Zale (ZLC) 11-K Annual report of employee stock purchases

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 11-K

FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

þ ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year ended July 31, 2004

OR

o TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission file number 001-04129

A.   Full title of the plan and the address of the plan, if different from that of issuer named below:

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

B.   Name of issuer of the securities held pursuant to the plan and the address of its principal executive offices:

Zale Corporation
901 W. Walnut Hill Lane
Irving, Texas 75038-1003

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Financial Statements and Supplemental Schedule

July 31, 2004 and 2003

(With Report of Independent Registered Public Accounting Firm Thereon)

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Table of Contents

	Page
Report of Independent Registered Public Accounting Firm		1
Statements of Net Assets Available for Benefits July 31, 2004 and 2003		2
Statements of Changes in Net Assets Available for Benefits Years ended July 31, 2004 and 2003		3
Notes to Financial Statements		4
Supplemental Schedule
Schedule H, Part IV, Line 4i — Schedule of Assets (Held at End of Year) July 31, 2004		11
Consent of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The Plan Committee
Zale Corporation Savings and Investment Plan:

We have audited the accompanying statements of net assets available for benefits of the Zale Corporation Savings and Investment Plan (the Plan) as of July 31, 2004 and 2003, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Zale Corporation Savings and Investment Plan as of July 31, 2004 and 2003, and the changes in net assets available for benefits for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets (held at end of year) is presented for purposes of additional analysis and is not a required part of the basic financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

KPMG LLP

Dallas, Texas
January 7, 2005

1

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Statements of Net Assets Available for Benefits

July 31, 2004 and 2003

	2004		2003
Assets:
Investments, at fair market value:
Cash and short-term investments	$	316,584		347,366
Common stock mutual funds		47,943,230		37,381,490
Bond mutual funds		11,534,684		13,221,576
Government securities mutual funds		18,753,207		18,524,696
Zale Corporation common stock		18,143,633		17,560,407
Participants’ loans		4,561,207		3,910,960
Total investments		101,252,545		90,946,495
Receivables:
Employer contributions:
Common Stock Contributions		—		1,986,033
Cash Contributions		1,951,564		—
Employee contributions		—		60,666
Other receivables		55,101		58,126
Total receivables		2,006,665		2,104,825
Liabilities:
Excess contributions payable		108,190		101,139
Net assets available for benefits	$	103,151,021		92,950,181

2

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Statements of Changes in Net Assets Available for Benefits

Years ended July 31, 2004 and 2003

	2004		2003
Increases in net assets:
Investment income:
Net appreciation	$	7,904,333		10,563,776
Interest and dividends		1,975,176		2,166,812
Contributions:
Employer
Common Stock Contributions		—		1,984,837
Cash Contributions		1,946,507		—
Participants		7,431,958		7,471,375
Rollovers		126,818		177,769
		9,505,283		9,633,981
Total increases in net assets		19,384,791		22,364,569
Decreases in net assets:
Payments to participants and beneficiaries		9,075,762		6,893,321
Refund of excess contributions		108,190		101,139
Total decreases in net assets		9,183,952		6,994,460
Net increase in net assets available for benefits		10,200,840		15,370,109
Net assets available for benefits, beginning of year		92,950,181		77,580,072
Net assets available for benefits, end of year	$	103,151,021		92,950,181

See accompanying notes to financial statements.

3

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Notes to Financial Statements

July 31, 2004 and 2003

(1)	Description of Plan
	The Zale Corporation Savings and Investment Plan (the Plan) is a defined contribution retirement plan. The following description of the Plan provides only general information. Participants should refer to the Summary Plan Description for a more complete description of the Plan’s provisions.

