<PAGE> 1
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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 January 31, 2000
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 February 18, 2000, 35,084,500 shares of the registrant's common stock were
outstanding.
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<PAGE> 2
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
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ -----------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 735,967 $ 567,952 $1,058,568 $ 822,138
Cost of Sales 375,411 291,830 542,182 423,927
---------- ---------- ---------- ----------
Gross Margin 360,556 276,122 516,386 398,211
Selling, General and Administrative Expenses 206,979 159,301 336,374 264,588
Depreciation and Amortization Expense 10,360 6,900 20,338 13,372
---------- ---------- ---------- ----------
Operating Earnings 143,217 109,921 159,674 120,251
Interest Expense, Net 8,347 7,750 16,038 14,625
---------- ---------- ---------- ----------
Earnings Before Income Taxes 134,870 102,171 143,636 105,626
Income Taxes 50,918 38,211 54,221 39,503
---------- ---------- ---------- ----------
Net Earnings $ 83,952 $ 63,960 $ 89,415 $ 66,123
========== ========== ========== ===========
Earnings Per Common Share:
Basic $ 2.38 $ 1.78 $ 2.52 $ 1.84
Diluted $ 2.33 $ 1.75 $ 2.48 $ 1.81
Weighted Average Number of Common
Shares Outstanding:
Basic 35,235 35,908 35,485 35,987
Diluted 35,983 36,456 36,124 36,534
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
January 31, July 31, January 31,
2000 1999 1999
----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 55,977 $ 35,403 $ 141,599
Restricted Cash 9,693 6,029 8,956
Customer Receivables, Net 615,656 510,714 587,730
Merchandise Inventories 626,370 571,669 545,536
Other Current Assets 37,380 36,827 25,072
----------- ----------- -----------
Total Current Assets 1,345,076 1,160,642 1,308,893
Property and Equipment, Net 216,643 203,841 174,941
Other Assets 101,909 99,654 46,631
Deferred Tax Asset, Net 55,864 62,795 58,803
----------- ----------- -----------
Total Assets $ 1,719,492 $ 1,526,932 $ 1,589,268
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
Current Liabilities:
Short-term Borrowings $ 386,750 $ 353,000 $ 100,103
Accounts Payable and Accrued Liabilities 345,758 237,392 271,290
Deferred Tax Liability, Net 9,837 13,364 20,800
----------- ----------- -----------
Total Current Liabilities 742,345 603,756 392,193
Non-current Liabilities 69,988 70,892 60,730
Long-term Debt 99,607 99,589 380,210
Excess of Revalued Net Assets Over
Stockholders' Investment, Net 50,135 53,084 56,033
Commitments and Contingencies
Stockholders' Investment:
Preferred Stock -- -- --
Common Stock 393 392 386
Additional Paid-In Capital 507,034 504,300 485,533
Accumulated Other Comprehensive Income 4,040 376 4,424
Accumulated Earnings 381,688 292,273 277,464
Deferred Compensation (3,256) (5,005) --
----------- ----------- -----------
889,899 792,336 767,807
Treasury Stock (132,482) (92,725) (67,705)
----------- ----------- -----------
Total Stockholders' Investment 757,417 699,611 700,102
----------- ----------- -----------
Total Liabilities and Stockholders' Investment $ 1,719,492 $ 1,526,932 $ 1,589,268
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
January 31, January 31,
2000 1999
---------------- ----------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 89,415 $ 66,123
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization expense 23,072 13,995
Deferred taxes and utilization of NOL 3,442 12,247
Changes in:
Restricted cash (3,664) (2,764)
Customer receivables, net (104,941) (92,262)
Merchandise inventories (52,874) (67,069)
Other current assets (524) 1,648
Other assets (3,628) (1,582)
Accounts payable and accrued liabilities 111,726 84,951
Non-current liabilities (904) (635)
--------- ---------
Net Cash Provided by Operating Activities 61,120 14,652
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (34,651) (29,290)
Dispositions of property and equipment 1,101 1,177
--------- ---------
Net Cash Used In Investing Activities (33,550) (28,113)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short term borrowings 100,000 --
Borrowings under revolving credit agreement 424,100 --
Payments on revolving credit agreement (490,350) --
Proceeds from exercise of stock options 1,164 6,914
Purchase of common stock (42,169) (24,923)
--------- ---------
Net Cash Used In Financing Activities (7,255) (18,009)
--------- ---------
Effect of Exchange Rate Changes on Cash 259 --
