<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 October 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 001-04129
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 November 5, 1999, 35,251,437 shares of the registrant's common stock were
outstanding.
===============================================================================
<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 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
</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
October 31,
-------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Net Sales $ 322,600 $ 254,186
Cost of Sales 167,002 132,097
----------------- ----------------
Gross Margin 155,598 122,089
Selling, General and Administrative Expenses 129,162 105,286
Depreciation and Amortization Expense 9,979 6,472
----------------- ----------------
Operating Earnings 16,457 10,331
Interest Expense, Net 7,691 6,876
----------------- ----------------
Earnings Before Income Taxes 8,766 3,455
Income Taxes 3,303 1,292
----------------- ----------------
Net Earnings $ 5,463 $ 2,163
================= ================
Earnings Per Common Share:
Basic $ 0.15 $ 0.06
Diluted $ 0.15 $ 0.06
Weighted Average Number of Common Shares
and Common Share Equivalents Outstanding:
Basic 35,734 36,066
Diluted 36,267 36,611
</TABLE>
See Notes to the Consolidated Financial Statements.
3
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
October 31, July 31, October 31,
1999 1999 1998
----------------- ----------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 40,372 $ 35,403 $ 145,161
Restricted Cash 6,488 6,029 5,758
Customer Receivables, Net 504,996 510,714 488,199
Merchandise Inventories 684,362 571,669 585,640
Other Current Assets 39,812 36,827 31,108
----------------- ----------------- ----------------
Total Current Assets 1,276,030 1,160,642 1,255,866
Property and Equipment, Net 211,120 203,841 172,628
Other Assets 103,543 99,654 46,187
Deferred Tax Asset, Net 62,691 62,795 58,803
----------------- ----------------- ----------------
Total Assets $ 1,653,384 $ 1,526,932 $ 1,533,484
================= ================= ================
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Short-term Borrowings $ 395,000 $ 353,000 $ --
Accounts Payable and Accrued Liabilities 343,932 237,392 294,260
Deferred Tax Liability, Net 13,238 13,364 20,800
----------------- ----------------- ----------------
Total Current Liabilities 752,170 603,756 315,060
Non-current Liabilities 70,777 70,892 50,311
Long-term Debt 99,598 99,589 480,294
Excess of Revalued Net Asset Over
Stockholders' Investment, Net 51,609 53,084 57,507
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock --- --- ---
Common Stock 392 392 384
Additional Paid-In Capital 506,070 504,300 482,062
Accumulated Other Comprehensive Income 2,550 376 3,453
Accumulated Earnings 297,735 292,273 213,504
Deferred Compensation (3,927) (5,005) ---
----------------- ----------------- ----------------
802,820 792,336 699,403
Treasury Stock (123,590) (92,725) (69,091)
----------------- ----------------- ----------------
Total Stockholders' Investment 679,230 699,611 630,312
----------------- ----------------- ----------------
Total Liabilities and Stockholders' Investment $ 1,653,384 $ 1,526,932 $ 1,533,484
================= ================= ================
</TABLE>
See Notes to the Consolidated Financial Statements.
4
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
October 31, October 31,
1999 1998
------------------- -------------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,463 $ 2,163
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization expense 11,679 6,784
Utilization of NOL operating losses --- 1,072
Changes in:
Restricted cash (459) 434
Customer receivables, net 5,719 7,269
Merchandise inventories (111,791) (107,173)
Other current assets (2,970) (4,388)
Other assets (4,199) (1,684)
Accounts payable and accrued liabilities 109,026 106,639
Non-current liabilities (115) 121
------------------- -------------------
Net Cash Provided by Operating Activities 12,353 11,237
------------------- -------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (18,106) (19,005)
Dispositions of property and equipment 493 1,446
------------------- -------------------
Net Cash Used in by Investing Activities (17,613) (17,559)
------------------- -------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short term borrowings 100,000 ---
Borrowings under revolving credit agreement 179,650 ---
Payments on revolving credit agreement (237,650) ---
Proceeds from exercise of stock options 601 3,337
Purchase of common stock (32,500) (24,923)
------------------- -------------------
Net Cash Provided by (Used in) Financing Activities 10,101 (21,586)
------------------- -------------------
Effect of Exchange Rate Changes on Cash 128 ---
Net Increase (Decrease) in Cash and Cash Equivalents 4,969 (27,908)
Cash and Cash Equivalents at Beginning of Period 35,403 173,069
------------------- -------------------
Cash and Cash Equivalents at End of Period $ 40,372 $ 145,161
=================== ===================
Supplemental cash flow information:
Interest paid $ 9,545 $ 11,096
Interest received $ 312 $ 2,670
Income taxes paid (net of refunds received) $ 2,025 $ 665
</TABLE>
See Notes to the 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 October 31,
1999, the Company operated 1,345 retail jewelry stores located primarily in
shopping malls throughout the United States, Canada and Puerto Rico. The Company
operates under four brand names: Zales Jewelers-Registered Trademark-, Gordon's
Jewelers-Registered Trademark-, Bailey Banks & Biddle Fine Jewelers-Registered
Trademark-, and Peoples Jewellers-Registered Trademark-. Zales Jewelers provides
traditional, moderately priced jewelry to a broad range of customers. Gordon's
Jewelers offers contemporary merchandise targeted to regional preferences at
somewhat higher price points than Zales Jewelers. Bailey Banks & Biddle Fine
Jewelers operates upscale jewelry stores which are considered among the finest
jewelry stores in their markets. Peoples Jewellers offers traditional moderately
priced jewelry to customers across Canada. Under the Zales Jewelers brand name,
at October 31, 1999, the Company also operated thirty-five Zales Outlet stores
in nineteen states and offered online shopping at www.zales.com.
The accompanying Consolidated Financial Statements are those of the
Company as of and for the three month period ended October 31, 1999. The Company
consolidates substantially all its U.S. 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. The Company
consolidates its Canadian retail operations into Zale International, Inc., which
is a wholly owned subsidiary of Zale Corporation. 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, 1999. The classifications in use at October 31, 1999
have been applied to the financial statements for July 31, 1999 and October 31,
1998.
The results of operations for the three month period ended October 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
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the reporting period. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Outstanding stock options issued
by the Company represent the only dilutive effect reflected in diluted weighted
average shares. There were antidilutive common stock equivalents of 567,500 and
1,284,000 for the three months ended October 31, 1999 and October 31, 1998,
respectively.
6
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
--------------------------------
1999 1998
------------- ------------
(amounts in thousands, except
per share amounts)
<S> <C> <C>
Net earnings available to shareholders $ 5,463 $ 2,163
BASIC:
Weighted average number of common shares outstanding 35,734 36,066
------------- ------------
Earnings per common share - basic $ 0.15 $ 0.06
============= ============
DILUTED:
Weighted average number of common shares outstanding 35,734 36,066
Effect of dilutive stock options 533 545
------------- ------------
Weighted average number of common shares outstanding as adjusted 36,267 36,611
------------- ------------
Earnings per common share - diluted $ 0.15 $ 0.06
============= ============
</TABLE>
ZALE FUNDING TRUST SECURITIZATION
On July 15, 1999, the Company redeemed approximately $380.8 million,
net of discount, aggregate principal amount of Receivables Backed Notes
("Receivables Notes") issued by Zale Funding Trust ("ZFT"), a limited purpose
Delaware business trust wholly owned by ZDel, and formed to finance customer
accounts receivable. The Receivables Notes were redeemed with available cash and
proceeds of advances under the Company's Revolving Credit Agreement and through
the issuance of Variable Funding Notes ("Variable Notes") to a purchaser group
under a new securitization facility in the initial aggregate principal amount of
$250 million. The Variable Notes are part of a 364-day liquidity facility and
are secured by a lien on customer accounts receivable. The Variable Notes
currently bear interest at the market commercial paper rate plus a dealer fee of
0.05 percent. In addition, the Company pays a fee of 0.375 percent per annum on
the funded portion of the facility and a commitment fee of 0.25 percent per
annum on the unfunded portion.
