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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

[X]

For the fiscal year ended July 31, 2000

OR

[   ]

For the transition period from          to           

Commission file no. 1-04129

Zale Corporation

Registrant’s telephone number, including area code:  (972) 580-4000

Securities registered pursuant to Section 12(b) of the Act: 

Securities registered pursuant to Section 12(g) of the Act: 

      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 [   ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

      As of September 5, 2000 the aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant was approximately $1,258,246,623.

      As of September 5, 2000, the registrant had outstanding 35,268,963 shares of its common stock, $.01 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE.

      Part III of this report incorporates information from the registrant’s definitive Proxy Statement relating to the registrant’s annual meeting of stockholders to be held on November 3, 2000.

PART I

Item 1.  Business

General

      Zale Corporation and its wholly owned subsidiaries (the “Company”) is the largest specialty retailer of fine jewelry in North America. At July 31, 2000, the Company operated 1,389 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®, Gordon’s Jewelers®, Bailey Banks & Biddle Fine Jewelers®, and Peoples Jewellers®. 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. Under the Zales Jewelers brand name the Company also operated 68 Zales Outlet stores in 26 states and offered online shopping at www.zales.com, at July 31, 2000. The Company acquired substantially all of the assets and certain operational liabilities of Peoples Jewellers Corporation, a Canadian company, effective May 23, 1999. Peoples Jewellers offers traditional moderately priced jewelry to customers across Canada. During the fiscal year ended July 31, 2000, the Company generated $1.8 billion of net sales.

      The Company believes it is well-positioned to compete in the approximately $40 billion, highly fragmented retail jewelry industry, leveraging its established brand names, economies of scale and geographic and demographic diversity. The Company enjoys significant brand name recognition as a result of its long-standing presence in the industry and its national and regional advertising campaigns. The Company believes that name recognition is an important advantage in jewelry retailing as products are generally unbranded and consumers must trust in a retailer’s reliability and credibility. In addition, as the largest specialty retailer of fine jewelry in North America, the Company believes it realizes economies of scale in purchasing and distribution, real estate, advertising and administrative costs. The Company also believes that the geographic diversity of its retail distribution network through all 50 states, Puerto Rico and Canada and the demographic breadth of its target customer groups may serve to mitigate earnings volatility typically associated with local or regional conditions.

      The Company is incorporated in Delaware. Its principal executive offices are located at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003, its telephone number at that address is (972) 580-4000, and its internet address is www.zalecorp.com.

Business Initiatives and Strategy

      The Company has developed and implemented disciplined merchandising and marketing strategies to promote its brand identities. Differentiated target customer segments have been emphasized for Zales, Gordon’s, Bailey Banks & Biddle, and Peoples. Product assortments have been broadened to capitalize on year round gift giving, bridal, fashion and special occasions.

      Management has developed a key item strategy as the foundation for merchandising and marketing initiatives. Items have been identified from among the best selling products in the retail jewelry industry, such as tennis bracelets, diamond solitaires, diamond stud earrings, and the three stone anniversary band. The Company has ensured that these items are available in an appropriate variety of styles and sizes to offer a range of competitive price points. At the same time, the Company has adopted an aggressive approach to inventory management to keep key items in stock and inventories current. This is achieved through the merchandise system which provides regular reporting to the Company’s merchandise buyers on in-stock position and slow moving merchandise. The Company employs a consistent methodology which provides inventory turnover and profitability information to identify slow-moving merchandise and determine appropriate merchandising actions on a timely basis.

      The Company’s marketing efforts are designed to enhance brand identity through product and event-focused promotional activities. The Company features selected key items at various price points through its advertising on television and radio, and in nationally distributed newspapers and magazines, local newspaper

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      The Company has recruited experienced buyers and has centralized purchasing for each brand to ensure consistency of quality and cost. In addition, the Company leverages its size to achieve better prices, payment terms, return privileges and cooperative advertising arrangements with certain product suppliers.

      The Company has enhanced its image as a provider of fine jewelry at competitive prices by establishing price points for merchandise that are perceived by customers as good values. Certain items are labeled “Brilliant Buys,” “Premier Values” and “Bailey’s Classic Values” in Zales and Peoples, Gordon’s and Bailey Banks & Biddle stores, respectively. These items are prominently displayed along with their prices throughout the store, a practice that is uncommon in the U.S. jewelry retailing industry and one that the Company believes enhances its reputation for pricing integrity.

      Over the past six years, the Company has opened approximately 400 stores. Additionally, approximately 70 percent of the Company’s stores have received significant remodeling or renovation within the last six years. Typically, these stores experience revenue growth that is significantly higher than other stores. The Company has taken steps to provide upgraded sales and product training through company-wide employee and manager training programs. Staffing plans are coordinated to schedule employees during peak sales periods.

      The Company’s strategy is to continue to increase store productivity and profitability by: (i) focusing on the core categories of bridal, fashion and watches; (ii) using key item merchandise to drive volume; (iii) remodeling and renovating all existing stores; (iv) enhancing merchandising systems to assist buyer decision making; (v) executing tailored staffing and training programs for store personnel; (vi) focusing advertising on brand building and product distinction; and (vii) providing exclusive products to develop brand distinction.

      The Company plans to open approximately 150 new stores, principally under the brand names Zales, Zales Outlet and Bailey Banks & Biddle, for which it will incur approximately $50 million in capital expenditures during the combined fiscal years 2001 and 2002. The Company expects these stores to solidify the Company’s core mall business by further penetrating markets where the Company is underrepresented and to expand into new markets such as outlet malls and selected urban settings. The Company targets premier regional mall locations throughout the country and selects sites based on a variety of well-defined demographic and store profitability characteristics. The Company has identified the specific malls for this planned expansion which satisfy the Company’s real estate strategy. The Company also plans to refurbish, remodel or relocate approximately 250 stores at a cost of approximately $60 million during the combined fiscal years 2001 and 2002.

      Over the past five years the Company has reduced selling, general and administrative expenses as a percent of sales principally by leveraging its fixed store and corporate operating expenses while increasing sales in its stores. Additionally, the Company has continued a focused effort to reduce selling, general and administrative expenses where appropriate by streamlining processes and leveraging technology where possible. Initiatives include: (i) outsourcing certain business functions, including certain aspects of management information systems operations, and the internal audit department, among other areas and (ii) streamlining corporate operations through review and improvement of current processes and application of new technology in areas such as merchandising and financial systems.

