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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-21526
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-0675400
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or
organization)
901 W. WALNUT HILL LANE
IRVING, TEXAS 75038-1003
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (972) 580-4000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 3, 1998, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$961,301,155.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
As of September 3, 1998, the registrant had outstanding 36,405,093 shares
of its common stock, $.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information from the registrant's
definitive Proxy Statement relating to the registrant's annual meeting of
stockholders to be held on November 13, 1998.
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PART I
ITEM 1. BUSINESS
GENERAL
Zale Corporation ("the Company") is the largest specialty retailer of fine
jewelry in the United States. At July 31, 1998, the Company operated 1,125
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(R) and Bailey, Banks & Biddle(R). The Zales Division provides more
traditional, moderately priced jewelry to a broad range of customers. In
addition, there are six Zales outlet stores in four states. The Gordon's
Division offers contemporary merchandise targeted to regional preferences at
somewhat higher price points than Zales. The Bailey, Banks & Biddle Division
operates upscale jewelry stores which are considered among the finest jewelry
stores in their markets. During fiscal 1998, the Company sold its Diamond Park
Fine Jewelers Division. See "Current Year Events" below. During the fiscal year
ended July 31, 1998, the Company generated $1.3 billion of net sales.
The Company believes it is well-positioned to compete in the approximately
$38 billion, highly fragmented retail jewelry industry, leveraging its
established brand names, economies of scale and geographic and demographic
diversity. The Company enjoys significant brand name recognition as a result of
its long-standing presence in the industry and its national and regional
advertising campaigns. Zales was established in 1924 and is supported by
national television advertising campaigns while Gordon's and Bailey, Banks &
Biddle have been in existence since 1905 and 1832, respectively, and are
supported by regional advertising campaigns. The Company believes that name
recognition is an important advantage in jewelry retailing as products are
generally unbranded and consumers must trust in a retailer's reliability and
credibility. In addition, as the largest specialty retailer of fine jewelry in
the United States, the Company believes it realizes economies of scale in
purchasing and distribution, real estate, advertising and administrative costs.
The Company also believes that the geographic diversity of its retail
distribution network through all 50 states and the demographic breadth of its
target customer groups may serve to mitigate earnings volatility typically
associated with local or regional conditions.
The Company is incorporated in Delaware. On January 23, 1992, the Company
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. The Company emerged from bankruptcy on July 30, 1993. Its principal
executive offices are located at 901 W. Walnut Hill Lane, Irving, TX 75038-
1003, and its telephone number at that address is (972) 580-4000.
BUSINESS INITIATIVES AND STRATEGY
In April 1994, Robert J. DiNicola joined the Company as Chairman and Chief
Executive Officer and began recruiting other experienced retailing executives to
build a new management team. The new team revitalized the Company by
strengthening its merchandise and customer focus and instituting a highly
disciplined approach to the execution of the Company's merchandising strategy.
The Company, through separate divisional management and buying teams, has
created and implemented individualized merchandising and marketing strategies to
reestablish and promote distinct brand identities for its three divisions.
Target markets have been reemphasized for the Zales, Gordon's and Bailey, Banks
& Biddle Divisions.
The Company has refocused and strengthened its merchandising efforts.
Management has developed a large selection of key items from among the best
selling products in the retail jewelry industry, such as tennis bracelets,
solitaires, diamond stud earrings and bezel style diamond pendants and earrings
and made certain that these items are available in an appropriate variety of
styles at a range of competitive price points. At the same time, the Company has
adopted an aggressive approach to inventory management to keep key items in
stock and inventories more current. This is achieved through enhancements to the
merchandise system which provides regular reporting to the Company's merchandise
buyers on in-stock position and slow moving merchandise. Since 1994, the Company
has employed a consistent methodology which provides better
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inventory turnover and profitability information to identify slow moving
merchandise and determine appropriate merchandising actions on a more timely
basis. Under this methodology, inventory the Company considers to be slow moving
decreased over 70% since fiscal 1994.
The Company's marketing efforts have become more product and event-focused.
Television, radio, newspaper inserts, and direct mail advertising now feature
selected key items at a variety of price points. The Company has also broadened
its marketing efforts beyond the Christmas season to tie in with other
gift-giving holidays, such as Valentine's Day and Mother's Day. In addition,
advertising and in-store promotions have been synchronized with mall marketing
efforts to take advantage of other periods of high mall traffic, such as Labor
Day, which are typically not considered jewelry oriented holidays.
The Company has recruited experienced buyers and has centralized purchasing
at a divisional level to ensure consistency of quality and cost. In addition,
management believes that the Company is now leveraging its size to achieve
better prices, payment terms, return privileges and cooperative advertising
arrangements with its suppliers for certain products.
The Company's image as a provider of fine jewelry at competitive prices has
been enhanced by establishing price points for merchandise that are perceived by
customers as good values. Certain items are labeled "Brilliant Buys," "Premier
Values" and "Bailey's Classic Values" in the Zales, Gordon's and Bailey, Banks &
Biddle stores, respectively. These items are prominently displayed along with
their prices throughout the store, a practice that is uncommon in the U.S.
jewelry retailing industry and one that the Company believes enhances its
reputation for pricing integrity.
Over the last five years, nearly 70% of the Company's stores are new or
have been either refurbished or remodeled. Sales for refurbished, remodeled, and
relocated stores have historically increased by over 14% in the year following
refurbishment, remodeling, or relocation. The Company has taken steps to provide
upgraded sales and product training to sales personnel through Company-wide
employee and manager training programs. Staffing plans are now coordinated to
better schedule employees during peak periods.
The Company's strategy is to continue to increase store productivity and
profitability at all divisions by: (i) focusing on the core categories of
bridal, fashion and watches; (ii) using key item merchandise to drive volume;
(iii) remodeling and renovating all existing stores; (iv) enhancing
merchandising systems to assist buyer decision making; (v) executing tailored
staffing and training programs for store personnel; (vi) focusing advertising on
brand building and product distinction; and (vii) providing exclusive products
to develop brand distinction.
The Company plans to open approximately 156 new stores, principally in the
Zales Division and Bailey, Banks & Biddle Division, for which it will incur
approximately $44 million in capital expenditures during the combined fiscal
years 1999 and 2000. These stores will solidify the Company's core mall business
by further penetrating markets where the Company is underrepresented. The
Company targets premier regional mall locations throughout the country and
selects sites based on a variety of well-defined demographic and store
profitability characteristics. The Company has identified the specific malls for
this planned expansion which satisfy the Company's real estate strategy. The
Company also plans to refurbish, remodel or relocate approximately 240 stores at
a cost of approximately $44 million during the same period.
Over the past three years the Company has reduced selling, general and
administrative expenses as a percent of sales principally by leveraging its
fixed store and corporate operating expenses while increasing sales in its
stores. Additionally, the Company has instituted a focused effort to reduce
selling, general and administrative expenses where appropriate by eliminating
duplicative areas, streamlining processes and leveraging technology where
possible. Initiatives include: (i) improving the return on credit operations,
including establishing a national credit card bank which has allowed greater
flexibility in establishing finance charge rates to customers and has simplified
the regulatory requirements under which the Company operates; (ii) outsourcing
certain non-strategic functions, including certain aspects of MIS operations,
credit card remittance processing, and the internal audit department among other
areas; and (iii) streamlining corporate operations through review and
improvement of current processes and application of new technology in areas such
as merchandising, credit, store point of sale and financial systems.
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The Company continues to apply a disciplined approach to its credit
policies, which are controlled centrally for all divisions. See
"Business -- Credit Operations."
CURRENT YEAR EVENTS
SERIES A WARRANTS. During fiscal 1998, 1.9 million of 2.0 million
authorized Series A warrants were exercised. Each Series A Warrant entitled the
holder to purchase one share of Zale common stock at a price of $10.368 per
share. All unexercised warrants as of July 30, 1998 were cancelled, consistent
with the terms of the warrant agreement.
STOCK REPURCHASE PLAN. On February 19, 1998, the Company announced a stock
repurchase program pursuant to which the Company was authorized to purchase
through the current calendar year up to an aggregate of $40.0 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 expired on July 30, 1998. As of July 31, 1998, the Company had
repurchased approximately 1.4 million shares at an aggregate cost of $40.0
million.
SALE OF DIAMOND PARK DIVISION. On September 3, 1997, the Company signed an
agreement to sell the majority of the assets of its Diamond Park Fine Jewelers
Division (the "Diamond Park Division 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. On October 6, 1997, the Company closed the Diamond Park
Division Sale. The Company received $58.0 million in October 1997 and
approximately $4.8 million was received in February 1998, at which time the
remaining inventory and net property and equipment of the Dillard's stores was
sold to the purchaser. The net proceeds from the Diamond Park Division Sale will
be reinvested into the Company's operations or used for general corporate
purposes, including repurchases of the Company's common stock.
SALE OF LAND. In fiscal 1998, the Company closed the sales of the excess
land surrounding the corporate headquarters facility for $12.9 million. The net
proceeds from the sales 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 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 Zale Delaware, Inc. ("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 (including repurchases of
the Company's common stock), limitations 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 the Senior Notes for 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.
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FISCAL YEAR 1999 EVENT
STOCK REPURCHASE PLAN. On August 25, 1998, the Board of Directors
authorized a new stock repurchase program pursuant to which the Company, from
time to time and at management's discretion, may purchase through fiscal year
1999 up to an aggregate of $50.0 million of the Company's common stock on the
open market.
INDUSTRY
The U.S. retail jewelry industry's sales were approximately $38 billion in
1997. Specialty jewelry stores (such as the Company) account for almost half of
the industry, according to publicly available data. Historically, retail jewelry
store sales have exhibited only limited effects of cyclicality. According to the
U.S. Bureau of the Census, retail jewelry store sales have increased every year
for the past 14 years with the exception of 1991 which included both the Persian
Gulf War and the introduction of the luxury tax. Other significant segments of
the industry include national chain department stores (such as J.C. Penney
Company, Inc. and Sears, Roebuck and Co.), mass merchant discount stores (such
as Wal-Mart Stores, Inc.), other general merchandise stores and apparel and
accessory stores. The remainder of the retail jewelry industry is composed
primarily of catalog and mail order houses, direct-selling establishments, TV
home shopping (such as QVC, Inc.) and computer on-line shopping.
The U.S. retail jewelry industry is highly fragmented with the 10 largest
companies accounting for less than 25% of the market. The largest jewelry
retailer is believed to be Wal-Mart Stores, Inc., followed by the Company and
J.C. Penney. The Company is the largest specialty jewelry retail chain in the
U.S., with approximately 3.5% of market share based on the United States Census
Bureau estimate of 1997 U.S. Retail Jewelry and Watch Sales. Only one other
specialty jewelry retailer had greater than 2% market share.
DIVISIONAL OPERATIONS
The Company operates principally under three divisions. The following table
presents net sales for the Zales, Gordon's, and Bailey, Banks & Biddle divisions
of the Company.
YEAR ENDED JULY 31,
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1998 1997 1996
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(IN THOUSANDS)
Zales Division (including Outlet stores)......... $ 733,395 $ 618,106 $ 534,198
Gordon's Division................................ 309,327 282,271 264,298
Bailey, Banks & Biddle Division.................. 241,441 226,323 205,418
Other(a)......................................... 29,547 127,118 133,463
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Total Net Sales........................ $1,313,710 $1,253,818 $1,137,377
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(a) Other net sales: (i) in 1997 and 1998 includes sales from its direct mail
operation and (ii) includes sales from the Diamond Park Fine Jewelers
Division which was divested during fiscal 1998.
Zales Division
The Zales Division is positioned as the Company's national flagship and is
a leading brand name in jewelry retailing in the United States. At July 31,
1998, the Zales Division had 695 Zales stores and six Zales Outlet stores in 50
states and Puerto Rico. Average Zales' store size is approximately 1,450 square
feet and the average selling price per unit sold is $254. Zales accounted for
approximately 56% of the Company's sales in fiscal 1998.
Zales' merchandise selection is generally standardized across the nation
and targeted at customers representing a cross-section of mainstream America. In
fiscal 1998, bridal merchandise represented 36% of the Division's merchandise
sales, while fashion jewelry and watches comprised most of the remaining 64%.
The bridal merchandise category consists of solitaire engagement rings, various
bridal sets and diamond and gold
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anniversary bands. Fashion jewelry consists generally of diamond fashion rings,
earrings, chains, watches and various other items. The Company believes that the
prominence of diamond jewelry in its product selection fosters an image of
quality and trust among consumers. While maintaining a strong focus on the
bridal segment of the business, added emphasis is being placed on the non-bridal
merchandise and gift-giving aspects of the business. New product lines,
including Blue Lagoon cultured pearls by Mikimoto, and Movado watches, have been
added. The combination of Zales' national presence and centralized merchandise
selection allows it to use television advertising across the nation as its
primary advertising medium, supplemented by newspaper inserts and direct mail.
Zales plans to begin building its Zales Outlet concept over the next
several years. Zales has also entered the direct fulfillment business through
its direct mail operations and Internet web site. These operations currently
account for less than 1% of the Company's sales.
The following table sets forth the number of stores and average sales per
store for the Zales Division for the periods indicated:
YEAR ENDED JULY 31,
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1998 1997 1996
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Average sales per store(b)........................ $1,092,000 $1,013,000 $974,000
Stores opened during period....................... 65 65 89(a)
Stores closed during period....................... 6 9 6
Total stores (including Outlet stores)............ 701 642 586
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(a) Includes 40 stores transferred from the Gordon's Division during fiscal 1996
and 20 Karten's stores acquired in January 1996.
(b) Based on sales per store open a full twelve months during the respective
fiscal year.
Gordon's Division
Since 1994, the Company has repositioned Gordon's as a major regional brand
with an upgraded product offering. At July 31, 1998, the Gordon's Division had
317 stores in 35 states and Puerto Rico, substantially all of which operate
under the trade name Gordon's Jewelers. Average store size is approximately
1,400 square feet and the average selling price per unit sold is $302, which
represents a 26% increase from the average selling price per unit sold two years
ago. Gordon's accounted for approximately 24% of the Company's net sales in
fiscal 1998.
Gordon's distinguishes itself from Zales by providing a more upscale,
contemporary product mix and tailoring a portion of store inventory to regional
tastes. A substantial portion of the remaining merchandise sold by stores in the
Gordon's Division overlaps the Zales Division product line. Regional broadcast
campaigns that emphasize key items will be utilized to complement the Division's
printed inserts.
The Gordon's Division will continue to emphasize its new image to match its
customer base and will further tailor key items to customer's regional
preferences. Steps to upgrade Gordon's have included store remodeling, a more
distinctive and fashion-oriented product assortment, improved displays, a
reduced degree of promotional pricing and the application of more stringent
credit-approval standards.
The following table sets forth the number of stores and average sales per
store for the Gordon's Division for the periods indicated:
YEAR ENDED JULY 31,
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1998 1997 1996
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Average sales per store(b)........................... $967,000 $888,000 $803,000
Stores opened during period.......................... 17 9 13
Stores closed during period.......................... 10 22 57(a)
Total stores......................................... 317 310 323
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(a) Includes 40 stores transferred to the Zales Division during fiscal 1996.
(b) Based on sales per store open a full twelve months during the respective
fiscal year.
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Bailey, Banks & Biddle Division
Since 1832, Bailey, Banks & Biddle has offered high-end merchandise,
exclusive designs and a prestigious shopping environment for the upscale
customer. The Division operates principally under the trade name Bailey, Banks &
Biddle, but also utilizes other trade names, including Corrigan's(R),
Sweeney's(R), Stifft's(R), Dobbins(R), Linz(R), and Zell Bros(R). The Division's
stores are among the pre-eminent stores in their markets and carry exclusive
items to appeal to the more affluent customer. The Bailey, Banks & Biddle
merchandise selection emphasizes the classic and traditional look and focuses on
diamond, precious stone and gold jewelry, as well as watches and giftware. At
July 31, 1998, the Bailey, Banks & Biddle Division operated 107 upscale jewelry
stores in 27 states and Guam. The Division has an average selling price per unit
sold of $528, an average store size of approximately 3,200 square feet and
accounted for approximately 18% of the Company's net sales in fiscal 1998.
Bailey, Banks & Biddle Division stores rely heavily on upscale direct-mail
catalogs, enabling the stores to focus on specific products for specific
customers. In fiscal year 1997, the Bailey, Banks & Biddle Division expanded its
customer base in cross-promotional campaigns using upscale customer lists from
such companies as American Express Company. This initiative will help the
Bailey, Banks & Biddle Division more accurately target prospective customers in
a cost-efficient manner.
The following table sets forth the number of stores and average sales per
store for the Bailey, Banks & Biddle Division for the periods indicated:
YEAR ENDED JULY 31,
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1998 1997 1996
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Average sales per store(a)....................... $2,290,000 $1,990,000 $1,755,000
Stores opened during period...................... 7 16 1
Stores closed during period...................... 13 15 12
Total stores..................................... 107 113 112
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(a) Based on sales per store open a full twelve months during the respective
fiscal year.
STORE OPERATIONS
The Company's stores are designed and managed to create an attractive
environment, maximize operating efficiencies and make shopping convenient and
enjoyable. The Company pays careful attention to store layout, particularly in
areas such as lighting, choice of materials and arrangement of display cases.
Promotional displays are changed periodically to provide variety, to reflect
seasonal events or to complement a particular mall's promotions.
Each of the Company's stores is operated under a store manager who is
responsible for certain store-level operations, including sales and personnel
matters. The Company has consolidated most non-sales administrative matters,
including purchasing, credit operations and payroll, at the divisional level in
an effort to maintain low operating costs at the store level. Each of the
Company's divisions also offers standard warranties and return policies and
provides extended warranty coverage which may be purchased at the customer's
option.
The Company has implemented inventory control systems, extensive security
systems and loss prevention procedures to maintain low inventory losses. The
Company screens employment applicants and provides all of its store personnel
with training in loss prevention. Despite such precautions, the Company
experiences losses from theft from time to time and maintains insurance to cover
such losses.
