<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-21526
ZALE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-0675400
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
901 W. Walnut Hill Lane, Irving, Texas 75038-1003
(Address of principal executive offices) (Zip Code)
(972) 580-4000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ] .
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 19, 1999, 36,100,466 shares of the registrant's common stock were
outstanding.
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<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 567,952 $ 522,017 $ 822,138 $ 774,543
Cost of Sales 291,830 270,576 423,927 402,179
------------ ------------ ------------ ------------
Gross Margin 276,122 251,441 398,211 372,364
Selling, General and Administrative Expenses 159,302 148,249 264,588 256,188
Depreciation and Amortization Expense 6,900 5,356 13,372 10,154
Unusual Item- Gain on Sale of Diamond Park
Fine Jewelers Division --- --- --- (1,634)
Unusual Item - Gain on Sale of Land --- (4,720) --- (4,720)
------------ ------------ ------------ ------------
Operating Earnings 109,920 102,556 120,251 112,376
Interest Expense, Net 7,749 8,369 14,625 16,524
------------ ------------ ------------ ------------
Earnings Before Income Taxes 102,171 94,187 105,626 95,852
Income Taxes 38,211 35,250 39,503 35,869
------------ ------------ ------------ ------------
Net Earnings $ 63,960 $ 58,937 $ 66,123 $ 59,983
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings Per Common Share:
Basic $ 1.78 $ 1.65 $ 1.84 $ 1.69
Diluted $ 1.75 $ 1.57 $ 1.81 $ 1.60
Weighted Average Number of Common
Shares Outstanding:
Basic 35,908 35,669 35,987 35,450
Diluted 36,456 37,584 36,534 37,576
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
January 31, July 31, January 31,
1999 1998 1998
------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 141,599 $ 173,069 $ 102,591
Restricted Cash 8,956 6,192 11,117
Customer Receivables, Net 587,730 495,468 548,323
Merchandise Inventories 545,536 478,467 522,328
Other Current Assets 25,072 26,720 26,114
------------ ------------ ------------
Total Current Assets 1,308,893 1,179,916 1,210,473
Property and Equipment, Net 174,941 162,884 152,938
Other Assets 46,631 44,326 45,715
Deferred Tax Asset, Net 58,803 58,803 52,700
------------ ------------ ------------
Total Assets $ 1,589,268 $ 1,445,929 $ 1,461,826
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 100,103 $ --- $ 12
Accounts Payable and Accrued Liabilities 271,290 187,621 198,300
Deferred Tax Liability, Net 20,800 20,800 23,700
------------ ------------ ------------
Total Current Liabilities 392,193 208,421 222,012
Non-current Liabilities 60,730 50,190 51,885
Long-term Debt 380,210 480,275 480,314
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 56,033 58,982 61,931
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- --- ---
Common Stock 386 380 363
Additional Paid-In Capital 485,533 477,657 444,577
Unrealized Gains on Securities 4,424 2,851 2,359
Accumulated Earnings 277,464 211,341 202,387
------------ ------------ ------------
767,807 692,229 649,686
Treasury Stock (67,705) (44,168) (4,002)
------------ ------------ ------------
Total Stockholders' Investment 700,102 648,061 645,684
------------ ------------ ------------
Total Liabilities and Stockholders' Investment $ 1,589,268 $ 1,445,929 $ 1,461,826
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
January 31, January 31,
1999 1998
---------------- ----------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 66,123 $ 59,983
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization expense 13,995 10,654
Non-cash charge in lieu of tax expense 12,247 35,674
Unusual Item- Gain on Sale of Diamond Park Fine
Jewelers Division --- (1,634)
Unusual Item - Gain on Sale of Land --- (4,720)
Changes in:
Restricted cash (2,764) (2,104)
Customer receivables, net (92,262) (94,053)
Merchandise inventories (67,069) (59,059)
Other current assets 1,648 13,157
Other assets (1,582) (1,127)
Accounts payable and accrued liabilities 84,951 53,520
Non-current liabilities (635) (3,918)
------------ ------------
Net Cash Provided by Operating Activities 14,652 6,373
------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (29,290) (35,957)
Dispositions of property and equipment 1,177 394
Net proceeds from the Sale of Diamond Park
Fine Jewelers Division --- 57,642
Proceeds from Sale of Land --- 8,074
------------ ------------
Net Cash (Used In) Provided by Investing Activities (28,113) 30,153
------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt --- (316)
Payments on revolving credit agreement --- (192,900)
Borrowings under revolving credit agreement --- 122,200
Proceeds from issuance of Senior Notes --- 99,530
Debt issue and capitalized financing costs --- (2,400)
Proceeds from exercise of stock options and warrants 6,914 7,328
Purchase of common stock (24,923) ---
------------ ------------
Net Cash (Used In) Provided by Financing Activities (18,009) 33,442
------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents (31,470) 69,968
Cash and Cash Equivalents at Beginning of Period 173,069 32,623
------------ ------------
Cash and Cash Equivalents at End of Period $ 141,599 $ 102,591
------------ ------------
------------ ------------
Supplemental cash flow information:
Interest paid $ 17,963 $ 17,736
Interest received $ 4,444 $ 4,576
Income taxes paid (net of refunds received) $ 1,561 $ 502
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
Zale Corporation and its wholly owned subsidiaries (the "Company") is
the largest specialty retailer of fine jewelry in the United States. At
January 31, 1999, the Company operated 1,138 retail jewelry stores located
primarily in shopping malls throughout the United States and Puerto Rico. The
Company operates three divisions: Zales-Registered Trademark-,
Gordon's-Registered Trademark-, and Bailey, Banks and Biddle-Registered
Trademark-. The Zales Division provides more traditional, moderately priced
jewelry to a broad range of customers. The Gordon's Division offers
contemporary merchandise targeted to regional preferences at somewhat higher
price points than the Zales Division. The Bailey, Banks and Biddle Division
operates upscale jewelry stores which are considered among the finest jewelry
stores in their markets. Under the Zales brand name, the Company operated
fifteen Zales Outlet stores in eight states and offered online shopping at
www.zales.com at January 31, 1999.