Current Year Events

      Stock Repurchase Plan. On July 18, 2000, the Company announced a stock repurchase program pursuant to which the Company, from time to time at the discretion of management and the Board of Directors and in accordance with the Company’s usual policies and applicable securities laws, may purchase

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      In April, 2000 the Company completed a $50 million repurchase program, which was authorized during September 1999. Under this program, the Company repurchased 1.3 million shares in fiscal 2000.

      Revolving Credit Agreement. In order to support the Company’s growth plans, the Company amended and restated its unsecured revolving credit agreement with a group of banks on March 30, 2000. The amended and restated revolving credit agreement (the “Revolving Credit Agreement”) provides for (i) a revolving credit loan facility to the Company and to its operating subsidiary, Zale Delaware, Inc. (such facility, the “U.S. Revolving Credit Facility”), in the aggregate principal amount of up to $215 million in commitments by certain U.S. lenders (the “U.S. Commitments”), including a $5 million sublimit for letters of credit, and (ii) a separate revolving credit facility for a Canadian subsidiary (the “Canadian Revolving Credit Facility”), which provides for Canadian Dollar denominated loans in the aggregate principal amount of up to a U.S. Dollar equivalent of $10 million in commitments by a Canadian lender (the “Canadian Commitment”). The total amount of commitments under the Revolving Credit Agreement to the Company and its subsidiaries is approximately $225 million. The Revolving Credit Agreement term is five years. Under the Revolving Credit Agreement the Company may, subject to approval of the U.S. Agent or the Canadian Agent, as the case may be, increase the total U.S. commitment to $285 million and the Canadian commitment to the U.S. Dollar equivalent of $25 million provided that the commitments together do not exceed a U.S. Dollar equivalent of $300 million. The increase can come from within or outside the bank group.

      The revolving credit loans bear interest at floating rates as follows: (A) loans outstanding under the U.S. Revolving Credit Facility bear interest, at the Company’s option, at either (i) the applicable Eurodollar Rate plus a margin equal to 0.75 percent (subject to adjustment as described below), or (ii) the Base Rate (which is the higher of the annual rate of interest announced from time to time by the agent bank under the Revolving Credit Agreement as its base rate or the Federal Funds Effective Rate plus 0.5 percent); and (B) loans outstanding under the Canadian Revolving Credit Facility bear interest, at the Company’s option, at either (i) a Bankers’ Acceptance Discount Rate (which varies depending upon whether the Canadian Lender is a bank named under Schedule I or II to the Bank Act (Canada) or neither) plus a margin equal to 0.75 percent (subject to adjustment as described below), or (ii) the annual rate of interest announced from time to time by the Canadian agent bank under the Revolving Credit Agreement as its “prime rate” for commercial loans in Canadian Dollars to borrowers in Canada. The margin applicable to Eurodollar Rates and Bankers’ Acceptance Discount Rates and letter of credit commission rates will be automatically reduced or increased from time to time based on certain future performance levels attained by the Company and its subsidiaries. Such margin will also be reduced if the debt of the Company and its subsidiaries under the Revolving Credit Agreement achieves an investment grade rating, and thereafter will be reduced or increased based upon changes in such rating. A utilization fee of 0.125 percent is to be paid on the average daily amount during each calendar quarter to the extent that the outstanding amount of loans under the U.S. Revolving Credit Facility exceeds 50 percent of the total U.S. Commitments during the preceding quarter, and/or if and to the extent that the outstanding amount of loans under the Canadian Revolving Credit Facility exceeds 50 percent of the total Canadian Commitments during the preceding fiscal quarter, such utilization fee being payable in each case on the average daily amount of such excess. The Company currently pays a commitment fee of 0.25 percent per annum on the preceding month’s unused U.S. Commitments and Canadian Commitment, which commitment fee is also subject to reduction or increase based on future performance and upon changes in the Company’s debt rating. The Company and its subsidiaries may repay the revolving credit loans under the Revolving Credit Agreement at any time without penalty prior to the maturity date. At July 31, 2000, there were no outstanding amounts under the U.S. Revolving Credit Facility. At July 31, 2000, the U.S. dollar equivalent of $9.7 million in revolving credit loans was outstanding under the Canadian Revolving Credit Facility, at an applicable interest rate on such date of 7.50 percent. The Revolving Credit Agreement contains certain restrictive covenants, which, among other things, requires the Company to comply with certain financial covenants including limitations on indebtedness, investments and capital expenditures. The Company is currently in compliance with all of its obligations under the Revolving Credit Agreement and the instruments governing its other indebtedness.

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      Sale of Private Label Credit Card Business. On July 10, 2000, the Company announced that it had agreed to sell its private label credit card operations to Associates First Capital Corporation (“AFCC”). Effective July 31, 2000, the Company sold, without recourse, all of the outstanding accounts receivable owned by Zale Funding Trust (“ZFT”), a Delaware statutory business trust and indirect wholly owned subsidiary of the Company, to Associates Credit Card Services, Inc. (“Associates”), a Delaware corporation, and wholly owned subsidiary of AFCC. The accounts receivable acquired by Associates constituted substantially all of the assets of ZFT. The total purchase price for the accounts receivable was approximately $542 million. The Company recognized a pretax gain of $0.2 million, net of an allowance for final settlement and transaction costs. The purchase price is subject to post-closing adjustment for improperly classified receivables. The transaction is accounted for as a sale in accordance with Statement of Financial Accounting Standards No. 125, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 125”).

      In connection with executing the Receivables Purchase Agreement, the Company entered into a ten year agreement whereby Hurley State Bank (“Hurley”), a wholly-owned subsidiary of AFCC, will issue private label credit cards branded with appropriate Company trademarks, and provide financing for the Company’s customers to purchase merchandise in exchange for payment by the Company of a merchant fee based upon a percentage of each credit card sale. The merchant fee is a percentage per credit sale credited to the Company under standard revolving accounts and a percentage per credit sale charged to the Company under certain promotional credit programs. The Company received a $41.8 million incentive for entering into the agreement. Portions of this payment are subject to refund for early termination of the agreement. This incentive payment will be recognized ratably over the term of the agreement.

