ITEM 1. BUSINESS
GENERAL
Electronics distributors form an integral part of the electronics industry. Most domestic and foreign manufacturers of electronic components rely on independent authorized distributors, such as Marshall Industries ("the Company"), to augment their product marketing operations and provide stocking and service capabilities. These manufacturers are relying to an increasing extent on distributors to market their products.
The Company is the fourth largest domestic distributor in sales volume of industrial electronic components and production supplies. Through its network of 37 sales and distribution facilities and 3 corporate support and distribution centers in the United States and Canada, the Company supplies and services a broad range of products, including semiconductors, passive components, connectors and interconnect products, and computer systems and peripheral products, as well as production supplies. The distribution of electronic components accounted for approximately 94% of total Company sales in fiscal 1994 and 1995. The distribution of industrial production supplies accounted for the balance, or 6%, of total Company sales in each of such periods. The Company believes it is the largest domestic distributor in sales volume of industrial production supplies to customers in the electronics industry.
ELECTRONIC COMPONENTS DISTRIBUTION
The distribution of semiconductor products accounted for approximately 70% and 73%, respectively, of total Company sales in fiscal 1994 and 1995. Passive components, connectors and interconnect products accounted for approximately 13% and 11%, respectively, of total Company sales for those periods. Sales of computer systems and peripheral products accounted for approximately 11% and 10%, respectively, of total Company sales in fiscal 1994 and 1995.
Texas Instruments ("TI") is the Company's largest supplier of semiconductor products. TI's semiconductor products accounted for approximately 15% and 14% of total Company sales in fiscal 1994 and 1995, respectively. The Company carries the full range of semiconductor products manufactured by TI and distributes the products of a number of other leading American manufacturers. The Company is also the major distributor in sales volume of Japanese semiconductor products in the United States. Sales of these products accounted for approximately 19% and 22% of total Company sales in fiscal 1994 and 1995, respectively. Additionally, the Company distributes components manufactured by European suppliers, such as Siemens Components, Inc. ("Siemens"), Philips Semiconductors, a North American Philips Company ("Philips"), formerly "Signetics," and SGS-Thomson Microelectronics Inc. ("SGS-Thomson").
The Company purchases electronic components from over 50 major suppliers in the following general categories:
SEMICONDUCTOR PRODUCTS: Semiconductor products include memory, logic and programmable logic devices, microprocessors and microperipheral components. The Company's principal suppliers are Atmel Corporation, Cypress Semiconductor Corporation, Fujitsu, Hitachi, IBM Technology Products, a unit of IBM, Lattice Semiconductor Corporation, Linear Technology, Philips, NEC Electronics, Inc., Siemens, SGS-Thomson, Sony Electronics, Inc., Sharp Electronics Corporation, TI, Toshiba America, Inc., and Xilinx, Inc.
PASSIVE COMPONENTS: The Company distributes passive components, including multilayer ceramic, tantalum and foil capacitors as well as resistor networks. These products are manufactured by such leading suppliers as AVX Corporation, a subsidiary of Kyocera Corporation, and Bourns, Inc.
CONNECTORS AND INTERCONNECT PRODUCTS: Connectors and interconnect products include surface mount sockets and fiber optic systems, along with printed circuit board level connectors. The Company's principal suppliers of connectors and interconnect products are AMP Incorporated and T&B/Ansley Corporation, which rank among the leading suppliers of these products.
COMPUTER SYSTEMS AND PERIPHERALS: The Company's product offerings include printers, keyboards, optical, hard and floppy disk drives, monitors, motherboards for personal computers, power supplies, and other systems components. Computer Products Inc., Fujitsu, IBM Personal Computer Company, NEC Electronics, Inc., Sharp Electronics Corporation, Sony Components Products, and Toshiba America Information Systems, Inc. are the major suppliers of these products to the Company.
VALUE ADDED SERVICES: In addition to the distribution of component parts, the Company provides a variety of value added services to its customers. The Company provides programmable logic array and PROM and EPROM programming, along with certain types of testing services. The Company also packages electronic component kits to customers' specifications ("kitting") and provides cable assembling services. Through the use of third party contractors, the Company provides contract manufacturing capabilities.
PRODUCTION SUPPLIES DISTRIBUTION
The Company believes that it is the largest domestic distributor in sales volume of industrial production supplies to customers in the electronics industry. Such supplies include hand tools, static control products, test equipment, soldering supplies, soldering equipment and work stations. Leading suppliers include CooperTools, a division of Cooper Industries, Kester Solder, a division of Litton Industries, Fluke Corporation, Tektronix, Inc., Loctite Corporation and 3M.
MARKETS
The Company currently has a national distribution network in the United States and Canada consisting of 37 sales and distribution centers and 3 corporate support and distribution centers. The Company believes that it has sales facilities in all of the major electronic products markets in the United States, including the Los Angeles/Orange County, San Francisco/Silicon Valley, Boston, Chicago, Denver, Philadelphia, Portland, Seattle, Connecticut, Florida, New Jersey, Georgia, Maryland, Minnesota, Ohio and Texas areas. In Canada, the Company has sales facilities in Toronto, Montreal and Vancouver. As a result of the Company's marketing strategy and expansion programs, the Company is currently distributing products manufactured by over 50 major electronic component suppliers to approximately 30,000 customers.
As described in Note 6 to the financial statements, the Company has made an investment in Sonepar Electronique International, the third largest electronic component distributor in Europe.
At May 31, 1995, the Company had approximately 1,370 employees, substantially all of whom were employed full-time.
CUSTOMERS AND MARKETING
Distributors offer electronics customers the convenience of immediate price and delivery information, backlog status, diverse off-the-shelf inventories in small and large quantities, rapid deliveries and the financing of their purchases. The Company's electronics distribution business services approximately 30,000 customers, the majority of which are small and medium size companies in the following industries: computers, communications, capital and office equipment, industrial control and medical equipment and systems integration. In recent years, contract manufacturers have also become major customers for electronic component distributors, including the Company, as many original equipment manufacturers ("OEM's") have outsourced their purchasing and manufacturing functions to them. No single customer accounted for more than 4% of the Company's sales during any of the last five fiscal years.
