<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 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 1-04129
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 May 21, 1999, 36,387,191 shares of the registrant's common stock were
outstanding.
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<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Page
----
<S> <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 17
Condition and Results of Operations
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 Nine Months Ended
April 30, April 30,
---------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales $ 280,736 $ 258,300 $ 1,102,874 $ 1,032,843
Cost of Sales 144,708 133,842 568,635 536,021
---------------- -------------- ---------------- ----------------
Gross Margin 136,028 124,458 534,239 496,822
Selling, General and Administrative Expenses 111,532 108,064 376,120 364,262
Depreciation and Amortization Expense 6,703 5,903 20,075 16,057
Unusual Item- Gain on Sale of Diamond Park
Fine Jewelers Division --- --- --- (1,634)
Unusual Item - Gain on Sale of Land --- --- --- (4,720)
---------------- -------------- ---------------- ----------------
Operating Earnings 17,793 10,491 138,044 122,857
Interest Expense, Net 7,677 8,062 22,302 24,576
---------------- -------------- ---------------- ----------------
Earnings Before Income Taxes 10,116 2,429 115,742 98,281
Income Taxes 3,849 926 43,352 36,795
---------------- -------------- ---------------- ----------------
Net Earnings $ 6,267 $ 1,503 $ 72,390 $ 61,486
---------------- -------------- ---------------- ----------------
---------------- -------------- ---------------- ----------------
Earnings Per Common Share:
Basic $ .17 $ .04 $ 2.01 $ 1.74
Diluted $ .17 $ .04 $ 1.98 $ 1.64
Weighted Average Number of Common
Shares Outstanding:
Basic 36,075 35,255 36,016 35,387
Diluted 36,808 37,425 36,618 37,496
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
April 30, 1999 July 31, 1998 April 30, 1998
---------------- ----------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 150,097 $ 173,069 $ 128,408
Restricted Cash 5,862 6,192 5,261
Customer Receivables, Net 535,202 495,468 501,257
Merchandise Inventories 562,873 478,467 524,632
Other Current Assets 24,357 26,720 27,610
---------------- ----------------- -----------------
Total Current Assets 1,278,391 1,179,916 1,187,168
Property and Equipment, Net 178,879 162,884 157,258
Other Assets 43,925 44,326 44,196
Deferred Tax Asset, Net 58,811 58,803 52,700
---------------- ----------------- -----------------
Total Assets $ 1,560,006 $ 1,445,929 $ 1,441,322
---------------- ----------------- -----------------
---------------- ----------------- -----------------
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ 380,760 $ --- $ 12
Accounts Payable and Accrued Liabilities 240,248 187,621 209,156
Deferred Tax Liability, Net 20,800 20,800 23,700
---------------- ----------------- -----------------
Total Current Liabilities 641,808 208,421 232,868
Non-current Liabilities 62,358 50,190 51,019
Long-term Debt 99,572 480,275 480,329
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 54,558 58,982 60,456
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- --- ---
Common Stock 389 380 365
Additional Paid-In Capital 492,888 477,657 447,274
Unrealized Gains on Securities 3,596 2,851 2,638
Deferred Compensation (5,431) --- ---
Accumulated Earnings 283,731 211,341 203,890
---------------- ----------------- -----------------
775,173 692,229 654,167
Treasury Stock (73,463) (44,168) (37,517)
---------------- ----------------- -----------------
Total Stockholders' Investment 701,710 648,061 616,650
---------------- ----------------- -----------------
Total Liabilities and Stockholders' Investment $ 1,560,006 $ 1,445,929 $ 1,441,322
---------------- ----------------- -----------------
---------------- ----------------- -----------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
April 30, 1999 April 30, 1998
---------------------- ----------------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 72,390 $ 61,486
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization expense 21,689 16,869
Non-cash charge in lieu of tax expense 13,854 36,417
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 330 3,752
Customer receivables, net (39,734) (46,987)
Merchandise inventories (84,406) (61,363)
Other current assets 2,363 11,661
Other assets (526) 464
Accounts payable and accrued liabilities 53,909 64,376
Non-current liabilities (622) (4,784)
---------------------- ----------------------
Net Cash Provided by Operating Activities 39,247 75,537
---------------------- ----------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (41,322) (47,807)
Dispositions of property and equipment 1,226 679
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 (40,096) 18,588
---------------------- ----------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt --- (325)
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 --- (2,621)
Proceeds from exercise of stock options 8,558 8,888
Proceeds from exercise of warrants --- 403
Purchase of common stock (30,681) (33,515)
---------------------- ----------------------
Net Cash (Used In) Provided by Financing Activities (22,123) 1,660
---- ----------------- ---- -----------------
Net (Decrease) Increase in Cash and Cash Equivalents (22,972) 95,785
Cash and Cash Equivalents at Beginning of Period 173,069 32,623
---------------------- ----------------------
Cash and Cash Equivalents at End of Period $ 150,097 $ 128,408
---------------------- ----------------------
---------------------- ----------------------
Supplemental cash flow information:
Interest paid $ 29,063 $ 26,939
Interest received $ 6,146 $ 3,758
Income taxes paid (net of refunds received) $ 28,820 $ 1,205
</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 North America. At April 30,
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 18 Zales Outlet
stores in eleven states and offered on-line shopping at www.zales.com at
April 30, 1999.