(a)	General
	Employees are eligible to participate in the Plan on the first day of the month following the later of the date the employee reaches age 21 or the date on which the employee completes one year of service. One year of service is defined by the Plan as 1,000 or more hours of service completed in a 12-month period beginning on the date of employment with Zale Corporation (the Company or Employer) or an anniversary of the employment date. Employees covered under a collective bargaining agreement and certain nonresident aliens are excluded from participation. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA).
(b)	Employee Contributions
	Under the Plan, participants are permitted to voluntarily contribute, on a pretax basis, from 1% to 30% of their annual earnings to their Employee 401(k) Contribution Account. All participants are subject to Internal Revenue Service (IRS) limitations on these contributions. The maximum amount a participant could contribute under this limitation is $13,000 and $12,000 for each calendar year 2004 and 2003, respectively. Effective August 1, 2002, employees who are or will be at least 50 years of age by the end of a calendar year are eligible to make additional pre-tax contributions called catch-up contributions to the Plan at any time during such calendar year. The maximum amount of catch-up contributions a participant can contribute is $3,000 in 2004 and $2,000 in 2003.
(c)	Employer Contributions
	The Plan provides that the Company make matching contributions (Employer 401(k) Matching Contributions) to each eligible participant who voluntarily contributes to the Plan.
	To be eligible for an Employer 401(k) Matching Contribution the Plan requires employment on the last day of the Plan year (July 31) in order to receive an allocation of matching contributions, unless the participant has died, retired on or after age 65, or became disabled during the Plan year. Further, the Employer 401(k) Matching Contributions are 50% of the first 4% of annual compensation contributed to the Plan as a salary deferral contribution. The Plan authorizes the Company to make Employer 401(k) Matching Contributions in cash or Company Common Stock. For Plan year ended July 31, 2004, Employer 401(k) Matching Contributions were made in cash. Employer 401(k) Matching Contributions for Plan year 2003 were made in Company Common Stock, subject to IRS limitations. Employer 401(k) Matching Contributions are allocated after the end of the Plan year. In addition, forfeitures may be used to help pay the Plan’s administrative expenses as well as to reduce matching contributions.

4

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Notes to Financial Statements

July 31, 2004 and 2003

(d)	Investment Options
	Upon enrollment in the Plan, participants may direct contributions in whole percentage increments to the following investment options:

Bond Investment Option	Invests primarily in domestic fixed income securities such as corporate bonds, U.S. government securities, certificates of deposit, commercial paper, and other fixed income securities.
Dreyfus General Government Securities Money Market	Invests solely in securities issued and guaranteed by the U.S. government or its agencies or instrumentalities, and repurchase agreements collateralized by these securities.
Growth and Income Investment Option	Invests in domestic and international common stocks, other equity securities, corporate and government bonds, and short-term cash equivalents.
Growth Investment Option	Invests primarily in domestic common stocks and other equity securities, with a smaller allocation to international securities.
Aggressive Growth Investment Option	Invests primarily in common stocks and other equity securities of small, rapidly growing companies and also larger companies with strong growth potential. This option invests in both domestic and international securities.
Global Investment Option	Invests primarily in common stocks and other equity securities of companies based both within and outside of the United States.
Zale Corporation Common Stock	Participants may invest up to 25% of their salary deferral contribution accounts and up to 100% of the balance of their other accounts in Company Common Stock.

Participants may change their investment options daily. After initial contributions, participants may reallocate investments in these investment options. Earnings or losses of the Plan are allocated to the participants based on their relative account balances in the respective investment programs of the Plan.

5

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Notes to Financial Statements