The Company's products are sold by both field and inside sales people. Sales personnel work directly with customers providing price, delivery, backlog and technical information regarding the products which the Company distributes. Each sales and distribution center is electronically linked to the Company's central computer system, which provides fully integrated on-line, real-time data with respect to the Company's nationwide inventory levels. The Company's computer system facilitates the control of purchasing and payables, shipping and receiving, and billing and collections. A salesperson may order shipment of a product from any distribution center within a matter of minutes. The Company has made significant investments, particularly during the last several years, to increase the capabilities of its computerized information systems. In December, 1992, the Company implemented new software for its operating and financial systems. The Company invested approximately $9 million in the design, purchase, and implementation of these systems. In the opinion of the Company, these systems, which were written in a contemporary language and architecture, have the capabilities to support future changes and enhancements required to meet market needs and growth. These systems have also allowed the Company to increase its electronic data interchange ("EDI") capabilities with its suppliers and customers. Due to the high volume of transactions and the cost competitiveness of the electronics components distribution industry, the Company believes that the expansion and upgrading of its information systems will be an ongoing requirement. In July, 1994, the Company introduced an electronic telecommunications service that allows customers to design, engineer and purchase products via the "Internet". In late fiscal 1995, the outside sales staff at certain sales locations were equipped with laptop computers to increase and enhance their productivity and customer service capabilities. The Company plans to complete this field sales automation program in fiscal 1996.
The Company has focused on obtaining franchises with suppliers which are among the leading manufacturers of the product categories that the Company distributes. The Company offers a broad line of products to meet its customers' needs. The Company has also concentrated its inventory and marketing efforts on the following product categories that it believes are the greatest growth areas of the distribution business: (1) high performance memory and programmable logic devices; (2) data conversion products; (3) microprocessors; (4) computer systems and peripherals; (5) printed circuit board level connectors; (6) passive components; and (7) industrial production supplies and instrumentation. Additionally, the Company is focusing on having its sales force sell a balanced mix of all types of products along with expanding its customer base.
RELATIONSHIP WITH SUPPLIERS
The majority of the products sold by the Company are purchased pursuant to distributor agreements. These agreements are typically for terms of one year, renewable annually, non-exclusive, and authorize the Company to sell through its sales and distribution centers all or a portion of the products produced by that manufacturer. These agreements may be cancelled by either party on short notice and generally provide for a return of the manufacturer's inventory upon cancellation. The Company's ten largest suppliers accounted for approximately 54% and 60%, respectively, of total Company sales in fiscal 1994 and 1995. Except for TI, which accounted for 15% and 14% of total Company sales for fiscal 1994 and 1995, no other supplier accounted for
more than 10%. Cancellation of an agreement with, or trade restrictions affecting purchases from, a major supplier could have a material adverse effect upon the Company's business. The Company believes that it has a satisfactory relationship with each of its suppliers. The Company considers its relationships with its Japanese suppliers to be sound. Nonetheless, because of uncertainties relating to U.S. trade issues, the possibility exists that continued access to Japanese products could be affected. In addition, the Company cannot determine the direction of U.S. trade issues or their ultimate effect on the competitive environment and the Company's results.
Most manufacturers of electronic components, including foreign manufacturers, protect authorized distributors, such as the Company, against potential inventory losses from declining prices and obsolescence. To protect its distributors from declining market prices, most electronic component manufacturers allow their distributors pricing adjustments as products are sold to customers as well as credits on unsold inventory when the manufacturers reduce prices on their price lists. In addition, under the terms of many such agreements, the distributor has the right to return to the manufacturer, for credit, any product classified as obsolete by the manufacturer and a specified portion of other inventory items purchased within a designated period of time. A manufacturer who elects to terminate a distribution agreement without cause is generally required to purchase from the distributor the products of such manufacturer carried in the distributor's inventory. While such agreements do not protect the Company totally from inventory losses, such agreements do, in management's opinion, provide substantial protection from such losses. No assurance can be given, however, that such price adjustment and return policies will continue.
To service its kitting and contract manufacturing customers, as described on page 3, the Company must buy a certain amount of products from third parties on a non-franchised basis. Since there are typically no return or price protection privileges on these purchases, there are significantly greater inventory risks associated with kitting and contract manufacturing orders than with the purchase and stocking of inventory pursuant to its franchise agreements.
NATURE OF BUSINESS AND COMPETITION
Although the Company's business is not seasonal to any material extent, its business is affected by the cyclical nature of the electronics industry and overall trends in the general economy. In addition, the Company has experienced industry-wide product shortages and excess supplies from time to time. During the last several months, there has been a tightening of product availability and long lead times for some products, such as certain memory and surface mount devices.
Supplying and servicing the electronics industry is a highly competitive business. The competition is from other large national distributors, numerous local and regional distributors, as well as some of the Company's suppliers. Providing service to customers is the major competitive factor of the industry. In addition to providing basic distribution services such as technical information, product availability and competitive pricing, prompt delivery and credit, the Company offers many sophisticated value added services. These additional services include component testing and assembly; just in time ("JIT") inventory management and delivery systems; kitting and contract assembly. In recent years, the Company has introduced a number of sophisticated automated inventory procurement and management services for its customers through its EDI and auto replenishment programs. The Company considers its emphasis on high-quality customer service, monitored by statistical process control ("SPC") methods, to be one of its strengths.
From time to time, the Company has experienced competition from "unauthorized" U.S. distributors of Japanese semiconductors who purchase these products in foreign countries at prices below those which the Company may purchase such products directly from its suppliers. In addition, a limited number of the Company's customers have moved their manufacturing operations out of the United States in recent years. Such changes have not had a material impact on the Company's business.
Information concerning backlog is not material to an understanding of the Company's business, as the Company's objective is to ship orders on the same day they are received unless the customer has requested a specific future delivery date on an order. Additionally, it is common industry practice for customers, in most cases, to be able to re-schedule or cancel orders with future delivery dates without penalties. In the electronics industry, the book-to-bill ratio, which is the ratio of sales orders received to shipments made, is commonly used as an indicator of business trends. Since late calendar 1991, the book-to-bill ratios for both the industry and the Company have been generally positive.
ITEM 2.

ITEM 2. PROPERTIES
The Company presently has 37 sales and distribution facilities and 3 corporate support and distribution centers. The Company's executive offices and corporate support and distribution center are located in El Monte, California. This facility is Company owned, has 258,000 square feet of space and utilizes an automated inventory handling system. The Company owns an additional 65,500 square foot warehouse and office facility in El Monte.
In addition to the El Monte facilities, a majority of the sales and distribution facilities located in Marshall's major markets are Company owned. The three largest facilities range from approximately 58,000 to approximately 65,000 square feet in size and are located in Milpitas, California; Irvine, California; and Boston, Massachusetts. The Company also owns facilities in Austin, Texas; Endicott, New York; San Diego, California; and Wallingford, Connecticut of approximately 8,000 to 15,000 square feet each.
The Company leases its remaining sales and distribution facilities. They are located in cities throughout the United States and Canada, vary in size depending on sales volume and are subject to leases whose initial terms expire at various dates through fiscal 2000. Substantially all of those leases include renewal provisions.
In the opinion of the Company, the current facilities are adequate for the Company's operating requirements.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter ended May 31, 1995.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under the symbol MI. The following table shows, for the periods indicated, the published closing sale prices per share for the Company's Common Stock.