The accompanying Consolidated Financial Statements are those of the
Company as of and for the three and nine month periods ended April 30, 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
April 30, 1999 have been applied to the financial statements for July 31,
1998 and April 30, 1998.
The results of operations for the three and nine month periods ended
April 30, 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
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 1,253,500
antidilutive common stock equivalents for the nine month period ended April
30, 1999. There were no antidilutive common stock equivalents for the three
and nine month periods ended April 30, 1998, and the three month period ended
April 30, 1999.
6
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ --------------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net earnings available to shareholders $ 6,267 $ 1,503 $ 72,390 $ 61,486
BASIC:
Weighted average number of common shares
outstanding 36,075 35,255 36,016 35,387
Net earnings per common share - basic $ 0.17 $ 0.04 $ 2.01 $ 1.74
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
DILUTED:
Weighted average number of common shares outstanding 36,075 35,255 36,016 35,387
Effect of dilutive securities:
Stock options 601 945 559 945
Restricted Stock 132 --- 43 ---
Warrants --- 1,225 --- 1,164
------------ ------------ ------------ --------------
Weighted average number of common shares
outstanding as adjusted 36,808 37,425 36,618 37,496
Net earnings per common share - diluted $ 0.17 $ 0.04 $ 1.98 $ 1.64
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
</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 April 30,
1999 the Company had repurchased approximately 1.1 million shares at an
aggregate cost of $30.7 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 nine
month periods ended April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------------------------- ---------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Net Earnings $ 6,267 $ 1,503 $ 72,390 $ 61,486
Other Comprehensive Income -
Unrealized gain (loss) on
investment securities - net (828) 279 745 456
------------------ ------------------ ------------------ ------------------
Total Comprehensive Income $ 5,439 $ 1,782 $ 73,135 $ 61,942
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
</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 $380.8 million, net of discount, aggregate principal amount of
Receivables Backed Notes ("Receivables Notes") issued and outstanding at
April 30, 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 before July 15, 1999 as the Company is in the process of entering into a
new transaction to replace the Receivables Securitization Facility. As of
April 30, 1999, all of the $380.8 million of the aggregate principal amount
outstanding under the Receivables Securitization Facility has been classified
as current, as this amount is due within the next twelve months. Previously,
the Company had classified a portion of this amount as non-current, because
the Company could use borrowings under its Revolving Credit Agreement to repay
that portion. However, as of May 1999, the $225.0 million Revolving Credit
Agreement is now a current obligation since it matures within the next twelve
months.
DEFERRED COMPENSATION
During February 1999, 180,692 shares of restricted Common Stock were
granted to certain key employees valued at $5.7 million as of the grant date.
The shares will vest ratably on each of the anniversaries ranging from three
to four years from the date of grant and are subject to restrictions on their
sale or transfer. The total cost of restricted stock is amortized to income
as compensation expense ratably over the vesting period and amounted to $0.3
million for the three and nine month periods ended April 30, 1999.
SUBSEQUENT EVENT
On June 2, 1999, the Company completed the acquisition of substantially
all assets and certain operational liabilities of Peoples Jewellers
Corporation, a privately owned chain of 177 fine jewelry stores operating
throughout Canada. The transaction was made at a purchase price of $115
million Canadian. In addition, the Company retired $20 million Canadian of
bank debt. The Company will fund the total cost from existing cash, and no
additional borrowing will be required. The purchase price will be allocated
to assets acquired and liabilities assumed based on their estimated fair
values, as well as intangible assets acquired. The excess purchase price over
the fair value of assets acquired will be classified as goodwill. The
acquisition will be accounted for under the purchase method.