As originally entered into, the facility required the Company to reduce
the outstanding amount of the Variable Notes to $150 million no later than
October 15, 1999. On September 15, 1999, the Company entered into an amendment
to the new securitization facility to reduce the commitment of the original
Variable Note purchaser group to $150 million and to add two new note purchaser
groups having an aggregate commitment of $200 million, thereby increasing the
total outstanding amount under the Variable Notes facility to $350 million on
terms consistent with the original facility. As of October 31, 1999, the entire
$350 million facility is classified as Short-term Borrowings since it matures
within the next twelve months. Additionally the Company used a portion of the
proceeds from the Variable Notes facility to pay off the approximate $100
million balance under the Revolving Credit Agreement. The Company expects to
refinance the Variable Notes on or before their maturity date with a new
transaction or, with the consent of the note purchaser groups, to extend the
maturity of the outstanding Variable Notes.
REVOLVING CREDIT AGREEMENT
In order to support the Company's growth plans, the Company and ZDel
(the "Borrowers") entered into a three year unsecured revolving credit agreement
(the "Revolving Credit Agreement") with a group of banks on March 31, 1997. The
Revolving Credit Agreement provides for revolving credit loans in an aggregate
amount of up to $225 million, including a $30 million sublimit for letters
of credit.
7
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
REVOLVING CREDIT AGREEMENT (CONTINUED)
The revolving credit loans bear interest at floating rates,
currently, at the Borrowers' option of either (i) the Eurodollar Rate plus
0.75 percent or (ii) the higher of the annual rate of interest announced from
time to time by the agent bank as its base rate or the Federal Funds
Effective Rate plus 0.5 percent. The interest rate based on Eurodollar Rates
and letter of credit commission rates can be reduced or increased based on
certain future performance levels attained by the Borrowers. The Company
currently pays a commitment fee of 0.25 percent per annum on the preceding
month's unused Revolving Credit Agreement commitment. The Borrowers may repay
the revolving credit loans at any time without penalty prior to the maturity
date. Subject to certain base levels, the interest rate and commitment fee
may be reduced or increased based on future performance, (e.g., interest rate
and commitment fee would be reduced if the Company obtains an investment
grade rating). The Revolving Credit Agreement may be extended by the
Borrowers for one year upon obtaining appropriate consent. At October 31,
1999, $45 million was outstanding under 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. The Company is currently in discussions with lenders and
expects to enter into a new transaction to replace the Revolving Credit
Agreement on or before the maturity date.
STOCK REPURCHASE PLAN
During September 1999, the Board of Directors approved a stock
repurchase program pursuant to which the Company, from time to time and at
management's discretion, may purchase through fiscal year 2000, up to an
aggregate of $50 million of the Company's common stock on the open market. As of
October 31, 1999, the Company had repurchased 0.8 million shares at an aggregate
cost of $32.5 million under this program.
COMPREHENSIVE INCOME
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 month periods ended October 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
October 31, October 31,
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Net Earnings $ 5,463 $ 2,163
Other Comprehensive Income:
Unrealized gains on investment securities, net (339) 602
Cumulative translation adjustments 2,513 ---
----------- -----------
Total Comprehensive Income $ 7,637 $ 2,765
============ ===========
</TABLE>
8
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
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. Effective August 1, 1999 ZDel declared a $750
million dividend to its Parent, Zale Corporation. In order to fulfill the
obligations of this dividend, ZDel issued a $750 million note payable to its
Parent. The following supplemental financial information sets forth, on an
unconsolidated basis, statements of operations, balance sheet, 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.
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 October 31, 1999
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $ 284,518 $ 38,082 $ --- $ 322,600
Cost of Sales --- 147,685 19,317 --- 167,002
--------- ---------- ----------- ----------- ---------
Gross Margin --- 136,833 18,765 --- 155,598
Selling, General, and Administrative
Expenses 37 125,815 3,310 --- 129,162
Depreciation and Amortization Expense --- 7,311 2,668 --- 9,979
--------- ---------- ----------- ----------- ---------
Operating Earnings (Loss) (37) 3,707 12,787 --- 16,457
Interest Expense, Net (16,875) 19,972 4,594 --- 7,691
--------- ---------- ----------- ----------- ---------
Earnings (Loss) Before Income Taxes 16,838 (16,265) 8,193 --- 8,766
Income Taxes (Benefit) 6,789 (6,559) 3,073 --- 3,303
--------- ---------- ----------- ----------- ---------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries 10,049 (9,706) 5,120 --- 5,463
Equity in Earnings of Subsidiaries (4,586) 5,277 --- (691) ---
--------- ---------- ----------- ----------- ---------
Net Earnings $ 5,463 $ (4,429) $ 5,120 $ (691) $ 5,463
========= ========== =========== =========== =========
</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
Three Months Ended October 31, 1998
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT NON-
COMPANY GUARANTOR GUARANTOR
ONLY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales $ --- $ 249,320 $ 4,866 $ --- $ 254,186
Cost of Sales --- 129,770 2,327 --- 132,097
--------- ---------- ----------- ----------- -----------
Gross Margin --- 119,550 2,539 --- 122,089
Selling, General, and Administrative
Expenses (Income) 38 115,716 (10,468) --- 105,286
Depreciation and Amortization Expense --- 6,122 350 --- 6,472
--------- ---------- ----------- ----------- -----------
Operating Earnings (Loss) (38) (2,288) 12,657 --- 10,331
Interest Expense, Net --- (3,025) 9,901 --- 6,876
--------- ---------- ----------- ----------- -----------
Earnings (Loss) Before Income Taxes (38) 737 2,756 --- 3,455
Income Taxes (Benefit) (14) 275 1,031 --- 1,292
--------- ---------- ----------- ----------- -----------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (24) 462 1,725 --- 2,163
Equity in Loss of Subsidiaries 2,187 1,725 --- (3,912) ---
--------- ---------- ----------- ----------- -----------
Net Earnings $ 2,163 $ 2,187 $ 1,725 $ (3,912) $ 2,163
========= ========== =========== =========== ===========
</TABLE>
11
<PAGE>
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION-- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
October 31, 1999
(unaudited)
(amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ --- $ 17,308 $ 23,064 $ --- $ 40,372
Restricted Cash --- 2,036 4,452 --- 6,488
Customer Receivables, Net --- --- 504,996 --- 504,996
Merchandise Inventories --- 627,716 56,646 --- 684,362
Other Current Assets --- 38,647 1,165 --- 39,812
----------- ----------- ------------- ------------ ------------
Total Current Assets --- 685,707 590,323 --- 1,276,030
Investment in Subsidiaries (82,301) 53,650 --- 28,651 ---
Property and Equipment, Net --- 192,940 18,180 --- 211,120
Intercompany Receivable 860,708 --- 1,816 (862,524) ---
Other Assets --- 8,100 95,443 --- 103,543
Deferred Tax Assets, Net 59 67,341 (4,709) --- 62,691
----------- ----------- ------------- ------------ ------------
Total Assets $ 778,466 $ 1,007,738 $ 701,053 $ (833,873) $ 1,653,384
=========== =========== ============= ============ ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Short-term Borrowings $ --- $ 45,000 $ 350,000 $ --- $ 395,000
Accounts Payable and Accrued
Liabilities 667 313,807 29,458 --- 343,932
Deferred Tax Liability, Net 646 17,954 (5,362) --- 13,238
----------- ----------- ------------- ------------ ------------
Total Current Liabilities 1,313 376,761 374,096 --- 752,170
Non-current Liabilities --- 59,286 11,491 --- 70,777
Intercompany Payable --- 711,737 150,879 (862,616) ---
Long-term Debt 99,598 --- --- --- 99,598
Excess of Revalued Net Assets Over
Stockholders' Investment, Net --- 51,609 --- --- 51,609
Total Stockholders' Investment 677,555 (191,655) 164,587 28,743 679,230