The above share prices have been adjusted to reflect the two for one stock split paid on February 28, 1994.
The Company had approximately 6,000 shareholders at May 31, 1995. It has never paid a cash dividend. Earnings have been retained to provide for the growth and expansion of the Company's business.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to the statements of income of the Company for the five fiscal years ended May 31, 1995, and the balance sheets of the Company at year end for each of those years. The selected financial data is derived from financial statements for such years and at such dates as audited by Arthur Andersen LLP, independent public accountants, including the statements of income for the three years ended May 31, 1995, and the balance sheets at May 31, 1994 and 1995 included elsewhere herein.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items in the statements of income as a percent of net sales for periods shown:
As an aid to understanding the results of operations, the following is a summary of the Company's unaudited quarterly results of operations for fiscal years 1993, 1994 and 1995 (in thousands except for per share data):
All per share amounts have been restated to reflect the two for one stock split paid on February 28, 1994.
FISCAL 1995 COMPARED TO FISCAL 1994
The increase in net sales for fiscal 1995, as compared to fiscal 1994, was due primarily to an increase in the sales volume of semiconductor products. Sales of semiconductor products increased by $157,126,000 primarily as a result of the strong market demand for such products. The sales volume of the Company's other major products increased modestly from the prior year.
The decrease in net margins for fiscal 1995, as compared to fiscal 1994, resulted from market pressures on the pricing of most of the Company's products, including value added products, and an increase in the sales volume of lower margin products, primarily memory products. The Company believes that these conditions affecting margins may continue in the near term.
The increase in selling, general and administrative ("SG & A") expenses, in dollars, for fiscal 1995, as compared to fiscal 1994, was primarily due to higher operating costs to meet the requirements from the significant increase in sales volume. SG & A expenses as a percentage of sales declined to 12% for fiscal 1995 as compared to 14% for fiscal 1994. Of the $5,067,000 increase in SG & A expenses for fiscal 1995, compared to fiscal 1994, approximately $2,200,000 was attributable to higher salaries, incentives and fringe benefits. There were also increases in delivery costs and bad debt expense, mostly due to the higher sales volume.
Interest expense, net of interest income, for fiscal 1995 remained at relatively the same amount as fiscal 1994, as the lower borrowing levels were offset by higher interest rates.
FISCAL 1994 COMPARED TO FISCAL 1993
The increase in net sales for fiscal 1994, as compared to fiscal 1993, was due to an increase in the sales volume of semiconductor products. Sales of semiconductor products increased by $178,237,000 as a result of the strong market demand and additional sales of products from new suppliers. The sales volume of the Company's other major products was relatively unchanged or decreased modestly from the prior year.
The decrease in net margins for fiscal 1994, as compared to fiscal 1993, was due to a decline in the margins of most of the Company's major products. This decline in margins resulted from market pressures on the pricing of many of the Company's products, including some of the Company's value added products, and an increase in the sales volume of lower margin products, such as DRAMS.
The increase in SG & A expenses, in dollars, for fiscal 1994, as compared to fiscal 1993, was primarily due to higher operating costs to support the significant increase in sales volume. In addition, the Company was amortizing $463,000 per quarter of deferred computer software costs associated with its new operating and financial systems that became operational in December, 1992. Fiscal 1994 expenses also included a charge of $890,000 that was recorded in the first quarter related to the costs of the elimination of approximately 120 positions. These positions were eliminated as of August 31, 1993 by a reorganization of the Company's field and corporate support functions. The amounts incurred for the last nine months of fiscal 1994 would have been higher except for the savings from the elimination of these positions. This reorganization reduced the Company's fiscal 1994 expenses by approximately $1,000,000 per quarter beginning the second quarter. Primarily due to the savings from the August, 1993 restructuring and the higher sales volume, SG & A as a percentage of sales declined significantly for fiscal 1994 as compared to fiscal 1993. The SG & A amounts for fiscal 1993 also included some extraordinary levels of expenses related to the Company's conversion to its new computer software systems in December, 1992. The Company estimated that it had incurred approximately $2.4 million to $2.9 million in additional costs, affecting both cost of sales and SG & A expenses in fiscal 1993 associated with the computer software conversion.
Interest expense for fiscal 1994 remained relatively unchanged from fiscal 1993, as lower borrowing levels were offset by higher interest rates beginning in late fiscal 1994.
In August, 1993 the Omnibus Budget Reconciliation Act of 1993 was enacted which essentially increased the Company's Federal tax rate from 34% to 35%. Additionally, as a result of the Act, a retroactive Federal tax adjustment of $163,000, or $.01 per share, was charged to income tax expense in the first quarter of fiscal 1994 for the period of January to May 1993.
INCOME TAXES
During the fourth quarter of fiscal year 1993, the Company implemented Statement of Financial Accounting Standards No. 109 covering income tax accounting. The adoption did not have a material impact on the financial statements for fiscal year 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been able to fund its working capital requirements for the past five years through cash flow from operations and bank borrowings.
For the five years ended May 31, 1995, the Company incurred approximately $14 million in net aggregate capital expenditures. Costs incurred to upgrade and expand the Company's computer system and the acquisition and construction of several facilities accounted for a significant portion of the capital expenditures for the last five years. Additionally, the Company incurred approximately $9 million for the design, purchase and development of new computer software for its operating and financial systems during fiscal years 1990 to 1993.
The Company's sources of liquidity at May 31, 1995 consisted principally of working capital of $254,394,000 and unsecured bank credit lines of $70,000,000, of which $20,000,000 in borrowings were outstanding. The Company believes that its working capital, borrowing capabilities, and the funds generated from operations should be sufficient to finance its anticipated operational requirements.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Marshall Industries:
We have audited the accompanying balance sheets of Marshall Industries (a California corporation) as of May 31, 1994 and 1995, and the related statements of income, shareholders' investment and cash flows for each of the three years in the period ended May 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Marshall Industries as of May 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Los Angeles, California July 21, 1995
Marshall Industries BALANCE SHEETS May 31, 1994 and 1995 (Dollars in thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
Marshall Industries STATEMENTS OF INCOME For the Years Ended May 31, 1993, 1994 and 1995 (In thousands except per share data)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Marshall Industries STATEMENTS OF SHAREHOLDERS' INVESTMENT For the Years Ended May 31, 1993, 1994 and 1995 (Dollars in thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Marshall Industries STATEMENTS OF CASH FLOWS For the Years Ended May 31, 1993, 1994 and 1995 (In thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Marshall Industries NOTES TO FINANCIAL STATEMENTS May 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition: Sales are recognized at the time of product shipment.