The accompanying Consolidated Financial Statements are those of the
Company as of and for the three and six month periods ended January 31, 1999
and 1998. The Company consolidates substantially all its retail operations
into Zale Delaware, Inc. ("ZDel"), a wholly owned subsidiary of Zale
Corporation. ZDel is the parent company for several subsidiaries, including
three that are engaged primarily in providing credit insurance to credit
customers of the Company. All significant intercompany transactions have been
eliminated. The Consolidated Financial Statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In management's
opinion, all material adjustments and disclosures necessary for a fair
presentation have been made. The accompanying Consolidated Financial
Statements should be read in conjunction with the audited Consolidated
Financial Statements and related notes thereto included in the Company's Form
10-K for the fiscal year ended July 31, 1998. The classifications in use at
January 31, 1999 have been applied to the financial statements for July 31,
1998 and January 31, 1998.
The results of operations for the three and six month periods ended
January 31, 1999 and 1998 are not indicative of the operating results for the
full fiscal year due to the seasonal nature of the Company's business.
Seasonal fluctuations in retail sales historically have resulted in higher
earnings in the quarter of the fiscal year which includes the Christmas
selling season.
EARNINGS PER COMMON SHARE
The Company accounts for earnings per common share under the Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"). SFAS No. 128
requires presentation of basic and diluted earnings per share. Basic earnings
per share is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the reporting
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
or converted into common stock. Outstanding stock options and warrants issued
by the Company represent the only dilutive effect reflected in diluted
weighted average shares. There were antidilutive common stock equivalents of
1,252,500 for the three month period ended January 31, 1999, and 1,262,000
for the six month period ended January 31, 1999. There were no antidilutive
common stock equivalents for the three and six month periods ended January
31, 1998.
6
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ --------------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net earnings available to shareholders $ 63,960 $ 58,937 $ 66,123 $ 59,983
BASIC:
Weighted average number of common shares
outstanding 35,908 35,669 35,987 35,450
Net earnings per common share - basic $ 1.78 $ 1.65 $ 1.84 $ 1.69
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
DILUTED:
Weighted average number of common shares outstanding 35,908 35,669 35,987 35,450
Effect of dilutive securities:
Stock options 548 795 547 974
Warrants --- 1,120 --- 1,152
------------ ------------ ------------ --------------
Weighted average number of common shares
outstanding as adjusted 36,456 37,584 36,534 37,576
Net earnings per common share - diluted $ 1.75 $ 1.57 $ 1.81 $ 1.60
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
</TABLE>
STOCK REPURCHASE PLAN
On August 25, 1998, the Board of Directors authorized a stock repurchase
program pursuant to which the Company, from time to time and at management's
discretion, may purchase up to an aggregate of $50.0 million of the Company's
common stock on the open market through fiscal year 1999. As of January 31,
1999 the Company had repurchased approximately 1.0 million shares at an
aggregate cost of $24.9 million.
COMPREHENSIVE INCOME
Effective August 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income is
defined as the change in equity during a period from transactions and other
events, except those resulting from investments by and distributions to
stockholders. The components of comprehensive income for the three and six
month periods ended January 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------------- ---------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Net Earnings $ 63,960 $ 58,937 $ 66,123 $ 59,983
Other Comprehensive Income -
Unrealized gains on
investment securities - net 971 68 1,573 177
------------------ ------------------ ------------------ ------------------
Total Comprehensive Income $ 64,931 $ 59,005 $ 67,696 $ 60,160
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
</TABLE>
7
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
ZALE FUNDING TRUST RECEIVABLES NOTES
Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust
wholly owned by ZDel and formed to finance customer accounts receivable, has
approximately $380.7 million, net of discount, aggregate principal amount of
Receivables Backed Notes ("Receivables Notes") issued and outstanding at
January 31, 1999 pursuant to the Receivables Securitization Facility. The
Receivables Notes are secured by a lien on all customer accounts receivable
and are scheduled for redemption on July 15, 1999 or may be amortized based
on customer account payments received. The Company expects that ZFT will
redeem the Receivables Notes through the issuance of new notes by ZFT on or
about July 15, 1999. As of January 31, 1999, $280.6 million of the aggregate
principal amount is classified as non-current as $225.0 million of this
amount potentially due within the next twelve months can be paid with
borrowings under the Company's Revolving Credit Agreement (as defined
herein), and $55.6 million would not be amortized within the next twelve
months based on customer account payments received.
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On September 23, 1997, the Company sold $100 million in aggregate
principal amount of 8 1/2 percent Senior Notes (the "Senior Notes") due 2007
by means of an offering memorandum to qualified institutional buyers under
Rule 144A promulgated under the Securities Act of 1933, as amended.
The Company's payment obligations under the Senior Notes are guaranteed
by ZDel (the "Guarantor Subsidiary"). Such guarantee is full and
unconditional with respect to ZDel. Zale Funding Trust ("ZFT"), a limited
purpose Delaware business trust wholly owned by ZDel which owns the customer
accounts receivable of ZDel, is not a guarantor of the obligations under the
Senior Notes. Separate financial statements of the Guarantor Subsidiary are
not presented because the Company's management has determined that they would
not be material to investors. The following supplemental financial
information sets forth, on an unconsolidated basis, statements of operations,
balance sheets, and statements of cash flow information for the Company
("Parent Company Only"), for the Guarantor Subsidiary and for the Company's
other subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental
financial information reflects the investments of the Company and the
Guarantor Subsidiary in the Guarantor and Non-Guarantor Subsidiaries using
the equity method of accounting. Certain reclassifications have been made to
provide for uniform disclosure of all periods presented. These
reclassifications are not material.