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, 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 April 30, 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 $ --- $ 274,789 $ 5,947 $ --- $ 280,736
Cost of Sales --- 141,848 2,860 --- 144,708
----------- ---------- ------------- ------------ ------------
Gross Margin --- 132,941 3,087 --- 136,028
Selling, General and Administrative
Expenses (Income) 38 120,436 (8,942) --- 111,532
Depreciation and Amortization Expense --- 6,371 332 --- 6,703
----------- ---------- ------------- ------------ ------------
Operating Earnings (Loss) (38) 6,134 11,697 --- 17,793
Interest Expense, Net --- (3,767) 11,444 --- 7,677
----------- ---------- ------------- ------------ ------------
Income (Loss) Before Income Taxes (38) 9,901 253 --- 10,116
Income Taxes (14) 3,766 97 --- 3,849
----------- ---------- ------------- ------------ ------------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (24) 6,135 156 --- 6,267
Equity in Earnings of Subsidiaries 6,291 157 --- (6,448) ---
----------- ---------- ------------- ------------ ------------
Net Earnings $ 6,267 $ 6,292 $ 156 $ (6,448) $ 6,267
----------- ---------- ------------- ------------ ------------
----------- ---------- ------------- ------------ ------------
</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 April 30, 1998
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $ 253,572 $ 4,728 $ --- $ 258,300
Cost of Sales --- 131,559 2,283 --- 133,842
----------- ---------- ------------- ------------ ------------
Gross Margin --- 122,013 2,445 124,458
Selling, General and Administrative
Expenses (Income) 38 115,997 (7,971) --- 108,064
Depreciation and Amortization Expense --- 5,667 236 --- 5,903
----------- ---------- ------------- ------------ ------------
Operating Earnings (Loss) (38) 349 10,180 --- 10,491
Interest Expense, Net --- (2,656) 10,718 --- 8,062
----------- ---------- ------------- ------------ ------------
Earnings (Loss) Before Income Taxes (38) 3,005 (538) --- 2,429
Income Taxes (14) 1,141 (201) --- 926
----------- ---------- ------------- ------------ ------------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (24) 1,864 (337) --- 1,503
Equity in Earnings (Loss) of Subsidiaries 1,527 (336) --- (1,191) ---
----------- ---------- ------------- ------------ ------------
Net Earnings (Loss) $ 1,503 $ 1,528 $ (337) $ (1,191) $ 1,503
----------- ---------- ------------- ------------ ------------
----------- ---------- ------------- ------------ ------------
</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
Nine Months Ended April 30, 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 $ --- $ 1,080,656 $ 22,218 $ --- $ 1,102,874
Cost of Sales --- 557,350 11,285 --- 568,635
------------ ------------- --------------- --------------- ---------------
Gross Margin --- 523,306 10,933 --- 534,239
Selling, General and Administrative
Expenses (Income) 113 402,522 (26,515) --- 376,120
Depreciation and Amortization Expense --- 19,071 1,004 --- 20,075
------------ ------------- --------------- --------------- ---------------
Operating Earnings (Loss) (113) 101,713 36,444 --- 138,044
Interest Expense, Net --- (10,186) 32,488 --- 22,302
------------ ------------- --------------- --------------- ---------------
Income (Loss) Before Income Taxes (113) 111,899 3,956 --- 115,742
Income Taxes (42) 41,912 1,482 --- 43,352
------------ ------------- --------------- --------------- ---------------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (71) 69,987 2,474 --- 72,390
Equity in Earnings of Subsidiaries 72,461 2,475 --- (74,936) ---
------------ ------------- --------------- --------------- ---------------
Net Earnings $ 72,390 $ 72,462 $ 2,474 $ (74,936) $ 72,390
------------ ------------- --------------- --------------- ---------------
------------ ------------- --------------- --------------- ---------------
</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
Nine Months Ended April 30, 1998
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $ 1,016,079 $ 16,764 $ --- $ 1,032,843
Cost of Sales --- 527,731 8,290 --- 536,021
------------- --------------- -------------- --------------- --------------
Gross Margin --- 488,348 8,474 --- 496,822
Selling, General and Administrative
Expenses (Income) 113 387,100 (22,951) --- 364,262
Depreciation and Amortization Expense --- 15,209 848 --- 16,057