----------- ----------- ------------- ------------ ------------
Total Liabilities and Stockholders'
Investment $ 778,466 $ 1,007,738 $ 701,053 $ (833,873) $ 1,653,384
=========== =========== ============= ============ ===========
</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
July 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 $ --- $ 22,294 $ 13,109 $ $ 35,403
Restricted Cash --- 1,533 4,496 --- 6,029
Customer Receivables, Net --- --- 510,714 --- 510,714
Merchandise Inventories --- 524,184 47,485 --- 571,669
Other Current Assets --- 33,869 2,958 --- 36,827
------------- ------------- --------------- --------------- --------------
Total Current Assets --- 581,880 578,762 --- 1,160,642
Investment in Subsidiaries 698,197 47,880 --- (746,077) ---
Property and Equipment, Net --- 183,789 20,052 --- 203,841
Intercompany Receivable 102,768 151,287 --- (254,055) ---
Other Assets --- 8,393 91,261 --- 99,654
Deferred Tax Assets, Net 58 67,335 (4,598) --- 62,795
------------- ------------- --------------- --------------- --------------
Total Assets $ 801,023 $ 1,040,564 $ 685,477 $ (1,000,132) $ 1,526,932
============= ============= =============== =============== ==============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Short-term Borrowings $ --- $ 103,000 $ 250,000 $ --- $ 353,000
Accounts Payable and Accrued
Liabilities 2,784 216,101 18,507 --- 237,392
Deferred Tax Liability, Net 646 17,954 (5,236) --- 13,364
------------- ------------- --------------- --------------- --------------
Total Current Liabilities 3,430 337,055 263,271 --- 603,756
Non-current Liabilities --- 59,294 11,598 --- 70,892
Intercompany Payable --- --- 254,055 (254,055) ---
Long-term Debt 99,589 --- --- --- 99,589
Excess of Revalued Net Assets Over
Stockholders' Investment, Net --- 53,084 --- --- 53,084
Total Stockholders' Investment 698,004 591,131 156,553 (746,077) 699,611
============= ============= =============== =============== ==============
Total Liabilities and Stockholders'
Investment $ 801,023 $ 1,040,564 $ 685,477 $ (1,000,132) $ 1,526,932
============= ============= =============== =============== ==============
</TABLE>
13
<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
Three Months Ended October 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 $ 31,899 $ 70,279 $ (89,461) $ (364) $ 12,353
Net Cash Flows from Investing Activities:
Additions to property and equipment --- (17,743) (363) --- (18,106)
Dispositions of property and equipment --- 478 15 --- 493
--------- ------------ --------------- -------------- --------------
Net Cash Used in Investing Activities --- (17,265) (348) --- (17,613)
--------- ------------ --------------- -------------- --------------
Net Cash Flows from Financing Activities:
Net increase in short term borrowings --- --- 100,000 --- 100,000
Borrowings under revolving credit agreement --- 179,650 --- --- 179,650
Payments on revolving credit agreement --- (237,650) --- --- (237,650)
Proceeds from exercise of stock options 601 --- --- --- 601
Purchase of common stock (32,500) --- --- --- (32,500)
Dividends paid --- --- (364) 364 ---
--------- ------------ --------------- -------------- --------------
Net Cash Provided by (Used in) Financing
Activities (31,899) (58,000) 99,636 364 10,101
--------- ------------ --------------- -------------- --------------
Effect of Exchange Rate Changes on Cash --- --- 128 --- 128
Net (Decrease) Increase in Cash and Cash
Equivalents --- (4,986) 9,955 --- 4,969
Cash and Cash Equivalents at Beginning of
Period --- 22,294 13,109 --- 35,403
--------- ------------ --------------- -------------- --------------
Cash and Cash Equivalents at End of Period $ --- $ 17,308 $ 23,064 $ --- $ 40,372
========= ============ =============== ============== ==============
</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
Three Months Ended October 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 $ 21,586 $ (11,247) $ 2,444 $ (1,546) $ 11,237
Net Cash Flows from Investing Activities:
Additions to property and equipment --- (18,634) (371) --- (19,005)
Dispositions of property and equipment --- 1,446 --- --- 1,446
--------- ------------ --------------- ------------- -------------
Net Cash Used in Investing Activities --- (17,188) (371) --- (17,559)
--------- ------------ --------------- ------------- -------------
Net Cash Flows from Financing Activities:
Proceeds from exercise of stock options and
warrants 3,337 --- --- --- 3,337
Purchase of common stock (24,923) --- --- --- (24,923)
Dividends paid --- --- (1,546) 1,546 ---
--------- ------------ -------------- ------------- -------------
Net Cash Used in Financing Activities (21,586) --- (1,546) 1,546 (21,586)
--------- ------------ -------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash
Equivalents --- (28,435) 527 --- (27,908)
Cash and Cash Equivalents at Beginning of
Period --- 165,248 7,821 --- 173,069
--------- ------------ -------------- ------------- -------------
Cash and Cash Equivalents at End of Period $ --- $ 136,813 $ 8,348 $ --- $ 145,161
========= ============ ============== ============= =============
</TABLE>
15
<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
October 31,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
Net Sales 100% 100%
Cost of Sales 51.8 52.0
----------- ----------
Gross Margin 48.2 48.0
Selling, General and Administrative Expenses 40.0 41.4
Depreciation and Amortization Expense 3.1 2.5
----------- ----------
Operating Earnings 5.1 4.1
Interest Expense, Net 2.4 2.7
----------- ----------
Earnings Before Income Taxes 2.7 1.4
Income Taxes 1.0 0.5
=========== ==========
Net Earnings 1.7 0.9
=========== ==========
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THREE MONTHS ENDED
OCTOBER 31, 1998
NET SALES. Net Sales for the three months ended October 31, 1999
increased by $68.4 million to $322.6 million, a 26.9 percent increase compared
to the previous year. The Net Sales increase primarily resulted from a 10.1
percent increase in sales from stores open for comparable periods, new stores
added during the last twelve months and sales from Peoples Jewellers, which was
acquired during May 1999. The Company believes that the comparable sales growth
continues to be influenced by the execution of its merchandising, marketing and
store operations strategies.
GROSS MARGIN. Gross Margin as a percentage of net sales increased by
0.2 percent for the three month period ending October 31, 1999, compared to the
same period last year. This increase was principally due to more efficient
purchasing, resulting in lower markdowns. There was no LIFO provision required
for the three months ended October 31,1999. The LIFO provision was $ 0.7 million
for the three months ended October 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 1.4 percent as a percentage of net sales.
Store expenses as a percentage of sales decreased by 1.9 percent principally due
to productivity improvements relating to the lowering of payroll and occupancy
costs as a percentage of sales. This decrease in expense was partially offset by
Peoples Jewellers, which has slightly higher store expense rates due to lower
average sales volume per store. The selling, general, and administrative expense
reduction demonstrates the Company's ability to leverage its fixed store and
corporate operating expenses while increasing sales in stores.
EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION AND AMORTIZATION
EXPENSE. As a result of the factors discussed above, Earnings Before Interest,
Taxes and Depreciation and Amortization Expense were $26.4 million and $16.8
million for the three months ended October 31, 1999 and 1998, respectively, an
increase of 57.3 percent.
16
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $3.5 million, primarily as a result of depreciation and
amortization from Peoples Jewellers and 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 $6.9
million for the three months ended October 31, 1999 and 1998, respectively. The
increase of $0.8 million is principally a result of lower interest income from
investments due to cash requirements for the acquisition of Peoples Jewellers
and the reduction of borrowings in conjunction with the refinancing of Zale
Funding Trust Securitization.
INCOME TAXES. The income tax provision for the three month periods
ended October 31, 1999 and 1998 was $3.3 million and $1.3 million, respectively,
reflecting an effective tax rate of 37.7 percent and 37.4 percent, respectively.