8
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION --(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 1999
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $ 556,547 $ 11,405 $ --- $ 567,952
Cost of Sales --- 285,732 6,098 --- 291,830
------------ ------------ --------------- --------------- -------------
Gross Margin --- 270,815 5,307 --- 276,122
Selling, General, and Administrative
Expenses (Income) 37 166,370 (7,105) --- 159,302
Depreciation and Amortization Expense --- 6,578 322 --- 6,900
------------ ------------ --------------- --------------- -------------
Operating Earnings (Loss) (37) 97,867 12,090 --- 109,920
Interest Expense, Net --- (3,394) 11,143 --- 7,749
------------ ------------ --------------- --------------- -------------
Income (Loss) Before Income Taxes (37) 101,261 947 --- 102,171
Income Taxes (14) 37,871 354 --- 38,211
------------ ------------ --------------- --------------- -------------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (23) 63,390 593 --- 63,960
Equity in Earnings of Subsidiaries 63,983 593 --- (64,576) ---
------------ ------------ --------------- --------------- -------------
Net Earnings $ 63,960 $ 63,983 $ 593 $ (64,576) $ 63,960
------------ ------------ --------------- --------------- -------------
------------ ------------ --------------- --------------- -------------
</TABLE>
9
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION --(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 1998
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $ 514,271 $ 7,746 $ --- $ 522,017
Cost of Sales --- 266,722 3,854 --- 270,576
------------ ------------ --------------- --------------- -------------
Gross Margin --- 247,549 3,892 --- 251,441
Selling, General, and Administrative
Expenses (Income) 37 156,919 (8,707) --- 148,249
Depreciation and Amortization Expense --- 5,041 315 --- 5,356
Unusual item - Gain on Sale of Land --- (4,720) --- --- (4,720)
------------ ------------ --------------- --------------- -------------
Operating Earnings (Loss) (37) 90,309 12,284 --- 102,556
Interest Expense, Net --- (1,475) 9,844 --- 8,369
------------ ------------ --------------- --------------- -------------
Earnings (Loss) Before Income Taxes (37) 91,784 2,440 --- 94,187
Income Taxes (14) 34,352 912 --- 35,250
------------ ------------ --------------- --------------- -------------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (23) 57,432 1,528 --- 58,937
Equity in Earnings of Subsidiaries 58,960 1,401 --- (60,361) ---
------------ ------------ --------------- --------------- -------------
Net Earnings $ 58,937 $ 58,833 $ 1,528 $ (60,361) $ 58,937
------------ ------------ --------------- --------------- -------------
------------ ------------ --------------- --------------- -------------
</TABLE>
10
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION --(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended January 31, 1999
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $ 805,867 $ 16,271 $ --- $ 822,138
Cost of Sales --- 415,502 8,425 --- 423,927
------------ ------------- --------------- --------------- ---------------
Gross Margin --- 390,365 7,846 --- 398,211
Selling, General, and Administrative
Expenses (Income) 75 282,086 (17,573) --- 264,588
Depreciation and Amortization Expense --- 12,700 672 --- 13,372
------------ ------------- --------------- --------------- ---------------
Operating Earnings (Loss) (75) 95,579 24,747 --- 120,251
Interest Expense, Net --- (6,419) 21,044 --- 14,625
------------ ------------- --------------- --------------- ---------------
Income (Loss) Before Income Taxes (75) 101,998 3,703 --- 105,626
Income Taxes (28) 38,146 1,385 --- 39,503
------------ ------------- --------------- --------------- ---------------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (47) 63,852 2,318 --- 66,123
Equity in Earnings of Subsidiaries 66,170 2,318 --- (68,488) ---
------------ ------------- --------------- --------------- ---------------
Net Earnings $ 66,123 $ 66,170 $ 2,318 $ (68,488) $ 66,123
------------ ------------- --------------- --------------- ---------------
------------ ------------- --------------- --------------- ---------------
</TABLE>
11
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION --(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended January 31, 1998
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $ 762,507 $ 12,036 $ --- $ 774,543
Cost of Sales --- 396,172 6,007 --- 402,179
------------ ------------ --------------- --------------- -------------
Gross Margin --- 366,335 6,029 --- 372,364
Selling, General, and Administrative
Expenses (Income) 75 271,093 (14,980) --- 256,188
Depreciation and Amortization Expense --- 9,542 612 --- 10,154
Unusual Item - Gain on Sale of Diamond
Park Fine Jewelers Division --- (1,634) --- --- (1,634)
Unusual Item - Gain on Sale of Land --- (4,720) --- --- (4,720)
------------ ------------ --------------- --------------- -------------
Operating Earnings (Loss) (75) 92,054 20,397 --- 112,376
Interest (Income) Expense, Net --- (2,072) 18,596 --- 16,524
------------ ------------ --------------- --------------- -------------
Earnings (Loss) Before Income Taxes (75) 94,126 1,801 --- 95,852
Income Taxes (28) 35,223 674 --- 35,869
------------ ------------ --------------- --------------- -------------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (47) 58,903 1,127 --- 59,983
Equity in Earnings of Subsidiaries 60,030 1,001 --- (61,031) ---
------------ ------------ --------------- --------------- -------------
Net Earnings $ 59,983 $ 59,904 $ 1,127 $ (61,031) $ 59,983
------------ ------------ --------------- --------------- -------------
------------ ------------ --------------- --------------- -------------
</TABLE>
12
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION-- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
January 31, 1999
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
ASSETS
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ --- $ 89,674 $ 51,925 $ --- $ 141,599
Restricted Cash --- 485 8,471 --- 8,956
Customer Receivables, Net --- --- 587,730 --- 587,730
Merchandise Inventories --- 535,065 10,471 --- 545,536
Other Current Assets --- 23,271 1,801 --- 25,072
------------ ------------ ------------- ------------ ------------