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 20,574 (31,470)
Cash and Cash Equivalents at Beginning of Period 35,403 173,069
--------- ---------
Cash and Cash Equivalents at End of Period $ 55,977 $ 141,599
========= =========
Supplemental cash flow information:
Interest paid $ 15,994 $ 17,963
Interest received $ 775 $ 4,444
Income taxes paid (net of refunds received) $ 12,043 $ 1,561
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
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 January 31,
2000, the Company operated 1,353 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(R), Gordon's Jewelers(R), Bailey
Banks & Biddle Fine Jewelers(R), and Peoples Jewellers(R). 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 January 31, 2000, the Company also operated
forty-two Zales Outlet stores in twenty-one 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 and six month periods ended January 31,
2000. 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 January 31, 2000
have been applied to the financial statements for July 31, 1999 and January 31,
1999.
The results of operations for the three month period ended January 31,
2000 and 1999, 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 1,000 and
1,252,500 for the three months ended January 31, 2000 and January 31, 1999,
respectively. There were antidilutive common stock equivalents of 610,000 and
1,262,000 for the six months ended January 31, 2000 and January 31, 1999,
respectively.
6
<PAGE> 7
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ --------------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net earnings available to shareholders $ 83,952 $ 63,960 $ 89,415 $ 66,123
BASIC:
Weighted average number of common shares
outstanding 35,235 35,908 35,485 35,987
Net earnings per common share - basic $ 2.38 $ 1.78 $ 2.52 $ 1.84
=========== ============ ============ ============
DILUTED:
Weighted average number of common shares outstanding
35,235 35,908 35,485 35,987
Effect of dilutive stock options 748 548 639 547
----------- ------------ ------------ ------------
Weighted average number of common shares
outstanding as adjusted 35,983 36,456 36,124 36,534
Net earnings per common share - diluted $ 2.33 $ 1.75 $ 2.48 $ 1.81
=========== ============ ============ ============
</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 January 31, 2000, the entire
$350 million facility is classified as Short-term Borrowings since it matures
within the next twelve months. The Company expects to refinance the Variable
Notes on or before their maturity date 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> 8
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 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. At January 31, 2000, $36.8 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
negotiations 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
January 31, 2000, the Company had repurchased 1.1 million shares at an aggregate
cost of $42.2 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 and six month periods ended January 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
---------------------------------- -----------------------------------
2000 1999 2000 1999
------------- -------------- -------------- ---------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Net Earnings $ 83,952 $ 63,960 $ 89,415 $ 66,123
Other Comprehensive Income:
Unrealized (loss) gain on investment
securities, net (1,095) 971 (1,434) 1,573
Cumulative translation adjustments 2,585 -- 5,098 --
-------- -------- -------- --------
Total Comprehensive Income $ 85,442 $ 64,931 $ 93,079 $ 67,696
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted for fiscal
years beginning after June 15, 2000. The Company has limited involvement with
derivative financial instruments and only uses them to manage well-defined
interest rate and foreign exchange risks. Forward foreign exchange contracts are
used to hedge the impact of fluctuations of foreign exchange on inventory
purchases. The amount of interest rate and foreign exchange contracts
outstanding at January 31, 2000 or in place during fiscal 2000 was immaterial to
both the Company's results of operations and its financial position.
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On September 23, 1997, the Company sold $100 million in aggregate
principal amount of 8 1/2 percent Senior Notes (the "Senior Notes") due 2007 by
means of an offering memorandum to qualified institutional buyers under Rule
144A promulgated under the Securities Act of 1933, as amended.