The Company will realize a cash benefit from utilization of tax net operating
loss carryforward ("NOL") (after limitations) against current and future tax
liabilities. As of July 31, 1999, the Company had a remaining NOL (after
limitations) of approximately $181 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 October 31, 1999, the Company had cash and cash equivalents of
$40.4 million, and $6.5 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 40 percent
of the Company's annual sales were made during the three months ended January
31, 1999 and 1998, 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.
FINANCE ARRANGEMENTS
- - On July 15, 1999, the Company redeemed approximately $380.8 million, net of
discount, aggregate principal amount of Receivables Backed Notes
("Receivables Notes") issued by Zale Funding Trust ("ZFT"), a limited purpose
Delaware business trust wholly owned by Zale Delaware, Inc. ("ZDel"), and
formed to finance customer accounts receivable. The Receivables Notes were
redeemed with available cash and proceeds of advances under the Company's
Revolving Credit Agreement and through the issuance of Variable Funding Notes
("Variable Notes") to a purchaser group under a new securitization facility
in the initial aggregate principal amount of $250 million. The Variable Notes
are part of a 364-day liquidity facility and are secured by a lien on
customer accounts receivable. The Variable Notes currently bear interest at
the market commercial paper rate plus a dealer fee of 0.05 percent. In
addition, the Company pays a fee of 0.375 percent per annum on the funded
portion of the facility and a commitment fee of 0.25 percent per annum on the
unfunded portion.
As originally entered into, the facility required the Company to
reduce the outstanding amount of the Variable Notes to $150 million no later
than October 15, 1999. On September 15, 1999, the Company entered into an
amendment to the new securitization facility to reduce the commitment of the
original Variable Note purchaser group to $150 million and to add two new
note purchaser groups having an aggregate commitment of $200 million, thereby
increasing the total outstanding amount under the Variable Notes facility to
$350 million on terms consistent with the original facility. As of October
31, 1999, the entire $350 million facility is classified as Short-term
Borrowings since it matures within the next twelve months. Additionally the
Company used a portion of the proceeds from the Variable Notes facility to
pay off the approximate $100 million balance under the Revolving Credit
Agreement. The Company expects to refinance the Variable Notes on or before
their maturity date with a new transaction or, with the consent of the note
purchaser groups, to extend the maturity of the outstanding Variable Notes.
17
<PAGE>
- - In order to support the Company's growth plans, the Company and ZDel (the
"Borrowers") entered into a three year unsecured revolving credit agreement
(the "Revolving Credit Agreement") with a group of banks on March 31, 1997.
The Revolving Credit Agreement provides for revolving credit loans in an
aggregate amount of up to $225 million, including a $30 million sublimit
for letters of credit.
The revolving credit loans bear interest at floating rates,
currently, at the Borrowers' option of either (i) the Eurodollar Rate plus
0.75 percent or (ii) the higher of the annual rate of interest announced from
time to time by the agent bank as its base rate or the Federal Funds
Effective Rate plus 0.5 percent. The interest rate based on Eurodollar Rates
and letter of credit commission rates can be reduced or increased based on
certain future performance levels attained by the Borrowers. The Company
currently pays a commitment fee of 0.25 percent per annum on the preceding
month's unused Revolving Credit Agreement commitment. The Borrowers may repay
the revolving credit loans at any time without penalty prior to the maturity
date. Subject to certain base levels, the interest rate and commitment fee
may be reduced or increased based on future performance, (e.g., interest rate
and commitment fee would be reduced if the Company obtains an investment
grade rating). The Revolving Credit Agreement may be extended by the
Borrowers for one year upon obtaining appropriate consent. At October 31,
1999, $45 million was outstanding under 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. The Company is currently in discussions with lenders and
expects to enter into a new transaction to replace the Revolving Credit
Agreement on or before the maturity date.
- - In order to support the Company's longer term capital financing
requirements, the Company issued $100 million of Senior Notes (the "Senior
Notes") on September 23, 1997. These notes bear interest at 8 1/2 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 and for general
corporate purposes. The indenture relating to the Senior Notes contains
certain restrictive covenants including but not limited to limitations on
indebtedness, limitations on dividends and other restricted payments
(including repurchases of the Company's common stock), limitations on
transactions with affiliates, limitations on liens and limitations on
disposition of proceeds of asset sales, among others.
CAPITAL GROWTH
- - Under its continued growth strategy, the Company plans to open
approximately 165 new stores for which it will incur approximately $40
million in capital expenditures during the combined fiscal years 2000 and
2001. These stores are expected to solidify the Company's core mall business
by further penetrating markets where the Company is underrepresented. During
the combined fiscal years 2000 and 2001, the Company anticipates spending
approximately $45 million to remodel, relocate or refurbish approximately 200
additional stores. The Company also estimates it will make capital
expenditures during the combined fiscal years 2000 and 2001 of approximately
$26 million for enhancements to its management information systems and
approximately $24 million for store visual presentation and other corporate
needs. In total, the Company anticipates spending approximately $135 million
on capital expenditures during the combined fiscal years 2000 and 2001. The
Revolving Credit Agreement limits the Company's capital expenditures to $75
million for fiscal year 2000.
OTHER ACTIVITIES AFFECTING LIQUIDITY
- - During September 1999, the Board of Director's 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 million of
the Company's common stock on the open market through fiscal year 2000. As of
October 31, 1999, the Company had repurchased 0.8 million shares at an
aggregate cost of $32.5 million under this program.
- - 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 Company expects to realize a cash benefit from
NOL utilization of approximately $9 million for fiscal 2000. As of July 31,
1999, the Company had a NOL (after limitations) of approximately $181
million, which represents up to $72 million in future tax benefits. The
utilization of this asset is subject to limitations. The most restrictive is
the Internal Revenue Code Section 382 annual limitation. The NOL can be
utilized through 2008.
18
<PAGE>
Management believes that operating cash flow, amounts available
under the Revolving Credit Agreement, the extension or replacement of the
Revolving Credit Agreement, the Variable Notes and a refinancing of the
Variable Notes (or an extension of the maturity of the outstanding Variable
Notes) should be sufficient to fund the Company's current operations, debt
service and currently anticipated capital expenditure requirements for the
foreseeable future.
YEAR 2000
The Company's management has recognized the need to ensure, to the
extent possible, 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 required modification in order to render these
systems Year 2000 compliant. The Company recognized 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 accomplishment of 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. However, to the extent possible, the Company has
undertaken 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 has used 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. In 1997 the Company
launched a formal project using an industry standard process to address the
Year 2000 problem. The process involved seven steps: 1) create awareness, 2)
assess/inventory, 3) devise strategy/action plan, 4)
replace/modify/outsource, 5) test/certify, 6) install and 7) provide post
implementation support. The specialized software programs and hardware used
throughout the corporation are now in the seventh phase of the process and
will remain there until after the transition to Calendar Year 2000.
Non-compliant programs and systems have been replaced, modified or
outsourced, including credit processing, Store POS systems, inventory
systems, distribution center systems, the EDI system, financial systems, HR
systems, and Data Audit. The period from August 1, 1999 through December 31,
1999 is being used to perform additional testing, address exceptions and
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 has remediated or replaced noncompliant systems.
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 and is not aware, after investigation, of
significant issues with any material vendors. It continues to communicate
with material vendors on these issues to ensure there are no material
changes. The Company has made 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 will continue to monitor their status in
that regard. The Company's primary delivery service has provided assurance
that its systems will function correctly through the date change. 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.
19
<PAGE>
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, were expended in fiscal year 1999. 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. For fiscal year 2000, which began August 1, 1999, the
Company expects these costs to be approximately $0.75 million.
The Company has had each of its departments develop basic
contingency plans to restore material functions 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, test them as possible, 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 in the United States 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 either the vendor or the
Company. To date all of these 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.