Total Current Assets --- 648,495 660,398 --- 1,308,893
Investment in Subsidiaries 700,248 56,573 --- (756,821) ---
Property and Equipment, Net --- 170,914 4,027 --- 174,941
Intercompany Receivable 102,817 138,958 --- (241,775) ---
Other Assets --- 9,759 36,872 --- 46,631
Deferred Tax Assets, Net 58 58,742 3 --- 58,803
------------ ------------ ------------- ------------ ------------
Total Assets $ 803,123 $ 1,083,441 $ 701,300 $ (998,596) $ 1,589,268
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ --- $ --- $ 100,103 $ --- $ 100,103
Accounts Payable and Accrued
Liabilities 2,803 265,461 3,026 --- 271,290
Deferred Tax Liability, Net 646 20,154 --- --- 20,800
------------ ------------ ------------- ------------ ------------
Total Current Liabilities 3,449 285,615 103,129 --- 392,193
Non-current Liabilities --- 49,594 11,136 --- 60,730
Intercompany Payable --- --- 241,775 (241,775) ---
Long-term Debt 99,572 --- 280,638 --- 380,210
Excess of Revalued Net Assets
Over Stockholders' Investment, Net --- 56,033 --- --- 56,033
Total Stockholders' Investment 700,102 692,199 64,622 (756,821) 700,102
------------ ------------ ------------- ------------ ------------
Total Liabilities and Stockholders'
Investment $ 803,123 $ 1,083,441 $ 701,300 $ (998,596) $ 1,589,268
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
</TABLE>
13
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION-- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
July 31, 1998
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
ASSETS
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ --- $ 165,248 $ 7,821 $ --- $ 173,069
Restricted Cash --- 1,541 4,651 --- 6,192
Customer Receivables, Net --- --- 495,468 --- 495,468
Merchandise Inventories --- 468,076 10,391 --- 478,467
Other Current Assets --- 24,502 2,218 --- 26,720
------------ ------------ ------------ ------------ ------------
Total Current Assets --- 659,367 520,549 --- 1,179,916
Investment in Subsidiaries 648,160 52,493 --- (700,653) ---
Property and Equipment, Net --- 158,807 4,077 --- 162,884
Intercompany Receivable 102,801 495 --- (103,296) ---
Other Assets --- 10,493 33,833 --- 44,326
Deferred Tax Assets, Net 59 58,741 3 --- 58,803
------------ ------------ ------------ ------------ ------------
Total Assets $ 751,020 $ 940,396 $ 558,462 $ (803,949) $ 1,445,929
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ --- $ --- $ --- $ --- $ ---
Accounts Payable and Accrued Liabilities 2,758 182,725 2,138 --- 187,621
Deferred Tax Liability, Net 646 20,154 --- --- 20,800
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 3,404 202,879 2,138 --- 208,421
Non-current Liabilities --- 38,420 11,770 --- 50,190
Intercompany Payable --- --- 103,296 (103,296) ---
Long-term Debt 99,555 --- 380,720 --- 480,275
Excess of Revalued Net Assets
Over Stockholders' Investment, Net --- 58,982 --- --- 58,982
Total Stockholders' Investment 648,061 640,115 60,538 (700,653) 648,061
------------ ------------ ------------ ------------ ------------
Total Liabilities and Stockholders'
Investment $ 751,020 $ 940,396 $ 558,462 $ (803,949) $ 1,445,929
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
14
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended January 31, 1999
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in) Operating
Activities $ 18,009 $ (48,083) $ 47,741 $ (3,015) $ 14,652
Net Cash Flows from Investing Activities:
Additions to property and equipment --- (28,625) (665) --- (29,290)
Dispositions of property and equipment --- 1,134 43 --- 1,177
------------ ------------ ------------ ------------ ------------
Net Cash Used in Investing Activities --- (27,491) (622) --- (28,113)
------------ ------------ ------------ ------------ ------------
Net Cash Flows from Financing Activities:
Proceeds from exercise of stock options 6,914 --- --- --- 6,914
Purchase of common stock (24,923) --- --- --- (24,923)
Dividends paid --- --- (3,015) 3,015 ---
------------ ------------ ------------ ------------ ------------
Net Cash Used in Financing Activities (18,009) --- (3,015) 3,015 (18,009)
------------ ------------ ------------ ------------ ------------
Net (Decrease) Increase in Cash and Cash
Equivalents --- (75,574) 44,104 --- (31,470)
Cash and Cash Equivalents at Beginning of
Period --- 165,248 7,821 --- 173,069
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ --- $ 89,674 $ 51,925 $ --- $ 141,599
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
15
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended January 31, 1998
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in) Operating
Activities $ (7,328) $ 10,501 $ 5,381 $ (2,181) $ 6,373
Net Cash Flows from Investing Activities:
Additions to property and equipment --- (35,246) (711) --- (35,957)
Dispositions of property and equipment --- 293 101 --- 394
Proceeds from the Sale of Diamond Park Fine
Jewelers Division --- 57,642 --- --- 57,642
Proceeds from Sale of Land --- 8,074 --- --- 8,074
------------ ------------ ------------ ------------ ------------
Net Cash Provided by (Used in) Investing
Activities --- 30,763 (610) --- 30,153
------------ ------------ ------------ ------------ ------------
Net Cash Flows from Financing Activities:
Payments on long-term debt --- (316) --- --- (316)
Payments on revolving credit agreement --- (192,900) --- --- (192,900)
Borrowings under revolving credit agreement --- 122,200 --- --- 122,200
Proceeds from issuance of Senior Notes 99,530 --- --- --- 99,530
Loan from Zale Corporation to Zale Delaware (99,530) 99,530 --- --- ---
Debt issue and capitalized financing costs --- (2,400) --- --- (2,400)
Proceeds from exercise of stock options 7,328 --- --- --- 7,328
Proceeds from issuance of common stock --- --- 2,500 (2,500) ---
Dividends paid --- --- (4,681) 4,681 ---
------------ ------------ ------------ ------------ ------------
Net Cash Provided by (Used in) Financing
Activities 7,328 26,114 (2,181) 2,181 33,442
------------ ------------ ------------ ------------ ------------
Net Increase in Cash and Cash Equivalents --- 67,378 2,590 --- 69,968
Cash and Cash Equivalents at Beginning of
Period --- 24,014 8,609 --- 32,623
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ --- $ 91,392 $ 11,199 $ --- $ 102,591
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
16
<PAGE>
ITEM 2.