Depreciation and Amortization: Depreciation on buildings is computed using the straight-line method over useful lives of 25 years. Building and leasehold improvements are amortized on the straight-line method over the shorter of the lives of the buildings or the remaining terms of the leases or useful lives of the assets. Depreciation on all other plant and equipment is computed on the straight-line and declining balance methods over useful lives of two to ten years. Maintenance and repairs and minor replacements of property are charged to expense when incurred. Major expenditures for additions and improvements are capitalized at cost. When assets are retired, or otherwise disposed of, the cost and related reserves are removed from the accounts, and any resulting gain or loss is included in income.
Interest Expense: Interest income of $1,180,000 is netted against interest expense in fiscal 1995. Interest income was not material in fiscal 1994 and 1993.
Tax Deferred Profit Sharing Plan: Under the provisions of the Marshall Industries Tax Deferred Profit Sharing Plan (the "Plan"), participating employees may agree to defer from two to twelve percent, with certain limitations, of their earnings each payroll period, and such amount is deposited in a nonforfeitable, fully vested trust account for the employees' benefit. The Company contributes quarterly an amount equal to 50 percent of the employees' contributions, limited to 3% of such employee earnings for the quarter, reduced by employee forfeitures of prior Company contributions. Company contributions may be limited to the extent of net profits and must be invested in the Company's common stock. The Plan, however, may not own more than 20 percent of the Company's outstanding shares. At May 31, 1995, the Plan owned less than 2% of the Company's outstanding shares. Company contributions and expenses related to the Plan amounted to $952,000 in 1993, $1,125,000 in 1994 and $1,141,000 in 1995.
Income Taxes: As discussed in Note 3, during fiscal 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted tax rates.
Cash and Accounts Payable: The Company's banking system provides for the daily replenishment of its bank accounts for check clearing requirements. Accordingly, outstanding checks of $11,015,000 and $11,169,000 that had not yet been paid by the Company's banks at May 31, 1994 and 1995, respectively, are reflected in cash and accounts payable in the accompanying financial statements.
Inventories: The Company values its inventories at the lower of average cost or market.
Shareholders' Investment: The Company has authorized 200,000 shares of no par value preferred stock, of which none was outstanding at May 31, 1994 or 1995.
Capitalized Deferred Software Costs: Deferred software costs are included in other assets and represent payments to vendors for the design, purchase and implementation of the computer software for the Company's operating and financial systems. Such deferred costs, aggregating to $10,088,000, are amortized over periods not to exceed five years. At May 31, 1994 and 1995, the accumulated amortization of such costs were $2,778,000 and $5,084,000, respectively.
Net Income Per Share: Per share amounts are computed on the basis of weighted average common and common equivalent shares outstanding (17,278,000 in 1993, 17,357,000 in 1994, and 17,439,000 in 1995). Common equivalent shares include the dilutive effect of outstanding stock options, if applicable. All share and per share data included in these financial statements have been restated to reflect the two for one stock split paid on February 28, 1994.
Reclassifications: Certain prior year amounts have been reclassified to conform with the 1995 presentation.
(2) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Bank credit lines --
The Company has revolving credit line agreements with two major banks to borrow up to $70,000,000 in the aggregate. These unsecured credit line agreements, with borrowing limits of up to $40,000,000 and $30,000,000 each, mature on December 31, 1995 and 1996, respectively. The interest rates under these credit lines are determined at the time of borrowing based on a choice of options as specified in the agreements. The options range from floating rates of LIBOR, IBOR, certificate of deposit, or banker's acceptance plus 1/2%, up to prime rate. At May 31, 1995, the prime rate was 9.0%. A commitment fee is payable based on 1/4% per annum on the daily average unused amounts of the lines of credit. In addition, both banks require a facility fee of 1/8% per annum on the commitment balance. There are no compensating balance requirements.
The terms of these credit agreements require the Company, among other things, to maintain a minimum net worth of $170,000,000 which is adjusted upward quarterly by 70 percent of net income and 70 percent of net proceeds from any sales of capital stock or subordinated debentures. At May 31, 1995, at least $231,033,000 of shareholders' investment was required to meet this covenant. The credit agreements also require the Company to meet certain specified working capital and financial ratios and not to make capital expenditures or incur lease liabilities in excess of certain specified amounts. The Company is in compliance with all conditions and covenants of these agreements.
Subsequent to May 31, 1995, the Company agreed in principle to amend one of its credit line agreements to extend its maturity date and replace the other agreement with a new agreement with a major bank. The maturity date of the amended and new agreements will be September 30, 1998. All of the major terms and conditions of the amended and new agreements are similar to the Company's current agreements. The amended and new agreements will provide the Company a total borrowing capacity of $55,000,000. This reduction in the total credit capacity was due to the Company's anticipated lower borrowing requirements.
Term loan --
In August 1994, the Company obtained an unsecured term loan in the amount of $25,000,000 with principal repayment due on September 30, 1997. The Company has the option of repaying the loan, or a portion thereof, prior to the maturity date. The interest rate on the loan is based on the 90 day LIBOR rate plus 1/2%. At May 31, 1995 the interest rate on the loan was 5.75%. The term loan agreement requires the Company to maintain a minimum net worth ($225,502,000 at May 31, 1995) and to meet certain specified working capital and financial ratios. The agreement prohibits capital expenditures in excess of specified amounts and issuance of debt, guarantees, loans or advances beyond specified amounts. The Company is in compliance with all conditions and covenants of the term loan agreement.
Industrial revenue bonds --
The industrial revenue bonds are secured by real property with a net book value of $2,985,000 at May 31, 1995.
Maturities of long-term debt --
Long-term debt at May 31, 1995 based on the amended terms is payable in succeeding fiscal years as follows: 1996 $410,000; 1997 $205,000; 1998 $25,000,000; 1999 $20,000,000.
The Company's bank credit lines, term loan and industrial revenue bonds approximate fair value as they bear floating interest rates.
(3) INCOME TAXES
The Company adopted the provisions of SFAS No. 109 effective in fiscal year 1993. The adoption of this Standard did not have a material effect on the financial statements for fiscal year 1993.
The provision (benefit) for income taxes consists of the following (in thousands):
The difference between the income tax provision at the Federal statutory rate and the recorded income tax provision is reconciled as follows (in thousands):
As of May 31, 1994 and 1995, deferred tax assets (liabilities) were comprised of the following (in thousands):
As of May 31, 1995, the Company had total deferred tax assets of $10,216,000 and total deferred tax liabilities of $4,524,000. The Company did not record any valuation allowances against deferred tax assets at May 31, 1995.
(4) COMMITMENTS AND CONTINGENCIES
Lease Commitments: The Company leases certain facilities and equipment under operating leases expiring at various dates through fiscal year 2001. The aggregate rent expense for all operating leases was $2,618,000 in 1993, $2,324,000 in 1994 and $2,665,000 in 1995.
The future minimum lease payments under all leases are shown below (in thousands):
Litigation: There are no material pending legal proceedings to which the Company is a party.