Prior to the acquisition of its assets by the Company, Peoples had
launched a Year 2000 compliance initiative that included replacement of its
core merchandising, accounting and distribution systems, inspection and
upgrades of POS devices, and validation of the Year 2000 compliance of its
vendors, suppliers and service providers. That initiative has been continued
by Zale, and its review indicates that Peoples will meet its Year 2000 goals
in a timely manner. The fourth calendar quarter is being spent preparing
contingency plans. Management does not expect any Year 2000 issues within
Peoples to be material to the Company.
Although there can be no assurance that unanticipated events will
not occur, or that the Company has identified all Year 2000 issues, it is
management's belief that the Company has taken and continues to take 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.
20
<PAGE>
This Management's Discussion and Analysis contains forward-looking
statements, including statements regarding, among other items, (i) the
Company's implementation of its merchandising strategies, (ii) the extension
or replacement of the Revolving Credit Agreement, (iii) a refinancing of the
Variable Notes on or before their maturity date with a new transaction or,
with the consent of the note purchaser groups, an extension of the maturity
of the outstanding Variable Notes, (iv) expected capital expenditures to be
made in the future, (v) expected significant upgrades to the Company's
management information systems over the next several years, (vi) the addition
of new locations through new store openings, (vii) the renovation and
remodeling of the Company's existing store locations, (viii) the Company's
efforts to reduce costs, (ix) the adequacy of the Company's sources of cash
to finance its current and future operations, (x) the terms of renewal of the
Company's store leases, (xi) resolution of litigation without material
adverse effect on the Company and (xii) the expected impact of the "Year
2000" issue. This notice is intended to take advantage of the "safe harbor"
provided by the Private Securities Litigation Reform Act of 1995 with respect
to such forward-looking statements. These forward-looking statements involve
a number of risks and uncertainties. Among others, factors that could cause
actual results to differ materially are the following: development of trends
in the general economy; competition in the fragmented retail jewelry
business; the variability of quarterly results and seasonality of the retail
business; the ability to improve productivity in existing stores and to
increase comparable store sales; the ability of the Company to refinance or
extend the Revolving Credit Agreement and Variable Notes on terms acceptable
to the Company; the availability of alternate sources of merchandise supply
during the three month period leading up to the Christmas season; the
dependence on key personnel who have been hired or retained by the Company;
the changes in regulatory requirements which are applicable to the Company's
business; unanticipated problems associated with the "Year 2000" issue;
management's decisions to pursue new distribution channels and strategies
which may involve additional costs; and the risk factors listed herein and
from time to time in the Company's Securities and Exchange Commission
reports, including but not limited to, its Annual Reports on Form 10-K for
year ended July 31, 1999.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of October
31, 1999 has not materially changed since July 31, 1999. The market risk
profile on July 31, 1999 is disclosed in the Company's Annual Report on Form
10-K for the year ended July 31, 1999.
21
<PAGE>
PART II. - OTHER INFORMATION:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On November 5, 1999, the Annual Meeting of Stockholders of the Company
was held at the University Club at the Galleria - Dallas, Texas. There
were 35,984,508 shares of common stock outstanding on the record date
and entitled to vote at the Annual Meeting.
(b) The following directors were elected:
<TABLE>
<CAPTION>
Name of Nominee Votes For Votes Withheld
----------------------------- ---------------------- ----------------------
<S> <C> <C>
Robert J. DiNicola 32,210,743 77,136
Beryl B. Raff 32,208,665 79,214
Glen Adams 32,210,844 77,035
Peter P. Copses 32,210,537 77,342
A. David Brown 32,207,940 79,939
Richard C. Marcus 32,210,625 77,254
Charles H. Pistor 32,198,876 89,003
Andrew H. Tisch 32,206,587 81,292
</TABLE>
(c) The appointment of Arthur Andersen LLP as Independent Public Accountants for
the fiscal year ending July 31, 1999 was ratified with 32,245,087 votes for,
10,867 votes against and 31,925 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Part I Exhibits-
27 Financial data schedule.
Part II Exhibits-
10.1 First Amendment to Class A Note Purchase Agreement, dated as
of September 15, 1999, among Zale Funding Trust (Issuer), Zale
Delaware, Inc. (Seller), Jewelers National Bank (Servicer),
The Class A Purchasers Parties Thereto, Credit Suisse First
Boston, New York Branch (Administrative Agent and Agent) and
Other Agents Parties Thereto. (1)
*10.10 September 7, 1999 Amendment to Employment Agreement, dated
August 1, 1998, between Zale Corporation and Beryl B. Raff.
(1)
*10.11 September 15, 1999 Amendment to Employment Agreement, dated
August 1, 1998, between Zale Corporation and Alan P. Shor. (1)
- --------------
(1) Filed herewith.
* Management Contracts and Compensatory Plans.
(b) Form 8-K
The Company filed two reports on Form 8-K (File No. 001-04129) dated
September 7, 1999 each enclosing a press release dated September 7,
1999.
22
<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 December 3, 1999 /s/ MARK R. LENZ
------------------ ------------------------------------------------
Mark R. Lenz
Senior Vice-President, Controller
(principal accounting officer of the registrant)
23
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
- --------------
10.1 First Amendment to Class A Note Purchase Agreement, dated as
of September 15, 1999, among Zale Funding Trust (Issuer), Zale
Delaware, Inc. (Seller), Jewelers National Bank (Servicer),
The Class A Purchasers Parties Thereto, Credit Suisse First
Boston, New York Branch (Administrative Agent and Agent) and
Other Agents Parties Thereto.
10.10 September 7, 1999 Amendment to Employment Agreement, dated
August 1, 1998, between Zale Corporation and Beryl B. Raff.
10.11 September 15, 1999 Amendment to Employment Agreement, dated
August 1, 1998, between Zale Corporation and Alan P. Shor.
27 Financial data schedule.
<PAGE>
FIRST AMENDMENT TO
CLASS A NOTE PURCHASE AGREEMENT
FIRST AMENDMENT, dated as of September 15, 1999 (this "AMENDMENT"), to
the CLASS A NOTE PURCHASE AGREEMENT, dated as of July 15, 1999, as heretofor
supplemented (the "ORIGINAL NOTE PURCHASE AGREEMENT" and, as amended by this
Amendment and as hereafter amended, supplemented or otherwise modified from time
to time, the "NOTE PURCHASE AGREEMENT"), by and among ZALE FUNDING TRUST, a
Delaware business trust (together with its successors and assigns, the
"ISSUER"), ZALE DELAWARE, INC., a Delaware corporation ("Z DEL"), individually
and as Seller, JEWELERS NATIONAL BANK, a national banking association ("JNB"),
as Servicer, the entities which from time to time are parties thereto as CLASS A
PURCHASERS (the "CLASS A PURCHASERS"), the AGENTS for the Purchaser Groups (as
defined in the Original Note Purchase Agreement) from time to time parties
thereto (each such party, together with their respective successors in such
capacity, an "AGENT"), and CREDIT SUISSE FIRST BOSTON, a Swiss banking
corporation acting through its New York Branch, as administrative agent for the
Class A Purchasers (together with its successors in such capacity, the
"ADMINISTRATIVE AGENT"). Terms used in this Amendment without definition are
used as defined in or for purposes of the Original Note Purchase Agreement.
RECITALS
A. Pursuant to the Original Note Purchase Agreement and
subject to the terms, conditions and limitations set forth or referred to
therein, the initial Class A Purchasers purchased the Class A Notes on the
Closing Date and agreed (on a committed or noncommitted basis, as applicable)
from time to time thereafter to purchase Class A Note Principal Balance
Increases.
B. By Transfer Supplements effective immediately prior to the
effectiveness of this Amendment, the Class A Purchasers in the Initial Purchaser
Group have assigned a portion of their respective interests in the Class A Note
Principal Balance, the Maximum Purchase Amount of the CP Conduit in such
Purchaser Group and the Commitment of the Liquidity Purchaser in such Purchaser
Group to members of a second Purchaser Group.
C. The Issuer and Z Del have requested certain modifications
to the Original Note Purchase Agreement, including an increase in the Total
Commitment thereunder and the addition of a third Purchaser Group.