The Company's payment obligations under the Senior Notes are guaranteed
by ZDel (the "Guarantor Subsidiary"). Such guarantee is full and unconditional
with respect to ZDel. Zale Funding Trust ("ZFT"), a limited purpose Delaware
business trust wholly owned by ZDel which owns the customer accounts receivable
of ZDel, is not a guarantor of the obligations under the Senior Notes. Separate
financial statements of the Guarantor Subsidiary are not presented because the
Company's management has determined that they would not be material to
investors. The following supplemental financial information sets forth, on an
unconsolidated basis, statements of operations, balance sheets, and statements
of cash flow information for the Company ("Parent Company Only"), for the
Guarantor Subsidiary and for the Company's other subsidiaries (the
"Non-Guarantor Subsidiaries"). The supplemental financial information reflects
the investments of the Company and the Guarantor Subsidiary in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting. Certain
reclassifications have been made to provide for uniform disclosure of all
periods presented. These reclassifications are not material.
9
<PAGE> 10
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 2000
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $662,079 $ 73,888 $ -- $735,967
Cost of Sales -- 339,555 35,856 -- 375,411
-------- -------- -------- -------- --------
Gross Margin -- 322,524 38,032 -- 360,556
Selling, General and Administrative
Expenses 38 197,794 9,147 -- 206,979
Depreciation and Amortization Expense -- 7,829 2,531 -- 10,360
-------- -------- -------- -------- --------
Operating Earnings (Loss) (38) 116,901 26,354 -- 143,217
Interest Expense, Net (16,875) 19,499 5,723 -- 8,347
-------- -------- -------- -------- --------
Income Before Income Taxes 16,837 97,402 20,631 -- 134,870
Income Taxes 5,884 37,093 7,941 -- 50,918
-------- -------- -------- -------- --------
Earnings Before Equity in
Earnings of Subsidiaries 10,953 60,309 12,690 -- 83,952
Equity in Earnings of Subsidiaries 72,999 5,902 -- (78,901) --
-------- -------- -------- -------- --------
Net Earnings $ 83,952 $ 66,211 $ 12,690 $(78,901) $ 83,952
======== ======== ======== ======== ========
</TABLE>
10
<PAGE> 11
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 1999
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ 556,547 $ 11,405 $ -- $567,952
Cost of Sales -- 285,732 6,098 -- 291,830
-------- --------- -------- -------- --------
Gross Margin -- 270,815 5,307 -- 276,122
Selling, General and Administrative
Expenses (Income) 37 166,369 (7,105) -- 159,301
Depreciation and Amortization Expense -- 6,578 322 -- 6,900
-------- --------- -------- -------- --------
Operating Earnings (Loss) (37) 97,868 12,090 -- 109,921
Interest Expense, Net -- (3,393) 11,143 -- 7,750
-------- --------- -------- -------- --------
Earnings (Loss) Before Income Taxes (37) 101,261 947 -- 102,171
Income Taxes (14) 37,871 354 -- 38,211
-------- --------- -------- -------- --------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (23) 63,390 593 -- 63,960
Equity in Earnings of Subsidiaries 63,983 593 -- (64,576) --
-------- --------- -------- -------- --------
Net Earnings $ 63,960 $ 63,983 $ 593 $(64,576) $ 63,960
======== ========= ======== ======== ========
</TABLE>
11
<PAGE> 12
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended January 31, 2000
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $946,597 $111,971 $ -- $1,058,568
Cost of Sales -- 487,240 54,942 -- 542,182
-------- -------- -------- -------- ----------
Gross Margin -- 459,357 57,029 -- 516,386
Selling, General and Administrative
Expenses 75 323,609 12,690 -- 336,374
Depreciation and Amortization Expense -- 15,140 5,198 -- 20,338
-------- -------- -------- -------- ----------
Operating Earnings (Loss) (75) 120,608 39,141 -- 159,674
Interest Expense, Net (33,750) 39,471 10,317 -- 16,038
-------- -------- -------- -------- ----------
Income Before Income Taxes 33,675 81,137 28,824 -- 143,636
Income Taxes 12,673 30,534 11,014 -- 54,221