The Company believes it is important to provide knowledgeable and
responsive customer service. The Company has implemented employee training
programs, including training in sales techniques for new employees, on-the-job
training and manager training for store managers.
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PURCHASING AND INVENTORY
The Company purchases substantially all of its merchandise in finished form
from a network of established suppliers and manufacturers located primarily in
the United States, Southeast Asia, and Italy. All purchasing is done through
divisional buying offices at the corporate headquarters. The Company either
purchases merchandise from its vendors or obtains merchandise on consignment.
The Company had approximately $146.8 million and $135.0 million of consignment
inventory on hand at July 31, 1998 and 1997, respectively. The increase in
consignment inventory results principally from testing of new products,
expansion of higher risk fashion and solitaire product categories and other
opportunities. The Company historically has not engaged in any substantial
amount of hedging activities with respect to merchandise held in inventory,
since the Company has been able to adjust retail prices to reflect price
fluctuations in the commodities that are used in the merchandise it sells. The
Company is not subject to substantial currency fluctuations because most
purchases are dollar denominated. During fiscal years 1998 and 1997, the Company
purchased approximately 33% and 27%, respectively, of its merchandise from its
top five vendors, including more than 11% from its top vendor.
CREDIT OPERATIONS
The Company's private label credit card programs help facilitate the sale
of merchandise to customers who wish to finance their purchases rather than use
cash or available credit limits on their bank cards. Approximately 50% of the
Company's net sales were generated by credit sales on the private label credit
cards in fiscal 1998. Providing customers with a credit account allows the
Company to build long term relationships with customers which facilitates
additional purchases.
The Company established a national credit card bank, Jewelers National Bank
("JNB" or "the Bank"), for the granting of credit under its private label credit
cards, in October 1997. The creation of the national bank allows the Company
greater flexibility in establishing rates charged to customers and simplifies
regulatory requirements.
New Account processing, Customer Service, and Collections for the private
label accounts are performed at credit centers located in Tempe, Arizona;
Clearwater, Florida; San Marcos, Texas and San Juan, Puerto Rico. The Bank uses
credit scoring to assess risk in extending credit to customers. The Bank has
enhanced the timeliness of its approval process for new accounts, whereby
customers can be approved rapidly at point of sale. The Bank offers a variety of
credit marketing programs to facilitate sales, with an emphasis on flexible
repayment terms.
As of July 31, 1998, the Company has approximately 2.8 million proprietary
credit card holders. The Company uses many of these credit customer names in its
targeted marketing programs. Proprietary credit sales have been stable as a
percentage of net sales, contrary to industry trends, in part because of an
increased emphasis on in-store promotions.
The Bank diligently follows up on delinquent accounts. Collectors are
trained with state of the art Computer Based Training programs ("CBT"). These
CBT programs are developed in-house by the credit organization. Collection
accounts are scored on a behavioral model at monthly billing. This statistical
analysis allows for optimum collection and follow-up on delinquent accounts.
Based on the behavioral score, the account is put into priority queuing for
letter and/or personal phone call follow-up. Early stage delinquencies are
handled with an approach which is sensitive to customer goodwill. If accounts
progress in delinquency, more assertive action is taken.
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The following table presents certain data concerning sales, credit sales
and accounts receivable for the past three fiscal years, excluding the Diamond
Park Division:
YEAR ENDED JULY 31,
------------------------------------
1998 1997 1996
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Net sales (thousands)............................ $1,284,163 $1,126,700 $1,003,914
Net credit sales (thousands)..................... $ 638,277 $ 556,771 $ 500,215
Credit sales as percentage of net sales.......... 49.7% 49.4% 49.8%
Average number of active customer accounts....... 755,000 715,000 678,000
Average balance per customer account............. $ 742 $ 719 $ 687
Customer receivables (thousands)................. $ 562,952 $ 508,885 $ 468,331
Average monthly collection percentage............ 9.6% 9.2% 9.2%
Bad debt expense as a percentage of total sales,
excluding Diamond Park Division................ 5.1% 4.9% 5.3%
Accounts receivable greater than 90 days past
due, excluding late fees....................... 8.4% 8.9% 9.1%
Accounts are automatically charged off when no full scheduled payment is
made for a period of seven consecutive billing cycles. Additionally, accounts
are charged off if 12 contracted payments are missed. Bad debt expense as a
percentage of total sales increased from the prior year principally as a result
of reduced recoveries of customer accounts previously written off.
INSURANCE AFFILIATES
The Company, through Zale Indemnity Company, Zale Life Insurance Company
and Jewel Re-Insurance Ltd., provides insurance and reinsurance facilities for
various types of insurance coverage, which typically are marketed to the
Company's private label credit card customers. Additionally, the Company
promotes the sale of credit insurance products to customers who use the private
label credit card program. In fiscal 1998, over 45% of the Company's private
label credit card purchasers purchased some form of credit insurance. The three
companies, which are wholly owned subsidiaries of ZDel, are the insurers (either
through direct written or reinsurance contracts) of the Company's customer
credit insurance coverages. In addition to providing replacement property
coverage for certain perils, such as theft, credit insurance coverage provides
protection to the creditor and cardholder for losses associated with the
disability, involuntary unemployment, leave of absence or death of the
cardholder. Zale Life Insurance Company also provides group life insurance
coverage for eligible employees of the Company. Zale Indemnity Company, in
addition to writing direct credit insurance contracts, also has certain
discontinued business that it continues to run off. Credit insurance operations
are dependent on the Company's retail sales on its private label credit cards
and are not significant on a stand-alone basis.
EMPLOYEES
As of July 31, 1998, the Company had approximately 10,000 employees, less
than 1% of whom were represented by unions. The Company usually hires a limited
number of temporary employees during each Christmas season. The Company
considers its relations with its employees to be good.
COMPETITION
The retailing industry is highly competitive. The industry is fragmented,
and the Company competes with a large number of independent regional and local
jewelry retailers, as well as national jewelry chains. The Company also competes
with other types of retailers who sell jewelry and gift items, such as
department stores, catalog showrooms, discounters, direct mail suppliers and
television home shopping programs. Certain of the Company's competitors are
non-specialty retailers which are larger and have greater financial resources
than the Company. The malls where the Company's stores are located typically
contain competing national chains, independent jewelry stores or department
store jewelry departments. The Company believes that it is
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also competing for consumers' discretionary spending dollars and, therefore,
competes with retailers who offer merchandise other than jewelry or giftware.
Notwithstanding the national or regional reputation of its competition, the
Company believes that it must compete on a mall-by-mall basis with other
retailers of jewelry as well as with retailers of other types of discretionary
items. Therefore, the Company competes primarily on the basis of reputation for
high quality products, brand recognition, store location, distinctive and
value-priced merchandise, personalized customer service and its ability to offer
private label credit card programs to customers wishing to finance their
purchases. The Company's success is also dependent on its ability to react to
and create customer demand for specific merchandise categories.
The Company holds no material patents, licenses, franchises or concessions;
however, the established trademarks and trade names for stores and products in
the Zales, Gordon's and Bailey, Banks & Biddle Divisions are important to the
Company in maintaining its competitive position in the jewelry retailing
industry.
MANAGEMENT INFORMATION SYSTEMS
The Company's information systems provide information necessary for: (i)
management operating decisions; (ii) sales and margin management; (iii)
inventory control; (iv) profitability monitoring by many measures (merchandise
category, buyer, store, division); and (v) expense control programs. Data
processing systems include point-of-sale reporting, purchase order management,
receiving, merchandise planning and control, payroll, general ledger, credit
card administration, and accounts payable. Bar code ticketing is used, and
scanning is utilized at all point-of-sale terminals to ensure timely sales and
margin data compilation and to provide for inventory control monitoring.
Information is made available on-line to merchandising staff on a timely basis,
thereby reducing the need for paper reports. The Company uses electronic data
interchange ("EDI") with certain of its vendors to facilitate timely merchandise
replenishment. The Company believes that the further use of EDI with its vendors
will lower the administrative costs associated with invoice processing and
settlement.
The Company's information systems allow management to monitor and control
the Company's credit operations, generate reports on a daily, monthly, quarterly
and annual basis for each store and transaction. Senior management can therefore
review and analyze credit activity by store, amount of sale, terms of sale or
employees who approved the sale. The entire credit extension and collection
process is automated and the system maintains all customer data to facilitate
future credit transactions.
The information systems also facilitate repeat business by maintaining a
detailed file of all credit transactions with each customer. This enables credit
transactions with existing customers to be completed rapidly and allows sales
personnel to process a greater number of credit transactions. The Company's
customer database also includes historical purchasing patterns and demographic
data, allowing the Company to specifically segment customers receiving direct
marketing promotions.
The Company has entered into a five-year agreement with a third party for
the management of the Company's mainframe processing operations, client server
systems, LAN operations, network services and desktop support. The Company
believes that by outsourcing this portion of its management information systems
it will be able to achieve additional efficiencies and allow the Company to
focus its internal information technology efforts on developing new systems to
enhance the performance of its core business.
The Company has an operations services agreement for credit operations with
a third-party servicer. The agreement, dated May 5, 1998, requires minimum
annual payments based on credit activities. The Company has a commitment of
approximately $15.2 million to be paid over the initial term of seven years.
Additional annual payments will be paid based on credit volume for normal credit
processing activities.
The Company has historically upgraded, and expects to continue to upgrade,
its information systems to improve operations and support future growth. The
Company estimates it will make capital expenditures of approximately $18 million
over the next two years for enhancements to its management information systems.
A portion of these expenditures will assist the Company in maintaining Year 2000
compliant systems. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
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REGULATION
The Company's operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts and limitations on the maximum amount of
finance charges that may be charged by a credit provider. In addition to the
Company's private label credit cards, credit to the Company's customers is
provided primarily through bank cards such as Visa(R), MasterCard(R), and
Discover(R), without recourse to the Company based upon a customer's failure to
pay. Any change in the regulation of credit which would materially limit the
availability of credit to the Company's traditional customer base could
adversely affect the Company's results of operations or financial condition.
The sale of insurance products by the Company is also highly regulated.
State laws currently impose disclosure obligations with respect to the Company's
sale of credit and other insurance. The Company's and its competitors' practices
are also subject to review in the ordinary course of business by the Federal
Trade Commission, and the Company's and other retail Company's credit cards are
subject to regulation by the Office of the Comptroller of the Currency since the
Company's credit card bank commenced operations. See "Credit Operations." The
Company believes that it is currently in material compliance with all applicable
state and federal regulations.
Merchandise in the retail jewelry industry is frequently sold at a discount
to the "regular" or "original" price. A number of states in which the Company
operates have regulations which require that retailers offering merchandise at
discounted prices must offer the merchandise at regular or original prices for
stated periods of time. Additionally, the Company is subject to certain
truth-in-advertising and other various state and federal laws, including
consumer protection regulations that regulate retailers generally and/or the
promotion and sale of jewelry in particular. The Company undertakes to monitor
changes in those laws and believes that it is in compliance with all applicable
federal and state laws with respect to such practices.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements,
including statements regarding, among other items, (i) expected capital
expenditures to be made in the future, (ii) expected significant upgrades to the
Company's management information systems over the next several years, (iii) the
addition of new locations through new store openings, (iv) the renovation and
remodeling of the Company's existing store locations, (v) the Company's efforts
to reduce costs, (vi) the adequacy of the Company's sources of cash to finance
its current and future operations, (vii) the terms of renewal of the Company's
store leases, (viii) resolution of litigation without material adverse effect on
the Company and (ix) the expected impact of the "Year 2000" issue. This notice
is intended to take advantage of the "safe harbor" provided by the Private
Securities Litigation Reform Act of 1995 with respect to such forward-looking
statements. These forward-looking statements involve a number of risks and
uncertainties. Among others, factors that could cause actual results to differ
materially are the following: development of trends in the general economy;
competition in the fragmented retail jewelry business; the variability of
quarterly results and seasonality of the retail business; the ability to improve
productivity in existing stores and to increase comparable store sales; the
availability of alternate sources of merchandise supply during the three month
period leading up to the Christmas season; the dependence on key personnel who
have been hired or retained by the Company; the changes in regulatory
requirements which are applicable to the Company's business; management's
decisions to pursue new distribution channels which may involve additional
costs; and the risk factors listed herein from time to time in the Company's
Securities and Exchange Commission reports, including but not limited to, its
Annual Reports on Form 10-K.
ITEM 2. PRINCIPAL PROPERTIES
The Company leases a 430,000 square foot corporate headquarters facility,
which extends through September 2008. The facility is located in Las Colinas, a
planned business development in Irving, Texas, near the Dallas/Fort Worth
International Airport. The Company also owns a 120,000 square foot warehouse in
Dallas, Texas.
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The Company leases three credit centers located in Clearwater, Florida
(30,000 square feet), Tempe, Arizona (24,200 square feet), and San Juan, Puerto
Rico (2,900 square feet) and one national collections center located in San
Marcos, Texas (9,000 square feet).
The Company rents most of its retail spaces under leases that generally
range from five to ten years and may contain minimum rent escalations. Most of
the store leases provide for the payment of base rentals plus real estate taxes,
insurance, common area maintenance fees and merchants association dues, as well
as percentage rents based on the stores' gross sales.
The following table indicates the expiration dates of the current terms of
the Company's leases as of July 31, 1998 (executed lease agreements, including
non-stores and unopened stores):
BAILEY,
ZALES GORDON'S BANKS & BIDDLE PERCENTAGE
TERM EXPIRES DIVISION DIVISION DIVISION OTHER TOTAL OF TOTAL
------------ -------- -------- -------------- ----- ----- ----------
1999 and prior.............. 119 56 13 0 188 17%
2000........................ 58 27 10 0 95 8%
2001........................ 68 23 16 0 107 9%
2002........................ 43 24 5 0 72 6%
2003 and thereafter......... 427 189 67 1 684 60%
--- --- --- -- ----- ---
Total number of leases...... 715 319 111 1 1,146 100%
=== === === == ===== ===
Management believes substantially all of the store leases expiring in
fiscal 1999 that it wishes to renew (including leases which expired earlier and
are on month-to-month extensions) will be renewed on terms not materially less
favorable to the Company than the terms of the expiring leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. The Company believes that such litigation and
claims, both individually and in the aggregate, will be resolved without
material effect on the Company's financial position or results of operations.
See "Unusual Item -- Reorganization Recoveries" in Notes to Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the quarter ended July 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals serve as executive officers of the Company.
Officers are elected by the Board of Directors, each to serve until their
successor is elected and qualified, or until their earlier resignation, removal
from office or death.
NAME AGE POSITION
---- --- --------
Robert J. DiNicola........................ 50 Chairman of the Board, Chief Executive
Officer and Director
Beryl B. Raff............................. 47 President and Chief Operating Officer
Alan P. Shor.............................. 39 Executive Vice President and Chief
Logistics Officer
Mary L. Forte............................. 47 Executive Vice President and Chief
Administrative Officer
Sue E. Gove............................... 40 Executive Vice President and Chief
Financial Officer
Pamela J. Romano.......................... 41 Senior Vice President and President, Zales
Division
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NAME AGE POSITION
---- --- --------
Susan H. Davidson......................... 36 Senior Vice President and President,
Gordon's Division
Ray A. Stuart............................. 42 Senior Vice President and President,
Bailey, Banks & Biddle Division
Thomas A. Carroll......................... 49 Senior Vice President, Real Estate
David L. Holmberg......................... 40 Senior Vice President, Store Operations,
Zales Division
David W. Howard........................... 48 Senior Vice President, Management
Information Systems
Gregory Humenesky......................... 47 Senior Vice President, Human Resources
Mark R. Lenz.............................. 42 Senior Vice President, Controller
Paul G. Leonard........................... 43 Senior Vice President and President,
Corporate Merchandising
Stephen C. Massanelli..................... 42 Senior Vice President, Treasurer
Gary W. Melton............................ 53 Senior Vice President, Credit Services
Ervin G. Polze............................ 46 Senior Vice President, Support Operations
The following is a brief description of the business experience of the
executive officers of the Company for at least the past five years.
Mr. Robert J. DiNicola has served as Chairman of the Board, Chief Executive
Officer and a director of the Company since April 18, 1994. For the three years
prior to joining the Company, Mr. DiNicola was a senior executive officer of The
Bon Marche Division of Federated Department Stores, Inc., having served as
Chairman and Chief Executive Officer of that Division from 1992 to 1994 and as
its President and Chief Operating Officer from 1991 to 1992. From 1989 to 1991,
Mr. DiNicola was a Senior Vice President of Rich's Department Store Division of
Federated. For 17 years, prior to joining the Federated organization, Mr.
DiNicola was associated with Macy's, where he held various executive, management
and merchandising positions, except for a one-year period while he held a
division officer position with The May Department Stores Company, Inc.
Ms. Beryl B. Raff was appointed President and Chief Operating Officer on
July 15, 1998. From July 1997 to July 1998, she served as Executive Vice
President and Chief Operating Officer. From November 1994 to July 1997, she
served as President of the Zales Division. From March 1991 through October 1994,
Ms. Raff served as Senior Vice President of Macy's East with responsibilities
for its jewelry business in a 12 state region. From April 1988 to March 1991,
Ms. Raff served as Group Vice President of Macy's South/Bullocks. Prior to 1988,
Ms. Raff had 17 years of retailing and merchandising experience with the
Emporium and Macy's department stores.
Mr. Alan P. Shor was appointed Executive Vice President and Chief Logistics
Officer on November 17, 1997 while retaining his position as General Counsel and
Secretary. From May 1997 to November 1997, Mr. Shor served as Executive Vice
President and Chief Administrative Officer, General Counsel and Secretary. From
June 1995 to May 1997, Mr. Shor served as Senior Vice President, General Counsel
and Secretary. For two years prior to joining the Company, Mr. Shor was the
managing partner of the Washington, D.C. office of the Troutman Sanders law
firm, whose principal office is based in Atlanta, Georgia. Mr. Shor, a member of
Troutman Sanders since 1983, was a partner of the firm from 1990 to 1995.