D. Upon the terms and conditions contained in this Amendment,
the parties hereto are willing to agree to such modifications.
AGREEMENTS
In consideration of the premises and of the agreements herein
contained, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby agree as
follows:
<PAGE>
SECTION 1. MODIFICATIONS TO ORIGINAL NOTE PURCHASE AGREEMENT.
(a) Subsection 2.3 (b) of the Original Note Purchase Agreement is hereby
amended and restated to read as follows:
"(b) If and to the extent that, and only for so long
as, a CP Conduit at any time determines in its sole discretion for any
reason whatsoever that it is unable to raise or is precluded or
prohibited from raising, or that it is not advisable to raise, funds
through the issuance of Commercial Paper Notes in the commercial paper
market of the United States to finance its purchase or maintenance of
its Percentage Interest of the Covered Portion of the Class A Principal
Balance or any portion thereof (which determination may be based on any
allocation method employed in good faith by such CP Conduit),
including, without limitation, by reason of market conditions or by
reason of insufficient availability under any of its Support Facilities
or the downgrading of any of its Support Parties, upon notice from such
CP Conduit to the Agent for its Purchaser Group and the Issuer, such
portion of such CP Conduit's Percentage Interest of the Class A
Principal Balance shall bear interest at a rate per annum equal to the
sum of the Alternative Rate plus the applicable Class A Program
Utilization Fee Rate, rather than as otherwise determined pursuant to
subsection 2.3(a) of this Agreement."
(b) The parties hereto acknowledge and agree that, for
purposes of Series 1999-A, the words "adjusted note principal amount," as such
words are used in the definition of "Aggregate Adjusted Note Principal Amount"
in Annex I to the Indenture and the Purchase and Servicing Agreement, are
intended to mean the aggregate unpaid principal balance of the Series 1999-A
Notes (without any reduction thereof by reason of Class A Charge-Offs, Class B
Charge-Offs or reductions in the Class B Invested Amount in respect of
Reallocated Class B Principal Collections).
(c) The parties hereto acknowledge that, through Transfer
Supplements effective immediately prior to this Amendment, Falcon Asset
Securitization Corporation, a Delaware corporation ("Falcon"), became a party to
the Note Purchase Agreement as a CP Conduit and Bank One, N.A. ("Bank One"),
became a party to the Note Purchase Agreement as a Liquidity Purchaser for
Falcon, together constituting a second Purchaser Group (the "Falcon Purchaser
Group"). The Maximum Purchase Amount for Falcon and the Commitment for Bank One
are each hereby amended to be $150,000,000, Bank One's Liquidity Percentage
shall remain 100%, and Bank One is hereby appointed as Agent for the Falcon
Purchaser Group. For purposes of the Note Purchase Agreement, Falcon shall be a
"CP Purchaser" and Bank One shall be a "Liquidity Purchaser" and an "Agent."
(d) EagleFunding Capital Corporation, a Delaware corporation
("EagleFunding"), as a CP Conduit, and BankBoston, N.A. ("BankBoston"), as a
Liquidity Purchaser for EagleFunding, are hereby joining the Note Purchase
Agreement as a third Purchaser Group (the "EagleFunding Purchaser Group"),
having a Maximum Purchase Amount and a Commitment, respectively, equal to
$50,000,000 and with BankBoston having a Liquidity Percentage of 100%.
BancBoston Robertson Stephens, Inc. is hereby appointed as Agent for the
EagleFunding Purchaser Group. For purposes of the Note Purchase Agreement,
EagleFunding shall be a "CP Purchaser;" BankBoston shall be a "Liquidity
Purchaser" and BancBoston Robertson Stephens, Inc. shall be an "Agent."
-2-
<PAGE>
(e) After giving effect to said Transfer Supplements and to
the changes set forth in paragraphs (c) and (d) above, the respective Maximum
Purchaser Amounts, Commitments, Purchaser Percentages, Liquidity Percentages,
addresses for notices, requests or demands (for purposes of subsection 9.2(a) of
the Note Purchase Agreement), addresses for payments (for purposes of subsection
9.2(b) of the Note Purchase Agreement) and Investing Offices of the Class A
Purchasers (in each case subject to modification from time to time as provided
in the Note Purchase Agreement) are as set forth on Schedule I to this
Amendment.
SECTION 2. MISCELLANEOUS. (a) This Amendment shall become effective as
of the opening of business on September 15, 1999.
(b) Each of Z Del, JNB and the Issuer hereby severally
represents and warrants to the Class A Purchasers, the Agents and the
Administrative Agent that
(i) no Termination Event, or any event that, after
the giving of notice or the lapse of time, would constitute a
Termination Event, has occurred and is continuing as of the date
hereof;
(ii) all of its respective representations and
warranties (individually or in any other capacity) contained in the
Note Purchase Agreement or otherwise made in writing pursuant to any of
the provisions thereof are true and correct in all material respects as
of the date hereof with the same force and effect as though such
representations and warranties had been made on and as of such date
(unless such representations and warranties specifically relate to an
earlier date);
(iii) it has the power and authority to execute,
deliver and perform this Amendment and the Note Purchase Agreement and
all the transactions contemplated hereby and thereby and has taken all
necessary action to authorize the execution, delivery and performance
of this Amendment and the Note Purchase Agreement;
(iv) when executed and delivered by each other party
hereto, this Amendment and the Note Purchase Agreement will constitute
its legal, valid and binding agreement, enforceable in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium and other laws of
general applicability relating to or affecting creditors' rights
generally and the rights of creditors from time to time in effect and
except that enforceability of its obligations hereunder and thereunder
is also subject to general principles of equity, regardless of whether
such enforceability is considered in a proceeding in equity or at law,
and indemnification sought in respect of securities laws violations may
be limited by public policy;
(v) no consent, license, approval or authorization
of, or registration with, any governmental authority, bureau or agency
is required to be obtained by it in connection with its execution,
delivery or performance of this Amendment or the Note Purchase
Agreement that has not been duly obtained and is in full force and
effect on the date hereof, except such that may be required by the blue
sky laws of any state and except those which the failure to obtain,
individually or in the aggregate, would not have a
-3-
<PAGE>
material adverse effect on it or on the transactions contemplated by,
or its ability to perform its respective obligations under, this
Amendment, the Note Purchase Agreement or the Related Documents; and
(vi) its execution, delivery and performance of each
of this Amendment and the Note Purchase Agreement do not violate any
provision of any existing law or regulation applicable to it, any order
or decree of any court to which it is subject, its charter or by-laws
or any mortgage, indenture, contract or other agreement to which it is
a party or by which it or any significant portion of its properties is
bound (other than violations of such laws, regulations, orders,
decrees, mortgages, indentures, contracts and other agreements which do
not affect the legality, validity or enforceability of any of such
agreements or the Receivables and which, individually or in the
aggregate, would not have a material adverse effect on it or on the
transactions contemplated by, or its ability to perform its respective
obligations under, this Amendment, the Note Purchase Agreement or the
Related Documents).
(c) Each of Falcon, Bank One, EagleFunding and BankBoston
hereby severally (with respect to itself only) (i) makes the representations and
warranties to, and agreements with, the Issuer, set forth in Section 4.4 of the
Note Purchase Agreement, and (ii) agrees to be bound by the provisions of the
Note Purchase Agreement as a Class A Purchaser and, as applicable, as a CP
Conduit or a Liquidity Purchaser. Each of Bank One and BancBoston Robertson
Stephens, Inc. hereby severally (with respect to itself only) agrees to be bound
by the provisions of the Note Purchase Agreement as an Agent.
(d) The Administrative hereby confirms that it has not imposed
any conditions on the increase in the Total Commitment herein provided pursuant
to clause (C) of the proviso to subsection 2.2(f) of the Note Purchase
Agreement.