ZALE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements of the Company (and the related
notes thereto) included elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's unaudited Consolidated Statements of Operations expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------- ------------------------
1999 1998 1999 1998
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of Sales 51.4 51.8 51.6 51.9
----------- ---------- --------- -----------
Gross Margin 48.6 48.2 48.4 48.1
Selling, General and Administrative Expenses 28.0 28.4 32.2 33.1
Depreciation and Amortization Expense 1.2 1.0 1.6 1.3
Unusual Item-Gain on Sale of Diamond Park
Fine Jewelers Division --- --- --- (0.2)
Unusual Item- Gain on Sale of Land --- (0.9) --- (0.6)
----------- ---------- --------- -----------
Operating Earnings 19.4 19.7 14.6 14.5
Interest Expense, Net 1.4 1.6 1.8 2.1
----------- ---------- --------- -----------
Earnings Before Income Taxes 18.0 18.1 12.8 12.4
Income Taxes 6.7 6.8 4.8 4.7
----------- ---------- --------- -----------
Net Earnings 11.3 11.3 8.0 7.7
----------- ---------- --------- -----------
----------- ---------- --------- -----------
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THREE MONTHS ENDED JANUARY
31, 1998
NET SALES. Net Sales for the three months ended January 31, 1999
increased by $45.9 million to $568.0 million, an 8.8 percent increase
compared to the previous year. The previous year's quarter included sales
from Diamond Park Fine Jewelry ("Diamond Park") stores, which the Company
divested during fiscal 1998. Excluding sales from Diamond Park stores, total
sales for the quarter increased 10.3 percent. Sales increased largely due to
comparable store sales growth of 7.0 percent, as well as sales from new
stores added during the last twelve months. The Company believes that the
sales growth was influenced by enhanced merchandise assortments, successful
marketing initiatives and strong store level execution.
GROSS MARGIN. Gross Margin as a percentage of net sales increased by 0.4
percent for the three month period ending January 31, 1999, compared to the
same period last year, principally as a result of lower markdowns. The LIFO
provision was $0.4 million the three month period ended January 31, 1999.
There was no LIFO provision required for the three months ended January 31,
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expense decreased 0.4 percent as a percentage of net sales,
principally due to store productivity improvements and the divestiture of the
Diamond Park division, which had significantly higher payroll and rent costs
as a percentage of sales. The improvement in store productivity was partially
offset by a planned shift of promotional activities from the first quarter to
the second quarter to continue the company's brand development efforts and
target peak mall traffic.
EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION AND AMORTIZATION
EXPENSE, AND UNUSUAL ITEMS. As a result of the factors discussed above,
Earnings Before Interest, Taxes and Depreciation and Amortization Expense,
and Unusual Items were $116.8 million and $103.2 million for the three months
ended January 31, 1999 and 1998, respectively.
17
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $1.5 million, primarily as a result of the purchase of
new assets principally for new store openings, renovations and
refurbishments. Due to fresh start reporting, the Company wrote-off
substantially all fixed assets of the Company effective July 31, 1993. As a
result, depreciation and amortization relates to capital expenditures since
July 31, 1993.
UNUSUAL ITEM - GAIN ON SALE OF LAND. Unusual Item - Gain on Sale of Land
represents the $4.7 million gain on the sale of excess land surrounding the
Company's corporate headquarters facility during the second quarter of fiscal
year 1998.
INTEREST EXPENSE, NET. Interest Expense, Net was $7.7 million and $8.4
million for the three months ended January 31, 1999 and 1998, respectively.
The decrease is a result of higher interest income from investments due to an
increase in cash and cash equivalents. The increase in cash and cash
equivalents is primarily due to an increase in net earnings, effective
inventory management and leveraging of accounts payable and accrued
liabilities.
INCOME TAXES. The Income Tax provision for the three month periods ended
January 31, 1999 and 1998 was $38.2 million and $35.3 million, respectively,
reflecting an effective tax rate of 37.4 percent for both periods. As a
result of guidelines regarding accounting for income taxes of companies
utilizing fresh-start reporting, the Company reports earnings on a
fully-taxed basis even though it has not paid significant income taxes
subsequent to the adoption of fresh-start reporting. Due to continued growth
in earnings and the restrictions placed on the Company's remaining NOL, the
Company expects to begin paying more significant taxes in fiscal 1999. The
Company will realize the cash benefit from utilization of the tax net
operating loss carryforward ("NOL") (after limitations) against current and
future tax liabilities. As of July 31, 1998, the Company had a remaining NOL
(after limitations) of approximately $250.8 million.