July 31, 2004 and 2003

(e)	Loan Provisions
	The Plan allows eligible participants to borrow from their Employee 401(k) Contribution and Rollover Accounts a minimum of $1,000 and a maximum equal to the lesser of $50,000 or 50% of their account balance. The $50,000 limit is reduced by the participant’s highest loan balance in the last 12 months. Loan transactions are treated as a transfer to (from) the investment fund from (to) the participant loan fund. Loan terms range from one to five years or up to fifteen years for the purchase of a primary residence. The loans are secured by the balance in the participant’s account and bear interest at the Wall Street Journal prime interest rate at the time the loan is made plus 2%, as determined by the Company’s Plan Committee (the Committee). Interest rates ranged between 6.00% and 6.25% for loans established during the Plan year ended July 31, 2004 and between 6.00% and 6.75% for loans established during the Plan year ended July 31, 2003. Principal and interest are paid ratably through biweekly payroll deductions.
(f)	Vesting
	A participant is automatically fully vested in employee contributions and Employer 401(k) Matching Contributions plus actual earnings thereon.
	Through July 1998, the Company also made discretionary profit sharing contributions to the Plan. Participants vest in Employer Discretionary Profit Sharing Contributions and earnings thereon as follows:

	Vested
	percent of
	discretionary
	profit sharing
Years of active service	contributions
Less than 3 years		0	%
3 years		20	%
4 years		40	%
5 years		60	%
6 years		80	%
7 or more years		100	%

For the purpose of this schedule, a year of service means a year from August 1 to July 31 during which a participant works at least 1,000 hours of service. Additionally, full vesting occurs upon a participant’s death, full and permanent disability, or retirement after age 65 with five years of participation. Participants are eligible to receive their vested interests in the Plan upon termination from the Company.

6

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Notes to Financial Statements

July 31, 2004 and 2003

(g)	Distributions and Withdrawals
	Upon retirement, a participant may withdraw the full value of his or her account in a single, lump-sum distribution or a direct rollover to an Individual Retirement Account (IRA) or another plan. Distribution of the participant’s entire balance also becomes due upon death or total disability. Upon termination of employment for any other reason, if the participant’s vested account balance is less than $5,000, it will be automatically distributed unless the participant elects to roll it over to an IRA or another plan. If the participant’s vested account is at least $5,000, the participant may leave the balance in the Plan until normal retirement age. Participants may make hardship withdrawals during employment from their Employee 401(k) Contributions (but not the earnings thereon) or Employer Discretionary Profit Sharing Contributions and earnings thereon (but not Employer 401(k) Matching Contributions) at specific times, subject to certain restrictions.
(h)	Forfeited Accounts
	For the Plan years ended July 31, 2004 and 2003, forfeited non-vested accounts were approximately $90,000 and $60,000, respectively. Forfeited accounts may be used to reduce future Employer 401(k) Matching Contributions or help pay the Plan’s administrative expenses.
(i)	Tax Status
	The Plan has received a favorable determination letter dated August 4, 2003 from the IRS stating that the Plan and the related trust are designed in accordance with the applicable provisions of the Internal Revenue Code (the Code). The Company and the Plan’s tax counsel believe the Plan is designed and continues to operate in accordance with the provisions of the Code.
(j)	Plan Administration
	The Plan is administered by the Committee, which is appointed by the Company’s board of directors (the Board) or Chief Executive Officer. The Company retains the services of State Street Bank and Trust as the trustee of the Plan and Mellon HR as the Plan’s recordkeeper. Additionally, the Committee retains the services of Capital Research & Consulting, an investment advisory firm, to monitor fund performances.

(2)	Plan Changes and Amendments
	Effective for the Plan year ended July 31, 2004, matching contributions were made in cash. Prior year matching contributions were made in Company Common Stock.
(3)	Amendment or Termination of the Plan
	The Company’s Board has the right to amend or terminate the Plan or to reduce or stop contributions either temporarily or permanently at its sole discretion. If the Board exercised its right to stop contributions permanently or to terminate the Plan, the entire amount in each participant’s account would be 100% vested and distributed under the direction of the Committee. The Board has no intention at this time to terminate the Plan.