Ms. Mary L. Forte was appointed Executive Vice President and Chief
Administrative Officer on January 13, 1998. From July 1994 to January 1998, Ms.
Forte served as President of the Gordon's Division. From January 1994 to July
1994, Ms. Forte served as Senior Vice President of QVC -- Home Shopping Network.
From July 1991 through January 1994, Ms. Forte served as Senior Vice President
of the Bon Marche, Home Division of the Federated Department Store. From July
1989 to July 1991, Ms. Forte was Vice President of Rich's Department Store,
Housewares Division. In addition to the above, Ms. Forte has an
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additional 13 years of retailing and merchandising experience with Macy's, The
May Department Stores Company, Inc. and Federated Department Stores.
Ms. Sue E. Gove was appointed Executive Vice President and Chief Financial
Officer on July 15, 1998. From December 1997 to July 1998, she served as Group
Vice President and Chief Financial Officer. From January 1996 to December 1997,
she served as Senior Vice President, Corporate Planning and Analysis. From
September 1996 through June 1997, Ms. Gove also served as Senior Vice President
and Treasurer, overseeing Investor Relations and the Treasury, Tax and Control
functions. Ms. Gove joined the Company in 1980 and served in numerous
assignments until her appointment to Vice President in 1989.
Ms. Pamela J. Romano joined the Company as Senior Vice President and
President of the Zales Division on September 22, 1997. Ms. Romano spent 15 years
with the Macy's organization, most recently as the Vice President and Divisional
Merchandising Manager with responsibility for fashion, bridge and fine jewelry
for Macy's East, a position she held from September 1994 to August 1997. From
1992 to 1994, Ms. Romano served as an Administrator and Councilor for precious,
semi-precious, and pearl jewelry in both the fine and bridge areas of Macy's.
From 1984 to 1992, Ms. Romano served as a buyer in precious, semi-precious and
pearl areas of Macy's/Federated Department stores.
Ms. Susan H. Davidson was appointed Senior Vice President and President of
the Gordon's Division on January 13, 1998. From April 1997 to January 1998, Ms.
Davidson served as the Senior Director of Merchandising for all diamond
categories in the Zales Division. Since joining the Company in April 1995, she
has served in the positions of gold, men's and diamond accent buyer. Prior to
joining the Company, Ms. Davidson served in merchandising management positions
for Montgomery Ward in Chicago and Macy's South. From the Fall of 1994 through
April 1995, Ms. Davidson served as Senior Buyer for Gold, Colored Stones and
Diamond Merchandise at Montgomery Ward. She also served as Buyer of Gold and
Silver from 1992 until the Fall of 1994.
Mr. Ray A. Stuart was appointed Senior Vice President and President of the
Bailey, Banks & Biddle Division on January 13, 1998. From April 1997 to January
1998, Mr. Stuart served as Senior Director of the Zales Direct Division, which
sells jewelry and related merchandise principally through direct mail catalogs.
Prior to joining the Company in 1997, he served as Group Buyer for Men's
Fragrances at Macy's West from June 1994 to March 1997. He also served as Group
Buyer for Diamonds and Estate Jewelry from May 1991 until May 1994. Previously
he served in a merchant capacity at Bullocks and Macy's South, managing fine
jewelry, fragrance and cosmetic businesses.
Mr. Thomas A. Carroll joined the Company on April 1, 1997 as Senior Vice
President, Real Estate. From August 1992 to March 1997, Mr. Carroll was Vice
President of Real Estate with the Brookstone Company. From 1990 to 1992, he was
associated with Norsouth Corporation, a real estate development company, as
Executive Vice President. From 1978 to 1990, he held various positions with
Federated Department Stores, serving as Vice President, Operations of the
Rich's/Goldsmith's Division from August 1986 until February 1990.
Mr. David L. Holmberg joined the Company on May 2, 1994 as Senior Vice
President of Store Operations for the Zales Division. Prior to joining the
Company, Mr. Holmberg served as Vice President and head of store operations for
Reeds Jewelers from 1989 to 1995. Mr. Holmberg held numerous store operations
positions with Kay Jewelers and J.B. Robinson's Jewelers during the preceding 10
years.
Mr. David W. Howard joined the Company on April 6, 1998, as Senior Vice
President, Management Information Systems. Prior to joining the Company in 1998,
he served as Senior Vice President, Information Systems at Sportmart from
November 1996 to April 1998. From October 1989 through November 1996, Mr. Howard
was with Roses Discount Stores. During that time, Mr. Howard held positions as
Director, Systems Development, Vice President, Information Services and Senior
Vice President, Distribution and Information Services.
Mr. Gregory Humenesky was appointed Senior Vice President, Human Resources
on April 15, 1996. From January 1995 to April 1996 he held the position of Vice
President, Personnel Development and Staffing for the Company. For eight years
prior to joining the Company, Mr. Humenesky was Senior Vice President,
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Human Resources for Macy's West. From June 1973 to February 1987, Mr. Humenesky
held senior level Human Resources positions within the Macy's organization.
Mr. Mark R. Lenz was appointed Senior Vice President, Controller on
November 19, 1997. He held various management positions in finance for the
Company until his appointment to Vice President, Controller in February 1995.
Prior to joining the Company in 1988, Mr. Lenz served in various positions in
the audit division of Arthur Andersen LLP, in Dallas, Texas.
Mr. Paul G. Leonard was appointed Senior Vice President and President of
Corporate Merchandising on January 13, 1998. Mr. Leonard served as President of
Bailey, Banks & Biddle Division from January 1995 to January 1998. Prior to
joining the Company in 1994 as President of Corporate Merchandising, Mr. Leonard
held positions as General Manager of Jewelry and then Senior Vice President of
Soft Lines for Ames Department Store. Prior to that, Mr. Leonard was a
Merchandise Vice President with The May Department Stores Company, Inc. Mr.
Leonard has more than 20 years of retailing and merchandising experience with an
emphasis on jewelry.
Mr. Stephen C. Massanelli joined the Company on June 10, 1997 as Senior
Vice President and Treasurer. From 1993 to 1997, Mr. Massanelli was a principal
and member of the Board of Directors of The Treadstone Group, Inc., a private
merchant banking organization in Dallas. Mr. Massanelli has more than 20 years
of financial and investment experience and has held positions with AMRESCO, Inc.
and NationsBank of Texas.
Mr. Gary W. Melton was appointed to Senior Vice President of Credit
Services on November 19, 1997. Mr. Melton held numerous assignments in the
credit services area since joining the Company in 1982 as Vice President of
Operations, JFS. These assignments include Director of National Credit
Operations, General Credit Manager, Assistant Director, and most recently, Vice
President of Credit Services.
Mr. Ervin G. Polze was appointed Senior Vice President, Support Operations
on January 17, 1996. From February 1995 through January 1996, he served as Vice
President, Support Operations. He held the position of Vice President,
Controller from March 1988 through February 1995. Mr. Polze joined the Company
in January 1983 and served in several assignments until his appointment to Vice
President in March 1988.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol ZLC. The following table sets forth the high and low sale prices for
the Common Stock for each fiscal quarter during the two most recent fiscal
years.
1998 1997
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
First..................................................... $28 3/16 $21 $21 7/8 $17 1/4
Second.................................................... 26 7/8 21 1/2 21 3/8 15 3/4
Third..................................................... 31 1/8 24 1/8 19 3/8 15 7/8
Fourth.................................................... 34 1/8 28 3/8 22 1/8 18 3/8
As of September 3, 1998, the outstanding shares of Common Stock were held
by approximately 1,253 holders of record. The Company has not paid dividends on
the Common Stock since the issuance on July 30, 1993, and does not anticipate
paying dividends on the Common Stock in the foreseeable future. In addition, the
Company's long-term indebtedness limits the Company's ability to pay dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by the
Consolidated Financial Statements of the Company (and the related Notes thereto)
contained elsewhere in this Form 10-K and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The income statement and balance sheet data for each of the years
ended July 31, 1998, 1997, 1996, 1995 and 1994, have been derived from the
Company's audited Consolidated Financial Statements.
YEAR ENDED JULY 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales........................ $1,313,710 $1,253,818 $1,137,377 $1,036,149 $ 920,307
Cost of sales.................... 681,908 643,318 576,764 524,010 460,060
---------- ---------- ---------- ---------- ----------
Gross margin..................... 631,802 610,500 560,613 512,139 460,247
Selling, general and
administrative expenses........ 475,846 480,522 457,371 434,101 401,744
Depreciation and amortization
expense (credit)(b)............ 22,565 14,022 7,538 381 (4,385)
Unusual items(a)................. (8,947) -- (4,486) -- --
---------- ---------- ---------- ---------- ----------
Operating earnings............... 142,338 115,956 100,190 77,657 62,888
Interest expense, net............ 32,039 36,098 30,102 29,837 28,142
---------- ---------- ---------- ---------- ----------
Earnings before income taxes,
extraordinary item............. 110,299 79,858 70,088 47,820 34,746
Income taxes..................... 41,362 29,305 25,094 16,350 11,621
---------- ---------- ---------- ---------- ----------
Earnings before extraordinary
items.......................... $ 68,937 $ 50,553 $ 44,994 $ 31,470 $ 23,125
========== ========== ========== ========== ==========
Net earnings..................... $ 68,937 $ 50,553 $ 43,898 $ 31,470 $ 21,557
========== ========== ========== ========== ==========
Earnings per common share:
Basic:
Earnings before
extraordinary item........ $ 1.96 $ 1.44 $ 1.28 $ .90 $ .66
Net earnings................ 1.96 1.44 1.25 .90 .62
Diluted:
Earnings before
extraordinary item........ 1.84 1.38 1.23 .88 .66
Net earnings................ 1.84 1.38 1.20 .88 .62
Weighted average number of common
shares outstanding:
Basic.......................... 35,201 35,054 35,068 34,970 34,991
Diluted........................ 37,368 36,632 36,465 35,849 35,009
BALANCE SHEET DATA:
Working capital.................. $ 971,495 $ 877,130 $ 775,500 $ 781,802 $ 763,216
Total assets..................... 1,445,929 1,281,206 1,163,811 1,110,708 1,112,647
Total debt....................... 480,275 451,787 404,354 443,624 447,478
Total stockholders' investment... 648,061 541,574 476,258 391,890 342,740
- ---------------
(a) Unusual items consist of the gain on sale of Diamond Park Fine Jewelers
Division of ($1.6 million) and a gain on sale of land of ($7.3 million) for
the year ended July 31, 1998, and reorganization recoveries of ($4.5
million) for the year ended July 31, 1996.
(b) The most significant effects of fresh-start reporting on results of
operations are the reduction in amortization and depreciation expense from
the write-off of substantially all the Company's fixed assets and the
amortization of the excess of revalued net assets over stockholders'
investment.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
With respect to forward looking statements made in this Management's
Discussion and Analysis of Financial Condition and Results of Operations see
"Item 1. Cautionary Notice Regarding Forward Looking Statements."
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's audited consolidated statements of operations expressed as a
percentage of net sales and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-K.
YEAR ENDED JULY 31,
-----------------------
1998 1997 1996
----- ----- -----
Net Sales................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................... 51.9 51.3 50.7
----- ----- -----
Gross Margin................................................ 48.1 48.7 49.3
Selling, General and Administrative Expenses................ 36.2 38.3 40.2
Depreciation and Amortization Expense....................... 1.7 1.2 0.7
Unusual Item -- Gain on Sale of Diamond Park Fine Jewelers
Division Assets........................................... (0.1) -- --
Unusual Item -- Gain on Sale of Land........................ (0.5) -- --
Unusual Item -- Reorganization Recoveries................... -- -- (0.4)
----- ----- -----
Operating Earnings.......................................... 10.8 9.2 8.8
Interest Expense, Net....................................... 2.5 2.9 2.6
----- ----- -----
Earnings Before Income Taxes and Extraordinary Items........ 8.3 6.3 6.2
Income Taxes................................................ 3.1 2.3 2.2
----- ----- -----
Earnings Before Extraordinary Items......................... 5.2 4.0 4.0
Extraordinary Items:
Loss on Early Extinguishment of Debt, Net of Income
Taxes.................................................. -- -- (0.1)
----- ----- -----
Net Earnings................................................ 5.2% 4.0% 3.9%
===== ===== =====
YEAR ENDED JULY 31, 1998 COMPARED TO YEAR ENDED JULY 31, 1997
Net Sales. Net Sales for the year ended July 31, 1998 increased by $60.0
million to $1,314.0 million, a 4.8% increase compared to the previous year. The
previous year included a full year of sales of the Company's Diamond Park Fine
Jewelers stores, which the Company divested in the first and second quarters of
fiscal 1998. Excluding sales from the Diamond Park Fine Jewelers Division, total
sales for the year increased 14.2%. The sales increase primarily resulted from a
9.3% increase in sales from stores open for comparable periods and 89 new stores
added during the year, which were partially offset by 29 stores closed during
the year. The Company believes that the sales growth was influenced by enhanced
merchandise assortments, successful product promotions and strong store level
execution.
Gross Margin. Gross Margin as a percentage of net sales was 48.1% for the
year ended July 31, 1998 compared to 48.7% for the year ended July 31, 1997, a
decrease of 0.6%. This decrease was primarily due to a shift in the 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 ($2.5)
million and $3.7 million for the years ended July 31, 1998 and 1997,
respectively, increasing gross margin as a percent of sales by 0.5% from the
previous year. The benefit in fiscal 1998 is partially a result of a reduction
in inventories during the current year.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses decreased to 36.2% of sales for the year ended July 31,
1998 from 38.3% for the year ended July 31, 1997, or 2.1% as a
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percentage of net sales. Store expenses as a percentage of sales decreased by
1.9% principally due to productivity improvements and the divestiture of the
Diamond Park Operations which had significantly higher payroll and rent costs as
a percentage of sales. Corporate expenses decreased by 0.2% of net sales
principally as a result of lower costs for payroll. The Selling, General and
Administrative Expense reduction demonstrates the Company's ability to leverage
its fixed store and corporate operating expenses while increasing sales in its
stores.
Earnings Before Interest, Taxes, Depreciation and Amortization Expense, and
Unusual Items. Earnings Before Interest, Taxes, Depreciation and Amortization
Expense, and Unusual Items were $156.0 million and $130.0 million for the years
ended July 31, 1998 and 1997, respectively, an increase of 20.0%.
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $8.5 million, primarily as a result of the purchase of new
assets, principally for new store openings, renovation and refurbishment. Due to
fresh-start reporting, the Company wrote-off substantially all fixed assets of
the Company effective July 31, 1993. As a result, depreciation and amortization
relates to capital expenditures since July 31, 1993.
Unusual Items -- Gain on Sale of Diamond Park Fine Jewelers Division and
Gain on Sale of Land. The Gain on Sale of Diamond Park Fine Jewelers Division
was $1.6 million and the Gain on the Sale of Land was $7.3 million for fiscal
1998. See "Current Year Events -- Sale of Diamond Park Division and Sale of
Land."
Interest Expense, Net. Interest Expense, Net was $32.0 million and $36.1
million for the years ended July 31, 1998 and 1997, respectively. The decrease
is a result of higher interest income from investments due to an increase in
cash and cash equivalents. The increase in cash and cash equivalents is
primarily due to an increase in net earnings and effective inventory management
resulting in the leveraging of accounts payable and accrued liabilities.
Income Taxes. The income tax expense for the years ended July 31, 1998 and
1997 was $41.4 million and $29.3 million, respectively, reflecting an effective
tax rate of 37.5% and 36.7%, 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 has not paid any
significant income taxes through fiscal 1998. The Company expects to begin
paying more significant income taxes in fiscal 1999. The Company will realize a
cash benefit from utilization of tax net operating loss carryforwards ("NOL")
(after limitations) against current and future tax liabilities. As of July 31,
1998, the Company had a remaining NOL (after limitations) of approximately
$250.8 million.
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
Net Sales. Net Sales for the year ended July 31, 1997 increased by $116.4
million to $1,253.8 million, a 10.2% increase compared to the previous year. The
sales increase primarily resulted from a 5.5% increase in stores open for
comparable periods as well as sales from 117 new stores added during the year,
which was partially offset by 61 stores closed during the year. The Company
believes that the sales growth was influenced by enhanced merchandise
assortments, successful product promotions and strong store level execution.
Gross Margin. Gross Margin as a percentage of net sales was 48.7% for the
year ended July 31, 1997 compared to 49.3% for the year ended July 31, 1996, a
decrease of 0.6%. This decrease was primarily due to the Company's more
competitive stance with regard to pricing as well as the ongoing transition to a
higher priced, lower margin product mix at the Gordon's Division in connection
with its repositioning as a more upscale and contemporary retailer. The LIFO
provision was $3.7 million and $2.4 million for the years ended July 31, 1997
and 1996, respectively, having the effect of reducing gross margin by 0.1%.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses decreased to 38.3% of sales for the year ended July 31,
1997 from 40.2% for the year ended July 31, 1996, or 1.9% as a percentage of net
sales. Store expenses as a percentage of sales decreased by 0.6% principally due
to productivity improvement as a result of store payroll increasing at a lower
rate than sales. Corporate expenses decreased by 0.7% of net sales principally
as a result of lower costs for payroll. The current year demonstrated
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the Company's ability to leverage its fixed store and corporate operating
expenses while increasing sales in the stores.
Earnings Before Interest, Taxes, Depreciation and Amortization Expense,
Extraordinary Item and Unusual Items. Earnings Before Interest, Taxes,
Depreciation and Amortization Expense, Extraordinary Item and Unusual Items were
$130.0 million and $103.2 million for the years ended July 31, 1997 and 1996,
respectively, an increase of 26.0%.
Depreciation and Amortization Expense. Depreciation and Amortization
Expense increased by $6.5 million, primarily as a result of the purchase of new
assets, principally for new store openings, renovation and refurbishment, since
the fresh-start reporting write-off of substantially all fixed assets of the
Company effective July 31, 1993.