(5) STOCK OPTIONS
The Company has one active stock option plan which provides for the granting of incentive and nonqualified stock options covering 2,040,000 shares of common stock. There were three other plans, which are inactive, during the periods reported. Nonqualified stock options may have an exercise price which is less than market value at the date of grant; incentive stock options must have an exercise price equal to market value at the date of grant. There were 50,000 and 40,000 options granted in fiscal 1994 and 1995, respectively, at exercise prices ranging from $24.00 to $27.875 per share. No options were granted during fiscal 1993. At May 31, 1995, 280,500 shares were available for additional grants.
The following is a summary of changes in outstanding options for the Company's stock option plans for the year ended May 31, 1995:
The difference between the quoted market value of the shares at the date of grant and the option price for grants made under the nonqualified plans is charged to income as compensation expense over the vesting periods of the related options. During fiscal 1993, 1994 and 1995, $215,000, $103,000 and $92,000, respectively, were charged against income and credited to additional paid-in capital under these plans. Options granted are exercisable over a period of ten to twenty years. The income tax effect of any difference between the market price at the grant date and the market price at the exercise date is credited to additional paid-in capital as the options are exercised.
(6) INVESTMENT IN SONEPAR ELECTRONIQUE INTERNATIONAL
In August, 1994, the Company invested 151 million French Francs ($27.9 million in U.S. dollars) in Sonepar Electronique International ("SEI"), one of the three largest electronic component distributors in Europe. This investment is in the form of an interest bearing, convertible note, guaranteed by a major French bank as to default. The interest on the note is the same as the Company's borrowing rates under its unsecured term loan, as described in Note 2. The note plus accrued interest will be converted in 1997 into a minority equity interest of up to 20% in SEI if certain anticipated sales and pre-tax income goals are met. If these goals are not met, the Company will have the option to call for the repayment in U.S. dollar equivalent of the original loan (plus accrued interest) or to convert the loan into a 20% equity interest in SEI. Following the conversion, SEI will have a 2 year option to purchase an equivalent amount in U.S. dollars of the Company's stock of up to 5% of the Company's outstanding shares on a fully diluted basis. The option price will be based on market prices at the time of conversion. In addition, the Company will have the option of increasing its equity investment to 49% in SEI. To finance its investment in SEI, the Company obtained an unsecured term loan in the amount of $25,000,000 (Note 2).
(7) BUSINESS SEGMENT
The Company is engaged in the distribution of industrial electronic components and production supplies through a nationwide network of sales and distribution facilities. In the opinion of management, the Company's products are identifiable to only one industry segment.
The Company's Canadian operations are currently not material to its results of operations or financial position.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
Marshall will file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A involving the election of directors. The Proxy Statement for the Annual Meeting of Shareholders to be held on October 24, 1995 is incorporated herein by this reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS -- The following financial statements of Marshall Industries are set forth in Item 8 of this Annual Report on Form 10-K:
(A) 2. FINANCIAL STATEMENT SCHEDULES -- All schedules are omitted since they are not applicable, not required, or the required information is included in the financial statements or notes thereto.
(A) 3. EXHIBITS -- The following exhibits are attached to this Annual Report on Form 10-K:
(B) REPORTS ON FORM 8-K -- Marshall has not filed any reports on Form 8-K during the quarter ended May 31, 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Marshall has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MARSHALL INDUSTRIES
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.
INDEX TO EXHIBITS


ITEM 1. BUSINESS
GENERAL
Zale Corporation (the "Company"), founded in 1924, is the nation's largest chain of specialty retail jewelry stores, operating 1,177 retail locations at July 31, 1995. For the twelve months ended July 31, 1995, total Company retail sales were approximately $1,036.1 million. The Company sells jewelry and giftware throughout the United States, Puerto Rico and Guam through its Zales, Gordon's, Guild and Diamond Park Divisions. The Company operates stores primarily in regional shopping malls and leased departments in department stores. Merchandise is sold for cash, on the Company's private label credit cards and on bank and national credit and charge cards. The Company also markets credit insurance to its private label credit card customers.
The Company historically has purchased substantially all of its merchandise in finished form from a network of established suppliers and manufacturers located primarily in the United States, the Orient and Italy. The Company is also centrally purchasing certain commodity items such as gold chains direct from manufacturers or other primary sources. A portion of the merchandise offered by the Company is procured from vendors under consignment programs through which the Company is not obligated to pay for the merchandise until it is sold to retail customers.
BUSINESS STRATEGY
The Company's goal in fiscal 1995 was to restore Zale Corporation as the pre-eminent fine jewelry retailer in the nation. To accomplish this task, the Company developed a three-phase plan, starting with getting back to the basics of retailing. That meant understanding and satisfying customers' needs, offering the right selection and quality of merchandise, and pursuing an effective and efficient marketing strategy. It also entailed paying close attention to the Company's store environment and operations, especially in improving customer service.
A major element of the Company's three-phase plan was to strengthen the merchandising in the stores. The Company developed a core group of items which have been perennial best-sellers. These items include tennis bracelets, diamond anniversary bands and diamond stud earrings. The Company made certain that these key items were available in a variety of styles and began to fill out the assortments with "good, better and best" price points. The Company has been diligent about maintaining a depth of stock on these key items at all times versus the traditional approach of having one or two pieces per store. Inventory management systems have been structured so that key items would be more consistently in stock and systems have been developed for prompt replenishment of key items.
Consistent with the Company's new merchandising plan, the Company began to make its marketing efforts more product-focused. Print, television and radio advertising feature selected key items in a variety of price points. The Company has broadened its advertising beyond the Christmas season, to tie in with other gift-giving holidays such as Valentine's Day and Mother's Day. In-store promotions have been synchronized to take advantage of high mall traffic periods. These strategies have helped to position Zales and Gordon's as gift-giving destinations.
After refining the merchandise mix and marketing, the Company worked to improve the quality of service and the efficiency of the stores. The Company focused initially on the top 300 stores in the Zales and Gordon's Divisions, moving the most experienced and capable managers into these stores. The Company also modified staff scheduling to put more sales personnel "on the floor" during peak traffic periods and introduced more extensive training in sales techniques and customer relationship building in all of its stores. The "focus" group of stores also received an increased level of merchandise and marketing support. As a result, the focus group stores outperformed the rest of the chain.
A majority of the Company's stores are situated in prime, centercourt mall locations or other high traffic areas of shopping malls. Beginning in late fiscal 1994 and continuing into fiscal 1995, the Company set out to establish separate identities for its Zales and Gordon's brand names. Previously managed by a single team, the two divisions were placed under separate management teams. New divisional management was brought in to the Zales, Gordon's and Guild divisions to create and implement an individualized merchandising approach. Different marketing techniques have been adopted, targeted toward each division's specific demographic base. At the same time, the Company is committed to enhancing the cost and efficiency benefits of centralized support operations.