-------- -------- -------- -------- ----------
Earnings Before Equity in
Earnings of Subsidiaries 21,002 50,603 17,810 -- 89,415
Equity in Earnings of Subsidiaries 68,413 11,179 -- (79,592) --
-------- -------- -------- -------- ----------
Net Earnings $ 89,415 $ 61,782 $ 17,810 $(79,592) $ 89,415
======== ======== ======== ======== ==========
</TABLE>
12
<PAGE> 13
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended January 31, 1999
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ 805,867 $ 16,271 $ -- $822,138
Cost of Sales -- 415,502 8,425 -- 423,927
-------- --------- -------- -------- --------
Gross Margin -- 390,365 7,846 -- 398,211
Selling, General and Administrative
Expenses (Income) 75 282,086 (17,573) -- 264,588
Depreciation and Amortization Expense -- 12,700 672 -- 13,372
-------- --------- -------- -------- --------
Operating Earnings (Loss) (75) 95,579 24,747 -- 120,251
Interest Expense, Net -- (6,419) 21,044 -- 14,625
-------- --------- -------- -------- --------
Earnings (Loss) Before Income Taxes (75) 101,998 3,703 -- 105,626
Income Taxes (28) 38,146 1,385 -- 39,503
-------- --------- -------- -------- --------
Earnings (Loss) Before Equity in
Earnings of Subsidiaries (47) 63,852 2,318 -- 66,123
Equity in Earnings of Subsidiaries 66,170 2,318 -- (68,488) --
-------- --------- -------- -------- --------
Net Earnings $ 66,123 $ 66,170 $ 2,318 $(68,488) $ 66,123
======== ========= ======== ======== ========
</TABLE>
13
<PAGE> 14
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
January 31, 2000
(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 $ -- $ 18,559 $ 37,418 $ -- $ 55,977
Restricted Cash -- 3,875 5,818 -- 9,693
Customer Receivables, Net -- -- 615,656 -- 615,656
Merchandise Inventories -- 561,821 64,549 -- 626,370
Other Current Assets -- 38,769 (1,389) -- 37,380
--------- --------- --------- --------- ----------
Total Current Assets -- 623,024 722,052 -- 1,345,076
Investment in Subsidiaries (14,602) 57,707 -- (43,105) --
Property and Equipment, Net -- 199,184 17,459 -- 216,643
Intercompany Receivable 873,834 -- -- (873,834) --
Other Assets -- 7,831 94,078 -- 101,909
Deferred Tax Assets, Net 59 60,627 (4,822) -- 55,864
--------- --------- --------- --------- ----------
Total Assets $ 859,291 $ 948,373 $ 828,767 $(916,939) $1,719,492
========= ========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Short-term Borrowings $ -- $ 36,750 $ 350,000 $ -- $ 386,750
Accounts Payable and Accrued Liabilities 2,831 303,326 39,601 -- 345,758
Deferred Tax Liability, Net 646 14,682 (5,491) -- 9,837
--------- --------- --------- --------- ----------
Total Current Liabilities 3,477 354,758 384,110 -- 742,345
Non-current Liabilities -- 59,279 10,709 -- 69,988
Intercompany Payable -- 617,997 255,853 (873,850) --
Long-term Debt 99,607 -- -- -- 99,607
Excess of Revalued Net Assets
Over Stockholders' Investment, Net -- 50,135 -- -- 50,135
Total Stockholders' Investment 756,207 (133,796) 178,095 (43,089) 757,417
--------- --------- --------- --------- ----------
Total Liabilities and Stockholders'
Investment $ 859,291 $ 948,373 $ 828,767 $(916,939) $1,719,492
========= ========= ========= ========= ==========
</TABLE>
14
<PAGE> 15
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)
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 $ -- $ 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>
15
<PAGE> 16
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended January 31, 2000
(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 $ 41,005 $ 95,437 $(72,913) $ (2,409) $ 61,120
Net Cash Flows from Investing Activities:
Additions to property and equipment -- (34,008) (643) -- (34,651)
Dispositions of property and equipment -- 1,086 15 -- 1,101
-------- --------- -------- --------- ---------
Net Cash Used in Investing Activities -- (32,922) (628) -- (33,550)
-------- --------- -------- --------- ---------
Net Cash Flows from Financing Activities:
Net Increase in short term borrowings -- -- 100,000 -- 100,000
Borrowings under revolving credit agreement -- 424,100 -- -- 424,100