Interest Expense, Net. Interest Expense, Net was $36.1 million and $30.1
million for the years ended July 31, 1997 and 1996, respectively. The increase
in interest expense was primarily due to higher borrowings under the Revolving
Credit Agreement to fund new store growth, inventory, and remodels and
renovations and a reduction in interest income resulting from lower average
balances in short term investments.
Income Taxes. The income tax expense for the years ended July 31, 1997 and
1996 was $29.3 million and $24.5 million, respectively, reflecting an effective
tax rate of 36.7% and 35.8%, respectively. As a result of guidelines regarding
accounting for income taxes of companies utilizing fresh-start reporting, the
Company reports earnings on a fully-taxed basis even though it does not expect
to pay any significant income taxes for the near future. The Company will
realize a cash benefit from utilization of tax net operating loss carryforwards
("NOL") (after limitations) against current and future tax liabilities. As of
July 31, 1997, the Company had a remaining NOL (after limitations) of
approximately $254.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory
and receivables growth, capital expenditures primarily for new store growth and
renovations, upgrading its management information systems and debt service. As
of July 31, 1998, the Company had cash and cash equivalents of $173.1 million,
and $6.2 million of restricted cash primarily relating to the collateral
requirements under the Receivables Securitization Facility established by the
Company in July 1994 (the "Receivables Securitization Facility") and the capital
requirements of the Company's national bank established by the Company in
October 1997. The retail jewelry business is highly seasonal, with a significant
proportion of sales and operating income being generated in November and
December of each year. Approximately 39.7% and 40.3% of the Company's annual
sales were made during the three months ended January 31, 1998 and 1997,
respectively, which includes the Christmas selling season. The Company's working
capital requirements fluctuate during the year, increasing substantially during
the fall season as a result of higher planned seasonal inventory levels.
Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters.
FISCAL 1998 FISCAL 1997
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------------------------------ ------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31, JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1998 1998 1998 1997 1997 1997 1997 1996
-------- --------- ----------- ----------- -------- --------- ----------- -----------
(IN THOUSANDS)
Net sales................... $280,867 $258,300 $522,017 $252,526 $273,580 $244,376 $505,083 $230,779
Gross margin................ 134,980 124,458 251,441 120,923 132,271 119,182 248,312 110,735
Operating earnings.......... 19,471 10,491 102,556 9,820 11,613 7,381 90,756 6,206
Net earnings (loss)......... 7,451 1,503 58,937 1,046 1,620 (1,444) 51,515 (1,138)
Net cash provided by operating activities was $112.8 million in fiscal
1998. The increase in net cash provided by operating activities resulted
principally from an increase in net earnings and effective inventory management
resulting in the leveraging of accounts payable and accrued liabilities. Net
cash provided by operating activities was $16.5 million and $18.5 million for
fiscal 1997 and fiscal 1996 respectively. In fiscal
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1997 and 1996, net earnings, depreciation and amortization charges and the
non-cash charge in lieu of tax expense were offset by additional working capital
needs for accounts receivable and inventory growth.
Net cash provided by investing activities was $12.5 million in fiscal 1998
primarily related to proceeds from the sale of Diamond Park Fine Jewelers
Division and proceeds from the sale of land offsetting capital expenditures for
new store growth and existing store remodeling and refurbishment. Net cash used
in investing activities was $49.1 million in fiscal 1997 and $50.8 million in
1996 principally related to capital expenditures for new store growth and
existing store remodeling and refurbishment.
Net cash provided by financing activities was $15.2 million in fiscal 1998,
principally from the issuance of the Senior Notes and proceeds from exercise of
stock options and warrants, offset by the repayment of the Revolving Credit
Agreement and purchase of Treasury stock. Net cash provided by financing
activities for fiscal 1997 was $46.8 million, for borrowings under the Company's
Revolving Credit Agreement. Net cash used in financing activities for fiscal
1996 was $52.6 million, principally related to payments of long term debt
retired during that year.
The Company, through Zale Funding Trust ("ZFT"), a limited purpose Delaware
business trust wholly owned by ZDel and formed to finance customer accounts
receivable, has approximately $380.7 million, net of discount, aggregate
principal amount of Receivables Backed Notes ("ZFT Receivables Notes") issued
and outstanding at July 31, 1998 pursuant to the Receivables Securitization
Facility. The ZFT Receivables Notes are secured by a lien on all customer
accounts receivable and are subject to redemption on the scheduled redemption
date of July 15, 1999 or may be amortized based on account payments received.
The Company expects to redeem the Notes through a refinancing transaction during
fiscal 1999. The Notes are classified as non-current at July 31, 1998 as the
balance potentially due at July 31, 1999 can be paid with borrowings under the
Company's revolving credit facility which are considered non-current.
In order to support the Company's growth plans, 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. The Revolving Credit Agreement replaced a prior secured commitment
totaling $150.0 million.
The revolving credit loans bear interest at floating rates, currently (i)
LIBOR plus 1.5% or (ii) the agent bank's adjusted base rate or the Federal Funds
Rate plus 0.5%, at the Borrowers' option. The interest rate based on LIBOR and
letter of credit commission rates can be reduced or increased based on certain
future performance levels attained by the Borrowers. The Company pays a
commitment fee of 0.25% per annum (subject to reduction based on future
performance) on the preceding month's unused Revolving Credit Agreement
commitment. The Borrowers may repay the revolving credit loans at any time
without penalty prior to the maturity date. The interest rates and commitment
fee will also be reduced if the Company obtains an investment grade rating. The
Revolving Credit Agreement may be extended by the Borrowers for one year upon
obtaining appropriate consent. At July 31, 1998, there were no loans outstanding
under the Revolving Credit Agreement. In addition, letters of credit in the
amount of approximately $0.7 million were outstanding at July 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.
During the year ended July 31, 1998, the Company made approximately $63.5
million in capital expenditures, a significant portion of which was used to open
89 new stores. Under its continued growth strategy, the Company plans to open
approximately 156 new stores for which it will incur approximately $44 million
in capital expenditures during the combined fiscal years 1999 and 2000. These
stores are expected to solidify the Company's core mall business by further
penetrating markets where the Company is underrepresented. Since fiscal 1994,
the Company remodeled or refurbished nearly 50% of its store base. During the
combined fiscal years 1999 and 2000, the Company anticipates spending
approximately $44 million to remodel, refurbish and relocate approximately 240
additional stores. The Company also estimates it will make capital expenditures
of approximately $18.0 million during the combined fiscal years 1999 and 2000
for enhancements to its management information systems. In total, the Company
anticipates spending approximately $136.8 million on capital expenditures during
the combined fiscal years 1999 and 2000. The Revolving
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Credit Agreement limits the Company's capital expenditures to $80.0 million and
$75 million for fiscal years 1999 and 2000 respectively.
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
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 (including repurchases of the Company's
common stock), limitations on transactions with affiliates, limitations on liens
and limitations on disposition of proceeds of asset sales, among others.
The Company established a national credit card bank in October 1997 for the
granting of credit under its private label credit cards. The creation of a
national credit card bank allows the Company greater flexibility in establishing
rates charged to customers and has simplified its regulatory environment.
There has been a decrease of approximately $33.2 million in owned
merchandise inventories at July 31, 1998 compared to the balance at July 31,
1997. This decrease resulted principally from the divestiture of the Diamond
Park operations earlier this fiscal year. Excluding Diamond Park operations,
owned inventories increased by 4.7 percent.
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 Division
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 $4.8 million. The net proceeds from
the Diamond Park Division Sale will be invested into the Company's operations or
will be used for general corporate purposes, including repurchases of the
Company's common stock.
In fiscal 1998, the Company closed the sales of the excess land surrounding
the corporate headquarters facility for $12.9 million. The net proceeds from the
sales 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 was authorized to purchase through the current
calendar year, up to an aggregate of $40.0 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
expired on July 30, 1998. As of July 31, 1998, the Company had repurchased
approximately 1.4 million shares at an aggregate cost of $40.0 million.
During fiscal 1998, 1.9 million of 2.0 million authorized Series A warrants
were exercised. Each Series A Warrant entitled the holder to purchase one share
of Zale common stock at a price of $10.368 per share. All unexercised warrants
as of July 30, 1998 were cancelled, consistent with the terms of the warrant
agreement.
On August 25, 1998, the Board of Directors authorized a new stock
repurchase program pursuant to which the Company, from time to time and at
management's discretion, may purchase through fiscal year 1999 up to an
aggregate of $50.0 million of the Company's common stock on the open market.
The Company has an operations services agreement for credit operations with
a third-party servicer. The agreement, dated May 5, 1998, requires minimum
annual payments based on credit activities. The Company has a commitment of
approximately $15.2 million to be paid over the initial term of seven years.
Additional annual payments will be paid based on credit volume for normal credit
processing activities.
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 1998 was approximately
$38.0 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 has not paid any significant income taxes
through fiscal 1998. The Company expects to begin paying more significant
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income taxes in fiscal year 1999. As of July 31, 1998, the Company had a NOL
(after limitations) of approximately $250.8 million, which represents up to
$98.0 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 Offering and net proceeds from the Diamond Park
Division Sale and Sale of Land should be sufficient to fund the Company's
current operations, debt service and currently anticipated capital expenditure
requirements for the foreseeable future.
YEAR 2000
The Company's management has recognized 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 Year 2000
compliant. The Company recognizes that failure by the Company to timely resolve
internal Year 2000 issues could result, in the worst case, in an inability of
the Company to distribute its merchandise to its stores and to process its daily
business for some period of time. However, Company management presently believes
that scenario is unlikely based on the progress made in its Year 2000
remediation plan. Failure of one or more third party service providers on whom
the Company relies to address Year 2000 issues could also result, in a worst
case scenario, in some business interruption. The lost revenues, if any,
resulting from a worst case scenario such as those examples described above
would depend on the time period in which the failure goes uncorrected and on how
widespread the impact.
Zale is using a combination of internal and external resources to assess
and make the needed changes to its many different information technology ("IT")
systems and personal computers, such as credit, point of sale, payroll, purchase
ordering, merchandise distribution, management reporting, mainframe, and
client/server applications. A formal project began 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 currently underway.
Non-compliant programs and systems are being replaced, modified or outsourced
throughout 1998 and early 1999. Testing has begun and will be substantially
complete by July 31, 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 conversion progress. Progress
reports on the Year 2000 project are presented regularly to the Company's Board
of Directors and senior management.
With regard to non-IT systems, such as the General Office security systems,
store security systems, environmental systems, and phone systems, the Company is
currently evaluating the compliance of such systems. Systems that are not
compliant, if any, will be remediated, upgraded or replaced by July 31, 1999.
Beginning in June 1998, the Company sent approximately 3,000 inquiries to
its vendors requesting compliance certification. The Company is presently
collecting responses to those inquiries, focusing first on the most critical
vendors. The Company outsources or will outsource its MIS processing and credit
processing and inquiry. These outsourcers have contractually committed to Year
2000 compliance and are diligently pursuing that commitment. The Company's
primary delivery service provider stated that its goal is to be Year 2000
compliant by May 31, 1999. The Company's payroll processing service provider has
indicated that its major systems will operate with correct date logic for Year
2000.
Direct expenditures were approximately $1.7 million and internal costs were
approximately $0.5 million, for a total cost of $2.2 million in expenditures
associated with the Year 2000 in fiscal year 1998. Direct costs of $3.5 million
and internal costs of $0.9 million, for a total cost of $4.4 million, are
expected in fiscal year 1999. The Company will fund these expenditures through
its normal IT operations budget. As required by generally accepted accounting
principles, these costs are expensed as incurred.
The Company has had each of its departments or divisions develop basic
contingency plans to restore the material functions of each of its systems or
activities in the case of a Year 2000 failure. The contingency plans cover all
material levels of activity within each business location, including the stores,
the General Office, the credit centers and third party service providers. The
Company plans to continually refine these plans and make
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them more comprehensive as more information becomes available from testing and
from third party suppliers. In addition, the Company's two processing
outsourcers also have contingency plans for the Company's processing should
their primary systems fail.
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 improve the efficiencies and productivity of the replaced systems,
have also been certified Year 2000 compliant by the vendors and have been or
will be installed by July 31, 1999. To date all of these capital projects were
part of the Company's long term strategic capital plan and their timing was not
accelerated as a result of the Year 2000 issue.
Although there can be no assurance that the Company will be able to
complete all of the modifications in the required time frame, that unanticipated
events will not occur, or that the Company will be able to identify all Year
2000 issues before problems manifest themselves, it is management's belief that
the Company is taking adequate action to address Year 2000 issues. Management
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 during the
periods presented. There is no assurance, however, that inflation will not
materially affect the Company in the future.
NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
130 requires the Company to report comprehensive income in the financial
statements. SFAS No. 131 requires the Company to disclose revenues, profits and
losses, and assets for certain business segments. These statements are effective
for fiscal years beginning after December 15, 1997, with earlier adoption
permitted. In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits an amendment of
FASB Statements Nos. 87, 88 and 106," which revises employers' disclosures about
pensions and other post-retirement benefit plans. This statement is effective
for fiscal years beginning after December 15, 1997, with earlier adoption
permitted. The Company has not yet determined the impact of these statements on
its financial statements and disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates which
may adversely affect its financial position, results of operations and cash
flows. In seeking to minimize the risks from interest rate fluctuations, the
Company manages exposures through its regular operating and financing
activities. The Company does not use financial instruments for trading or other
speculative purposes and is not party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
borrowing activities, which are described in the "Long-Term Debt" Notes to the
Consolidated Financial Statements. The majority of the Company's borrowings are
under fixed rate arrangements. See "Long-Term Debt" Notes to the Consolidated
Financial Statements, which are incorporated herein by reference.
The investments of the Company's insurance subsidiaries, primarily stocks
and bonds in the amount of $26.6 million, approximate market value at July 31,
1998.
Based on the Company's market risk sensitive instruments (including
variable rate debt) outstanding at July 31, 1998, the Company has determined
that there was no material market risk exposure to the Company's consolidated
financial position, results of operations or cash flows as of such date.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and
supplementary data are included as pages F-1 through F-30 at the end of this
Annual Report on Form 10-K:
PAGE
INDEX NUMBER
----- ------
Management's Report......................................... F-2
Report of Independent Public Accountants.................... F-3
Consolidated Statements of Operations....................... F-4
Consolidated Balance Sheets................................. F-5
Consolidated Statements of Cash Flows....................... F-6
Consolidated Statements of Stockholders' Investment......... F-7
Notes to Consolidated Financial Statements.................. F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required to be included in Part III of this Annual Report
on Form 10-K is incorporated by reference to the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report.
1. FINANCIAL STATEMENTS
The list of financial statements required by this item is set forth in
Item 8.
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
NUMBER
------
Report of Independent Public Accountants.................... 27
Schedule II -- Valuation and Qualifying Accounts............ 28
All other financial statements and financial statement schedules for which
provision is made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions, are not
material or are not applicable and, therefore, have been omitted or are included
in the consolidated financial statements or notes thereto.
3. EXHIBITS
2.1 -- Disclosure Statement Pursuant to Section 1125 of the
Bankruptcy Code with Respect to Plan of Reorganization
under Chapter 11 of the Bankruptcy Code for Zale
Corporation and its Affiliated Debtors, dated March 22,
1993 (Exhibit T3E-1).(1)
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2.2 -- Motion to Approve Amendments to the Plan of
Reorganization under Chapter 11 of the Bankruptcy Code of
Zale Corporation and its Affiliated Debtors, dated May
19, 1993 (Exhibit 2.6).(2)
2.3 -- Order Approving Amendments to the Plan of Reorganization
under Chapter 11 of the Bankruptcy Code of Zale
Corporation and its Affiliated Debtors, dated May 20,
1993 (Exhibit 2.7).(2)
3.1 -- Restated Certificate of Incorporation of Zale
Corporation, dated July 30, 1993.(3)
3.2 -- Amended Bylaws of Zale Corporation, dated November 1,
1996.(7)
4.1 -- Indenture, dated as of July 1, 1994, among Zale Funding
Trust, as Issuer and Bankers Trust Company, as Indenture
Trustee.(5)
4.2 -- Purchase and Servicing Agreement, dated as of July 1,
1994, among Zale Funding Trust, Diamond Funding Corp.,
Zale Delaware, Inc., and Jewelers Financial Services,
Inc.(5)
4.3 -- Revolving Credit Agreement dated March 31, 1997 among
Zale Corporation and Zale Delaware, Inc. and The First
National Bank of Boston, as agent for the lenders
identified therein. The Schedules attached to the
Agreement, as identified in the list of Schedules filed
as a part of this exhibit, are omitted from this filing,
but will be provided supplementally to the Commission
upon request.(7)
4.4 -- Indenture dated September 30, 1997, by and among Zale
Corporation, Zale Delaware, Inc. and Bank One, N.A. as
Trustee (10)
*10.1 -- Indemnification agreement, dated as of July 21, 1993,
between Zale Corporation and certain present and former
directors thereof.(5)
10.2 -- Amended and Restated Agreement of Limited Partnership of
Jewel Recovery, L.P., dated as of July 30, 1993.(3)
*10.3 -- Zale Corporation Stock Option Plan.(3)
10.4 -- Trust Agreement, dated as of November 24, 1993, among
Zale Corporation, Zale Delaware, Inc. and United States
Trust Company of New York.(4)
*10.6 -- The Executive Severance Plan for Zale Corporation and Its
Affiliates, as amended and restated as of February 10,
1994.(4)
*10.6a -- Amendment to The Executive Severance Plan for Zale
Corporation and Its Affiliates effective May 20, 1995.(6)
*10.7 -- Settlement Agreement, dated as of November 30, 1997,
between Zale Corporation and Louis J. Grabowsky.(11)
10.8 -- Lease Agreement Between Principal Mutual Life Insurance
Company, As Landlord, and Zale Corporation, as Debtor and
Debtor-In-Possession, As Tenant, dated as of September
17, 1992.(6)
10.8a -- First Lease Amendment and Agreement between Principal
Mutual Life Insurance Company and Zale Delaware, Inc.,
dated as of February 1, 1996.(6)
10.9 -- Indemnification Agreement, executed on October 30, 1996,
and dated as of June 6, 1996, between Zale Corporation
and Andrea Jung.(7)
*10.10 -- Form Change of Control Agreement dated as of October 30,
1996, but executed thereafter, between Zale Corporation
and Key Employees.(8)
10.10a -- Modified list of parties to Change of Control
Agreement.(11)
10.11 -- Asset Purchase Agreement, dated September 3, 1997, by and
among Finlay Enterprises, Inc., Finlay Fine Jewelry
Corporation, Zale Corporation and Zale Delaware, Inc.(9)
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*10.12 -- Employment Agreement, dated as of August 1, 1997, between
Zale Corporation and Robert J. DiNicola.(11)
*10.13 -- Employment Agreement, dated as of August 1, 1998, between
Zale Corporation and Beryl B. Raff.(11)
*10.14 -- Employment Agreement, dated as of August 1, 1998, between
Zale Corporation and Alan P. Shor.(11)
*10.15 -- Employment Agreement, dated as of January 15, 1998
between Zale Corporation and Mary L. Forte.(11)
*10.16 -- Employment Agreement, dated as of August 1, 1998, between
Zale Corporation and Sue E. Gove.(11)
*10.17 -- Form of Zale Executive Bonus Plan.(11)
21 -- Subsidiaries of the registrant.(11)
23 -- Consent of Independent Public Accountants.(11)
27 -- Financial data schedule.(11)
- ---------------
(1) Incorporated by reference from the exhibit shown in parenthesis to the
registrant's Form T-3 (No. 22-24-68) filed with the Commission on April 2,
1993.