      In connection with the Receivables Purchase Agreement, the Company agreed pursuant to an Agreement and Plan of Merger, dated as of July 10, 2000, to merge Jewelers National Bank (“JNB”), a wholly owned subsidiary of the Company, with and into Hurley (the “Merger”). With a portion of the proceeds from such sale, ZFT paid off all of its outstanding indebtedness and the Company’s receivables securitization facility was terminated. The Merger is subject to, among other things, Federal Deposit Insurance Corporation approval and approval from the Director of the Division of Banking for the State of South Dakota. The Company anticipates that the closing of the transactions contemplated under the Agreement and Plan of Merger will take place by the first calendar quarter of 2001. Until consummation of the Merger, the Company will sell, without recourse, its credit card receivables to Associates on a daily basis pursuant to an interim purchase and servicing arrangement. Following consummation of the Merger, AFCC and its affiliates will assume responsibility for JNB’s previously owned credit operations, including servicing facilities in San Marcos, Texas; Clearwater, Florida; Tempe, Arizona; and San Juan, Puerto Rico.

      As a result of the sale of the Company’s customer receivables to AFCC and the Merger, the Company’s current credit processing service agreement with a third-party servicer will terminate upon conversion to AFCC’s systems, which is expected to occur by the first calendar quarter of 2001.

      On July 31, 2000, the Company redeemed the then outstanding balance of approximately $335 million aggregate principal amount of variable notes under the Company’s securitization facility with the proceeds from the sale of its customer receivables and terminated its securitization facility. The variable notes bore interest at the market commercial paper rate plus a dealer fee of 0.05 percent and the Company paid a fee of 0.375 percent per annum on the funded portion of the facility and a commitment fee of .25 percent per annum on the unfunded portion.

Recent Development

      Acquisition of Piercing Pagoda, Inc. On August 11, 2000, the Company entered into an Agreement and Plan of Merger with Piercing Pagoda, Inc., a Delaware corporation, pursuant to which the Company through an indirect wholly owned subsidiary (Jewelry Expansion Corp.) agreed to acquire all of the outstanding shares of Piercing Pagoda.

      The Company through its subsidiary commenced a tender offer on August 22, 2000 to purchase all of the outstanding shares of Piercing Pagoda, Inc.’s $0.01 par value per share common stock for $21.50 per share in

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      Retirement of Robert J. DiNicola.  On August 30, 2000, Robert J. DiNicola announced his retirement as Chairman of the Board of Directors of the Company, effective September 6, 2000, but continues to serve as a Director. Beryl B. Raff, who had served as Chief Executive Officer and President of the Company, was appointed to serve as Chairman of the Board and Chief Executive Officer. Alan P. Shor, who had served as Executive Vice President and Chief Operating Officer of the Company, was appointed to serve as President and Chief Operating Officer, and was named a member of the Company’s Board of Directors.

Industry

      The U.S. retail jewelry industry’s sales were approximately $40 billion in 1999. Specialty jewelry stores (such as the Company) account for over half of the industry, according to publicly available data. Historically, retail jewelry store sales have exhibited only limited effects of cyclicality. According to the United States Census Bureau, retail jewelry store sales have increased every year for the past 16 years with the exception of 1991 which included both the Persian Gulf War and the introduction of the luxury tax. Other significant segments of the industry include national chain department stores (such as J.C. Penney Company, Inc. and Sears, Roebuck and Co.), mass merchant discount stores (such as Wal-Mart Stores, Inc.), other general merchandise stores and apparel and accessory stores. The remainder of the retail jewelry industry is composed primarily of catalog and mail order houses, direct-selling establishments, TV home shopping (such as QVC, Inc.) and computer online shopping.

      The U.S. retail jewelry industry is highly fragmented with the seven largest companies accounting for less than 25 percent of the market. The largest jewelry retailer is believed to be Wal-Mart Stores, Inc., followed by the Company. The Company is the largest specialty jewelry retail chain in North America, with approximately five percent of market share based on the United States Census Bureau estimate of 1999 U.S. Retail Jewelry and Watch Sales. Only two other specialty jewelry retailers had greater than three percent market share.

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Operations

      The Company operates principally under four brand names. The following table presents net sales, average sales per store and the number of stores for Zales, Gordon’s, Bailey Banks & Biddle, and Peoples for the periods indicated.

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      Zales is positioned as the Company’s national flagship and is a leading brand name in jewelry retailing in the United States. At July 31, 2000, Zales had 736 Zales stores in 50 states and Puerto Rico. Average store size is approximately 1,470 square feet, and the average selling price per unit sold is $269. The Zales brand accounted for approximately 54 percent of the Company’s sales in fiscal year 2000.

      Zales’ merchandise selection is generally standardized across the nation and targeted at customers representing a cross-section of mainstream America. In fiscal year 2000, bridal merchandise represented 35 percent of merchandise sales, while fashion jewelry and watches comprised the remaining 65 percent. The bridal merchandise category consists of solitaire engagement rings, various bridal sets and diamond and gold anniversary bands. Fashion jewelry consists generally of diamond fashion rings, earrings, gold chains, watches and various other items. The Company believes that the prominence of diamond jewelry in its product selection fosters an image of quality and trust among consumers. While maintaining a strong focus on the bridal segment of the business, Zales places added emphasis on non-bridal merchandise such as the fashion and gift-giving aspects of the business. Zales also introduces innovative items and capitalizes on emerging trends, including platinum engagement rings, diamond fashion jewelry and 18 carat certified diamond jewelry. The combination of Zales’ national presence and centralized merchandise selection allows it to use television advertising across the nation as its primary advertising medium, supplemented by newspaper inserts and direct mail. Zales broadened its television advertising presence in fiscal year 2000 to include brand awareness marketing such as sponsorship of the Rockefeller Center Christmas Tree Lighting and sponsorship of the CNN Voice of the Millenium. Zales is in the direct fulfillment business through its direct mail operations and internet web site, which accounted for less than one percent of the Company’s net sales in fiscal year 2000.

      Zales Outlet builds on the Zales brand recognition and national advertising programs. At July 31, 2000, the Company operated 68 Zales Outlet stores in 26 states. The Company has begun expanding its Zales Outlet concept and plans to continue its growth over the next several years. The merchandise assortment in a Zales Outlet Store caters to the brand conscious and value-oriented female shopper and includes a wide selection of today’s most fashion-forward looks, including name brand watches and fashion items like tanzanite jewelry. Zales Outlet accounted for less than four percent of the Company’s net sales in fiscal 2000.