Unusual Item - Gain on Sale of
Diamond Park Fine Jewelers Division --- (1,634) --- --- (1,634)
Gain on Sale of Land --- (4,720) --- --- (4,720)
------------- -------------- -------------- --------------- --------------
Operating Earnings (Loss) (113) 92,393 30,577 --- 122,857
Interest Expense, Net --- (4,738) 29,314 --- 24,576
------------- --------------- -------------- --------------- --------------
Earnings (Loss) Before Income Taxes (113) 97,131 1,263 --- 98,281
Income Taxes (42) 36,364 473 --- 36,795
------------- --------------- -------------- --------------- --------------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (71) 60,767 790 --- 61,486
Equity in Earnings of Subsidiaries 61,557 665 --- (62,222) ---
------------- --------------- -------------- --------------- --------------
Net Earnings $ 61,486 $ 61,432 $ 790 $ (62,222) $ 61,486
------------- --------------- -------------- --------------- --------------
------------- --------------- -------------- --------------- --------------
</TABLE>
12
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION-- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
April 30, 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 $ --- $ 143,333 $ 6,764 $ --- $ 150,097
Restricted Cash --- 1,041 4,821 --- 5,862
Customer Receivables, Net --- --- 535,202 --- 535,202
Merchandise Inventories --- 552,666 10,207 --- 562,873
Other Current Assets --- 22,338 2,019 --- 24,357
------------- ------------- ---------------- --------------- --------------
Total Current Assets --- 719,378 559,013 --- 1,278,391
Investment in Subsidiaries 701,880 48,124 --- (750,004) ---
Property and Equipment, Net --- 175,074 3,805 --- 178,879
Intercompany Receivable 100,684 47,219 --- (147,903) ---
Other Assets --- 8,670 35,255 --- 43,925
Deferred Tax Assets, Net 58 58,742 11 --- 58,811
------------- ------------- ---------------- --------------- --------------
Total Assets $ 802,622 $ 1,057,207 $ 598,084 $ (897,907) $ 1,560,006
------------- ------------- ---------------- --------------- --------------
------------- ------------- ---------------- --------------- --------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-term Debt $ --- $ --- $ 380,760 $ --- $ 380,760
Accounts Payable and Accrued
Liabilities 694 237,459 2,095 --- 240,248
Deferred Tax Liability, Net 646 20,154 --- --- 20,800
------------- ------------- ---------------- --------------- --------------
Total Current Liabilities 1,340 257,613 382,855 --- 641,808
Non-current Liabilities --- 51,201 11,157 --- 62,358
Intercompany Payable --- --- 147,903 (147,903) ---
Long-term Debt 99,572 --- --- --- 99,572
Excess of Revalued Net Assets
Over Stockholders' Investment, Net --- 54,558 --- --- 54,558
Total Stockholders' Investment 701,710 693,835 56,169 (750,004) 701,710
------------- ------------- ---------------- --------------- --------------
Total Liabilities and Stockholders'
Investment $ 802,622 $ 1,057,207 $ 598,084 $ (897,907) $ 1,560,006
------------- ------------- ---------------- --------------- --------------
------------- ------------- ---------------- --------------- --------------
</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
Nine Months Ended April 30, 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 Operating Activities $ 22,123 $ 17,470 $ 12,367 $ (12,713) $ 39,247
Net Cash Flows from Investing Activities:
Additions to property and equipment --- (40,568) (754) --- (41,322)
Dispositions of property and equipment --- 1,183 43 --- 1,226
---------- ------------ ------------- ------------ ----------
Net Cash Used in Investing Activities --- (39,385) (711) --- (40,096)
---------- ------------ ------------- ------------ ----------
Net Cash Flows from Financing Activities:
Proceeds from exercise of stock options 8,558 --- --- --- 8,558
Purchase of common stock (30,681) --- --- --- (30,681)
Dividends paid --- --- (12,713) 12,713 ---
---------- ------------ ------------- ------------ ----------
Net Cash Used in Financing Activities (22,123) --- (12,713) 12,713 (22,123)
---------- ------------ ------------- ------------ ----------
Net Decrease in Cash and Cash Equivalents --- (21,915) (1,057) --- (22,972)
Cash and Cash Equivalents at Beginning of
Period --- 165,248 7,821 --- 173,069
---------- ------------ ------------- ------------ ----------
Cash and Cash Equivalents at End of Period $ --- $ 143,333 $ 6,764 $ --- $ 150,097