(2) Incorporated by reference from the exhibit shown in parenthesis to the
registrant's Form 8-A/A (No. 02-21526) filed with the Commission on July
16, 1993.
(3) Previously filed as an exhibit to the registrant's Form 10-Q (No. 1-4129)
for the quarterly period ended September 30, 1993, and incorporated herein
by reference.
(4) Incorporated by reference to the corresponding exhibit to the registrant's
Registration Statement on Form S-1 (No. 33-73310) filed with the
Commission on December 23, 1993, as amended.
(5) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1995, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1996, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the registrant's Form 10-Q for the
quarterly period ended October 31, 1996, and incorporated herein by
reference.
(8) Previously filed as an exhibit to the registrant's Form 10-Q for the
quarterly period ended January 31, 1997, and incorporated herein by
reference.
(9) Previously filed as an exhibit to the registrants' Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1997, and incorporated herein by
reference.
(10) Incorporated by reference to Exhibit 4.1 to the registrant's Registration
Statement on Form S-4 (No. 33-39473) filed with the Commission on November
4, 1997.
(11) Filed herewith.
* Management Contracts and Compensatory Plans.
4. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended July 31, 1998.
25
27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Management's Report......................................... F-2
Report of Independent Public Accountants.................... F-3
Consolidated Statements of Operations....................... F-4
Consolidated Balance Sheets................................. F-5
Consolidated Statements of Cash Flows....................... F-6
Consolidated Statements of Stockholders' Investment......... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
28
MANAGEMENT'S REPORT
To the Stockholders of Zale Corporation:
The integrity and consistency of the consolidated financial statements of
Zale Corporation (the "Company"), which were prepared in accordance with
generally accepted accounting principles, are the responsibility of management
and properly include some amounts that are based upon estimates and judgments.
The Company maintains a system of internal accounting controls, to provide
reasonable assurance, at appropriate cost, that the Company's assets are
protected and transactions are properly recorded. Additionally, the integrity of
the financial accounting system is based on careful selection and training of
qualified personnel, organizational arrangements which provide for appropriate
division of responsibilities and communication of established written policies
and procedures.
The consolidated financial statements of the Company have been audited by
Arthur Andersen LLP, independent public accountants. Their report expresses
their opinion as to the fair presentation, in all material respects, of the
financial statements and is based upon their independent audit conducted in
accordance with generally accepted auditing standards.
The Audit Committee, composed solely of outside directors, meets
periodically with the independent public accountants and representatives of
management to discuss auditing and financial reporting matters. In addition, the
independent public accountants meet periodically with the Audit Committee
without management representatives present and have free access to the Audit
Committee at any time. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of the independent public accountants,
which is subject to stockholder approval, and the general oversight review of
management's discharge of its responsibilities with respect to the matters
referred to above.
Robert J. DiNicola Sue E. Gove
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
F-2
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Zale Corporation:
We have audited the accompanying consolidated balance sheets of Zale
Corporation (a Delaware corporation) and subsidiaries as of July 31, 1998 and
1997, and the related consolidated statements of operations, cash flows, and
stockholders' investment for each of the three years in the period ended July
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zale
Corporation and subsidiaries as of July 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended July 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 31, 1998
F-3
30
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1998 1997 1996
---------- ---------- ----------
Net Sales.............................................. $1,313,710 $1,253,818 $1,137,377
Cost of Sales.......................................... 681,908 643,318 576,764
---------- ---------- ----------
Gross Margin........................................... 631,802 610,500 560,613
Selling, General and Administrative Expenses........... 475,846 480,522 457,371
Depreciation and Amortization Expense.................. 22,565 14,022 7,538
Unusual Item -- Gain on Sale of Diamond Park Fine
Jewelers Division.................................... (1,634) -- --
Unusual Item -- Gain on Sale of Land................... (7,313) -- --
Unusual Item -- Reorganization Recoveries.............. -- -- (4,486)
---------- ---------- ----------
Operating Earnings..................................... 142,338 115,956 100,190
Interest Expense, Net.................................. 32,039 36,098 30,102
---------- ---------- ----------
Earnings Before Income Taxes and Extraordinary Item.... 110,299 79,858 70,088
Income Taxes........................................... 41,362 29,305 25,094
---------- ---------- ----------
Earnings Before Extraordinary Item..................... 68,937 50,553 44,994
Extraordinary Item:
Loss on Early Extinguishment of Debt, Net of Income
Tax Benefit of $(603)............................. -- -- (1,096)
---------- ---------- ----------
Net Earnings........................................... $ 68,937 $ 50,553 $ 43,898
========== ========== ==========
Earnings Per Common Share:
Basic:
Earnings Before Extraordinary Item................ $ 1.96 $ 1.44 $ 1.28
Extraordinary Items............................... -- -- (.03)
---------- ---------- ----------
Net Earnings...................................... $ 1.96 $ 1.44 $ 1.25
========== ========== ==========
Diluted:
Earnings Before Extraordinary Item................ $ 1.84 $ 1.38 $ 1.23
Extraordinary Items............................... -- -- (.03)
---------- ---------- ----------
Net Earnings...................................... $ 1.84 $ 1.38 $ 1.20
========== ========== ==========
Weighted Average Number of Common Shares and Common
Share Equivalents Outstanding:
Basic................................................ 35,201 35,054 35,068
Diluted.............................................. 37,368 36,632 36,465
See Notes to the Consolidated Financial Statements.
F-4
31
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
JULY 31, JULY 31,
1998 1997
---------- ----------
Current Assets:
Cash and Cash Equivalents................................. $ 173,069 $ 32,623
Restricted Cash........................................... 6,192 9,013
Customer Receivables, Net................................. 495,468 454,270
Merchandise Inventories................................... 478,467 511,702
Other Current Assets...................................... 26,720 39,271
---------- ----------
Total Current Assets........................................ 1,179,916 1,046,879
Property and Equipment, Net................................. 162,884 138,011
Other Assets................................................ 44,326 43,616
Deferred Tax Asset, Net..................................... 58,803 52,700
---------- ----------
Total Assets................................................ $1,445,929 $1,281,206
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt......................... $ -- $ 328
Accounts Payable and Accrued Liabilities.................. 187,621 145,721
Deferred Tax Liability, Net............................... 20,800 23,700
---------- ----------
Total Current Liabilities................................... 208,421 169,749
Non-current Liabilities..................................... 50,190 53,544
Long-term Debt.............................................. 480,275 451,459
Excess of Revalued Net Assets Over Stockholders' Investment,
Net....................................................... 58,982 64,880
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock........................................... -- --
Common Stock.............................................. 380 350
Additional Paid-In Capital................................ 477,657 401,121
Unrealized Gains on Securities............................ 2,851 2,182
Accumulated Earnings...................................... 211,341 142,404
---------- ----------
692,229 546,057
Treasury Stock............................................ (44,168) (4,483)
---------- ----------
Total Stockholders' Investment.............................. 648,061 541,574
---------- ----------
Total Liabilities and Stockholders' Investment.............. $1,445,929 $1,281,206
========== ==========
See Notes to the Consolidated Financial Statements.
F-5
32
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1998 1997 1996
---------- ----------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $ 68,937 $ 50,553 $ 43,898
Non-cash items:
Depreciation and amortization expense..................... 23,689 16,290 8,904
Non-cash charge in lieu of tax expense.................... 37,569 28,280 23,208
Other adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Unusual Item -- Gain on Sale of Diamond Park Fine Jewelers
Division.................................................. (1,634) -- --
Unusual Item -- Gain on Sale of Land........................ (7,313) -- --
Extraordinary loss on early extinguishment of debt.......... -- -- 1,699
Changes in:
Restricted Cash........................................... 2,821 22,497 19,912
Customer receivables, net................................. (41,198) (34,393) (22,323)
Merchandise inventories................................... (19,277) (53,840) (74,739)
Other current assets...................................... 12,551 (13,736) (1,253)
Other assets.............................................. 122 1,467 (768)
Accounts payable and accrued liabilities.................. 42,119 (73) 18,014
Non-current liabilities................................... (5,613) (580) 1,957
--------- ----------- ---------
Net Cash Provided by Operating Activities................... 112,773 16,465 18,509
--------- ----------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......................... (63,497) (54,025) (48,790)
Dispositions of property and equipment...................... 649 4,887 829
Acquisition, net of cash acquired........................... -- -- (2,547)
Proceeds from Sale of Diamond Park Fine Jewelers Division... 62,443 -- --
Proceeds from Sale of Land.................................. 12,911 -- --
Other....................................................... -- -- (340)
--------- ----------- ---------
Net Cash Provided by (Used in) Investing Activities......... 12,506 (49,138) (50,848)
--------- ----------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) proceeds from long-term debt.................. (410) 291 (66,608)
Payments on revolving credit agreement...................... (192,900) (1,027,700) (765,150)
Borrowings under revolving credit agreement................. 122,200 1,074,800 788,750
Net proceeds from issuance on Senior Notes.................. 99,530 -- --
Payment for redemption of Series B Warrants................. -- -- (9,264)
Payment of prepayment penalty and other related costs on
early extinguishment of debt.............................. -- -- (1,699)
Debt issue and capitalized financing costs.................. (2,621) (945) (629)
Proceeds from exercise of stock options..................... 9,198 1,073 1,714
Proceeds from exercise of warrants.......................... 20,170 -- 278
Purchase of common stock.................................... (40,000) (759) --
--------- ----------- ---------
Net Cash Provided by (Used in) Financing Activities......... 15,167 46,760 (52,608)
--------- ----------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents........ 140,446 14,087 (84,947)
Cash and Cash Equivalents at Beginning of Period............ 32,623 18,536 103,483
--------- ----------- ---------
Cash and Cash Equivalents at End of Period.................. $ 173,069 $ 32,623 $ 18,536
========= =========== =========
Supplemental cash flow information:
Interest paid............................................. $ 35,853 $ 34,914 $ 35,020
Interest received......................................... $ 7,776 $ 936 $ 3,233
Income taxes paid (net of refunds received)............... $ 1,741 $ 3,431 $ 1,653
See Notes to the Consolidated Financial Statements.
F-6
33
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(AMOUNTS IN THOUSANDS)
NUMBER OF ADDITIONAL UNREALIZED
COMMON SHARES COMMON PAID-IN GAINS ON ACCUMULATED TREASURY
OUTSTANDING STOCK CAPITAL SECURITIES EARNINGS STOCK TOTAL
------------- ------ ---------- ---------- ----------- -------- --------
Balance, July 31, 1995........ 34,983 $350 $337,534 $ 979 $ 53,027 $ 0 $391,890
Net Earnings.................. -- -- -- -- 43,898 -- 43,898
Purchase of B Warrants........ -- -- (4,190) -- (5,074) -- (9,264)
Reduction of Tax Valuation
Allowance................... -- -- 23,208 -- -- -- 23,208
Change in Estimate of
Realization of Deferred
Income Tax Asset............ -- -- 24,500 -- -- -- 24,500
Exercise of Stock Options..... 189 2 1,712 -- -- -- 1,714
Exercise of Warrants.......... 27 -- 278 -- -- -- 278
Unrealized Gain on
Securities.................. -- -- -- 34 -- -- 34
------ ---- -------- ------ -------- -------- --------
Balance, July 31, 1996........ 35,199 352 383,042 1,013 91,851 0 476,258
Net Earnings.................. -- -- -- -- 50,553 -- 50,553
Reduction of Tax Valuation
Allowance................... -- -- 13,280 -- -- -- 13,280
Exercise of Stock Options..... 113 1 1,072 -- -- -- 1,073
Unrealized Gain on
Securities.................. -- -- -- 1,169 -- -- 1,169
Recoveries and Purchase of
Common Stock................ (290) (3) 3,727 -- -- (4,483) (759)
------ ---- -------- ------ -------- -------- --------
Balance, July 31, 1997........ 35,022 350 401,121 2,182 142,404 (4,483) 541,574
Net Earnings.................. -- -- -- -- 68,937 -- 68,937
Reduction of Tax Valuation
Allowance................... -- -- 46,572 -- -- -- 46,572
Exercise of Stock Options..... 768 11 9,187 -- -- -- 9,198
Exercise of Warrants.......... 1,945 19 20,151 -- -- -- 20,170
Unrealized Gain on
Securities.................. -- -- -- 669 -- -- 669
Purchase of Common Stock...... (1,365) -- -- -- -- (40,000) (40,000)
Recoveries of Common Stock.... (5) -- 166 -- -- (166) --
Contribution to 401(k) plan... 35 -- 460 -- -- 481 941
------ ---- -------- ------ -------- -------- --------
Balance, July 31, 1998........ 36,400 $380 $477,657 $2,851 $211,341 $(44,168) $648,061
====== ==== ======== ====== ======== ======== ========
See Notes to the Consolidated Financial Statements.
F-7
34
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS include the accounts of
Zale Corporation and its wholly-owned subsidiaries (the "Company" or "Zale").
The Company consolidates substantially all its retail operations into Zale
Delaware, Inc. ("ZDel"). ZDel is the parent company for several subsidiaries,
including three that are engaged primarily in providing credit insurance to
credit customers of the Company. All significant intercompany transactions have
been eliminated. On January 18, 1996, the Company acquired Karten's Jewelers,
Inc., ("Karten's") a privately owned chain of 20 fine jewelry stores. The
Company acquired all the outstanding shares of common stock for $3.0 million in
cash and assumption of all liabilities.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS includes cash on hand, deposits in banks and
short-term marketable securities at varying interest rates with maturities of
three months or less. The carrying amount approximates fair value because of the
short maturity of those instruments. At July 31, 1998, $6.2 million was
restricted primarily by $2.3 million relating to the collateral requirements
under the Receivables Securitization Facility, and $2.2 million relating to the
capital requirements of Jewelers National Bank ("JNB"), the Company's national
credit card bank.
CUSTOMER RECEIVABLES are classified as current assets, including amounts
which are due after one year, in accordance with industry practices. The
allowance for doubtful accounts was $67.3 million and $57.8 million at July 31,
1998 and 1997, respectively. Finance charge income and net earnings from credit
insurance subsidiaries of $113.3 million, $101.0 million and $90.8 million for
the years ended July 31, 1998, 1997 and 1996, respectively, has been reflected
as a reduction of Selling, General and Administrative Expenses. Finance charge
and insurance charge income are recorded pursuant to the calculation set forth
in the Company's credit card agreement.
MERCHANDISE INVENTORIES are stated at the lower of cost or market, which is
determined primarily in accordance with the retail inventory method.
Substantially all inventories represent finished goods which are valued using
the last-in, first-out ("LIFO") method.
LONG LIVED ASSETS In fiscal 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
establishes accounting standards for the impairment of long-lived assets and
goodwill. Under the guidance of SFAS, No. 121, intangibles and long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount may not be recoverable. Any impairment would be recognized
in operating results if a permanent reduction were to occur.
DEPRECIATION AND AMORTIZATION are computed using the straight-line method
over the estimated useful lives of the assets or remaining lease life. Estimated
useful lives of the assets range from three to fifteen years. Original cost and
related accumulated depreciation or amortization are removed from the accounts
in the year assets are retired. Gains or losses on dispositions of property and
equipment are included in operations in the year of disposal. Computer software
costs related to the development of major systems are capitalized as incurred
and are amortized over their useful lives.
EXCESS OF REVALUED NET ASSETS OVER STOCKHOLDERS' INVESTMENT is being
amortized over fifteen years. Amortization was $5.9 million for each of the
years ended July 31, 1998, 1997 and 1996. Accumulated amortization was $29.5
million and $23.6 million at July 31, 1998 and 1997, respectively.
F-8
35
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STORE PREOPENING COSTS are charged to results of operations in the period
in which the store is opened. Store closing costs are estimated and recognized
in the period in which the Company makes the decision that the store will close.
Such costs include the present value of estimated future rentals net of
anticipated sublease income, loss on retirement of property and equipment and
other related occupancy costs.
ADVERTISING EXPENSES are charged against operations when incurred.
Cooperative advertising funds are received from certain merchandise vendors.