      Gordon’s is positioned as a major regional brand with an upgraded product offering. At July 31, 2000, Gordon’s had 306 stores in 34 states and Puerto Rico. Average store size is approximately 1,400 square feet and the average selling price per unit sold is $304. Gordon’s accounted for approximately 19 percent of the Company’s net sales in fiscal year 2000.

      Gordon’s distinguishes itself from Zales by providing a more upscale, contemporary product mix and tailoring a portion of store inventory to regional tastes. A portion of the merchandise sold by Gordon’s stores overlaps the Zales’ product line. Regional radio broadcast campaigns that emphasize key items are utilized to complement printed inserts.

      Gordon’s expects to continue to emphasize its image to match its customer base and further tailor key items to customers’ regional preferences. The Company has taken steps to upgrade Gordon’s image, including store remodeling, offering a more distinctive and fashion-oriented product assortment, improved displays, and focusing on exclusive and value oriented merchandise.

      Established in 1832, Bailey Banks & Biddle offers high-end merchandise, exclusive designs and a prestigious shopping environment for the upscale customer. The stores are among the pre-eminent stores in their markets and carry both exclusive and recognized designer merchandise selections to appeal to the more affluent customer. The Bailey Banks & Biddle merchandise assortments emphasize the classic and traditional look and focus on diamonds, precious stones and gold jewelry, as well as watches and giftware. At July 31, 2000, Bailey Banks & Biddle operated 111 upscale jewelry stores in 29 states. The Company also utilizes the

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      Bailey Banks & Biddle stores rely heavily on upscale direct mail catalogs, enabling the stores to focus on specific products for specific customers. In fiscal year 2000, Bailey Banks & Biddle expanded its advertising reach with a repetitive presence in nationally distributed newspapers such as The New York Times and The Wall Street Journal and high profile magazines such as Town & Country , Vanity Fair, and Bon Appétit.

      Effective May 23, 1999, the Company acquired substantially all assets and certain operational liabilities of Peoples Jewellers Corporation, a privately owned chain. At July 31, 2000, Peoples operated 168 stores in 9 provinces operating throughout Canada under the Peoples and Mappins names. Peoples offers traditional jewelry and attracts the moderate customer segment in Canada. Peoples has the largest market share in Canada. Its closest specialty jewelry competitor has fewer than 40 locations. The stores have an average selling price per unit sold of approximately $170, an average store size of approximately 1,500 square feet and accounted for approximately 9 percent of the Company’s net sales in fiscal year 2000.

      The Company believes that Peoples is the Canadian version of the Zales brand. Peoples has experienced significant growth and improvement in store productivity during fiscal 2000 by employing a focused merchandising strategy that offers the top 250 key items or “Brilliant Buys.” A significant portion of this merchandise overlaps Zales, allowing the Company to leverage its merchandising strength. The Company increased the depth and breadth of both merchandising and marketing for fiscal year 2000.

      During fiscal 2000, the Company executed an aggressive marketing strategy for Peoples that included media campaigns similar to those that Zales employs, including television advertising during key holiday periods.

Store Operations

      The Company’s stores are designed to create an attractive environment, maximize operating efficiencies and make shopping convenient and enjoyable. The Company pays careful attention to store layout, particularly in areas such as lighting, choice of materials and arrangement of display cases to maximize merchandise presentation. Promotional displays are changed periodically to provide variety, to reflect seasonal events or to complement a particular mall’s promotions.

      Each of the Company’s stores is led by a store manager who is responsible for certain store-level operations, including sales and a limited number of personnel matters. Non-sales administrative matters, including purchasing, credit operations and payroll are consolidated at the corporate level in an effort to maintain low operating costs at the store level. Each of the stores also offers standard warranties and return policies and provides extended warranty coverage which may be purchased at the customer’s option.

      The Company has implemented inventory control systems, extensive security systems and loss prevention procedures to maintain low inventory losses. The Company screens employment applicants and provides all of its store personnel with training in loss prevention. Despite such precautions, the Company experiences losses from theft from time to time and maintains insurance to cover such losses.

      The Company believes it is important to provide knowledgeable and responsive customer service. The Company has implemented employee training programs, including training in sales techniques for new employees, on-the-job training and manager training for store managers. Under the banner of Zale Corporation University, the Company offers training to employees at every level of the organization, from store associate to buyer.

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Purchasing and Inventory

      The Company purchases substantially all of its merchandise in finished form from a network of established suppliers and manufacturers located primarily in the United States, Southeast Asia, and Italy. All purchasing is done through buying offices at the corporate headquarters. The Company either purchases merchandise from its vendors or obtains merchandise on consignment. The Company had approximately $167.9 million and $131.7 million (including Peoples Jewellers) of consignment inventory on hand at July 31, 2000 and 1999, respectively. The Company historically has not engaged in any substantial amount of hedging activities with respect to merchandise held in inventory, since the Company has been able to adjust retail prices to reflect price fluctuations in the commodities that are used in the merchandise it sells. The Company is not subject to substantial currency fluctuations because most purchases are dollar denominated. During fiscal years 2000 and 1999, the Company purchased approximately 33 percent of its merchandise from its top five vendors, including more than 11 percent from its top vendor.

Credit Operations

      The Company’s private label credit card program helps facilitate the sale of merchandise to customers who wish to finance their purchases rather than use cash or other sources. Approximately 44 percent of the Company’s net sales were generated by credit sales on the private label credit cards in fiscal year 2000. The Company has found that opening a credit account allows its sales personnel to build customer relationships that generate customer loyalty and facilitate repeat purchases as well as enhancing the Company’s target marketing capability. Peoples Jewellers outsources its proprietary credit program to a third party provider. In July 2000, the Company entered into agreements for the outsourcing of its domestic private label credit card operations to Hurley, an affiliate of AFCC. See Current Year Events — “Sale of Private Label Credit Card Business.”

      In October 1997, the Company established a national credit card bank, Jewelers National Bank (“JNB”), for the granting of credit under its private label credit cards as part of the outsourcing of the Company’s credit card operations. In connection with the sale of the Company’s private label credit operations, JNB will merge with and into Hurley. Credit extension, customer service, and collections for the private label accounts has been performed by JNB in Tempe, Arizona, and Service Centers in Clearwater, Florida, San Marcos, Texas; and San Juan, Puerto Rico and will continue to be so performed until JNB’s merger with Hurley. Following consummation of the Merger, Hurley will assume responsibility for the Company’s credit operations, including issuance of the Company’s credit cards and operation of JNB’s servicing facilities in San Marcos, Texas, Clearwater, Florida, Tempe, Arizona and San Juan, Puerto Rico. Hurley will also issue the Company’s private label credit cards and pay the Company for charges of authorized goods and services on such cards in exchange for the Company’s payment of a merchant fee based upon the type of credit utilized by the credit card holder.