---------- ------------ ------------- ------------ ----------
---------- ------------ ------------- ------------ ----------
</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
Nine Months Ended April 30, 1998
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by Operating Activities $ 24,224 $ 10,603 $ 52,427 $ (11,717) $ 75,537
Net Cash Flows from Investing Activities:
Additions to property and equipment --- (46,589) (1,218) --- (47,807)
Dispositions of property and equipment --- 578 101 --- 679
Proceeds from sale of Diamond Park Fine
Jewelers Division --- 57,642 --- --- 57,642
Proceeds from sale of land --- 8,074 --- --- 8,074
------------- -------------- ---------------- -------------- --------------
Net Cash Provided by (Used in) Investing
Activities --- 19,705 (1,117) --- 18,588
------------- -------------- ---------------- -------------- --------------
Net Cash Flows from Financing Activities:
Payments on long-term debt --- (325) --- --- (325)
Net payments under 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 --- (2,621) --- --- (2,621)
Purchase of common stock (33,515) --- --- --- (33,515)
Proceeds from exercise of stock options 8,888 --- --- --- 8,888
Proceeds from exercise of warrants 403 --- --- --- 403
Proceeds from issuance of common stock --- --- 2,500 (2,500) ---
Dividends paid --- --- (14,217) 14,217 ---
------------- -------------- ---------------- -------------- --------------
Net Cash Used in Financing Activities (24,224) (25,884) (11,717) (11,717) (1,660)
------------- -------------- ---------------- -------------- --------------
Net Increase in Cash and Cash Equivalent
Equivalents --- 56,192 39,593 --- 95,785
Cash and Cash Equivalents at Beginning of
Period --- 24,014 8,609 --- 32,623
------------- -------------- ---------------- -------------- --------------
Cash and Cash Equivalents at End of Period $ --- $ 80,206 $ 48,202 $ --- $ 128,408
------------- -------------- ---------------- -------------- --------------
------------- -------------- ---------------- -------------- --------------
</TABLE>
16
<PAGE>
ITEM 2.
ZALE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements of the Company (and the related
notes thereto) included elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's unaudited Consolidated Statements of Operations expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------- ------------------------
1999 1998 1999 1998
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of Sales 51.5 51.8 51.6 51.9
----------- ---------- --------- -----------
Gross Margin 48.5 48.2 48.4 48.1
Selling, General and Administrative Expenses 39.7 41.8 34.1 35.3
Depreciation and Amortization Expense 2.5 2.3 1.8 1.6
Unusual Item-Gain on Sale of Diamond Park
Fine Jewelers Division --- --- --- (0.2)
Unusual Item- Gain on Sale of Land --- --- --- (0.5)
----------- ---------- --------- -----------
Operating Earnings 6.3 4.1 12.5 11.9
Interest Expense, Net 2.7 3.1 2.0 2.4
----------- ---------- --------- -----------
Earnings Before Income Taxes 3.6 1.0 10.5 9.5
Income Taxes 1.4 0.4 3.9 3.5
----------- ---------- --------- -----------
Net Earnings 2.2 0.6 6.6 6.0
----------- ---------- --------- -----------
----------- ---------- --------- -----------
</TABLE>
THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 1998
NET SALES. Net Sales for the three months ended April 30, 1999 increased
by $22.4 million to $280.7 million, an 8.7 percent increase compared to the
previous year. Sales increased largely due to comparable store sales growth
of 6.0 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 0.3
percent for the three month period ending April 30, 1999, compared to the
same period last year, principally due to more efficient purchasing resulting
in lower markdowns. The LIFO benefit was $(0.6) million and $(0.7) million
for the three month periods ended April 30, 1999 and 1998, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expense decreased 2.1 percent as a percentage of net sales,
principally due to store productivity improvements and a planned shift in
promotional expenditures. There was also a slight improvement in net credit
income and corporate expenses as a percent of sales during the current period.
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 $24.5 million and $16.4 million for the three months
ended April 30, 1999 and 1998, respectively.