Amounts charged against operations were $45.8 million, $46.1 million and $37.6
million for the years ended July 31, 1998, 1997 and 1996, respectively, net of
amounts contributed by vendors to the Company. The amounts of prepaid
advertising at July 31, 1998 and 1997 are $4.4 million and $3.4 million,
respectively.
RECLASSIFICATIONS. The classifications in use at July 31, 1998 have been
applied to the financial statements for July 31, 1997 and 1996.
MERCHANDISE INVENTORIES
The Company uses the LIFO method of accounting for inventory, which results
in a matching of current costs with current revenues. The LIFO
(benefit)/provision was ($2.5) million, $3.7 million and $2.4 million for the
years ended July 31, 1998, July 31, 1997 and July 31, 1996, respectively. The
estimated cost of replacing the Company's inventories exceeds its net LIFO cost
by approximately $13.4 million and $16.0 million at July 31, 1998 and 1997,
respectively. Inventories on a first-in, first-out ("FIFO") basis were $491.9
million and $527.7 million at July 31, 1998 and 1997, respectively. The Company
also maintained consigned inventory at its retail locations of approximately
$146.8 million and $135.0 million at July 31, 1998 and 1997, respectively. This
consigned inventory and related contingent obligation are not reflected in the
Company's financial statements. At the time consigned inventory is sold, the
Company records the purchase liability in accounts payable and the related cost
of merchandise in Cost of Sales.
PROPERTY AND EQUIPMENT
The Company's property and equipment consists of the following:
JULY 31, 1998 JULY 31, 1997
------------- -------------
(AMOUNTS IN THOUSANDS)
Buildings and Leasehold Improvements................ $ 80,149 $ 59,932
Furniture and Fixtures.............................. 129,145 101,767
Construction in Progress............................ 19,054 9,409
Property Held for Sale.............................. -- 6,345
-------- --------
228,348 177,453
Less: Accumulated Amortization and Depreciation..... (65,464) (39,442)
-------- --------
Total Net Property and Equipment.................... $162,884 $138,011
======== ========
Property Held for Sale represents land and buildings which were being held
for future sale and not used in the Company's operations. These properties were
disposed of during fiscal year 1998.
F-9
36
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES
The Company's accounts payable and accrued liabilities consist of the
following:
JULY 31, 1998 JULY 31, 1997
------------- -------------
(AMOUNTS IN THOUSANDS)
Accounts Payable.................................... $ 77,711 $ 59,321
Accrued Payroll..................................... 22,542 18,280
Accrued Taxes....................................... 18,601 13,248
Extended Warranty................................... 15,706 12,420
Accrued Percentage Rent............................. 11,093 7,805
Other Accruals...................................... 41,968 34,647
-------- --------
Total Accounts Payable and Accrued Liabilities...... $187,621 $145,721
======== ========
The Company's non-current liabilities consist principally of the
accumulated obligation for postretirement benefits under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," loss
reserves for insurance subsidiaries and reserves for tax contingencies.
POSTRETIREMENT BENEFITS. The Company provides medical and dental insurance
benefits for all eligible retirees and spouses with benefits to the latter
continuing after the death of the retiree for a maximum of thirty-six months.
Substantially all of the Company's full-time employees, who were hired on or
before November 14, 1994, become eligible for those benefits upon reaching age
55 while working for the Company and having ten years of continuous service. The
medical and dental benefits are provided under two plans. The lifetime maximum
on medical benefits is $500,000 up to the age of 65 and $50,000 thereafter.
These benefits include deductibles, retiree contributions and co-insurance
provisions that are assumed to grow with the health care cost trend rate. The
costs of the postretirement benefits are recognized in the financial statements
over an employee's active working career on an accrual basis.
The accumulated postretirement benefits obligation ("APBO"), which
represents the actuarial present value of benefits attributed to employee
service rendered as of July 31, 1998 and 1997, for the unfunded plan, include
the following components:
JULY 31, JULY 31,
1998 1997
--------- ---------
(AMOUNTS IN THOUSANDS)
Active Employees Under Retirement Age.................... $ 2,875 $ 3,453
Active Employees Eligible to Retire...................... 2,080 1,884
Current Retirees......................................... 10,356 7,315
------- -------
Accumulated Benefit Obligation........................... 15,311 12,652
Unrecognized Prior Service Cost.......................... 16 38
Unrecognized Net Gain.................................... 5,538 8,230
------- -------
Total Accrued Postretirement Benefit Liability........... $20,865 $20,920
======= =======
The unrecognized gain of $5.5 million at July 31, 1998, results primarily
from changes in plan experience and actuarial assumptions, including a reduction
in average claim cost and a reduction in the number of eligible participants.
The gain will be amortized in accordance with SFAS No. 106.
F-10
37
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The annual expense relating to postretirement benefits, which are reflected
in Selling, General and Administrative Expenses, are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1998 1997 1996
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Service Cost....................................... $ 440 $ 613 $1,130
Interest Cost...................................... 936 1,112 1,557
Amortization....................................... (743) (582) 58
----- ------ ------
Total Postretirement Benefit Cost.................. $ 633 $1,143 $2,745
===== ====== ======
The weighted-average discount rate used in determining the APBO at July 31,
1998 and 1997 was 7.0 percent and 7.5 percent, respectively. At July 31, 1998
and 1997, the initial medical trend rates were 11.0 percent and 12.0 percent,
respectively, and are assumed to gradually decrease to 6.0 percent in the year
2005. The effect of a one percent increase in the health care cost trend rate on
the APBO and the net periodic expense would be an increase of approximately $1.5
million and $0.2 million, respectively.
LONG-TERM DEBT
Long-term debt consists of the following:
JULY 31, JULY 31,
1998 1997
--------- ---------
(AMOUNTS IN THOUSANDS)
Senior Notes........................................... $ 99,556 $ --
Revolving Credit Agreement............................. -- 70,700
Receivables Securitization Facility.................... 380,719 380,677
Other (primarily mortgages)............................ -- 410
-------- --------
480,275 451,787
Less Current Portion................................... -- (328)
-------- --------
Total Long-Term Debt................................... $480,275 $451,459
======== ========
Fiscal year scheduled maturities of long-term debt at July 31, 1998 were as
follows: 1999 -- $0 million; 2000 -- $380.7 million; 2001 -- $0 million;
2002 -- $0 million; 2003 -- $0 million; thereafter -- $99.6 million; for a total
of $480.3 million.
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 (including repurchases of
the Company's common stock), 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
F-11
38
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
REVOLVING CREDIT AGREEMENT. On March 31,1997, the Company and ZDel (the
"Borrowers") entered into a three year unsecured revolving credit agreement (the
"Revolving Credit Agreement") with a group of banks which provides for revolving
credit loans in an aggregate amount of up to $225.0 million, including a $30.0
million sublimit for letters of credit. The Revolving Credit Agreement replaces
a prior secured commitment totaling $150.0 million.
The revolving credit loans bear interest at floating rates, currently LIBOR
plus 1.5 percent or the agent bank's adjusted base rate percent or the Federal
Funds Rate plus 0.5 percent, at the Borrowers' option. The interest rate based
on LIBOR can be reduced based on certain future performance levels attained by
the Borrowers. The Company pays a commitment fee of .25 percent per annum
(subject to reduction based on future performance) on the preceding month's
unused Revolving Credit Agreement commitment. The Borrowers may repay the
revolving credit loans at any time without penalty prior to the maturity date.
At the Borrowers' election, the Revolving Credit Agreement provides for a one
year extension upon obtaining appropriate consent. At July 31, 1998, there were
no loans outstanding under the Revolving Credit Agreement. In addition, letters
of credit in the amount of approximately $0.7 million were outstanding at July
31, 1998.
The Revolving Credit Agreement contains certain restrictive covenants,
which, among other things, restricts within certain limits the Borrowers'
ability to pay dividends and make other payments, incur additional indebtedness,
make capital expenditures, engage in certain transactions with affiliates, incur
liens, make investments and sell assets. The Revolving Credit Agreement also
requires the Borrowers to maintain certain financial ratios and specified levels
of net worth.
RECEIVABLES SECURITIZATION FACILITY. The Company formed Zale Funding Trust
("ZFT"), a limited purpose Delaware business trust, in 1994 to finance customer
accounts receivable. ZFT established an accounts receivable securitization
facility (the "ZFT Securitization"), pursuant to which it issued approximately
$380.7 million, net of discount, aggregate principal amount of Receivables
Backed Notes ("ZFT Receivables Notes"). The proceeds from the ZFT Receivables
Notes were used to buy the revolving credit card accounts receivable of ZDel and
other affiliates. Collections from those receivables are used in part to pay
interest on the ZFT Receivables Notes and to purchase daily ZDel's customer
accounts receivable. The ZFT Receivables Notes are secured by a lien on all
customer accounts receivable and are nonrecourse with regard to Zale and ZDel.
The ZFT Receivables Notes bear interest at the following rates, payable
monthly in arrears (amounts in thousands):
PRINCIPAL RATE
--------- ----
$ 37,620 LIBOR + .40%, not to exceed 12.0%
294,100 7.325%
28,600 7.50%
20,440 8.15%
--------
$380,760
========
The effective interest rate, based on a current LIBOR rate of 5.594
percent, including amortization of debt issuance costs, approximated 7.57
percent at July 31, 1998.
Jewelers Financial Services, Inc. (the "Servicer"), a subsidiary of ZDel,
is the servicing entity for the collection of the customer accounts receivable
and its servicing obligations are guaranteed by ZDel.
F-12
39
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ZFT Receivables Notes will be subject to redemption at the option of
ZFT in whole but not in part, on the scheduled redemption date of July 15, 1999,
at a redemption price equal to the outstanding principal amount of the ZFT
Receivables Notes together with accrued and unpaid interest thereon at the
applicable interest rates. If ZFT has not given notice by June 15, 1999 that it
will redeem the ZFT Receivables Notes in full on the scheduled payment date
occurring in July 1999, the Servicer will promptly solicit bids for the purchase
of all or a portion of the receivables. If the Servicer is unable to sell the
receivables for a price such that the proceeds of such sale, together with other
available funds, is sufficient to pay in full the outstanding principal amount
of the ZFT Receivables Notes and interest thereon to the Scheduled Redemption
Date, the ZFT Receivables Notes will remain outstanding and will begin
amortizing based on collections of customer accounts receivable beginning in
August 1999. The Company intends to refinance the facility during the fiscal
year 1999. The Notes are classified as non-current at July 31, 1998, as the
balance potentially due at July 31, 1999 can be paid with borrowings under the
Revolving Credit Agreement which are considered non-current.
The ZFT Securitization imposes certain reporting obligations on the Company
and limits ZFT's ability, among other things, to grant liens, incur certain
indebtedness, or enter into other lines of business. Additionally, under certain
conditions as defined, including among other things, failure to pay principal or
interest when due, failure to cure a borrowing base deficiency and breach of any
covenant that is not cured, the ZFT Securitization is subject to an early
amortization whereby the ZFT Receivables Notes may be declared due and payable
immediately. The restricted cash balance shown on the Consolidated Balance
Sheets as of July 31, 1998 and 1997 includes the restricted cash of ZFT of $2.3
million and $5.4 million as of July 31, 1998 and July 31, 1997 respectively
which is based on the relationship between the ZFT Receivables Notes outstanding
and gross accounts receivable as of July 31, 1998 and 1997.
LEASE COMMITMENTS
The Company rents most of its retail space under leases that generally
range from five to ten years and may contain base rent escalations. The Company
amended and extended its corporate headquarters lease for five years effective
at the expiration of the current lease, which will continue to be treated as an
operating lease starting in September 1997. Lease incentives of approximately
$4.3 million for reimbursement of certain leasehold improvement expenditures
will be amortized against lease payments over the life of the lease. All
existing real estate leases are treated as operating leases. Sublease rental
income under noncancelable leases is not material.
Rent expense is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1998 1997 1996
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Retail Space:
Minimum Rentals.................................. $79,181 $ 70,344 $61,724
Rentals Based on Sales........................... 13,046 27,762 27,752
------- -------- -------
92,227 98,106 89,476
Equipment and Corporate Headquarters............... 2,643 3,240 3,368
------- -------- -------
Total Rent Expense................................. $94,870 $101,346 $92,844
======= ======== =======
Contingent rentals paid to lessors of certain store facilities are
determined principally on the basis of a percentage of sales in excess of
contractual limits.
F-13
40
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rent commitments as of July 31, 1998, for all noncancellable
leases of ongoing operations were as follows: 1999 -- $80.9 million;
2000 -- $77.1 million; 2001 -- $72.1 million; 2002 -- $66.5 million;
2003 -- $63.5 million; thereafter -- $212.7 million; for a total of $572.8
million.
INTEREST
Interest expense for the years ended July 31, 1998, 1997 and 1996 was
approximately $37.2 million, $36.9 million and $33.2 million, respectively.
Interest income for the years ended July 31, 1998, 1997 and 1996 was $5.2
million, $0.8 million and $3.1 million, respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on estimated
future tax effects of the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates.
Currently, the Company files a consolidated income tax return. The
effective income tax rate varies from the federal statutory rate as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, JULY 31, JULY 31,
1998 1997 1996
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Federal Income Tax Expense at Statutory Rate..... $38,605 $27,950 $24,531
Amortization of Excess of Revalued Net Assets
Over Stockholders' Investment.................. (2,064) (2,064) (2,064)
State Income Taxes, Net of Federal Income Tax
Benefit........................................ 4,635 3,243 2,520
Other............................................ 186 176 107
------- ------- -------
Total Income Tax Expense......................... 41,362 29,305 25,094
Tax Benefit on Extraordinary Item................ -- -- (603)
------- ------- -------
Total Income Tax Expense......................... $41,362 $29,305 $24,491
======= ======= =======
Effective Income Tax Rate........................ 37.5% 36.7% 35.8%
======= ======= =======
Pursuant to the guidance provided by the American Institute of Certified
Public Accountants in Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company
adopted fresh-start reporting as of the close of business on July 31, 1993. In
connection with the adoption of fresh-start reporting, the net book values of
substantially all non-current assets existing at July 30, 1993 (the "Effective
Date") were eliminated. As a consequence, SFAS No. 109, in conjunction with SOP
90-7, requires that any tax benefits realized for book purposes after the
Effective Date, from the reduction of the valuation allowance existing as of the
Effective Date be reported as an increase to additional paid-in capital rather
than as a reduction in the tax provision in the Consolidated Statements of
Operations. However, the Company will realize the cash benefit from utilization
of its tax net operating loss ("NOL") against current and future tax
liabilities. The cash benefit realized was approximately $38 million, $28
million and $23 million for the years ended July 31, 1998, 1997 and 1996,
respectively.
As of July 31, 1998, the Company has a NOL carryforward (after limitations)
of approximately $250.8 million. A majority of the tax basis NOL carryforward,
which will be available to offset future taxable
F-14
41
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income of the Company, was determined based upon the initial equity valuation of
the Company as determined upon the Effective Date. The utilization of this asset
is subject to limitations. The most restrictive is the Internal Revenue Code
Section 382 annual limitation. The NOL carryforward will begin to expire in
fiscal year 2002 but can be utilized through 2009.
Tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at July 31,
1998 and 1997 are presented below.
JULY 31, JULY 31,
1998 1997
--------- ---------
(AMOUNTS IN THOUSANDS)
Current Deferred Taxes:
Assets --
Customer receivables................................... $ 8,152 $ 22,549
Accrued liabilities.................................... 20,690 17,374
State and local taxes.................................. 1,950 1,950
Net operating loss carryforward........................ 38,000 29,000
Other.................................................. 120 120
-------- --------
Total Assets........................................... 68,912 70,993
Less -- Valuation Allowance............................ (22,073) (32,353)
-------- --------
46,839 38,640
Liabilities --
Merchandise inventories, principally due to LIFO
reserve.............................................. (67,224) (62,133)
Other.................................................. (415) (207)
-------- --------
Deferred Current Tax Liability, Net......................... $(20,800) $(23,700)
======== ========
Non-Current Deferred Taxes:
Assets --
Property and equipment,................................ $ 13,976 $ 16,031
Net operating loss carryforward........................ 59,813 70,143
Postretirement benefits................................ 9,815 9,960
Other.................................................. 2,726 2,168
-------- --------
Total Assets........................................... 86,330 98,302
Less -- Valuation Allowance............................ (27,357) (44,798)
-------- --------
58,973 53,504
Liabilities --
Other.................................................. (170) (804)
-------- --------
Deferred Non-Current Tax Asset, Net......................... $ 58,803 $ 52,700
======== ========
Pursuant to the requirements of SFAS No. 109, a valuation allowance must be
provided when it is more likely than not that the deferred income tax asset will
not be realized. The valuation reserve was approximately $49.4 million and $77.2
million as of July 31, 1998 and 1997, respectively. The Company believes that,
as of July 31, 1998, a sufficient history of earnings has been established to
make realization of a $38.0 million deferred income tax asset more likely than
not. The change in valuation allowance from July 31, 1997 to July 31, 1998 was
$27.8 million.
F-15
42
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL STOCK
COMMON STOCK. At July 31, 1998 and 1997, 70,000,000 shares of Common Stock,
par value of $0.01 per share, were authorized, 38,061,538 shares and 35,348,150
shares, respectively, were issued, of which 36,400,047 shares and 35,021,900
shares, respectively, were outstanding. The Company held 1,661,491 and 326,250
treasury shares at July 31, 1998 and 1997, respectively.
PREFERRED STOCK. At July 31, 1998 and 1997, 5,000,000 shares of Preferred
Stock, par value of $0.01, were authorized. None are issued or outstanding.
WARRANTS. Zale emerged from bankruptcy through a Plan of Reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Plan") on July 30,
1993. Pursuant to the Plan, Zale had authorized 2,000,000 Series A Warrants to
purchase common stock. During 1998, 1,945,420 Series A Warrants were exercised.
The remaining 27,330 Series A Warrants expired July 30, 1998. Accordingly, at
July 31, 1998 there were no warrants outstanding and at July 31, 1997 there were
1,972,750 Series A Warrants outstanding. Each Series A Warrant entitled the
holder to purchase one share of Zale common stock for $10.368 per share (subject
to certain anti-dilution adjustments).