      The Company currently has approximately 1.7 million customer names on file to which it directs promotional material. The Company uses many of these customer names in its target marketing programs.

      The Company has a credit processing service agreement for domestic credit operations with a third-party servicer. The agreement requires minimum annual payments based on credit activities. The Company has a commitment of approximately $15.2 million to be paid over the initial term of seven years. In connection with the sale of the Company’s customer receivables to AFCC and the Merger, this agreement will be terminated upon conversion to AFCC’s systems, which is expected to occur by the first calendar quarter of 2001. See “Current Year Events — Sale of Private Label Credit Card Business.”

Insurance Affiliates

      The Company, through Zale Indemnity Company, Zale Life Insurance Company and Jewel Re-Insurance Ltd., provides insurance and reinsurance facilities for various types of insurance coverage, which typically are marketed to the Company’s private label credit card customers. Additionally, the Company promotes the sale of credit insurance products to customers who use the private label credit card program. In fiscal year 2000, over 47 percent of the Company’s private label credit card purchasers purchased some form

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Employees

      As of July 31, 2000, the Company had approximately 13,000 active employees, less than one percent of whom were represented by unions. The Company usually hires a limited number of temporary employees during each Christmas season.

Competition

      The retailing industry is highly competitive. The industry is fragmented, and the Company competes with a large number of independent regional and local jewelry retailers, as well as national jewelry chains. The Company also competes with other types of retailers who sell jewelry and gift items, such as department stores, catalog showrooms, discounters, direct mail suppliers, online retailers and television home shopping programs. Certain of the Company’s competitors are non-specialty retailers which are larger and have greater financial resources than the Company. The malls where the Company’s stores are located typically contain competing national chains, independent jewelry stores or department store jewelry departments. The Company believes that it is also competing for consumers’ discretionary spending dollars and, therefore, competes with retailers who offer merchandise other than jewelry or giftware.

      Notwithstanding the national or regional reputation of its competition, the Company believes that it must compete on a mall-by-mall basis with other retailers of jewelry as well as with retailers of other types of discretionary items. Therefore, the Company competes primarily on the basis of reputation for high quality products, brand recognition, store location, distinctive and value-priced merchandise, personalized customer service and its ability to offer private label credit card programs to customers wishing to finance their purchases. The Company’s success is also dependent on its ability to react to and create customer demand for specific merchandise categories.

      The Company holds no material patents, licenses, franchises or concessions; however, the established trademarks and trade names for stores and products in Zales, Gordon’s, Bailey Banks & Biddle, and Peoples are important to the Company in maintaining its competitive position in the jewelry retailing industry.

      As a specialty retailer of fine jewelry, the Company’s business is seasonal in nature, with its second quarter, which includes the months of November through January, typically representing a proportionally greater percentage of annual sales, earnings from operations and cash flow. Management expects such seasonality to continue.

Management Information Systems

      The Company’s information systems provide information necessary for: (i) management operating decisions; (ii) sales and margin management; (iii) inventory control; (iv) profitability monitoring by many measures (merchandise category, buyer, store); and (v) expense control programs. Data processing systems include point-of-sale reporting, purchase order management, receiving, merchandise planning and control, payroll, general ledger, credit card administration, and accounts payable. Bar code ticketing is used, and

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      The Company’s information systems allow management to monitor and control the Company’s operations, and to generate reports on a daily, monthly, quarterly and annual basis for each store and transaction. Senior management can therefore review and analyze activity by store, amount of sale, terms of sale or employees who approved the sale.

      The Company entered into a five-year agreement during December 1996 with a third party for the management of the Company’s mainframe processing operations, client server systems, LAN operations and desktop support. The Company believes that by outsourcing this portion of its management information systems it will be able to achieve additional efficiencies and allow the Company to focus its internal information technology efforts on developing new systems to enhance the performance of its core business.

      The Company has historically upgraded, and expects to continue to upgrade, its information systems to improve operations and support future growth. The Company estimates it will make capital expenditures of approximately $35 million over the next two years for enhancements to its management information systems and expansion and development of e-commerce sites.

Regulation

      The Company’s operations are affected by numerous laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider. In addition to the Company’s private label credit cards, credit to the Company’s customers is provided primarily through bank cards such as Visa®, MasterCard®, and Discover®, without recourse to the Company based upon a customer’s failure to pay. Any change in the regulation of credit which would materially limit the availability of credit to the Company’s traditional customer base could adversely affect the Company’s results of operations or financial condition.

      The sale of insurance products by the Company is also highly regulated. State laws currently impose disclosure obligations with respect to the Company’s sale of credit and other insurance. The Company’s and its competitors’ practices are also subject to review in the ordinary course of business by the Federal Trade Commission and Industry Canada Competition Bureau, and the Company’s and other retail company’s credit cards are currently subject to regulation by the Office of the Comptroller of the Currency. Following the Merger, the Company’s credit cards will be subject to regulation by the Federal Deposit Insurance Corporation and state banking authorities. See “Business — Credit Operations.” The Company believes that it is currently in material compliance with applicable and regulations.

      Merchandise in the retail jewelry industry is frequently sold at a discount off the “regular” or “original” price. A number of jurisdictions in which the Company operates have regulations which require that retailers offering merchandise at discounted prices must offer the merchandise at regular or original prices for stated periods of time. Additionally, the Company is subject to certain truth-in-advertising and other various laws, including consumer protection regulations that regulate retailers generally and/or the promotion and sale of jewelry in particular. The Company undertakes to monitor changes in those laws and believes that it is in material compliance with applicable laws with respect to such practices.

