2 million for the nine months ended April 30, 1998 and 1997, respectively.
The decrease is a result of higher interest income from investments due to an
increase in cash and cash equivalents.
19
<PAGE> 20
INCOME TAXES. The income tax expense for the nine month period ended
April 30, 1998 and 1997 was $36.8 million and $28.2 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 April 30, 1998, the Company had cash and cash equivalents of
$128.4 million. 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 April 30, 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 April 30, 1998, there were no loans outstanding under the
Revolving Credit Agreement. Letters of credit in the amount of approximately
$0.6 million were outstanding at April 30, 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 has simplified its regulatory environment.
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 nine months of
fiscal 1998, the Company opened 67 of these new stores.
Since fiscal 1994, the Company has opened, remodeled or refurbished
nearly 71 percent 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 a decrease of approximately $65.4 million in owned
merchandise inventories at April 30, 1998 compared to the balance at April 30,
1997. The decrease resulted principally from the divestiture of the Diamond
Park operations earlier this fiscal year. Excluding Diamond Park operations,
owned inventories decreased by 1.5 percent and average inventory per store
decreased by 5.4 percent from April 30, 1997. The decrease is a result of
increased sales per store and tighter management of in-stock inventory levels
enhanced by the Company's new merchandise management systems.
20
<PAGE> 21
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
was sold to the purchaser for approximately $4.6 million. The net proceeds from
the Diamond Park Asset Sale will be invested into the Company's operations or
will be used for general corporate purposes.
On January 30, 1998, the Company closed the sale of a portion of the
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 May 4, 1998, the Company received net
proceeds of $4.8 million for the sale of the remaining parcel of land.
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 potential dilutive impact
of the issuance of approximately 1.9 million shares of Common Stock upon
exercise of the Series A Warrants, which expire on July 30, 1998. As of April
30, 1998, the Company had repurchased approximately 1.2 million shares at an
aggregate cost of $33.5 million.
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's management recognizes the need to ensure that its
operations and relationships with vendors and other third parties will not be
adversely impacted by software processing errors arising from calculations using
the year 2000 and beyond ("Year 2000"). Like those of many companies, a
significant number of Zale's computer applications and systems require
modification over the next year in order to render these systems compliant with
the Year 2000.
Zale is using a combination of internal and external resources to
assess and make the needed changes to its many different information systems
such as mainframe, client/server applications and outsourced systems, among
others. A formal project was begun in 1997 to inventory all the specialized
software programs and hardware used in the company's business. The inventory is
substantially complete and renovation is underway. Non-compliant programs and
systems are being replaced, modified or outsourced throughout 1998 and early
1999. Testing will be substantially complete by December 31, 1998.
Management anticipates direct external expenditures associated with
the Year 2000 to be approximately $1.7 million in fiscal year 1998 and $3.5
million in fiscal year 1999. As required by generally accepted accounting
principles, these costs are expensed as incurred.
Additionally, in the normal course of business, the Company has made
capital investments in certain third party software and hardware systems to
address the financial and operational needs of the business. These systems,
which will
21
<PAGE> 22
improve the efficiencies and productivity of the replaced systems, have also
been certified as Year 2000 compliant by the vendors and will be installed prior
to August 1, 1999.
The company has communicated, and will continue to communicate with its
suppliers, financial institutions and others with which it does business to
monitor and evaluate Year 2000 conversions progress. Progress reports on the
Year 2000 project are presented regularly to the Company's Board of Directors
and senior management.
Although there can be no assurance that the Company will be able to
complete all of the modifications in the required time frame, or that the
Company will be able to identify all Year 2000 issues before problems manifest
themselves, in management's opinion, the Company is taking adequate action to
address Year 2000 issues and does not expect the financial impact of being Year
2000 compliant to be material to the Company's consolidated financial position,
results of operations or cash flows.
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> 23
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-
The Company filed a Report on Form 8-K on April 29, 1998 to report
certain Financial Data Schedules restated in compliance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share."
23
<PAGE> 24
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 June 5, 1998 /s/ MARK R. LENZ
--------------------------- ---------------------------------
Mark R. Lenz
Senior Vice-President, Controller
(principal accounting officer
of the registrant)
24
<PAGE> 25
INDEX TO EXHIBITS
Exhibit Number
27 Financial data schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE APRIL
30, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> APR-30-1998
<CASH> 133,669<F2>
<SECURITIES> 0
<RECEIVABLES> 501,257<F1>
<ALLOWANCES> 0
<INVENTORY> 524,632
<CURRENT-ASSETS> 1,187,168
<PP&E> 157,258<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,441,322
<CURRENT-LIABILITIES> 232,868
<BONDS> 480,329
0
0
<COMMON> 365
<OTHER-SE> 616,285
<TOTAL-LIABILITY-AND-EQUITY> 1,441,322
<SALES> 1,032,843
<TOTAL-REVENUES> 1,032,843
<CGS> 536,021
<TOTAL-COSTS> 536,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,576
<INCOME-PRETAX> 98,281
<INCOME-TAX> 36,795
<INCOME-CONTINUING> 61,486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,486
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.64
<FN>
<F2>Amount includes cash and cash equivalents and restricted cash.
<F1>This asset value represents a net amount.
</FN>
</TABLE>