17
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $0.8 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 expense relates to capital expenditures
since July 31, 1993.
INTEREST EXPENSE, NET. Interest Expense, Net was $7.7 million and $8.1
million for the three month periods ended April 30, 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 and
leveraging of accounts payable and accrued liabilities.
INCOME TAXES. The Income Tax provision for the three month periods ended
April 30, 1999 and 1998 was $3.8 million and $0.9 million, respectively,
reflecting an effective tax rate of 38.0 percent and 38.1 percent,
respectively. As a result of guidelines regarding accounting for income taxes
of companies utilizing fresh-start reporting, the Company has reported
earnings on a fully-taxed basis even though it had not paid significant
income taxes prior to fiscal 1999. See "Liquidity and Capital Resources" for
information concerning the Company's net operating loss carryforward ("NOL").
NINE MONTHS ENDED APRIL 30, 1999 COMPARED TO NINE MONTHS ENDED APRIL 30, 1998
NET SALES. Net Sales for the nine months ended April 30, 1999 increased
by approximately $70 million to $1,102.9 million, a 6.8 percent increase
compared to the previous year. The previous year's period included sales from
Diamond Park Fine Jewelry ("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 9.4 percent. Sales increased
largely due to comparable store sales growth of 6.2 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 nine month period ended April 30, 1999, compared to the same
period last year, principally due to more efficient purchasing resulting in
lower markdowns. The LIFO benefit was $0.2 million for the nine months ended
April 30, 1999. There was no LIFO provision required for the nine months that
ended April 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.2 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. As a result of factors discussed above, Earnings Before
Interest Taxes, Depreciation and Amortization Expense and Unusual Items were
$158.1 million and $132.6 million for the nine months ended April 30, 1999
and 1998, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $4.0 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 expense relates to capital expenditures
since July 31, 1993.
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 nine month period ended April 30, 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.
18
<PAGE>
INTEREST EXPENSE NET. Interest Expense, Net was $22.3 million and $24.6
million for the nine months ended April 30, 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 and leveraging of
accounts payable and accrued liabilities.
INCOME TAXES. The Income Tax expense for the nine month period ended
April 30, 1999 and 1998 was $43.4 million and $36.8 million, respectively,
reflecting an effective tax rate of 37.5 percent and 37.4 percent,
respectively. As a result of guidelines regarding accounting for income taxes
of companies utilizing fresh-start reporting, the Company has reported
earnings on a fully-taxed basis even though it had not paid any significant
income taxes prior to fiscal 1999. See "Liquidity and Capital Resources" for
information concerning the Company's NOL.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of funding inventory
and receivables growth, capital expenditures primarily for new store growth
and renovations, upgrading its management information systems and debt
service. As of April 30, 1999, the Company had cash and cash equivalents of
$150.1 million, and $5.9 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 and customer receivable levels .
Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust
wholly owned by ZDel and formed to finance customer accounts receivable, has
approximately $380.8 million, net of discount, aggregate principal amount of
Receivables Backed Notes ("Receivables Notes") issued and outstanding at
April 30, 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 before July 15, 1999 as the Company is in the process of entering into a
new transaction to replace the Receivables Securitization Facility. As of
April 30, 1999, all of the $380.8 million of the aggregate principal amount
outstanding under the Receivables Securitization Facility has been classified
as current, as this amount is due within the next twelve months. Previously,
the Company had classified a portion of this amount as non-current, because
the Company could use borrowings under its Revolving Credit Agreement to repay
that portion. However, as of May 1999, the $225.0 million Revolving Credit
Agreement is now a current obligation since it matures within the next twelve
months.
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.
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 April 30, 1999,
no loans were outstanding under the Revolving Credit Agreement. The Revolving
Credit Agreement matures on March 31, 2000. At the Company's election, the
Revolving Credit Agreement provides for a one year extension upon obtaining
appropriate consent. The Company expects to extend or refinance the Revolving
Credit Agreement. 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
19
<PAGE>
stores are expected to solidify the Company's core mall business by further
penetrating markets where the Company is under represented. In the first nine
months of fiscal 1999, the Company opened 38 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 $20
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 $84.4 million in owned merchandise
inventories at April 30, 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 April 30,
1999, the Company had repurchased approximately 1.1 million shares at an
aggregate cost of $30.7 million.