Cautionary Notice Regarding Forward-Looking Statements

      This Annual Report on Form 10-K contains forward-looking statements, including statements regarding the Company’s objectives and expectations regarding its merchandising and marketing strategies, store renovation, remodeling and expansion, inventory performance, capital expenditures, liquidity, development of its management information systems and e-commerce sites, productivity and profitability which are based

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      The Company leases a 430,000 square foot corporate headquarters facility, which extends through 2008. The facility is located in Las Colinas, a planned business development in Irving, Texas, near the Dallas/ Fort Worth International Airport. During fiscal year 1999, the Company sold a 120,000-square foot warehouse in Dallas, Texas, leasing back approximately 60,000 square feet of that warehouse. The Company leases a 32,000-square foot general office facility in Toronto, Ontario Canada for Peoples, which lease extends to April 2001.

      The Company currently leases three credit centers located in Clearwater, Florida (30,000 square feet), Tempe, Arizona (24,200 square feet), and San Juan, Puerto Rico (2,900 square feet) and one national collections center located in San Marcos, Texas (9,000 square feet). See “Current Year Events — Sale of Private Label Credit Card Business.”

      The Company rents most of its retail spaces under leases that generally range from five to ten years and may contain minimum rent escalations. Most of the store leases provide for the payment of base rentals plus real estate taxes, insurance, common area maintenance fees and merchants association dues, as well as percentage rents based on the stores’ gross sales.

      The following table indicates the expiration dates of the current terms of the Company’s leases as of July 31, 2000 (executed lease agreements, including non-stores and unopened stores):

      Management believes substantially all of the store leases expiring in fiscal year 2001 that it wishes to renew (including leases which expired earlier and are on month-to-month extensions) will be renewed on terms not materially less favorable to the Company than the terms of the expiring leases. Management believes its facilities are suitable and adequate for the Company’s business as presently conducted and as proposed to be conducted.

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      The Company is involved in certain legal actions and claims arising in the ordinary course of business. The Company currently believes that such litigation and claims, both individually and in the aggregate, will be resolved without material effect on the Company’s financial position or results of operations.

      On November 3, 1999, a plaintiff amended a complaint filed in the Circuit Court for Colbert County, State of Alabama to commence a purported class action against the Company, Jewelers National Bank, Zale Indemnity Company, Zale Life Insurance Company, Jewelers Financial Services, Jewel Re-Insurance, Ltd., and certain employees of the Company. On July 21, 2000, the same plaintiff commenced a purported class action in the United States District Court for the Eastern District of Texas, Texarkana Division against the Company, Jewelers National Bank, Zale Indemnity Company, Zale Life Insurance Company, Jewel Re-Insurance, Ltd. and certain employees of the Company. Both purported class actions concern allegations that the defendants marketed credit insurance to customers in violation of state statutory and common laws and bring claims based on, inter alia, fraud, breach of contract, and consumer protection laws. The federal complaint alleges that the Company’s credit insurance practices violated federal anti-racketeering laws. In both complaints, plaintiff seeks, among other things, compensatory and punitive damages as well as injunctive relief. Both actions are in the discovery stage, and neither has been certified as a class action. The Company intends to vigorously defend the alleged claims.

      No matters were submitted to a vote of security holders of the Company during the quarter ended July 31, 2000.

Executive Officers of the Registrant

      The following individuals serve as executive officers of the Company. Officers are elected by the Board of Directors annually, each to serve until their successor is elected and qualified, or until their earlier resignation, removal from office or death.

The following is a brief description of the business experience of the executive officers of the Company for at least the past five years.

      Ms. Beryl B. Raff was appointed Chairman of the Board and Chief Executive Officer effective September 6, 2000. Prior to her appointment as Chairman, Ms. Raff served as a member of the Company’s Board of Directors, and President and Chief Executive Officer since September 1999. In July 1998, she was appointed President and Chief Operating Officer. From July 1997 to July 1998, she served as Executive Vice President and Chief Operating Officer. From November 1994 to July 1997, she served as President of Zales. From March 1991 through October 1994, Ms. Raff served as Senior Vice President of Macy’s East with responsibilities for its jewelry business in a twelve-state region. From April 1988 to March 1991, Ms. Raff served as Group Vice President of Macy’s South/ Bullocks. Prior to 1988, Ms. Raff had 17 years of retailing and merchandising experience with the Emporium and Macy’s department stores.

      Mr. Alan P. Shor was named President and Chief Operating Officer and was appointed as a member of the Company’s Board of Directors effective September 6, 2000. Prior to this time, Mr. Shor served as Executive Vice President and Chief Operating Officer since September 1999. From November 1997 to

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      Ms. Sue E. Gove was appointed Executive Vice President and Chief Financial Officer on July 15, 1998. From December 1997 to July 1998, she served as Group Vice President and Chief Financial Officer. From January 1996 to December 1997, she served as Senior Vice President, Corporate Planning and Analysis. From September 1996 through June 1997, Ms. Gove also served as Senior Vice President and Treasurer, overseeing Investor Relations and the Treasury, Tax and Control functions. Ms. Gove joined the Company in 1980 and served in numerous assignments until her appointment to Vice President in 1989.

      Ms. Mary L. Forté was appointed Executive Vice President and Chief Administrative Officer on January 13, 1998. From July 1994 to January 1998, Ms. Forté served as President of Gordon’s. From January 1994 to July 1994, Ms. Forté served as Senior Vice President of QVC — Home Shopping Network. From July 1991 through January 1994, Ms. Forté served as Senior Vice President of the Bon Marche, Home Division of the Federated Department Store. From July 1989 to July 1991, Ms. Forté was Vice President of Rich’s Department Store, Housewares Division. In addition to the above, Ms. Forté has an additional 13 years of retailing and merchandising experience with Macy’s, The May Department Stores Company, Inc. and Federated Department Stores.

PART II

      The Common Stock is listed on the New York Stock Exchange (“NYSE”) under the symbol ZLC. The following table sets forth the high and low sale prices for the Common Stock for each fiscal quarter during the two most recent fiscal years.

      As of September 5, 2000, the outstanding shares of Common Stock were held by approximately 1,061 holders of record. The Company has not paid dividends on the Common Stock since its initial issuance on July 30, 1993, and does not anticipate paying dividends on the Common Stock in the foreseeable future. In addition, the Company’s short-term borrowings and long-term debt limit the Company’s ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

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      The following selected financial data is qualified in its entirety by the Consolidated Financial Statements of the Company (and the related Notes thereto) contained elsewhere in this Form 10-K and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The income statement and balance sheet data for each of the years ended July 31, 2000, 1999, 1998, 1997 and 1996, have been derived from the Company’s audited Consolidated Financial Statements.