(e) Except as expressly amended hereby, all of the
representations, warranties, terms, covenants and conditions of the Original
Note Purchase Agreement shall remain unamended and shall continue to be, and
shall remain, in full force and effect in accordance with their respective
terms, and except as expressly provided herein, this Amendment shall not
constitute or be deemed to be a waiver of or compliance with or a consent to
noncompliance with any term or condition of the Note Purchase Agreement or any
Related Document. All references to the Note Purchase Agreement in any Related
Document shall be deemed to mean the Original Note Purchase Agreement, as
amended by this Amendment and as it may be further amended, supplemented,
extended, modified or restated from time to time in accordance with its terms.
This Amendment shall not constitute a novation of the Note Purchase Agreement,
but shall constitute an amendment thereof. The parties hereto agree to be bound
by the terms and conditions of the Original Note Purchase Agreement, as amended
by this Amendment, as though the terms and conditions of the Note Purchase
Agreement were set forth herein.
(d) All representations and warranties made hereunder and in
any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Amendment.
-4-
<PAGE>
(e) This Amendment may be amended, supplemented or otherwise
modified only as provided in Section 9.1 of the Note Purchase Agreement.
(f) This Amendment may be executed by one or more of the
parties to this Amendment on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
(g) Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provisions in any
other jurisdiction.
(h) THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ITS
CONFLICTS OF LAW PROVISIONS.
(i) The provisions of Sections 9.10 (Jurisdiction; Consent to
Service of Process), 9.12 (Limited Recourse; No Proceedings), and 9.14 (Waiver
of Jury Trial) of the Original Note Purchase Agreement are applicable to this
Amendment and to the Note Purchase Agreement as though set forth herein in their
entireties.
[signature pages follow]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
ZALE FUNDING TRUST
By: Wilmington Trust Company, not in
its individual capacity but solely as
Owner Trustee under the Amended and
Restated Trust Agreement dated as of
July 15, 1999
By: /s/ JAMES P. LAWLER
---------------------------------------
Name: JAMES P. LAWLER
Title: Vice President
ZALE DELAWARE, INC., individually and as
Seller
By: /s/ STEPHEN C. MASSANELLI
---------------------------------------
Name: STEPHEN C. MASSANELLI
Title: Senior Vice President-
Treasurer
JEWELERS NATIONAL BANK, as Servicer
By: /s/ SUE E. GOVE
---------------------------------------
Name: SUE E. GOVE
Title: Vice President
CREDIT SUISSE FIRST BOSTON,
NEW YORK BRANCH, as Administrative Agent
By: /s/ THOMAS MEIER
---------------------------------------
Name: THOMAS MEIER
Title: Vice President
By: /s/ ELIZABETH A. WHALEN
---------------------------------------
Name: ELIZABETH A. WHALEN
Title: Associate
-6-
<PAGE>
CLASS A PURCHASERS
GRAMERCY PURCHASER GROUP:
GRAMERCY CAPITAL CORPORATION,
as a CP Conduit
By Credit Suisse First Boston, New York
Branch, its Attorney-in-Fact
By: /s/ MARY E. CONNERS
---------------------------------------
Name: MARY E. CONNERS
Title: Vice President
By: /s/ AIMEE SEVILLA
---------------------------------------
Name: AIMEE SEVILLA
Title: Associate
CREDIT SUISSE FIRST BOSTON,
NEW YORK BRANCH, as a
Liquidity Purchaser and
as Agent for the Gramercy
Purchaser Group
By: /s/ THOMAS MEIER
---------------------------------------
Name: THOMAS MEIER
Title: Vice President
By: /s/ ELIZABETH A. WHALEN
---------------------------------------
Name: ELIZABETH A. WHALEN
Title: Associate
-7-
<PAGE>
FALCON PURCHASER GROUP:
FALCON ASSET SECURITIZATION
CORPORATION, as a CP Conduit
By: /s/ ELIZABETH CHUNG
---------------------------------------
Name: ELIZABETH CHUNG
Title: Authorized [ILLEGIBLE]
BANK ONE, N.A., as a Liquidity Purchaser
and as Agent for the Falcon Purchaser
Group
By: /s/ ELIZABETH CHUNG
---------------------------------------
Name: ELIZABETH CHUNG
Title: Vice President
EAGLEFUNDING PURCHASER GROUP:
EAGLEFUNDING CAPITAL CORPORATION,
as a CP Conduit
By BancBoston Robertson Stephens, Inc,
its Attorney-in-Fact
By: /s/ DAWN DRUYOR
---------------------------------------
Name: DAWN DRUYOR
Title: Vice President
-8-
<PAGE>
BANKBOSTON, N.A., as a Liquidity Purchaser
for the EagleFunding Purchaser Group
By: /s/ DAWN DRUYOR
---------------------------------------
Name: DAWN DRUYOR
Title: Vice President
BANCBOSTON ROBERTSON STEPHENS, INC.,
as Agent for the EagleFunding Purchaser
Group
By: /s/ DAWN DRUYOR
---------------------------------------
Name: DAWN DRUYOR
Title: Vice President
The provisions of subsection 1(b)
above are hereby acknowledged:
THE BANK OF NEW YORK
as Indenture Trustee
By: /s/ ERWIN SORIANO
--------------------------------
Name: ERWIN SORIANO
Title: Assistant Treasurer
-9-
<PAGE>
SCHEDULE I TO
FIRST AMENDMENT TO
CLASS A NOTE PURCHASE AGREEMENT
DESCRIPTION OF PURCHASER GROUPS
I. GRAMERCY PURCHASER GROUP
GRAMERCY CAPITAL CORPORATION
A. Type of Purchaser: CP Conduit
B. Maximum Purchase Amount (applicable only to CP Conduit): $150,000,000
C. Commitment: (n/a to CP Conduit): N/A
D. Purchaser Percentage (n/a to Liquidity Purchaser): 42.857143%
E. Liquidity Percentage (applicable only to Liquidity Purchaser): N/A
F. Notice Address:
c/o Credit Suisse First Boston,
New York Branch, its Administrative Agent
Eleven Madison Avenue
New York, New York 10010-3629
Attention: Asset Finance Department
Telephone: (212) 325-9075
Telefax: (212) 325-6677
G. Address for Payments:
The Bank of New York
ABA #021-000-018
For credit to Credit Suisse First Boston CS Remittance/Gramercy Capital
Account #8900386630
H. Investing Office:
Eleven Madison Avenue
New York, New York
CREDIT SUISSE FIRST BOSTON,
NEW YORK BRANCH
A. Type of Purchaser: Liquidity Purchaser
B. Maximum Purchase Amount (applicable only to CP Conduit): N/A
<PAGE>
C. Commitment: (n/a to CP Conduit): $150,000,000
D. Purchaser Percentage (n/a to Liquidity Purchaser): N/A
E. Liquidity Percentage (applicable only to Liquidity Purchaser): 100%
F. Notice Address:
Eleven Madison Avenue
New York, New York 10010-3629
Attention: Asset Finance Department
Telephone: (212) 325-9105
Telefax: (212) 325-6677
G. Address for Payments:
The Bank of New York
ABA #021-000-018
For credit to Credit Suisse First Boston CS Remittance/Loan Clearing Account
Account #8900329262
H. Investing Office:
Eleven Madison Avenue
New York, New York
(ii)
<PAGE>
II. FALCON PURCHASER GROUP
FALCON ASSET SECURITIZATION CORPORATION
A. Type of Purchaser: CP Conduit
B. Maximum Purchase Amount (applicable only to CP Conduit): $150,000,000
C. Commitment: (n/a to CP Conduit): N/A
D. Purchaser Percentage (n/a to Liquidity Purchaser): 42.857143%
E. Liquidity Percentage (applicable only to Liquidity Purchaser): N/A
F. Notice Address:
c/o Bank One, N.A.
1 Bank One Plaza, 1IL-19
Chicago, Illinois 60670-0079
Attention: Asset Backed Finance
Telephone: (312) 732-5366
Telefax: (312) 732-1844
G. Address for Payments:
Bank One, N.A.