The Company offers credit through its own private label credit cards to enable creditworthy customers to finance their purchases without using cash or bank card lines of credit. The Company seeks to establish a relationship with its customers through merchandise and credit card programs that encourages repeat purchases of fashion and gift items as well as substantial purchases on occasions such as engagements, anniversaries, Christmas, birthdays, graduations and other gift-giving holidays. Through mailing lists available from the Company's credit operations, the Company can mail promotional material directly to customers to advertise special sales or unique items that are offered in its stores. The Company encourages customers with major credit cards to apply for a Company credit card even when no purchase is made. This enables the Company to solicit new business from those customers by direct mailings. The Company believes that this program enhances future sales to customers with a strong credit history.
As part of the Company's business strategy, it has embarked on a store remodeling and refurbishment program. This program will enable the Company to enhance its stores in certain key markets relative to its competition. Additionally, the Company plans on making expenditures of approximately $15.0 million on its management information systems to migrate to client server based applications from mainframe applications over the next several years. The Company anticipates spending approximately $50.0 million on capital expenditures in fiscal 1996. Capital expenditures are typically scheduled for the late spring through early fall in order to have new or renovated stores ready for the Christmas selling season. During the year ended July 31, 1995, the Company made approximately $42.3 million in capital expenditures principally to open 18 new stores and enhance the appearance of 393 stores. This included 153 relocations, complete remodelings or major refurbishments and 240 stores that were enhanced through addition of either or all of new carpet, paint and new wall coverings and display elements. The Company intends to continue its store upgrade program and open 250 new locations over the next three years.
SELECTED DIVISIONAL DATA
The Company operates principally under four divisions as described below. The following table presents net sales for the Zales, Gordon's, Guild and Diamond Park Divisions of the Company.
(1) Amounts in this column represent historical income statement data for the twelve months ended July 31, 1993 which includes the four month period ended July 31, 1993 and the eight months ended March 31, 1993.
(2) Other net sales in fiscal 1995 includes sales from the Company's Outlet stores which are being used to sell overstocked and other merchandise no longer sold in the regular retail locations. Outlet store sales and operating results in the prior years were not significant and were classified in cost of sales.
Zales Division
At August 1, 1995, the Zales Division operated 534 stores, including 35 stores transferred from the Gordon's Division effective August 1, 1995, under the name "Zales" in 48 states and Puerto Rico. The Zales Division is being positioned as the leading national brand name in jewelry retailing in the United States. Zales' customers represent a solid cross-section of mainstream America, seeking good value in fine-quality merchandise. The average purchase at a Zales location is $257. The Zales Division stores average approximately 1,400 square feet.
The following table sets forth the number of stores and average sales per store for the Zales Division for the periods indicated:
Gordon's Division
At August 1, 1995, the Gordon's Division operated 332 stores, subsequent to the transfer of 35 stores to the Zales Division effective August 1, 1995. The division operates 318 stores under the name "Gordon's"(R) in 39 states and Puerto Rico and 14 stores operating under the name "Daniel's"(R) in Arizona. The Company has positioned Gordon's as a dominant regional brand to differentiate it from the national Zales brand. Its merchandise mix features more contemporary and localized looks, and its average sale is $225. The Gordon's Division stores average approximately 1,300 square feet.
The following table sets forth the number of stores and average sales per store for the Gordon's Division for the periods indicated:
Guild Division
At August 1, 1995, the Guild Division operated 123 upscale jewelry stores in 26 states and Guam. The following table sets forth the Guild Division's trade names and the number of stores operating under each of those names as of August 1, 1995.
The Guild Division offers higher-end merchandise, more exclusive designs and a prestigious shopping environment for the upscale customer. The Guild Division has an average sale of $477. The Guild Division stores average approximately 3,200 square feet.
The following table sets forth the number of stores and average sales per store for the Guild Division for the periods indicated:
Diamond Park Division
At August 1, 1995, the Diamond Park Division operated 188 leased locations in department stores including Dillard's(R) (66 locations), Mercantile (59 locations), The Broadway(R) (41 locations), and Marshall Field's(R) (22 locations) in 24 states. The Diamond Park Division offers a service for retailers that wish to turn to an outside provider for specialized management and marketing skills required to sell fine jewelry. The Diamond Park Division creates leased jewelry departments at specified locations, primarily major department stores, tailoring the merchandising concept to that of the host company.
The following table sets forth the number of departments and average sales per department for the Diamond Park Division for the periods indicated:
BUSINESSES OF NON-RETAIL AFFILIATES
Zale Indemnity Company, Zale Life Insurance Company and Jewel Re-Insurance Ltd. are providers of various types of insurance coverage, which typically are marketed to the Company's private label credit card customers. The three companies are the insurers (either through direct written or reinsurance contracts) of the Company's customer credit insurance coverages. In addition to providing replacement property coverage for certain perils, such as theft, credit insurance coverage provides protection to the creditor and cardholder for losses associated with the disability, involuntary unemployment or death of the cardholder. Zale Life Insurance Company also provides group life insurance coverage for eligible employees of the Company. Zale Indemnity Company, in addition to writing direct credit insurance contracts, also has certain discontinued businesses 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.
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, the Orient and Italy. The Company either purchases merchandise from its vendors or acquires merchandise on consignment. The Company had approximately $85.9 million and $111.4 million of consignment inventory on hand at July 31, 1995 and 1994, respectively. The Company is subject to the risk of fluctuation in prices of diamonds, precious stones and gold. 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 significant price fluctuations in the commodities that are used in the merchandise it sells. No assurances, however, can be given that the Company will be able to adjust prices to reflect commodity price fluctuations in the future. The Company is not subject to substantial currency fluctuations because most purchases are dollar denominated. During the years ended July 31, 1995 and March 31, 1994, the Company purchased approximately 29 percent and 38 percent, respectively, of its merchandise from its top five vendors. Although the Company believes that alternate sources of supply are available, the abrupt loss of any significant supplier during the three months ended November 30 of any year, the period leading up to the Christmas selling season, could result in a material adverse effect on the Company's business.
COMPETITION
The jewelry 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 nationally recognized jewelry chains. The Company's sales represent approximately 6% of national retail jewelry store sales. The Company must also compete with other types of retailers who sell jewelry and gift items, such as department stores, catalog showrooms, discounters and home shopping programs. The Company believes that it is also competing for consumers' discretionary spending dollars. The Company must, therefore, also compete 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 store location, reputation for high- quality, distinctive and value-priced merchandise, personal 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 product lines.
The Company also competes for desirable new store locations with other jewelers and specialty retailers. Historically, the Company has generally been able to lease locations in new or vacated mall space which the Company considered desirable.