Payments on revolving credit agreement -- (490,350) -- -- (490,350)
Proceeds from exercise of stock options 1,164 -- -- -- 1,164
Purchase of common stock (42,169) -- -- -- (42,169)
Dividends paid -- -- (2,409) 2,409 --
-------- --------- -------- --------- ---------
Net Cash Provided by (Used in) Financing Activities (41,005) (66,250) 97,591 2,409 (7,255)
-------- --------- -------- --------- ---------
Effect of Exchange Rate Changes on Cash -- -- 259 -- 259
Net (Decrease) Increase in Cash and Cash Equivalents -- (3,735) 24,309 -- 20,574
Cash and Cash Equivalents at Beginning of Period -- 22,294 13,109 -- 35,403
-------- --------- -------- --------- ---------
Cash and Cash Equivalents at End of Period $ -- $ 18,559 $ 37,418 $ -- $ 55,977
======== ========= ======== ========= =========
</TABLE>
16
<PAGE> 17
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION--(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended January 31, 1999
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided by (Used in) Operating Activities $ 18,009 $ (48,083) $ 47,741 $(3,015) $ 14,652
Net Cash Flows from Investing Activities:
Additions to property and equipment -- (28,625) (665) -- (29,290)
Dispositions of property and equipment -- 1,134 43 -- 1,177
-------- --------- -------- ------- ---------
Net Cash Used in Investing Activities -- (27,491) (622) -- (28,113)
-------- --------- -------- ------- ---------
Net Cash Flows from Financing Activities:
Proceeds from exercise of stock options 6,914 -- -- -- 6,914
Purchase of common stock (24,923) -- -- -- (24,923)
Dividends paid -- -- (3,015) 3,015 --
-------- --------- -------- ------- ---------
Net Cash Used in Financing Activities (18,009) -- (3,015) 3,015 (18,009)
-------- --------- -------- ------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents -- (75,574) 44,104 -- (31,470)
Cash and Cash Equivalents at Beginning of Period -- 165,248 7,821 -- 173,069
-------- --------- -------- ------- ---------
Cash and Cash Equivalents at End of Period $ -- $ 89,674 $ 51,925 $ -- $ 141,599
======== ========= ======== ======= =========
</TABLE>
17
<PAGE> 18
ITEM 2.
ZALE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements of the Company (and the related
notes thereto) included elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's unaudited Consolidated Statements of Operations expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------ -----------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of Sales 51.0 51.4 51.2 51.6
----- ----- ----- -----
Gross Margin 49.0 48.6 48.8 48.4
Selling, General and Administrative Expenses 28.1 28.0 31.8 32.2
Depreciation and Amortization Expense 1.4 1.2 1.9 1.6
----- ----- ----- -----
Operating Earnings 19.5 19.4 15.1 14.6
Interest Expense, Net 1.1 1.4 1.5 1.8
----- ----- ----- -----
Earnings Before Income Taxes 18.4 18.0 13.6 12.8
Income Taxes 6.9 6.7 5.1 4.8
----- ----- ----- -----
Net Earnings 11.5 11.3 8.5 8.0
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1999
NET SALES. Net Sales for the three months ended January 31, 2000
increased by $168.0 million to $736.0 million, a 29.6 percent increase compared
to the previous year. The Net Sales increase primarily resulted from a 14.7
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
0.4 percent for the three month period ending January 31, 2000, compared to the
same period last year. This increase was principally due to less promotional
activity resulting in lower markdowns. Additionally, there was no LIFO provision
required for the three months ended January 31,2000. The LIFO provision was $0.4
million for the three months ended January 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses increased 0.1 percent as a percentage of net sales. This
increase is primarily due to a 0.5 percent increase in advertising expenses as a
percentage of sales to continue the Company's brand development efforts and
Peoples Jewellers, which had slightly higher store expense rates due to lower
average sales volume per store. These increases in expense were partially offset
by leveraging of corporate fixed costs.