ABA #071-000-013
For credit to Falcon Asset Securitization
Account #51-14810
H. Investing Office:
1 Bank One Plaza
Chicago, Illinois
(iii)
<PAGE>
BANK ONE, N.A.
A. Type of Purchaser: Liquidity Purchaser
B. Maximum Purchase Amount (applicable only to CP Conduit): N/A
C. Commitment: (n/a to CP Conduit): $150,000,000
D. Purchaser Percentage (n/a to Liquidity Purchaser): N/A
E. Liquidity Percentage (applicable only to Liquidity Purchaser): 100%
F. Notice Address:
1 Bank One Plaza, 1IL-19
Chicago, Illinois 60606-0079
Attention: Asset Backed Finance
Telephone: (312) 732-5366
Telefax: (312) 732-1844
G. Address for Payments:
Bank One, N.A.
ABA #071-000-013
For credit to ___________________________________
Account #_____________
H. Investing Office:
1 Bank One Plaza
Chicago, Illinois
(iv)
<PAGE>
III. EAGLEFUNDING PURCHASER GROUP
EAGLEFUNDING CAPITAL CORPORATION
A. Type of Purchaser: CP Conduit
B. Maximum Purchase Amount (applicable only to CP Conduit): $50,000,000
C. Commitment: (n/a to CP Conduit): N/A
D. Purchaser Percentage (n/a to Liquidity Purchaser): 14.285714%
E. Liquidity Percentage (applicable only to Liquidity Purchaser): N/A
F. Notice Address:
c/o BancBoston Robertson Stephens, Inc.
100 Federal Street
Boston, Massachusetts 02110
Attention:_________________
Telephone: (617) __________
Telefax: (617) __________
G. Address for Payments:
BankBoston, N.A.
ABA #011-000-390
For credit to __________________________________________
Account #________________
H. Investing Office:
100 Federal Street
Boston, Massachusetts
(v)
<PAGE>
BANKBOSTON, N.A.
A. Type of Purchaser: Liquidity Purchaser
B. Maximum Purchase Amount (applicable only to CP Conduit): N/A
C. Commitment: (n/a to CP Conduit): $50,000,000
D. Purchaser Percentage (n/a to Liquidity Purchaser): N/A
E. Liquidity Percentage (applicable only to Liquidity Purchaser): 100%
BankBoston, N.A.
100 Federal Street
Boston, Massachusetts 02110
Attention:_________________
Telephone: (617) __________
Telefax: (617) __________
G. Address for Payments:
BankBoston, N.A.
ABA #011-000-390
For credit to __________________________________________
Account #________________
H. Investing Office:
100 Federal Street
Boston, Massachusetts
(vi)
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT, dated as of September 7, 1999, is by and between Zale
Corporation, a Delaware corporation ("Company"), and Beryl B. Raff
("Executive").
WHEREAS, Executive and Company entered into that certain Employment
Agreement dated August 1, 1998 which sets forth the terms and conditions for
Executive's continued employment with the Company (the "Agreement"); and
WHEREAS, the Board of Directors of the Company has determined that it
is in the best interest of the Company to amend certain provisions of the
Agreement in order to retain and motivate Executive; and
WHEREAS, Executive and Company now desire to amend such provisions of
the Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged the parties hereby
agree as follows:
1. Section 1 of the Agreement is hereby amended and restated in its
entirety to read as follows:
<PAGE>
"1. EMPLOYMENT. Executive agrees to enter into the continued
employment of the Company, and the Company agrees to employ Executive,
on the terms and conditions set forth in this Agreement. Executive
agrees during the term (as hereinafter defined) to devote substantially
all of her business time, efforts, skills and abilities to the
performance of her duties as stated in this Agreement and to the
furtherance of the Company's business. Executive's job title will be
President and Chief Executive Officer and her duties will be those as
are designated by the Board of Directors of the Company ("Board"),
consistent with this position. Executive further agrees to serve
without additional compensation as an Officer or Director, or both, of
any subsidiary, division or affiliate of the Company or any other
entity in which the Company holds an equity interest, provided,
however, that (a) the Company shall indemnify Executive from
liabilities in connection with serving in any such position to the same
extent as her indemnification rights pursuant to the Company's
Certificate of Incorporation, Bylaws and applicable Delaware law, and
(b) such other position shall not materially detract from the
responsibilities of Executive pursuant to this Section 1 or her ability
to perform such responsibilities."
2. Section 2(b) of the Agreement is hereby amended as follows:
The second sentence of Section 2(b) Incentive Bonus shall be changed to
read as follows:
<PAGE>
"Executive is eligible to receive 100% of her base salary in
accordance with the terms and conditions of the Executive Bonus
Program."
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Agreement as of the date first above written.
By: /s/ Beryl B. Raff
----------------------------------------
Beryl B. Raff
ZALE CORPORATION
By: /s/ Robert J. DiNicola
----------------------------------------
Robert J. DiNicola
Chairman of the Board of Directors
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT, dated as of September 15, 1999, is by and between Zale
Corporation, a Delaware corporation ("Company"), and Alan P. Shor ("Executive").
WHEREAS, Executive and Company entered into that certain Employment
Agreement dated August 1, 1998 which sets forth the terms and conditions for
Executive's continued employment with the Company (the "Agreement"); and
WHEREAS, the Board of Directors of the Company has determined that it
is in the best interest of the Company to amend certain provisions of the
Agreement in order to retain and motivate Executive; and
WHEREAS, Executive and Company now desire to amend such provisions of
the Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged the parties hereby
agree as follows:
1. Section 1 of the Agreement is hereby amended and restated in its
entirety to read as follows:
<PAGE>
"1. EMPLOYMENT. Executive agrees to enter into the continued
employment of the Company, and the Company agrees to employ Executive,
on the terms and conditions set forth in this Agreement. Executive
agrees during the term (as hereinafter defined) to devote substantially
all of his business time, efforts, skills and abilities to the
performance of his duties as stated in this Agreement and to the
furtherance of the Company's business. Executive's job title will be
Executive Vice President and Chief Operating Officer and his duties
will be those as are designated by the Board of Directors of the
Company ("Board"), consistent with this position. Executive further
agrees to serve without additional compensation as an Officer or
Director, or both, of any subsidiary, division or affiliate of the
Company or any other entity in which the Company holds an equity
interest, provided, however, that (a) the Company shall indemnify
Executive from liabilities in connection with serving in any such
position to the same extent as his indemnification rights pursuant to
the Company's Certificate of Incorporation, Bylaws and applicable
Delaware law, and (b) such other position shall not materially detract
from the responsibilities of Executive pursuant to this Section 1 or
his ability to perform such responsibilities."
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Agreement as of the date first above written.
By: /s/ Alan P. Shor
----------------------------------------
Alan P. Shor
<PAGE>
ZALE CORPORATION
By: /s/ Robert J. DiNicola
----------------------------------------
Robert J. DiNicola
Chairman of the Board of Directors
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
OCTOBER 31, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 46,860
<SECURITIES> 0
<RECEIVABLES> 504,996<F1>
<ALLOWANCES> 0
<INVENTORY> 684,362
<CURRENT-ASSETS> 1,276,030
<PP&E> 211,120
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,653,384
<CURRENT-LIABILITIES> 752,170
<BONDS> 99,598
0
0
<COMMON> 392
<OTHER-SE> 678,838
<TOTAL-LIABILITY-AND-EQUITY> 1,653,384
<SALES> 322,600
<TOTAL-REVENUES> 322,600
<CGS> 167,002
<TOTAL-COSTS> 129,162<F2>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,691
<INCOME-PRETAX> 8,766
<INCOME-TAX> 3,303
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,463
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
<FN>
<F1>THIS ASSET VALUE REPRESENTS A NET AMOUNT.
<F2>AMOUNT INCLUDES CASH AND CASH EQUIVALENTS AND RESTRICTED CASH.
</FN>
</TABLE>