The Company holds no material patents, licenses (other than its licenses to operate its Diamond Park leased locations), franchises or concessions; however, the established tradenames for stores and products in the Company's Zales, Gordon's and Guild Divisions are important to the Company in maintaining its competitive position in the jewelry retailing industry.
CREDIT OPERATIONS
Jewelers Financial Services, Inc. ("JFS") has credit approval, customer service and collection systems that management considers to be sophisticated. The Company offers and grants credit to qualified customers. See "Business Strategy". The credit programs help facilitate the sale of merchandise to customers who wish to finance their purchases rather than use cash or major credit cards. Credit extension, customer service and advanced collections for all the accounts are performed by JFS at servicing centers located in Tempe, Arizona; Clearwater Florida; San Juan, Puerto Rico; and Guam. The Company has Point-of-Sale Instant Credit ("POSIC") which allows sales associates to obtain new account credit approval generally within two minutes for most qualified customers. This compares to the previous instant credit turnaround time of approximately fifteen minutes. Flexible payment arrangements, typically twenty-eight to thirty-four months, are extended to credit customers. Early stage collection of accounts, collection agency placement of charged- off accounts and collection of accounts under which the related obligors are involved in bankruptcy proceedings are performed by JFS at the Company's National Collections Center located in San Marcos, Texas. The mailing of statements regarding the accounts and the processing of payments on the accounts are performed by JFS at the Company's headquarters in Irving, Texas. The Company's credit insurance affiliates provide coverage for credit purchasers in the event of total disability, involuntary unemployment, death and losses due to theft, burglary, fire and windstorm. See "Businesses of Non-Retail Affiliates".
Approximately 52 percent of the Company's retail sales during the year ended July 31, 1995 through its Zales, Gordon's and Guild Divisions were generated by credit sales on the private label credit cards. At July 31, 1995, there were approximately 656,000 active customer charge accounts. The Company also has an additional 473,000 promotable charge customers without an outstanding balance and over 2.5 million customer names on file that are not current charge customers.
The following table presents certain data concerning sales, credit sales and accounts receivable for the past two fiscal years (1):
(1) The table excludes the Diamond Park Division which does not have a proprietary credit plan.
EMPLOYEES
As of July 31, 1995, the Company had approximately 9,000 employees, of whom 23 are represented by unions. The Company considers its relations with its employees to be good.
OTHER
On December 13, 1993, the Board of Directors of the Company authorized the change in the Company's fiscal year end to July 31. Such change was effective as of April 1, 1994. The Company's determination to change its fiscal year was based on several considerations. By changing to a July 31 fiscal year end, the Company has established quarterly reporting periods that are more consistent with other companies in the retail industry. Additionally, a July 31 year end coincides with the Company's emergence from bankruptcy proceedings, thereby providing for greater comparability of historical financial data in the future, and, it makes the Company's planning process more effective.
ITEM 2.

ITEM 2. PRINCIPAL PROPERTIES
The Company occupies a corporate headquarters facility, completed in March 1984 with 430,000 square feet, under a lease extending through September 1997. The facility is located on a 17-acre tract in Las Colinas, a planned business development in Irving, Texas, near the Dallas/Fort Worth International Airport. The Company owns 33 acres of land surrounding the corporate headquarters facility and a 120,000 square foot warehouse in Dallas, Texas.
The Company also leases four servicing centers located in Clearwater, Florida (30,000 square feet), Tempe, Arizona (24,200 square feet), San Juan, Puerto Rico (2,900 square feet) and Guam (556 square feet) and one national collections center located in San Marcos, Texas (9,000 square feet).
The Company rents all of its retail spaces, other than the Diamond Park Division leased locations, under leases with terms ranging from five to fifteen years. 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:
The Company owns several parcels of developed and undeveloped real estate formerly owned by Gordon, which the Company no longer uses in operations and intends to sell.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
JEWEL RECOVERY, L.P. Pursuant to the Plan of Reorganization, 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 unsecured claims against Zale.
There is a possibility that the Company may recover the $3.0 million advance made to Jewel Recovery as well as other amounts related to the finalization of the Chapter 11 claims settlement process. It is likely that these matters will be resolved by the end of the second quarter of fiscal 1996. The Company does not expect these recoveries to be material to its financial position or recurring operations.
In addition, the Company and ZDel have agreed to indemnify certain parties to litigation settlements entered into by the Company in connection with the Plan of Reorganization against cross-claims, similar third-party claims or costs of defending such claims brought against such parties as a result of litigation instigated by the Company, ZDel or Jewel Recovery. At October 6, 1995, no material claims had been asserted against the Company or ZDel for such indemnification.
OTHER. 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.
ITEM 4.

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, 1995.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included in the registrant's Annual Report to Stockholders for the year ended July 31, 1995 on page 32 under the caption "Common Stock Information," and is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the registrant's Annual Report to Stockholders for the year ended July 31, 1995 on page 13 under the caption "Selected Financial Data," and is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is included in the registrant's Annual Report to Stockholders for the year ended July 31, 1995 on pages 13 through 16 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the registrant's Annual Report to Stockholders for the year ended July 31, 1995 on pages 17 through 31, and is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The following individuals serve as executive officers of the Company. Officers are elected by the Board of Directors, each to serve until his successor is elected and qualified, or until his earlier resignation, removal from office or death.
ROBERT J. DINICOLA, Age 48. Chairman of the Board, Chief Executive Officer and Director
Mr. 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 seventeen 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 May Co.
LARRY POLLOCK, Age 48. President, Chief Operating Officer and Director
The Board of Directors elected Mr. Pollock President and Chief Operating Officer of the Company on January 10, 1994 and appointed him as a director on July 27, 1994. From January 1990 until joining the Company, Mr. Pollock served as President and Chief Executive Officer of Kartens Jewelers. From 1987 to 1990, Mr. Pollock was a consultant in the retail jewelry industry. For eighteen years prior to 1987, Mr. Pollock was associated with J.B. Robinson Jewelers, Inc. where he held various executive positions including President and Chief Executive Officer from 1981 through 1986. Mr. Pollock has an ownership interest in two radio stations in the Cleveland area and also serves as a director of New West Eyeworks.
MERRILL J. WERTHEIMER, Age 55. Executive Vice President - Finance and Administration
Mr. Wertheimer was appointed Executive Vice President - Finance and Administration on January 27, 1995. From June 1991 through January 1995, he served as Senior Vice President and Controller of the Company. From February 1990 to May 1991, Mr. Wertheimer served as President and Chief Executive Officer of Henry Silverman Jewelers. Mr. Wertheimer served as Senior Vice President of the Company from September 1987 to October 1989 and also served as Chief Financial Officer of the Company from March 1987 to October 1989.