As part of Zale's settlement of certain bankruptcy litigation in 1993 with
Swarovski International Holding, A.G. ("Swarovski"), Zale issued its Series B
Warrants to purchase common stock. Each Series B Warrant entitled the holder to
purchase for $10.368 per share, one share of Zale common stock (subject to
certain anti-dilution adjustments). The Series B Warrants were presently
exercisable and, if not previously exercised, would expire on September 9, 1998,
subject to the Company's right to accelerate the expiration date of the Series B
Warrants if certain conditions were met. At July 31, 1995, the Series B Warrants
issued entitled the holders to purchase an aggregate of 1,852,884 shares of Zale
common stock. On August 31, 1995, Zale redeemed the Series B Warrants and
acquired all Swarovski's rights, title and interest under the warrant agreement
and paid $9.3 million to Swarovski in consideration of the redemption. As a
result of this, the Series B Warrants were canceled and are no longer
outstanding. Additional Paid-In Capital decreased $4.2 million, whereas
Accumulated Earnings decreased $5.1 million due to this transaction.
TREASURY STOCK. During 1998, the Company received 5,317 shares of common
stock valued on the date of receipt at $31.25 per share which was approved for
distribution to pre-confirmation creditors of the Company but not claimed by
such pre-confirmation creditors. This resulted in a $0.2 million increase to
additional paid-in capital offset by an equal increase in treasury stock. In
November 1996, the Company received approximately 191,000 shares of common stock
valued on the date of receipt at $19.50 per share which were approved for
distribution to pre-confirmation creditors of the Company but not claimed by
such pre-confirmation creditors. This resulted in a $3.7 million increase to
additional paid-in capital offset by an equal increase in treasury stock. The
Company also received approximately 99,000 shares of common stock as part of its
settlement of remaining pre-bankruptcy litigation for which the Company paid
$0.8 million. The Company expects no additional significant recoveries of stock
in the future. In February 1998, the Company announced a stock repurchase
program. During 1998, the Company repurchased 1,364,971 shares of stock
resulting in a $40.0 million increase in treasury stock.
On August 25, 1998, the Board of Directors authorized a new stock
repurchase program pursuant to which the Company, from time to time and at
management's discretion, may purchase through fiscal year 1999 up to an
aggregate of $50 million of the Company's common stock on the open market.
F-16
43
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLANS. As of July 31, 1998 the Company had two stock option
plans. On July 30, 1993 the Company adopted a stock option plan (the "Stock
Option Plan") to enable the Company to attract, retain and motivate officers and
key employees by providing for proprietary interest of such individuals in the
Company. Options to purchase an aggregate of 6,555,000 shares of common stock
may be granted under the Stock Option Plan to eligible employees. Options
granted under the Stock Option Plan (i) must be granted at an exercise price not
less than the fair market value of the shares of common stock into which such
options are exercisable, (ii) vest ratably over a four-year vesting period and
(iii) expire ten years from the date of grant. The 1995 Outside Director Stock
Option Plan, (the "Director Plan") authorizes the Company to grant common stock
to non-employee directors at fair market value of the Company common stock on
the date of grant. The options vest over a four year period and expire ten years
from the date of grant. The maximum number of shares which may be granted under
the Director Plan is 150,000 shares.
Stock option transactions are summarized as follows:
WEIGHTED AVERAGE
SHARES GRANT PRICE EXERCISE PRICE
------------------------- --------------------------- -------------------------
FISCAL 1998 FISCAL 1997 FISCAL 1998 FISCAL 1997 FISCAL 1998 FISCAL 1997
----------- ----------- ------------ ------------ ----------- -----------
Outstanding, beginning
of year............. 3,088,425 2,722,075 $ 8.68-21.81 $ 8.68-19.00 $15.16 $13.60
Granted............... 1,295,000 615,700 25.13-33.44 17.56-21.81 33.24 21.37
Exercised............. (767,968) (112,825) 8.68-19.31 8.73-17.69 11.72 11.67
Canceled.............. (249,700) (136,525) 9.00-21.81 9.00-17.69 17.67 13.07
--------- --------- ------------ ------------ ------ ------
Outstanding, end
of year............. 3,365,757 3,088,425 $ 8.68-33.44 $ 8.68-21.81 $22.65 $15.16
========= ========= ============ ============ ====== ======
As of July 31, 1998 and 1997, 1,155,257 and 1,195,875, respectively, of
options outstanding were exercisable.
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company accounts for the Stock Option Plan under
APB Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for this plan been determined pursuant to the provisions of
SFAS No. 123, the Company's pro-forma net earnings for fiscal 1998, 1997 and
1996 would have been (amounts in thousands) $67,002, $48,587, and $43,627
respectively, resulting in diluted earnings per share of $1.79, $1.33 and $1.20,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black Scholes option pricing model with the following
weighted-average assumptions used for options granted in fiscal 1998, 1997, and
1996 respectively: risk-free interest rate of 5.8 percent, 6.0 percent, and 6.5
percent, expected dividend yield of zero, expected lives of 5 years, and
expected volatility of 32.2 percent, 35.8 percent, and 37.0 percent.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to August 1, 1996, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-17
44
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
In February 1997, the FASB issued 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 years
ended July 31, 1998, 1997 and 1996, there were antidilutive common stock
equivalents of 1,266,000, 524,000, and 1,073,500, respectively.
YEAR ENDED JULY 31,
---------------------------
1998 1997 1996
------- ------- -------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Earnings before extraordinary item.......................... $68,937 $50,553 $44,994
Extraordinary item.......................................... -- -- (1,096)
------- ------- -------
Net earnings available to shareholders...................... $68,937 $50,553 $43,898
======= ======= =======
BASIC:
Weighted average number of common shares outstanding........ 35,201 35,054 35,068
Earnings per common share -- basic (before extraordinary
item)..................................................... $ 1.96 $ 1.44 $ 1.28
Extraordinary item per common share -- basic................ -- -- (0.03)
------- ------- -------
Earnings per common share -- basic.......................... $ 1.96 $ 1.44 $ 1.25
======= ======= =======
DILUTED:
Weighted average number of common shares outstanding........ 35,201 35,054 35,068
Effect of dilutive securities:
Stock options............................................... 980 675 648
Warrants.................................................... 1,187 903 749
------- ------- -------
Weighted average number of common shares outstanding as
adjusted.................................................. 37,368 36,632 36,465
Earnings per common share -- diluted (before extraordinary
item)..................................................... $ 1.84 $ 1.38 $ 1.23
Extraordinary item per common share -- diluted.............. -- -- (0.03)
------- ------- -------
Earnings per common share -- diluted........................ $ 1.84 $ 1.38 $ 1.20
======= ======= =======
UNUSUAL ITEM -- GAIN ON SALE OF DIAMOND PARK
On September 3, 1997, the Company signed an agreement to sell its Diamond
Park Fine Jewelers Division (the "Diamond Park Division 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 Division Sale. The Company received
$58.0 million in October 1997 and approximately $4.8 million was received in
February 1998, at which time the remaining inventory and net property and
equipment of the Dillard's stores was sold to the purchaser. The net proceeds
from the Diamond Park Division Sale will be reinvested into the
F-18
45
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's operations or used for general corporate purposes including
repurchases of the Company's common stock.
UNUSUAL ITEM -- GAIN ON SALE OF LAND
In fiscal 1998, the Company closed the sales of the excess land surrounding
the corporate headquarters facility for $12.9 million. The net proceeds from the
sale will be used for general corporate purposes, including the Company's stock
repurchase program.
UNUSUAL ITEM -- REORGANIZATION RECOVERIES
Pursuant to the Plan, Zale assigned certain claims and causes of action and
advanced $3.0 million to Jewel Recovery, L.P., a limited partnership ("Jewel
Recovery") which was formed upon Zale's emergence from bankruptcy. The sole
purpose of Jewel Recovery is to prosecute and settle such assigned claims and
causes of action. The general partner of Jewel Recovery is Jewel Recovery, Inc.,
a subsidiary of the Company. Its limited partners are holders of various prior
unsecured claims against Zale. The $3.0 million advance was fully reserved as of
July 30, 1993 as its collectibility was uncertain.
Jewel Recovery has pursued certain claims and has been awarded significant
recoveries against third parties. During the first quarter of fiscal year 1996,
Zale was notified that it would recover its $3.0 million advance to Jewel
Recovery. The $3.0 million advance was repaid to Zale in December 1995.
Additionally, Fleet Bank ("Fleet"), formerly Shawmut Bank, was elected as
Disbursement Agent and held all cash and common stock to be used in settlements
of creditors claims. During fiscal 1996, Fleet provided Zale with information on
creditors whose claim rights have terminated. As a result, during fiscal year
1996, Zale recovered cash funds of approximately $1.5 million held by Fleet
related to cash approved for distribution to pre-confirmation creditors of Zale
but not claimed by such pre-confirmation creditors. The $3.0 million and the
$1.5 million recoveries were recorded as unusual items in the Company's first
quarter of fiscal year 1996 and are reflected on the Consolidated Statements of
Operations for the year ended July 31, 1996.
COMMITMENTS AND CONTINGENCIES
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that such litigation and
claims will be resolved without material effect on the Company's financial
position or results of operations.
The Company has an operations services agreement for management information
systems with a third-party servicer. The agreement, which began in December
1996, requires fixed payments totaling $34.4 million over a 60 month term and a
variable amount based on usage.
The Company has an operations services agreement for credit operations with
a third-party servicer. The agreement, dated May 5, 1998, requires minimum
annual payments based on credit activities. The Company has a commitment of
approximately $15.2 million to be paid over the initial term of seven years.
Additional annual payments will be paid based on credit volume for normal credit
processing activities.
BENEFIT PLANS
Defined Contribution Retirement Plan
At July 31, 1998, the Company maintains The Zale Corporation Savings &
Investment Plan. Substantially all employees who are at least age 21 are
eligible to participate in the plan. Effective August 1, 1998, new employees
will be required to complete one year of continuous service with the Company to
be eligible to participate in the plan. Each employee can contribute from one
percent to fifteen percent of their annual
F-19
46
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
salary. Under this plan, the Company previously matched 50 cents in Zale stock
for every dollar an employee contributed up to two percent of annual earnings.
Effective August 1, 1998, the Company will match one dollar in Zale stock for
every dollar an employee contributes up to four percent of annual earnings,
subject to Internal Revenue Service limitations. In order for an employee to be
eligible for the Company match, the employee must have worked at least 1,000
hours during the plan year and be employed on the last day of the plan year.
For matching contributions made through fiscal 1998 an employee is 33.3
percent vested in the Zale stock after one year of service, 66.7 percent vested
after two years of service and 100 percent vested after three years of service.
Matching contributions subsequent to July 31, 1998, will immediately vest 100%.
In order to be eligible for the contribution, employees must be employed by the
Company at the time of the contribution. As of July 31, 1998, approximately
6,830 employees participated in The Zale Corporation Savings & Investment Plan.
Also, under this plan, the Company may make a profit sharing cash
contribution at its sole discretion. To be eligible for such discretionary
profit sharing contributions, an employee must have at least twelve consecutive
months of service, have worked at least 1,000 hours during the plan year and be
employed on the last day of the plan year.
For discretionary profit sharing contributions made through fiscal 1998, an
employee is 20 percent vested in the profit sharing contributions after three
years of service, 40 percent vested after four years of service, 60 percent
vested after five years of service, 80 percent vested after six years of service
and 100 percent vested after seven years of service. The Company's contribution
to the plan including matching contributions was $4.0 million, $3.5 million and
$3.9 million for fiscal years 1998, 1997 and 1996, respectively. The Company
contributed 35,047 treasury shares to its 401(k) plan in fiscal year 1998.
Effective for fiscal years subsequent to July 31, 1998, the Company has
discontinued the profit sharing feature of The Zale Corporation Savings &
Investment Plan as a result of the increased match discussed above.
Retirement Plan
On September 14, 1995, the Boards of Directors of Zale and ZDel approved
the preparation and implementation of the Zale Delaware, Inc. Supplemental
Executive Retirement Plan (the "Plan"), which was executed on behalf of the
Company February 23, 1996, to be effective as of September 15, 1995. The purpose
of the Plan is to provide eligible executives with the opportunity to receive
payments each year after retirement equal to a portion of their final average
pay as defined.
FINANCIAL INSTRUMENTS
The Company has adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," which extends existing fair value disclosure practices
by requiring all entities to disclose the fair value of financial instruments,
for which it is practicable to estimate fair value.
As cash and short-term cash investments, customer receivables, trade
payables and certain other short-term financial instruments are all short-term
in nature, their carrying amount approximates fair value. The carrying amount of
the $380.7 million, net of discount, Receivables Securitization Facility also
approximates fair value. Also, the carrying amount of the $99.6 million, net of
discount, Senior Notes approximates fair value.
The investments of the Company's insurance subsidiaries, primarily stocks
and bonds in the amount of $26.6 million, approximate market value at July 31,
1998 and are reflected in Other Assets on the Consolidated Balance Sheets.
Investments are classified as available for sale and are carried at fair value.
Changes in unrealized gains and losses are recorded directly to stockholders'
investment.
F-20
47
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments and customer receivables. The Company maintains
cash and cash equivalents, short and long-term investments and certain other
financial instruments with various financial institutions. These financial
institutions are located throughout the country. Concentrations of credit risk
with respect to customer receivables are limited due to the Company's large
number of customers and their dispersion across many regions. As of July 31,
1998 and 1997, the Company had no significant concentrations of credit risk.
RELATED-PARTY TRANSACTIONS
One of the Company's directors serves as a director of a company from which
the Company purchased approximately $3.1 million and $3.4 million of jewelry
merchandise during fiscal year 1998 and 1997, respectively. The Company believes
the terms were equivalent to those of unrelated parties.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
Effective July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires the Company to report comprehensive
income in the financial statements. SFAS No. 131 requires the Company to
disclose revenues, profits and loss, and assets for certain business segments.
These statements are effective for fiscal years beginning after December 15,
1997, with earlier adoption permitted. The Company has not yet determined the
impact of these statements on its financial statements and financial
disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits." This statement is effective
for fiscal years beginning after December 15, 1997. The Company has not yet
determined the impact of this statement on its financial disclosures.
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. 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.