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      With respect to forward-looking statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations see “Business — Cautionary Notice Regarding Forward-Looking Statements.”

Results of Operations

      The following table sets forth certain financial information from the Company’s audited consolidated statements of operations expressed as a percentage of net sales and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.

Year Ended July 31, 2000 Compared to Year Ended July 31, 1999

      Net Sales. Net Sales for the year ended July 31, 2000 increased by $364.7 million to $1.8 billion, a 25.5 percent increase compared to the previous year. Excluding sales from Peoples Jewellers which was acquired in fiscal 1999, total sales for the year increased $230.6, or 16.4 percent. The sales increase primarily resulted from a 11.6 percent increase in sales from stores open for comparable periods, 84 new stores added during the year and twelve months of sales for Peoples which was acquired in May 1999. These factors were partially offset by 28 stores closed during the year. The Company believes that 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 was 48.7 percent for the year ended July 31, 2000 compared to 48.4 percent for the year ended July 31, 1999, an increase of 0.3 percent. This increase was principally due to less promotional pricing activity at the store level and fewer markdowns. The LIFO benefit was $3.0 million and $0.7 million for the years ended July 31, 2000 and 1999.

      Selling, General and Administrative Expenses. Selling, General and Administrative Expenses decreased to 34.6 percent of sales for the year ended July 31, 2000, from 35.2 percent for the year ended July 31, 1999, or 0.6 percent as a percentage of net sales. Store expenses as a percentage of sales increased by 0.4 percent principally due to increased advertising to promote the Company’s brands. Net corporate expenses decreased by 1.0 percent as a percentage of net sales. 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 its stores.

      Earnings Before Interest, Taxes, Depreciation and Amortization Expense. Earnings Before Interest, Taxes, Depreciation and Amortization Expense were $252.8 million and $189.4 million for the years ended July 31, 2000 and 1999, respectively, an increase of 33.5 percent.

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      Depreciation and Amortization Expense. Depreciation and Amortization Expense increased by $13.0 million, primarily as a result of the purchase of new assets, principally for new store openings, renovation and refurbishment and amortization of goodwill from the acquisition of Peoples Jewellers. In addition, the Company refined the Peoples Jewellers goodwill amortization period from twenty years to fifteen years, resulting in a $0.9 million adjustment to goodwill amortization expense. Due to fresh start reporting, the Company wrote off substantially all fixed assets of the Company effective July 31, 1993. As a result, depreciation and amortization relates to capital expenditures since July 31, 1993.

      Interest Expense, Net. Interest Expense, Net was $32.2 million and $30.5 million for the years ended July 31, 2000 and 1999, respectively. The increase of $1.7 million is principally a result of lower interest income from investments for fiscal year 2000 due to the acquisition of Peoples Jewellers for approximately $78 million in cash.

      Income Taxes. The income tax expense for the years ended July 31, 2000 and 1999 was $66.7 million and $48.5 million, respectively, reflecting an effective tax rate of 37.4 and 37.5 percent for the years ended July 31, 2000 and 1999, respectively. The Company will realize a cash benefit from utilization of tax net operating loss carryforwards (“NOL”) (after annual limitations) against current and future tax liabilities. As of July 31, 2000, the Company had a remaining NOL (after limitations) of approximately $170 million.

Year Ended July 31, 1999 Compared to Year Ended July 31, 1998

      Net Sales. Net Sales for the year ended July 31, 1999 increased by $115.2 million to $1.4 billion, a 8.8 percent increase compared to the previous year. Excluding sales from Diamond Park Fine Jewelers which was divested in fiscal year 1998, total sales for the year increased 10.9 percent. The sales increase primarily resulted from a 6.0 percent increase in sales from stores open for comparable periods, 64 new stores added during the year and two months of sales for Peoples which was acquired in May 1999. These factors were partially offset by 32 stores closed during the year. The Company believes that 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 was 48.4 percent for the year ended July 31, 1999 compared to 48.1 percent for the year ended July 31, 1998, an increase of 0.3 percent. This increase was principally due to more efficient purchasing, resulting in lower markdowns. The LIFO benefit was $0.7 million and $2.5 million for the years ended July 31, 1999 and 1998.

      Selling, General and Administrative Expenses. Selling, General and Administrative Expenses decreased to 35.2 percent of sales for the year ended July 31, 1999 from 36.2 percent for the year ended July 31, 1998, or 1.0 percent as a percentage of net sales. Store expenses as a percentage of sales decreased by 1.0 percent principally due to productivity improvements relating to the lowering of payroll costs as a percentage of sales. Net corporate expenses decreased by 0.2 percent of net sales. This decrease in expense was partially offset by Peoples, which had slightly higher store expenses as a percentage of sales. 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 its stores.

      Earnings Before Interest, Taxes, Depreciation and Amortization Expense. Earnings Before Interest, Taxes, Depreciation and Amortization Expense were $189.4 million and $156.0 million for the years ended July 31, 1999 and 1998, respectively, an increase of 21.4 percent.

      Depreciation and Amortization Expense. Depreciation and Amortization Expense increased by $6.9 million, primarily as a result of the purchase of new assets, principally for new store openings, renovation and refurbishment and the acquisition of Peoples. Due to fresh start reporting, the Company wrote-off substantially all fixed assets of the Company effective July 31, 1993. As a result, depreciation and amortization relates to capital expenditures since July 31, 1993.

      Interest Expense, Net. Interest Expense, Net was $30.5 million and $32.0 million for the years ended July 31, 1999 and 1998, respectively. The decrease is a result of higher interest income from investments due to an increase in net monthly average cash and cash equivalents for fiscal year 1999 as compared to fiscal year 1998.

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      Income Taxes. The income tax expense for the years ended July 31, 1999 and 1998 was $48.5 million and $41.4 million, respectively, reflecting an effective tax rate of 37.5 percent for both years. The Company will realize a cash benefit from utilization of tax net operating loss carryforwards (“NOL”) (after annual limitation) against current and future tax liabilities. As of July 31, 1999, the Company had a remaining NOL (after limitations) of approximately $189 million.

Liquidity and Capital Resources

      The Company’s cash requirements consist principally of funding inventory growth, capital expenditures primarily for new store growth and renovations, upgrading its management information systems and debt service. As of July 31, 2000, the Company had cash and cash equivalents of $298.2 million, and $3.9 million of restricted cash. The restricted cash primarily relates to the capital requirements of the Company’s national bank and consignment arrangements from 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 41 percent and 40 percent of the Company’s annual sales were made during the three months ended January 31, 2000 and 1999, respectively, which includes the Christmas selling season. The Company’s working capital requirements fluctuate during the year, increasing substantially during the fall season as a result of higher planned seasonal inventory levels.