On June 2, 1999, the Company completed the acquisition of substantially
all assets and certain operational liabilities of Peoples Jewellers
Corporation, a privately owned chain of 177 fine jewelry stores operating
throughout Canada. The transaction was made at a purchase price of $115
million Canadian. In addition, the Company retired $20 million Canadian of
bank debt. The Company will fund the total cost from existing cash, and no
additional borrowing will be required. The purchase price will be allocated
to assets acquired and liabilities assumed based on their estimated fair
values, as well as intangible assets acquired. The excess purchase price over
the fair value of assets acquired will be classified as goodwill. The
acquisition will be accounted for under the purchase method.
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. As a result of guidelines regarding accounting
for income taxes of companies utilizing fresh-start reporting, the Company
has reported earnings on a fully-taxed basis even though it had not paid
significant income taxes prior to fiscal 1999. Due to continued growth and
earnings and the restrictions placed on the Company's remaining NOL, the
Company began paying more significant income taxes in fiscal year 1999. The
Company will continue to 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 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 (and anticipated extension or refinancing),
the Receivables Securitization Facility (and the anticipated refinancing of
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 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
20
<PAGE>
worst case scenario, in some business interruption. However, to the extent
possible, the Company has undertaken efforts to ensure that its most critical
vendors and service providers will be able to serve the Company without
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 nearing completion. Non-compliant programs and
systems are being replaced, modified or outsourced, with a target completion
by July 31, 1999. Those critical systems that have been replaced, modified or
outsourced include credit processing, CATS systems, some inventory systems,
distribution center systems, the EDI system, and some financial systems.
Important systems that are in the final stages of testing and certification
include HR systems, Data Audit and remaining inventory systems. All testing
is expected to be substantially complete by July 31, 1999. The period from
August 1, 1999 through December 31, 1999 will be used to respond to issues,
contingencies and/or third party concerns. 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 remediate or replace noncompliant 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 continues to follow-up with those material
vendors who either did not respond or whose response was insufficient. The
Company will likely make site visits to critical vendors' facilities as
appropriate. The Company outsources its MIS processing and credit processing
and inquiry systems. These outsourcers have contractually committed to Year
2000 compliance, and the Company is monitoring their progress in that regard.
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 nine months ended April
30, 1999 internal costs and direct expenditures totaled approximately $3.4
million. The Company has funded and will continue to 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, and expects these costs to be
approximately $.75 million.
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
critical functions within each business location, including the stores, the
General Office, the credit centers and third party service providers. The
Company will continue to refine these plans and make them more comprehensive
as more information becomes available from testing and from third party
suppliers. In addition, the Company's two processing outsourcers also have
contingency plans for the Company's processing should their primary systems
fail.
Additionally, in the normal course of business, the Company has made
capital investments in certain third party software and hardware systems to
address the financial and operational needs of the business. These systems,
which will improve the efficiencies and productivity of the replaced systems,
have also been certified Year 2000 compliant by the vendors and have been or
will be installed by July 31, 1999. To date all of these
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; the extension or refinancing of the Revolving Credit
Agreement; 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 April 30,
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)
/s/ MARK R. LENZ
-------------------------------------------------
Date June 4, 1999 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
APRIL 30, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> APR-30-1999
<CASH> 155,959<F2>
<SECURITIES> 0
<RECEIVABLES> 535,202<F1>
<ALLOWANCES> 0
<INVENTORY> 562,873
<CURRENT-ASSETS> 1,278,391
<PP&E> 178,879<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,560,006
<CURRENT-LIABILITIES> 641,808
<BONDS> 99,572
0
0
<COMMON> 389
<OTHER-SE> 701,321
<TOTAL-LIABILITY-AND-EQUITY> 1,560,006
<SALES> 1,102,874
<TOTAL-REVENUES> 1,102,874
<CGS> 568,635
<TOTAL-COSTS> 376,120
<OTHER-EXPENSES> 20,075
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,302
<INCOME-PRETAX> 115,742
<INCOME-TAX> 43,352
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,390
<EPS-BASIC> 2.01
<EPS-DILUTED> 1.98
<FN>
<F1>THIS ASSET VALUE REPRESENTS A NET AMOUNT.
<F2>AMOUNT INCLUDES CASH AND CASH EQUIVALENTS AND RESTRICTED CASH.
</FN>
</TABLE>