SIX MONTHS ENDED JANUARY 31, 1999 COMPARED TO SIX MONTHS ENDED JANUARY 31,
1998
NET SALES. Net sales for the six months ended January 31, 1999 increased
by $47.6 million to $822.1 million, a 6.1 percent increase compared to the
previous year. The previous year's period included sales from Diamond Park
stores. The Company divested 139 Diamond Park stores as of October 6, 1997
and 47 additional Diamond Park stores as of January 31, 1998. Excluding sales
from the Diamond Park division, total sales for the period increased 9.6
percent. Sales increased largely due to comparable store sales growth of 6.3
percent, as well as new stores added in the last twelve months. The Company
believes that the sales growth was influenced by enhanced merchandise
assortments, successful marketing initiatives and strong store level
execution.
GROSS MARGIN. Gross Margin as a percentage of net sales increased by 0.3
percent for the six month period ended January 31, 1999, compared to the same
period last year, principally as a result of lower markdowns. The LIFO
provision was $0.4 million and $0.7 million for the six months ended January
31, 1999 and 1998, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 0.9 percent as a percentage of net sales,
principally due to store productivity improvements and the divestiture of the
Diamond Park operations which had significantly higher payroll and rent costs
as a percentage of sales.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION EXPENSE,
AND UNUSUAL ITEMS. Earnings Before Interest Taxes, Depreciation and
Amortization Expense and Unusual Items were $133.6 million and $116.2 million
for the six months ended January 31, 1999 and 1998.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $3.2 million, primarily as a result of the purchase of
new assets principally for new store openings, renovations and
refurbishments. Due to fresh start reporting, the Company wrote-off
substantially all fixed assets of the Company effective July 31, 1993. As a
result, depreciation and amortization relates to capital expenditures since
July 31, 1993.
18
<PAGE>
UNUSUAL ITEM - GAIN ON SALE OF DIAMOND PARK FINE JEWELERS DIVISION.
Unusual Item - Gain on Sale of Diamond Park Fine Jewelers Division was $1.6
million for the six month period ended January 31, 1998.
UNUSUAL ITEM - GAIN ON SALE OF LAND. Unusual Item - Gain on Sale of Land
of $4.7 million represents the gain on the sale of excess land surrounding
the Company's corporate headquarters facility, during the second quarter of
fiscal year 1998.
INTEREST EXPENSE NET. Interest Expense, Net was $14.6 million and $16.5
million for the six months ended January 31, 1999 and 1998, respectively. The
decrease is a result of higher interest income from investments due to an
increase in cash and cash equivalents. The increase in cash and cash
equivalents is primarily due to an increase in net earnings, effective
inventory management and leveraging of accounts payable and accrued
liabilities.
INCOME TAXES. The Income Tax expense for the six month period ended
January 31, 1999 and 1998 was $39.5 million and $35.9 million, respectively,
reflecting an effective tax rate of 37.4 percent for both periods. As a
result of guidelines regarding accounting for income taxes of companies
utilizing fresh-start reporting, the Company reports earnings on a
fully-taxed basis even though it has not paid any significant income taxes
subsequent to fresh-start reporting. Due to continued growth in earnings and
the restrictions placed on the Company's remaining NOL, the Company expects
to begin paying more significant taxes in fiscal 1999. The Company will
realize the cash benefit from utilization of the tax net operating loss
carryforward ("NOL") (after limitations) against current and future tax
liabilities. As of July 31, 1998, the Company had a remaining NOL (after
limitations) of approximately $250.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory
and receivables growth, capital expenditures primarily for new store growth
and renovations, upgrading its management information systems and debt
service. As of January 31, 1999, the Company had cash and cash equivalents of
$141.6 million, and $9.0 million of restricted cash. The retail jewelry
business is highly seasonal with a significant proportion of sales and
operating income being generated in November and December of each year.
Approximately 39.7 percent and 40.3 percent of the Company's annual sales were
made during the three months ended January 31, 1998 and 1997, respectively,
which includes the Christmas selling season. The Company's working capital
requirements fluctuate during the year, increasing substantially during the
fall season as a result of higher planned seasonal inventory levels.
Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust
wholly owned by Zale Delaware, Inc. ("ZDel") and formed to finance customer
accounts receivable, has approximately $380.7 million, net of discount,
aggregate principal amount of Receivables Backed Notes ("Receivables Notes")
issued and outstanding at January 31, 1999 pursuant to the Receivables
Securitization Facility. The Receivables Notes are secured by a lien on all
customer accounts receivable and are scheduled for redemption on July 15,
1999 or may be amortized based on customer account payments received. The
Company expects that ZFT will redeem the ZFT Receivables Notes through the
issuance of new notes by ZFT on or about July 15, 1999. As of January 31,
1999, $280.6 million of the aggregate principal amount is classified as
non-current as $225.0 million of this amount potentially due within the next
twelve months can be paid with borrowings under the Company's Revolving
Credit Agreement (as defined herein), and $55.6 million would not be
amortized within the next twelve months based on customer account payments
received.
In order to support the Company's longer-term capital financing
requirements, the Company issued $100 million of the Senior Notes on
September 23, 1997. These notes bear interest at 8 1/2 percent and are due in
2007. The Senior Notes are unsecured and are fully and unconditionally
guaranteed by ZDel. The proceeds were utilized to repay indebtedness under
the Company's Revolving Credit Agreement (as defined herein)and for general
corporate purposes. The indenture relating to the Senior Notes contains
certain restrictive covenants, including, but not limited to, limitations on
indebtedness, limitations on dividends and other restricted payments
(including limitations on the repurchases of the Company's common stock),
limitations on transactions with affiliates, limitations on liens and
limitations on disposition of proceeds of asset sales, among others.