F-21
48
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1998
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
Net Sales......................... $ -- $1,291,146 $ 22,564 $ -- $1,313,710
Cost of Sales..................... -- 670,776 11,132 -- 681,908
------- ---------- -------- -------- ----------
Gross Margin...................... -- 620,370 11,432 -- 631,802
Selling, General, and
Administrative Expenses
(Income)........................ 158 509,123 (33,435) -- 475,846
Depreciation and Amortization
Expense......................... -- 21,352 1,213 -- 22,565
Unusual Item -- Gain on Sale of
Diamond Park Fine Jewelers
Division........................ -- (1,634) -- -- (1,634)
Unusual Item -- Gain on Sale of
Land............................ -- (7,313) -- -- (7,313)
------- ---------- -------- -------- ----------
Operating Earnings................ (158) 98,842 43,654 -- 142,338
Interest Expense, Net............. -- (7,327) 39,366 -- 32,039
------- ---------- -------- -------- ----------
Earnings (Loss) Before Income
Taxes........................... (158) 106,169 4,288 -- 110,299
Income Taxes (Benefit)............ (59) 39,812 1,609 -- 41,362
------- ---------- -------- -------- ----------
Earnings (Loss) Before Equity in
Earnings (Loss) of
Subsidiaries.................... (99) 66,357 2,679 -- 68,937
Equity in Earnings (Loss) of
Subsidiaries.................... 69,036 2,619 -- (71,655) --
------- ---------- -------- -------- ----------
Net Earnings...................... $68,937 $ 68,976 $ 2,679 $(71,655) $ 68,937
======= ========== ======== ======== ==========
F-22
49
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1997
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
Net Sales......................... $ -- $1,233,438 $ 20,380 $ -- $1,253,818
Cost of Sales..................... -- 633,208 10,110 -- 643,318
------- ---------- -------- -------- ----------
Gross Margin...................... -- 600,230 10,270 -- 610,500
Selling, General, and
Administrative Expenses
(Income)........................ 150 497,636 (17,264) -- 480,522
Depreciation and Amortization
Expense......................... -- 12,295 1,727 -- 14,022
------- ---------- -------- -------- ----------
Operating Earnings (Loss)......... (150) 90,299 25,807 -- 115,956
Interest Expense, Net............. -- 1,739 34,359 -- 36,098
------- ---------- -------- -------- ----------
Earnings (Loss) Before Income
Taxes........................... (150) 88,560 (8,552) -- 79,858
Income Taxes (Benefit)............ (55) 32,498 (3,138) -- 29,305
------- ---------- -------- -------- ----------
Earnings (Loss) Before Equity in
Earnings (Loss) of
Subsidiaries.................... (95) 56,062 (5,414) -- 50,553
Equity in Earnings (Loss) of
Subsidiaries.................... 50,648 (6,040) -- (44,608) --
------- ---------- -------- -------- ----------
Net Earnings (Loss)............... $50,553 $ 50,022 $ (5,414) $(44,608) $ 50,553
======= ========== ======== ======== ==========
F-23
50
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1996
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
Net Sales................................... $ -- $1,119,047 $ 18,330 $ -- $1,137,377
Cost of Sales............................... -- 567,856 8,908 -- 576,764
------- ---------- -------- -------- ----------
Gross Margin................................ -- 551,191 9,422 -- 560,613
Selling, General, and Administrative
Expenses (Income)......................... 151 464,237 (7,017) -- 457,371
Depreciation and Amortization Expense....... -- 6,479 1,059 -- 7,538
Unusual Items -- Reorganization
Recoveries................................ -- (1,486) (3,000) -- (4,486)
------- ---------- -------- -------- ----------
Operating Earnings (Loss)................... (151) 81,961 18,380 -- 100,190
Interest Expense (Income), Net.............. -- (2,457) 32,559 -- 30,102
------- ---------- -------- -------- ----------
Earnings (Loss) Before Income Taxes and
Extraordinary Item........................ (151) 84,418 (14,179) -- 70,088
Income Taxes (Benefit)...................... (54) 30,225 (5,077) -- 25,094
------- ---------- -------- -------- ----------
Earnings (Loss) Before Extraordinary Item... (97) 54,193 (9,102) -- 44,994
Extraordinary Item, Net of Income Taxes of
$(603).................................... -- (1,096) -- -- (1,096)
------- ---------- -------- -------- ----------
Earnings (Loss) Before Equity in Earnings
(Loss) of Subsidiaries.................... (97) 53,097 (9,102) -- 43,898
Equity in Earnings (Loss) of Subsidiaries... 43,995 (11,247) -- (32,748) --
------- ---------- -------- -------- ----------
Net Earnings (Loss)......................... $43,898 $ 41,850 $ (9,102) $(32,748) $ 43,898
======= ========== ======== ======== ==========
F-24
51
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1998
(AMOUNTS IN THOUSANDS)
ASSETS
NON-
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
Current Assets:
Cash and Cash Equivalents.......... $ -- $165,248 $ 7,821 $ -- $ 173,069
Restricted Cash.................... -- 1,541 4,651 -- 6,192
Customer Receivables, Net.......... -- -- 495,468 -- 495,468
Merchandise Inventories............ -- 468,076 10,391 -- 478,467
Other Current Assets............... -- 24,502 2,218 -- 26,720
-------- -------- -------- --------- ----------
Total Current Assets....... -- 659,367 520,549 -- 1,179,916
Investment in Subsidiaries......... 648,160 52,493 -- (700,653) --
Property and Equipment, Net........ -- 158,807 4,077 -- 162,884
Intercompany Receivable............ 102,801 495 -- (103,296) --
Other Assets....................... -- 10,493 33,833 -- 44,326
Deferred Tax Asset, Net............ 59 58,741 3 -- 58,803
-------- -------- -------- --------- ----------
Total Assets............... $751,020 $940,396 $558,462 $(803,949) $1,445,929
======== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term
Debt............................ $ -- $ -- $ -- $ -- $ --
Accounts Payable and Accrued
Liabilities..................... 2,758 182,725 2,138 -- 187,621
Deferred Tax Liability, Net........ 646 20,154 -- -- 20,800
-------- -------- -------- --------- ----------
Total Current
Liabilities.............. 3,404 202,879 2,138 -- 208,421
Non-current Liabilities............ -- 38,420 11,770 -- 50,190
Intercompany Payable............... -- -- 103,296 (103,296) --
Long-term Debt..................... 99,555 -- 380,720 -- 480,275
Excess of Revalued Net Assets Over
Stockholders' Investment, Net... -- 58,982 -- -- 58,982
Total Stockholders'
Investment............... 648,061 640,115 60,538 (700,653) 648,061
-------- -------- -------- --------- ----------
Total Liabilities and
Stockholders'
Investment............... $751,020 $940,396 $558,462 $(803,949) $1,445,929
======== ======== ======== ========= ==========
F-25
52
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1997
(AMOUNTS IN THOUSANDS)
ASSETS
NON-
PARENT GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
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 Asset, 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
======== ======== ======== ========= ==========
F-26
53
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1998
(AMOUNTS IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
-------- --------- --------- ------------ ------------
Net Cash Provided by (Used in)
Operating Activities........... $ 10,632 $ 101,492 $ 13,922 $(13,273) $ 112,773
Net Cash Flows from Investing
Activities:
Additions to property and
equipment...................... -- (61,959) (1,538) -- (63,497)
Dispositions of property and
equipment...................... -- 548 101 -- 649
Proceeds from Sale of Diamond
Park Fine Jewelers Division.... -- 62,443 -- -- 62,443
Proceeds from Sale of Land....... -- 12,911 -- -- 12,911
-------- --------- -------- -------- ---------
Net Cash Provided by (Used in)
Investing Activities........... -- 13,943 (1,437) -- 12,506
-------- --------- -------- -------- ---------
Net Cash Flows from Financing
Activities:
Proceeds from long-term debt..... -- (410) -- -- (410)
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, Inc............. (99,530) 99,530 -- -- --
Debt issue and capitalized
financing costs................ -- (2,621) -- -- (2,621)
Proceeds from exercise of stock
options........................ 9,198 -- -- -- 9,198
Proceeds from exercise of
warrants....................... 20,170 -- -- -- 20,170
Purchase of common stock......... (40,000) -- -- -- (40,000)
Proceeds from issuance of common
stock.......................... -- -- 2,500 (2,500) --
Dividends paid................... -- -- (15,773) 15,773 --
-------- --------- -------- -------- ---------
Net Cash Provided by (Used in)
Financing Activities........... (10,632) 25,799 (13,273) 13,273 15,167
-------- --------- -------- -------- ---------
Net Increase (Decrease) in Cash
and Cash Equivalents........... -- 141,234 (788) -- 140,446
Cash and Cash Equivalents at
Beginning of Period............ -- 24,014 8,609 -- 32,623
-------- --------- -------- -------- ---------
Cash and Cash Equivalents at End
of Period...................... $ -- $ 165,248 $ 7,821 $ -- $ 173,069
======== ========= ======== ======== =========
F-27
54
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1997
(AMOUNTS IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
------ ----------- --------- ------------ ------------
Net Cash Provided by (Used in)
Operating Activities.............. $ (314) $ 23,764 $ 5,910 $(12,895) $ 16,465
Net Cash Flows from Investing
Activities:
Additions to property and
equipment......................... -- (54,025) -- -- (54,025)
Dispositions of property and
equipment......................... -- 2,277 2,610 -- 4,887
------ ----------- -------- -------- -----------
Net Cash Provided by (Used in)
Investing Activities.............. -- (51,748) 2,610 -- (49,138)
------ ----------- -------- -------- -----------
Net Cash Flows from Financing
Activities:
Proceeds from long-term debt........ -- 291 -- -- 291
Payments on revolving credit
agreement......................... -- (1,027,700) -- -- (1,027,700)
Borrowings under revolving credit
agreement......................... -- 1,074,800 -- -- 1,074,800
Debt issue and capitalized financing
costs............................. -- (945) -- -- (945)
Proceeds from exercise of stock
options........................... 1,073 -- -- -- 1,073
Purchase of common stock............ (759) -- -- -- (759)
Dividends paid...................... -- -- (12,895) 12,895 --
------ ----------- -------- -------- -----------
Net Cash Provided by (Used in)
Financing Activities.............. 314 46,446 (12,895) 12,895 46,760
------ ----------- -------- -------- -----------
Net (Decrease) Increase in Cash and
Cash Equivalents.................. -- 18,462 (4,375) -- 14,087
Cash and Cash Equivalents at
Beginning of Period............... -- 5,552 12,984 -- 18,536
------ ----------- -------- -------- -----------
Cash and Cash Equivalents at End of
Period............................ $ -- $ 24,014 $ 8,609 $ -- $ 32,623
====== =========== ======== ======== ===========
F-28
55
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1996
(AMOUNTS IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
------- --------- --------- ------------ ------------
Net Cash Provided by (Used in) Operating
Activities................................... $ 8,937 $ 9,205 $ 12,416 $(12,049) $ 18,509
Net Cash Flows from Investing Activities:
Additions to property and equipment.......... -- (48,102) (688) -- (48,790)
Dispositions of property and equipment....... -- 829 -- -- 829
Acquisition, net of cash acquired............ -- (2,547) -- -- (2,547)
Other........................................ 34 (408) 34 -- (340)
------- --------- -------- -------- ---------
Net Cash Provided by (Used in) Investing
Activities................................ 34 (50,228) (654) -- (50,848)
------- --------- -------- -------- ---------
Net Cash Flows from Financing Activities:
Payments on long-term debt................... -- (66,608) -- -- (66,608)
Payments on revolving credit agreement....... -- (765,150) -- -- (765,150)
Borrowings under revolving credit
agreement................................. -- 788,750 -- -- 788,750
Redemption of Series B Warrants.............. (9,264) -- -- -- (9,264)
Prepayment penalty........................... (1,699) -- -- -- (1,699)
Debt issue and capitalized financing costs... -- (629) -- -- (629)
Proceeds from exercise of stock options...... 1,714 -- -- -- 1,714
Proceeds from exercise of warrants........... 278 -- -- -- 278
Dividends paid............................... -- -- (12,049) 12,049 --
------- --------- -------- -------- ---------
Net Cash Used In Financing Activities........ (8,971) (43,637) (12,049) 12,049 (52,608)
------- --------- -------- -------- ---------
Net Decrease in Cash and Cash Equivalents.... -- (84,660) (287) -- (84,947)
Cash and Cash Equivalents at Beginning of
Period.................................... -- 90,212 13,271 -- 103,483
------- --------- -------- -------- ---------
Cash and Cash Equivalents at End of Period... $ -- $ 5,552 $ 12,984 $ -- $ 18,536
======= ========= ======== ======== =========
F-29
56
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for the years ended July 31, 1998
and 1997 were as follows (amounts in thousands except per share data):
FISCAL 1998
FOR THE THREE MONTHS ENDED
------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1998 1998 1998 1997
-------- --------- ----------- -----------
Net sales.................................................. $280,867 $258,300 $522,017 $252,526
Gross margin............................................... 134,980 124,458 251,441 120,923
Net earnings............................................... 7,451 1,503 58,937 1,046
Net earnings per diluted common share...................... .20 .04 1.57 .03
FISCAL 1997
FOR THE THREE MONTHS ENDED
------------------------------------------------
JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
1997 1997 1997 1996
-------- --------- ----------- -----------
Net sales.................................................. $273,580 $244,376 $505,083 $230,779
Gross margin............................................... 132,271 119,182 248,312 110,735
Net earnings (loss)........................................ 1,620 (1,444) 51,515 (1,138)
Net earnings (loss) per diluted common share............... .04 (.04) 1.41 (.03)
F-30
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 30th day of
September, 1998.
ZALE CORPORATION
By: /s/ ROBERT J. DINICOLA
---------------------------------------
Robert J. DiNicola
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT J. DINICOLA Chairman of the Board and September 30, 1998
- ----------------------------------------------------- Chief Executive Officer
Robert J. DiNicola (principal executive
officer of the registrant)
/s/ SUE E. GOVE Executive Vice President and September 30, 1998
- ----------------------------------------------------- Chief Financial Officer
Sue E. Gove (principal financial
officer of the registrant)
/s/ MARK R. LENZ Senior Vice President, September 30, 1998
- ----------------------------------------------------- Controller (principal
Mark R. Lenz accounting officer of the
registrant)
/s/ GLEN ADAMS Director September 30, 1998
- -----------------------------------------------------
Glen Adams
/s/ A. DAVID BROWN Director September 30, 1998
- -----------------------------------------------------
A. David Brown
/s/ PETER P. COPSES Director September 30, 1998
- -----------------------------------------------------
Peter P. Copses
/s/ ANDREA JUNG Director September 30, 1998
- -----------------------------------------------------
Andrea Jung
/s/ RICHARD C. MARCUS Director September 30, 1998
- -----------------------------------------------------
Richard C. Marcus
/s/ CHARLES H. PISTOR, JR. Director September 30, 1998
- -----------------------------------------------------
Charles H. Pistor, Jr.
/s/ ANDREW H. TISCH Director September 30, 1998
- -----------------------------------------------------
Andrew H. Tisch
26
58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Zale Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Zale Corporation (a Delaware corporation) and
subsidiaries included in this Form 10-K, and have issued our report thereon
dated August 31, 1998. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. Schedule II is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 31, 1998
27
59
SCHEDULE II
ZALE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END
OF PERIOD EARNINGS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
Fiscal year ended July 31, 1998
Allowance for doubtful accounts............................ $57,819 $66,066 $56,600(1) $67,285
Fiscal year ended July 31, 1997
Allowance for doubtful accounts............................ 51,402 55,850 49,433(1) 57,819
Fiscal year ended July 31, 1996
Allowance for doubtful accounts............................ 42,596 53,508 44,702(1) 51,402
- ---------------
(1) Accounts written off, less recoveries and other adjustments.
28
60
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Disclosure Statement Pursuant to Section 1125 of the
Bankruptcy Code with Respect to Plan of Reorganization
under Chapter 11 of the Bankruptcy Code for Zale
Corporation and its Affiliated Debtors, dated March 22,
1993 (Exhibit T3E-1).(1)
2.2 -- Motion to Approve Amendments to the Plan of
Reorganization under Chapter 11 of the Bankruptcy Code of
Zale Corporation and its Affiliated Debtors, dated May
19, 1993 (Exhibit 2.6).(2)
2.3 -- Order Approving Amendments to the Plan of Reorganization
under Chapter 11 of the Bankruptcy Code of Zale
Corporation and its Affiliated Debtors, dated May 20,
1993 (Exhibit 2.7).(2)
3.1 -- Restated Certificate of Incorporation of Zale
Corporation, dated July 30, 1993.(3)
3.2 -- Amended Bylaws of Zale Corporation, dated November 1,
1996.(7)
4.1 -- Indenture, dated as of July 1, 1994, among Zale Funding
Trust, as Issuer and Bankers Trust Company, as Indenture
Trustee.(5)
4.2 -- Purchase and Servicing Agreement, dated as of July 1,
1994, among Zale Funding Trust, Diamond Funding Corp.,
Zale Delaware, Inc., and Jewelers Financial Services,
Inc.(5)
4.3 -- Revolving Credit Agreement dated March 31, 1997 among
Zale Corporation and Zale Delaware, Inc. and The First
National Bank of Boston, as agent for the lenders
identified therein. The Schedules attached to the
Agreement, as identified in the list of Schedules filed
as a part of this exhibit, are omitted from this filing,
but will be provided supplementally to the Commission
upon request.(7)
4.4 -- Indenture dated September 30, 1997, by and among Zale
Corporation, Zale Delaware, Inc. and Bank One, N.A. as
Trustee.(10)
*10.1 -- Indemnification agreement, dated as of July 21, 1993,
between Zale Corporation and certain present and former
directors thereof.(5)
10.2 -- Amended and Restated Agreement of Limited Partnership of
Jewel Recovery, L.P., dated as of July 30, 1993.(3)
*10.3 -- Zale Corporation Stock Option Plan.(3)
10.4 -- Trust Agreement, dated as of November 24, 1993, among
Zale Corporation, Zale Delaware, Inc. and United States
Trust Company of New York.(4)
*10.6 -- The Executive Severance Plan for Zale Corporation and Its
Affiliates, as amended and restated as of February 10,
1994.(4)
*10.6a -- Amendment to The Executive Severance Plan for Zale
Corporation and Its Affiliates effective May 20, 1995.(6)
*10.7 -- Settlement Agreement, dated as of November 30, 1997,
between Zale Corporation and Louis J. Grabowsky.(11)
10.8 -- Lease Agreement Between Principal Mutual Life Insurance
Company, As Landlord, and Zale Corporation, as Debtor and
Debtor-In-Possession, As Tenant, dated as of September
17, 1992.(6)
10.8a -- First Lease Amendment and Agreement between Principal
Mutual Life Insurance Company and Zale Delaware, Inc.,
dated as of February 1, 1996.(6)
10.9 -- Indemnification Agreement, executed on October 30, 1996,
and dated as of June 6, 1996, between Zale Corporation
and Andrea Jung.(7)
*10.10 -- Form Change of Control Agreement dated as of October 30,
1996, but executed thereafter, between Zale Corporation
and Key Employees.(8)
29
61
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.10a -- Modified list of parties to Change of Control
Agreement.(11)
10.11 -- Asset Purchase Agreement, dated September 3, 1997, by and
among Finlay Enterprises, Inc., Finlay Fine Jewelry
Corporation, Zale Corporation and Zale Delaware, Inc.(9)
*10.12 -- Employment Agreement, dated as of August 1, 1997, between
Zale Corporation and Robert J. DiNicola.(11)
*10.13 -- Employment Agreement, dated as of August 1, 1998, between
Zale Corporation and Beryl B. Raff.(11)
*10.14 -- Employment Agreement, dated as of August 1, 1998, between
Zale Corporation and Alan P. Shor.(11)
*10.15 -- Employment Agreement, dated as of January 15, 1998
between Zale Corporation and Mary L. Forte.(11)
*10.16 -- Employment Agreement, dated as of August 1, 1998, between
Zale Corporation and Sue E. Gove.(11)
*10.17 -- Form of Zale Executive Bonus Plan(11)
21 -- Subsidiaries of the registrant.(11)
23 -- Consent of Independent Public Accountants.(11)
27 -- Financial data schedule.(11)
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(1) Incorporated by reference from the exhibit shown in parenthesis to the
registrant's Form T-3 (No. 22-24-68) filed with the Commission on April 2,
1993.
(2) Incorporated by reference from the exhibit shown in parenthesis to the
registrant's Form 8-A/A (No. 02-21526) filed with the Commission on July
16, 1993.
(3) Previously filed as an exhibit to the registrant's Form 10-Q (No. 1-4129)
for the quarterly period ended September 30, 1993, and incorporated herein
by reference.
(4) Incorporated by reference to the corresponding exhibit to the registrant's
Registration Statement on Form S-1 (No. 33-73310) filed with the Commission
on December 23, 1993, as amended.
(5) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1995, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1996, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the registrant's Form 10-Q for the
quarterly period ended October 31, 1996, and incorporated herein by
reference.
(8) Previously filed as an exhibit to the registrant's Form 10-Q for the
quarterly period ended January 31, 1997, and incorporated herein by
reference.
(9) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526)
for the fiscal year ended July 31, 1997, and incorporated herein by
reference.
(10) Incorporated by reference to Exhibit 4.1 to the registrant's Registration
Statement on Form S-4 (No. 33-39473) filed with the Commission on November
4, 1997.
(11) Filed herewith.
* Management Contracts and Compensatory Plans.
30