7

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Notes to Financial Statements

July 31, 2004 and 2003

(4)   Summary of Significant Accounting Policies

(a)	Basis of Accounting
	The Plan uses the accrual method of accounting.
(b)	Investment Valuation and Income Recognition
	Investments in mutual fund securities and the Company’s Common Stock are valued at fair market value based on quoted market prices as of the Plan’s year-end. Participants loans are valued at their outstanding balances, which approximate fair value. Purchases and sales of securities are recorded on a trade-date basis. The Plan offers seven investment options. These investment options are: Bond Investment, Dreyfus General Government Securities Money Market, Growth and Income Investment, Growth Investment, Aggressive Growth Investment, Global Investment, and Zale Corporation Common Stock (see note 1(d) for detail of investment options).
	Net appreciation and depreciation of investments are calculated based on the difference between the fair market value of the investments as of the beginning of the Plan year, or purchase price if purchased during the Plan year, and the fair market value of the investment as of the end of the Plan year, or the selling price if sold during the Plan year. Such amounts are shown as net depreciation or appreciation in these financial statements.
(c)	Administration Expenses
	The Plan has a revenue sharing agreement with the Plan’s mutual funds and recordkeeper involving Sub Transfer Agent and 12b-1 revenues. Sub Transfer Agent and 12b-1 revenues are deposited directly to the Plan. Most administrative expenses related to the Plan’s investments are paid by the Plan and are offset by the Sub Transfer Agent and 12b-1 revenues. While it is not required that the Company reimburse the Plan for any administrative expenses not covered by Sub Transfer Agent, 12b-1 revenues, and forfeitures, the Company has done so in the past and may do so in the future. For the Plan years ended July 31, 2004 and 2003, the Plan incurred approximately $158,000 and $191,000, respectively, in expenses that were not covered by funds received under the revenue sharing agreement and were paid by the Company.
(d)	Use of Estimates
	The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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 amount of changes in net assets during the reporting period. Actual results could differ from those estimates.

8

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Notes to Financial Statements

July 31, 2004 and 2003

(e)	Risks and Uncertainties
	The Plan provides for certain investments that are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in values of investment securities will occur in the near term, and such changes could materially affect the amounts reported in the statements of net assets available for benefits and of changes in net assets available for benefits.
(f)	Payment of Benefits
	Payments to participants and beneficiaries are recorded when paid.

(5)	Investments
	The following investments are greater than 5% of ending net assets as of July 31, 2004 and 2003:

	2004		2003
Oppenheimer Ltd. Term Government Fund	$	5,799,496		6,732,824
Oppenheimer Strategic Income Fund		5,794,141		6,663,400
Bond Fund of America		5,740,542		6,558,176
Franklin Custodian U.S. Government Securities Fund		4,951,876		6,385,180
Zale Corporation Common Stock		18,143,633		17,560,407

For the Plan years ended July 31, 2004 and 2003, the Plan’s net appreciation (depreciation) in the fair value of investments is as follows:

	2004		2003
Bond Investment Option	$	389,843		631,456
Growth and Income Investment Option		1,407,821		780,641
Growth Investment Option		955,902		419,485
Aggressive Growth Investment Option		1,908,693		1,604,157
Global Investment Option		734,086		187,004
Dreyfus General Government Securities Money Market		1,000		(3,036	)
Zale Corporation Common Stock		2,506,987		6,944,069
	$	7,904,333		10,563,776

As of July 31, 2004 and 2003, the Plan did not directly invest in any derivative financial instruments; however, the Bond Investment Option, Growth and Income Investment Option, Aggressive Growth Investment Option, and the Global Investment Option held by the Plan include mutual funds that invest in derivative financial instruments. As described in the investments’ prospectuses, futures, forwards, and options are used only for the purpose of managing the funds’ exposure to stock and bond markets and to fluctuations in interest rates and currency values.