19
<PAGE>
In order to support the Company's seasonal financing needs, the Company
entered into a three year unsecured Revolving Credit Agreement with a group
of banks on March 31, 1997. The Revolving Credit Agreement provides for
revolving credit loans in an aggregate amount of up to $225.0 million,
including a $30.0 million sublimit for letters of credit. At January 31,
1999, there were no loans outstanding under the Revolving Credit Agreement.
At the Company's election, the Revolving Credit Agreement provides for a one
year extension upon obtaining appropriate consent. The Company is currently
in compliance with all of its covenant obligations under the Revolving Credit
Agreement and the instruments governing its other indebtedness.
Under its growth strategy, the Company plans to open approximately 150
new stores for which it will incur approximately $36 million in capital
expenditures during the combined fiscal years 1999 and 2000. These stores are
expected to solidify the Company's core mall business by further penetrating
markets where the Company is under represented. In the first six months of
fiscal 1999, the Company opened 25 of these new stores.
Since fiscal 1994, the Company has opened, remodeled or refurbished
approximately 70 percent of its store base. During the combined fiscal years
1999 and 2000, the Company anticipates spending approximately $40 million in
additional funds to remodel and refurbish approximately 200 more stores. The
Company also estimates it will make capital expenditures of approximately $18
million during the combined fiscal years 1999 and 2000 for enhancements to
its management information systems. In total, the Company anticipates
spending approximately $130 million on capital expenditures during the
combined fiscal years 1999 and 2000.
There has been an increase of $67.1 million in owned merchandise
inventories at January 31, 1999 compared to the balance at July 31, 1998. The
increase of inventory levels is principally the result of seasonality and new
store growth as well as expansion in the depth and breadth of merchandise
available in the stores to accommodate increasing sales.
On August 25, 1998, the Board of Directors authorized a stock repurchase
program pursuant to which the Company, from time to time and at management's
discretion, may purchase up to an aggregate of $50.0 million of the Company's
common stock on the open market through fiscal year 1999. As of January 31,
1999, the Company had repurchased approximately 1.0 million shares at an
aggregate cost of $24.9 million.
Future liquidity will be enhanced to the extent that the Company is able
to realize the cash benefit from utilization of its NOL against current and
future tax liabilities. The cash benefit realized in fiscal year 1998 was
approximately $38.0 million. Guidelines regarding accounting for income taxes
of companies utilizing fresh-start reporting require the Company to report
earnings on a fully-taxed basis even though it has not paid significant
income taxes subsequent to the adoption of fresh-start reporting. Due to
continued growth in earnings and the restrictions placed on the Company's
remaining NOL,the Company expects to begin paying more significant income
taxes in fiscal year 1999. As of July 31, 1998, the Company had a NOL (after
limitations) of approximately $250.8 million, which represents up to $98.0
million in future tax benefits. The most restrictive limitation is the
Internal Revenue Code Section 382 annual limitation. The NOL will begin to
expire in fiscal year 2002 but can be utilized through 2009.
Management believes that operating cash flow, amounts available under
the Revolving Credit Agreement, the Receivables Securitization Facility, and
amounts available from the transaction redeeming the Receivables Notes, and
net proceeds from the Senior Notes offering should be sufficient to fund the
Company's current operations, debt service, currently anticipated capital
expenditure requirements and stock repurchase program requirements for the
foreseeable future.
YEAR 2000
The Company's management has recognized the need to ensure that its
operations and relationships with vendors and other third parties will not be
adversely impacted by software processing errors arising from calculations
using the year 2000 and beyond ("Year 2000"). Like those of many companies, a
significant number of the Company's computer applications and systems require
modification in order to render these systems Year 2000 compliant. The
Company recognizes that failure by the Company to timely resolve internal
Year 2000 issues could result, in the worst case, in an inability of the
Company to distribute its merchandise to its stores and to process its daily
business for some period of time. However, Company management presently
believes
20
<PAGE>
that scenario is unlikely based on the progress made in its Year 2000
remediation plan. Failure of one or more third party service providers on
whom the Company relies to address Year 2000 issues could also result, in a
worst case scenario, in some business interruption. The lost revenues, if
any, resulting from a worst case scenario such as those examples described
above would depend on the time period in which the failure goes uncorrected
and on how widespread the impact.
Zale is using a combination of internal and external resources to assess
and make the needed changes to its many different information technology
("IT") systems and personal computers, such as credit, point of sale,
payroll, purchase ordering, merchandise distribution, management reporting,
mainframe, and client/server applications. A formal project began in 1997 to
inventory all the specialized software programs and hardware used in the
Company's business. The inventory is complete and continues to be validated
quarterly, and renovation is well underway. Non-compliant programs and
systems are being replaced, modified or outsourced, with a target completion
by the first half of 1999. Testing has begun and will be substantially
complete by July 31, 1999. The period from August 1, 1999 through December
31, 1999 will be used to respond to any remaining issues, contingencies
and/or third party concerns. The Company has communicated and will continue
to communicate with its suppliers, financial institutions and others with
which it does business to monitor and evaluate Year 2000 conversion progress.
Progress reports on the Year 2000 project are presented regularly to the
Company's Board of Directors and senior management.
With regard to non-IT systems, such as the General Office security
systems, store security systems, environmental systems, and phone systems,
the Company continues to evaluate and insure the compliance of such systems.
Systems that are not compliant have been, or will be remediated, upgraded or
replaced by July 31, 1999.