BERYL RAFF, Age 44. Senior Vice President and President, Zales Division
Ms. Raff joined the Company on November 21, 1994 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 has seventeen years of retailing and merchandising experience with the Emporium and Macy's department stores.
MARY FORTE, Age 44 Senior Vice President and President, Gordon's Division
Ms. Forte joined the Company on July 18, 1994 as President of the Gordon's Division. From January 1994 to July 1994, Ms. Forte served as Senior Vice President of QVC - Home Shopping Network. From July 1991 through January 1994, Ms. Forte served as Senior Vice President of the Bon Marche', Home Division. From July 1989 to July 1991, Ms. Forte was Vice President of Rich's Department Store, Housewares Division. In addition to the above, Ms. Forte has an additional thirteen years of retailing and merchandising experience with Macy's, The May Company and Federated Department stores.
PAUL LEONARD, Age 40. Senior Vice President and President, Guild Division
Mr. Leonard was appointed President of the Company's Fine Jewelers Guild Division on January 27, 1995. From October 1994 to January 1995, Mr. Leonard served as President of Corporate Merchandising for the Company. For three years prior to joining the Company, Mr. Leonard held positions as General Manager of Jewelry and then Senior Vice President of Soft Lines for Ames Department Store. Prior to that, Mr. Leonard was a Merchandise Vice President with The May Company. Mr. Leonard has more than twenty years of retailing and merchandising experience with an emphasis in jewelry.
MAX BROWN, Age 66. Senior Vice President and President, Diamond Park Division
Mr. Brown has been President of the Company's Diamond Park Division since January 11, 1993. From July 1989 to January 1993, Mr. Brown was Vice President and General Manager of the Diamond Park Division. Prior to 1989, he served as the Director of Stores for the Diamond Park Division.
JO ANN CONNOLLY, Age 48. Senior Vice President, Corporate Merchandising
Ms. Connolly was appointed Senior Vice President of Corporate Merchandising in January 1995. From 1989 to January 1995, Ms. Connolly served as Vice President and Merchandise Manager in the Zales Division and from 1984 to 1989 as Vice President and Merchandise Manager in the Guild Division.
PAUL KANNEMAN, Age 38. Senior Vice President and Chief Information Officer
Mr. Kanneman joined the Company on November 14, 1994 as Chief Information Officer. From July 1993 to November 1994, Mr. Kanneman was an Associate Partner with Andersen Consulting LLP. Mr. Kanneman was a Principal from August 1991 to July 1993, and a Senior Associate from August 1989 to July 1991 with Booz, Allen & Hamilton, Inc.
HERSCHEL KRANITZ, Age 55. Senior Vice President, Human Resources
Mr. Kranitz has been Senior Vice President -- Human Resources of the Company since March 14, 1994. From May 1989 to March 1994, Mr. Kranitz served as Vice President -- Human Resources of Raynet, Inc.
ALAN P. SHOR, Age 36. Senior Vice President, General Counsel and Secretary
Mr. Shor joined the Company on June 5, 1995 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.
JOHN SKINNER, Age 57. Senior Vice President and President, Jewelers Financial Services, Inc.
Mr. Skinner has been a Senior Vice President of the Company since October 7, 1992. Mr. Skinner has served in various capacities with the Company since September 1984, including President of Jewelers Financial Services, Inc., and Vice President and General Credit Manager of the Company.
THOMAS E. WHIDDON, Age 42. Senior Vice President and Chief Financial Officer
Mr. Whiddon was appointed Senior Vice President and Chief Financial Officer on August 28, 1995. From April 1994 through August 1995, he served as Senior Vice President and Treasurer of the Company. From September 1988 to April 1994, Mr. Whiddon served as Vice President and Treasurer of Eckerd Corporation. Prior to becoming Treasurer, Mr. Whiddon served as Vice President and Assistant Treasurer of Eckerd Corporation from April 1986 to August 1988.
The information required by this item relating to directors and Section 16(a) Reporting is included in the registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on November 2, 1995 under the captions "Proposal No. 1 -- Election of Directors," on pages 4 through 6, and "Section 16(a) Reporting," on pages 16 to 17, and is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on November 2, 1995 under the caption "Executive and Director Compensation," on pages 9 through 12, and, except as stated in the next sentence, is incorporated herein by reference. The foregoing incorporation by reference specifically excludes the discussion in such Proxy Statement under the captions "Report of the Compensation Committee on Executive Compensation" and "Stock Price Performance."
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on November 2, 1995 under the caption "Outstanding Voting Securities of the Company and Principal Holders Thereof," on pages 2 to 3, and is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on November 2, 1995 under the caption "Related Party Transactions," on pages 12 to 13, and is incorporated herein by reference.
PART IV
ITEM 14.

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
See Item 8 on page 8.
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
____________________________________________
(1) Incorporated by reference from the exhibit shown in parenthesis to the registrant's Form T-3 (No. 22-24-68) filed with the Commission on April 2, 1993.
(2) Incorporated by reference from the exhibit shown in parenthesis to the registrant's Form 8-A/A (No. 02-21526) filed with the Commission on July 16, 1993.
(3) Previously filed as an exhibit to the registrant's Form 10-Q (No. 1-4129) for the quarterly period ended September 30, 1993, and incorporated herein by reference.
(4) Incorporated by reference to the corresponding exhibit to the registrant's Registration Statement on Form S-1 (No. 33-73310) filed with the Commissions on December 23, 1993, as amended.
(5) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526) for the fiscal year ended March 31, 1994, and incorporated herein by reference.
(6) Filed herewith.
* Management Contracts and Compensatory Plans.
(4) REPORTS ON FORM 8-K
None.
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 16 day of October, 1995. 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.
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 included in Zale Corporation (a Delaware corporation) and subsidiaries' Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our reports thereon dated September 12, 1995. Our report on the financial statements for the four months ended July 31, 1993, and for the year ended March 31, 1993, includes an explanatory paragraph with respect to changes in methods of accounting for postretirement benefits other than pensions and accounting for income taxes as discussed in the Notes to Consolidated Financial Statements. Our audits were 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 audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas, September 12, 1995
SCHEDULE II
ZALE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
(1) Accounts written off, less recoveries and other adjustments.
(2) Amount includes a provision for excess customer receivable chargeoffs of closed store accounts of $8,230 and a provision for valuation of customer receivables of $12,500.
INDEX TO EXHIBITS
INDEX TO EXHIBITS
- --------------------- (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. INDEX TO EXHIBITS
(4) Incorporated by reference to the corresponding exhibit to the registrant's Registration Statement on Form S-1 (No. 33-73310) filed with the Commissions on December 23, 1993, as amended.
(5) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526) for the fiscal year ended March 31, 1994, and incorporated herein by reference.
(6) Filed herewith.
* Management Contracts and Compensatory Plans.