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 $153.6 million and $116.8
million for the three months ended January 31, 2000 and 1999, respectively, an
increase of 31.5 percent.
18
<PAGE> 19
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 $8.3 million and $7.8
million for the three months ended January 31, 2000 and 1999, respectively. The
increase of $0.5 million is principally a result of lower interest income from
investments due to cash requirements for the acquisition of Peoples Jewellers.
INCOME TAXES. The income tax provision for the three month periods
ended January 31, 2000 and 1999 was $50.9 million and $38.2 million,
respectively, reflecting an effective tax rate of 37.8 percent and 37.4 percent,
respectively. This increase is a result of higher income tax rates relating to
the Company's Canadian subsidiaries. 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 January 31, 2000,
the Company had a remaining NOL (after limitations) of approximately $156
million.
SIX MONTHS ENDED JANUARY 31, 2000 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1999
NET SALES. Net Sales for the six months ended January 31, 2000
increased by $236.4 million to $1,058.6 million, a 28.8 percent increase
compared to the previous year. The Net Sales increase primarily resulted from a
13.3 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
0.4 percent for the six month period ending January 31, 2000, compared to the
same period last year. This increase was principally due to less promotional
activity resulting in lower markdowns. Additionally, there was no LIFO provision
required for the six months ended January 31, 2000. The LIFO provision was $0.4
million for the six months ended January 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative Expenses decreased 0.4 percent as a percentage of net sales. This
decrease is primarily a result of a 0.8 percent reduction in corporate expenses
as a percent of sales due to the leveraging of corporate fixed costs. This
decrease in expense was partially offset by a 0.4 percent increase in
advertising expenses to continue the Company's brand development efforts and by
Peoples Jewellers, which has slightly higher store expense rates due to lower
average sales volume per store.
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 $180.0 million and $133.6
million for the six months ended January 31, 2000 and 1999, respectively, an
increase of 34.7 percent.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and Amortization
Expense increased by $7.0 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 $16.0 million and
$14.6 million for the six months ended January 31, 2000 and 1999, respectively.
The increase of $1.4 million is principally a result of lower interest income
from investments due to cash requirements for the acquisition of Peoples
Jewellers.
19
<PAGE> 20
INCOME TAXES. The income tax provision for the six month periods ended
January 31, 2000 and 1999 was $54.2 million and $39.5 million, respectively,
reflecting an effective tax rate of 37.7 percent and 37.4 percent, respectively.
This increase is a result of higher income tax rates relating to the Company's
Canadian subsidiaries. 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 January 31, 2000, the Company had a
remaining NOL (after limitations) of approximately $156 million.
LIQUIDITY AND CAPITAL RESOURCES
o The Company's cash requirements consist principally of funding inventory and
receivables growth, capital expenditures primarily for new store growth and
renovations, upgrading its management information systems and debt service. As
of January 31, 2000, the Company had cash and cash equivalents of $56.0 million,
and $9.7 million of restricted cash. The restricted cash primarily relates to
the collateral requirements under the Zale Funding Trust ("ZFT") securitization,
capital requirements of the Company's national bank and consignment arrangements
with certain vendors. 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
o 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 January 31, 2000, the entire
$350 million facility is classified as Short-term Borrowings since it matures
within the next twelve months. The Company expects to refinance the Variable
Notes on or before their maturity date with the consent of the note purchaser
groups, to extend the maturity of the outstanding Variable Notes.
o 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.