9

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN

Notes to Financial Statements

July 31, 2004 and 2003

(6)	Related-Party Transactions
	During the 2004 and 2003 Plan years, the Plan engaged in certain transactions with State Street Bank and Trust in its role as the trustee and asset custodian for the Plan. Such transactions are considered as exempt party-in-interest transactions.
(7)	Prohibited Transactions
	In the 2004 Plan year, there were no prohibited transactions. During the 2003 Plan year, the Plan engaged in certain prohibited transactions related to the unintentional late remission of contributions to the Plan’s trust. The transactions, totaling $47,788, were detailed in the supplemental Schedule of Nonexempt Transactions in the 2003 Form 11-K. The Plan’s management corrected the prohibited transactions, plus lost earnings, in accordance with ERISA.
(8)	Subsequent Event
	The Company, with the approval of the Board, removed State Street Bank and Trust Company as the trustee and named Mellon Bank N.A. as successor trustee of the Plan effective August 1, 2004.

10

ZALE CORPORATION
SAVINGS AND INVESTMENT PLAN
EIN: 75-0675400
Plan No.: 002

Schedule H, Part IV, Line 4i — Schedule of Assets (Held at End of Year)

July 31, 2004

(a)	(b)				(c)		(e)
	Identity of issuer		Shares		Description of investment		Current value
	Short-term investments/cash:
*		State Street Bank		316,584	ST Investment Fund/Cash		$	316,584
	Mutual funds:				Bond Investment Option:
		Oppenheimer		570,255		Oppenheimer Ltd Term Government Fund		5,799,496
		Oppenheimer		1,399,551		Oppenheimer Strategic Income Fund		5,794,141
		American funds		431,619		Bond Fund of America		5,740,542
		Franklin Templeton		745,764		Franklin Custodian U.S. Gov. Securities Fund		4,951,876
					Growth and Income Investment Option:
		American Funds		275,206		Income Fund of America		4,706,037
		Washington Mutual		554,353		Van Kampen Equity Income Fund A		4,396,018
		Mass. Financial Services		288,584		MFS Total Return Fund		4,357,624
		Putnam Funds		440,239		Putnam Asset Allocation A		4,323,148
					Growth Investment Option:
		American Funds		100,165		Washington Mutual Investors		2,891,763
		American Funds		121,741		Growth Fund of America		2,997,265
		Mass. Financial Services		192,697		MFS Core Growth		2,848,060
		Janus		133,971		Janus Aspen Cap App Fund		2,770,512
					Aggressive Growth Investment Option:
		Davis		148,626		Davis NY Venture Fund		4,136,250
		Franklin Templeton		151,335		Franklin Small Capital Growth Fund		4,453,780
		Franklin Templeton		125,680		Franklin California Growth Fund		4,177,593
		Mass. Financial Services		247,499		MFS Research Fund		4,177,780
					Global Investment Option:
		American Funds		50,567		Europacific Growth Fund		1,552,402
		Oppenheimer		30,355		Oppenheimer Global Fund		1,536,581
		Putnam Mutual Funds		76,003		Putnam International Growth Fund		1,536,799
		Franklin Templeton		85,411		Franklin International Fund		1,787,657
					Dreyfus Government Fund Option:
		Dreyfus Fund		3,295,797		General Government Securities Money Market Fund		3,295,797
*		Zale Corporation		668,520	Zale Corporation Common Stock, par value $0.01			18,143,633
*		Participant’s loans		N/A	Participant’s loans, interest rates ranging from 6.00% - 8.75%			4,561,207
		Total					$	101,252,545

* Column (a) indicates each identified person/entity known to be a party in interest.

Historical cost (column (d)) is not presented on this schedule, as all investments are participant directed.

This supplemental schedule lists assets held for investment purposes as of July 31, 2004, as required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974.

See accompanying independent auditors’ report.

11

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Committee has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Zale Corporation Savings and Investment Plan
		(Registrant)
Date	January 21, 2005	/s/ Cynthia T. Gordon
		Cynthia T. Gordon
		Senior Vice-President, Controller
		(principal accounting officer of the registrant)

INDEX TO EXHIBIT

Exhibit
Number	Description
23.1	Consent of Independent Registered Public Accounting Firm