Since June 1998, the Company has sent approximately 3,500 inquiries to
its vendors requesting compliance certification. The Company has collected
responses to those inquiries. It is in the process of following-up with those
material vendors who either did not respond or whose response was
insufficient. The focus on mission critical vendors will intensify and site
visits to vendor facilities will be made as appropriate. The Company
outsources or will outsource its MIS processing and credit processing and
inquiry systems. These outsourcers have contractually committed to Year 2000
compliance. The Company's primary delivery service provider stated that its
goal is to be Year 2000 compliant by May 31, 1999. The Company's payroll
processing service provider has indicated that its major systems will operate
with correct date logic for Year 2000. The Company's major benefits vendors
and service providers have indicated they are or will be Year 2000 compliant,
as have most of the Company's major merchandise vendors.
Direct expenditures were approximately $1.7 million and internal costs
were approximately $0.5 million, for a total cost of $2.2 million in
expenditures associated with the Year 2000 in fiscal year 1998. Direct costs
of $3.5 million and internal costs of $0.9 million, for a total cost of $4.4
million, are expected in fiscal year 1999. For the six months ended January
31, 1999, internal costs and direct expenditures have been approximately $2.1
million. The Company will fund these expenditures through its normal IT
operations budget. As required by generally accepted accounting principles,
these costs are expensed as incurred. The Company is currently addressing the
financial needs associated with the Year 2000 for fiscal year 2000, which
begins August 1, 1999. The Company does not expect these needs to be material.
The Company has had each of its departments or divisions develop basic
contingency plans to restore the material functions of each of its systems or
activities in the case of a Year 2000 failure. The contingency plans cover
all material levels of activity within each business location, including the
stores, the General Office, the credit centers and third party service
providers. The Company plans to continually refine these plans and make them
more comprehensive as additional information becomes available from testing
and from third party suppliers. In addition, the Company's two processing
outsourcers also have contingency plans for the Company's processing should
their primary systems fail.
Additionally, in the normal course of business, the Company has made
capital investments in certain third party software and hardware systems to
address the financial and operational needs of the business. These systems,
which will improve the efficiencies and productivity of the replaced systems,
have also been certified Year 2000 compliant by the vendors and have been or
will be installed by July 31, 1999. To date all of these
21
<PAGE>
capital projects were part of the Company's long term strategic capital plan
and their timing has not been accelerated as a result of the Year 2000 issue.
Although there can be no assurance that the Company will be able to
complete all of the modifications in the required time frame, that
unanticipated events will not occur, or that the Company will be able to
identify all Year 2000 issues before problems manifest themselves, it is
management's belief that the Company is taking adequate action to address
Year 2000 issues. Management does not expect the financial impact of being
Year 2000 compliant to be material to the Company's consolidated financial
position, results of operations or cash flows.
INFLATION
In management's opinion, changes in Net Sales and Net Earnings that have
resulted from inflation and changing prices have not been material. There is
no assurance, however, that inflation will not materially affect the Company
in the future.
This Management's Discussion and Analysis contains forward-looking
statements, including statements concerning expected capital expenditures to
be made in the future, expected significant upgrades to the Company's
management information systems over the next several years, the addition of
new locations through either new store openings or strategic acquisitions,
the renovation and remodeling of the Company's existing store locations, the
expected impact of the "Year 2000" issue, and the adequacy of the Company's
sources of cash to finance its current and future operations. These
forward-looking statements involve a number of risks and uncertainties. In
addition to the factors discussed above, among other factors that could cause
actual results to differ materially are the following: the impact of general
economic conditions due to the fact that jewelry purchases are discretionary
for consumers and may be affected by adverse trends in the general economy;
the ability of ZFT to redeem the Receivables Notes on terms acceptable to ZFT
and the Company; competition in the fragmented retail jewelry business; the
variability of quarterly results and seasonality of the retail business; the
ability to improve productivity in existing stores and to increase comparable
store sales; the availability of alternate sources of merchandise supply in
the case of an abrupt loss of any significant supplier during the three month
period leading up to the Christmas season; the dependence on key personnel;
the changes in regulatory requirements which are applicable to the Company's
business; management decisions to pursue new product lines which may involve
additional costs; and the risk factors listed from time to time in the
Company's Securities and Exchange commission reports, including but not
limited to, its Annual Report on Form 10-K for the year ended July 31, 1998.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of January 31,
1999 has not materially changed since July 31, 1998. The market risk profile
on July 31, 1998 is disclosed in the Company's Annual Report on Form 10-K for
the year ended July 31, 1998.
22
<PAGE>
Part II. - Other Information:
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits-
27 Financial data schedule.
Part II Exhibits-
None.
(b) Form 8-K
None
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zale Corporation
--------------------------------------------------
(Registrant)
Date March 5, 1999 /s/ MARK R. LENZ
---------------- --------------------------------------------------
Mark R. Lenz
Senior Vice-President, Controller
(principal accounting officer of the registrant)
24
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number
- --------------
<S> <C>
27 Financial data schedule.
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JANUARY
31, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 150,555<F2>
<SECURITIES> 0
<RECEIVABLES> 587,730<F1>
<ALLOWANCES> 0
<INVENTORY> 545,536
<CURRENT-ASSETS> 1,308,893
<PP&E> 174,941<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,589,268
<CURRENT-LIABILITIES> 392,193
<BONDS> 380,210
0
0
<COMMON> 386
<OTHER-SE> 699,716
<TOTAL-LIABILITY-AND-EQUITY> 1,589,268
<SALES> 822,138
<TOTAL-REVENUES> 822,138
<CGS> 423,927
<TOTAL-COSTS> 264,588
<OTHER-EXPENSES> 14,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,625
<INCOME-PRETAX> 105,626
<INCOME-TAX> 39,503
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,123
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.81
<FN>
<F1>THIS ASSET VALUE REPRESENTS A NET AMOUNT.
<F2>AMOUNT INCLUDES CASH AND CASH EQUIVALENTS AND RESTRICTED CASH.
</FN>
</TABLE>