20
<PAGE> 21
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 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. At January 31, 2000, $36.8 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
negotiations with lenders and expects to enter into a new transaction to replace
the Revolving Credit Agreement on or before the maturity date.
o 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
o Under its continued growth strategy, the Company plans to open approximately
165 new stores for which it will incur an aggregate of 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 an aggregate of 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
o 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 January 31,
2000, the Company had repurchased 1.1 million shares at an aggregate cost of
$42.2 million under this program.
o 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 $10 million for fiscal 2000. As of January 31,
2000, the Company had a NOL (after limitations) of approximately $156 million,
which represents up to $61 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.
o The Company has limited involvement with derivative financial instruments and
only uses them to manage well-defined interest rate and foreign exchange risks.
Forward foreign exchange contracts are used to hedge the impact of fluctuations
of foreign exchange on inventory purchases. The amount of interest rate and
foreign exchange contracts outstanding at January 31, 2000 or in place during
fiscal 2000 was immaterial to both the Company's results of operations and its
financial position.
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
21
<PAGE> 22
sufficient to fund the Company's current operations, debt service and currently
anticipated capital expenditure requirements for the foreseeable future.
YEAR 2000
The Company did not experience any significant malfunctions or errors
in its operating or business systems when the date rolled from December 31, 1999
to January 1, 2000 and beyond. Based on its operations since January 1, 2000,
the Company does not expect any significant impact to its on-going business as a
result of the date change. However, the Company continues to evaluate its
systems and any Year 2000 impact as each significant date milestone passes. It
is possible that some issues may arise with such milestones as leap year or
financial closings. The Company believes that any such problems, if they occur,
are likely to be minor and correctable and will not cause any business
interruption.
To date, the Company has not had any significant problems arising from
Year 2000 issues affecting its suppliers or service providers. The Company
currently is not aware of any significant Year 2000 or similar problems
experienced by its suppliers or service providers.
The Company expended approximately $1.7 million in direct expenditures
and $0.5 million in internal costs in Fiscal Year 1998 for expenditures
associated with the Year 2000. 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 information technology operations budget. As required by
generally accepted accounting principals, these costs are expensed as incurred.
For Fiscal Year 2000, which began August 1, 1999, the Company expects Year 2000
costs to be approximately $0.75 million.
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.
22
<PAGE> 23
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 Company has limited involvement with derivative financial
instruments and only uses them to manage well-defined interest rate and foreign
exchange risks. Forward foreign exchange contracts are used to hedge the impact
of fluctuations of foreign exchange on inventory purchases. The amount of
interest rate and foreign exchange contracts outstanding at January 31, 2000 or
in place during fiscal 2000 was immaterial to both the Company's results of
operations and its financial position. The market risk of the Company's
financial instruments as of January 31, 2000 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.
23
<PAGE> 24
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
24
<PAGE> 25
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 March 3, 2000 Mark R. Lenz
Senior Vice-President, Controller
(principal accounting officer of the registrant)
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial data schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JANUARY
31, 2000 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 65,670<F2>
<SECURITIES> 0
<RECEIVABLES> 615,656<F1>
<ALLOWANCES> 0
<INVENTORY> 626,370
<CURRENT-ASSETS> 1,345,076
<PP&E> 216,643<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,719,492
<CURRENT-LIABILITIES> 742,345
<BONDS> 99,607
0
0
<COMMON> 393
<OTHER-SE> 757,024
<TOTAL-LIABILITY-AND-EQUITY> 1,719,492
<SALES> 735,967
<TOTAL-REVENUES> 735,967
<CGS> 375,411
<TOTAL-COSTS> 206,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,347
<INCOME-PRETAX> 134,870
<INCOME-TAX> 50,918
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,952
<EPS-BASIC> 2.38
<EPS-DILUTED> 2.33
<FN>
<F1>THIS ASSET VALUE REPRESENTS A NET AMOUNT.
<F2>AMOUNT INCLUDES CASH AND CASH EQUIVALENTS AND RESTRICTED CASH.
</FN>
</TABLE>