Operating Activities

      Set forth below is certain summary information with respect to the Company’s operations for the most recent eight fiscal quarters.

		Fiscal 2000
		For the Three Months Ended
		July 31,				April 30,				January 31,				October 31,
		2000				2000				2000				1999
		(In thousands)
Net sales		$	373,755			$	361,273			$	735,967			$	322,601
Gross margin			180,471				176,736				360,556				155,830
Operating earnings			25,594				25,150				143,217				16,457
Net earnings			11,577				10,522				83,952				5,463

[Additional columns below]

[Continued from above table, first column(s) repeated]

		Fiscal 1999
		For the Three Months Ended
		July 31,				April 30,				January 31,				October 31,
		1999				1999				1999				1998
		(In thousands)
Net sales		$	325,994			$	280,736			$	567,952			$	254,186
Gross margin			157,441				136,028				276,122				122,089
Operating earnings			21,879				17,793				109,920				10,331
Net earnings			8,542				6,267				63,960				2,163

      Net cash provided by operating activities was $141.9 million, $81.1 million and $112.8 million for fiscal years 2000, 1999, and 1998 respectively. The net cash provided by operating activities in fiscal year 2000 increased from the prior year principally due to the increase in operating earnings and the leveraging of accounts payable and accrued liabilities. In fiscal 1999, net cash provided by operating activities resulted principally from an increase in net earnings and effective inventory management resulting in the leveraging of accounts payable and accrued liabilities.

      There has been an increase of approximately $58.8 million in owned merchandise inventories at July 31, 2000 compared to the balance at July 31, 1999. This increase resulted principally from new store growth.

      Net cash provided by investing activities was $508.3 million in fiscal 2000, principally related to the proceeds from the sale of credit card receivables to AFCC, offset slightly by higher capital expenditures. In fiscal 1999, net cash used in investing activities was $154.3 million, principally related to the acquisition of Peoples, as well as expenditures for new store growth and expenditures for remodeling existing stores. Net cash provided by investing activities was $12.5 million in fiscal 1998, primarily related to proceeds from the sale of Diamond Park Fine Jewelers and proceeds from the sale of land, offsetting capital expenditures for new store growth and existing store remodeling and refurbishment.

      Net cash used in financing activities was $387.4 million in fiscal 2000, principally related to the repayment of the Variable Funding Notes and Revolving Credit Agreement, as well as the stock repurchase plan approved in September 1999. Net cash used in financing activities in fiscal 1999 was $64.6 million principally related to the refinancing and reduction of the Zale Funding Trust receivables securitization facility and repurchase of the Company’s common stock on the open market. Net cash provided by financing activities

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Finance Arrangements

•  On July 31, 2000, the Company redeemed the then outstanding balance of approximately $335 million aggregate principal amount of Variable Notes under the Company’s securitization facility with the proceeds from the sale of its customer receivables and terminated the facility. The Variable Notes bore interest at the market commercial paper rate plus a dealer fee of 0.05 percent and the Company paid a fee of 0.375 percent per annum on the funded portion of the facility and a commitment fee of .25 percent per annum on the unfunded portion. See “Current Year Events — Sale of Private Label Credit Card Business.”

•  In order to support the Company’s growth plans, the Company amended and restated its unsecured Revolving Credit Agreement on March 30, 2000. The Revolving Credit Agreement provides for (i) a U.S. Revolving Credit facility to the Company and to its operating subsidiary, Zale Delaware, Inc., in the aggregate principal amount of up to $215 million in commitments by certain U.S. lenders, including a $5 million sublimit for letters of credit, and (ii) a separate Canadian Revolving Credit facility for a Canadian subsidiary, which provides for Canadian Dollar denominated loans in the aggregate principal amount of up to a U.S. Dollar equivalent of $10 million in commitments by a Canadian lender. The total amount of commitments under the Revolving Credit Agreement to the Company and its subsidiaries is approximately $225 million and the term is five years. Under the Revolving Credit Agreement the Company may, subject to approval of the U.S. Agent or the Canadian Agent, as the case may be, increase the total U.S. commitment to $285 million and the Canadian commitment to a U.S. Dollar equivalent of $25 million provided that the commitments together do not exceed the U.S. Dollar equivalent of $300 million.

      The revolving credit loans bear interest at floating rates as follows: (A) loans outstanding under the U.S. Revolving Credit facility bear interest, at the Company’s option, at either (i) the applicable Eurodollar Rate plus a margin equal to 0.75 percent (subject to adjustment as described below), or (ii) the Base Rate (which is the higher of the annual rate of interest announced from time to time by the agent bank under the Revolving Credit Agreement as its base rate or the Federal Funds Effective Rate plus 0.5 percent); and (B) loans outstanding under the Canadian Revolving Credit facility bear interest, at the Company’s option, at either (i) a Bankers’ Acceptance Discount Rate (which varies depending upon whether the Canadian Lender is a bank named under Schedule I or II to the Bank Act (Canada) or neither) plus a margin equal to 0.75 percent (subject to adjustment as described below), or (ii) the annual rate of interest announced from time to time by the Canadian agent bank under the Revolving Credit Agreement as its “prime rate” for commercial loans in Canadian Dollars to borrowers in Canada. At July 31, 2000, there were no amounts outstanding under the U.S. Revolving Credit facility. At July 31, 2000, the U.S. Dollar equivalent of $9.7 million in revolving credit loans was outstanding under the Canadian Revolving Credit facility, at an applicable interest rate on such date of 7.50 percent.

•  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. Pursuant to the Indenture, the Company and the Company’s subsidiaries subject to the Indenture, are prohibited from paying any dividend to the direct or indirect holders of capital stock of the Company or such subsidiary, other than stock dividends or dividends made to the Company or any such subsidiary.

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Capital Growth

      During the year ended July 31, 2000, the Company made approximately $79 million in capital expenditures, a portion of which was used to open 84 new stores. Under its continued growth strategy, the Company plans to open approximately 150 new stores for which it will incur approximately $50 million in capital expenditures during the combined fiscal years 2001 and 2002. These stores are expected to solidify the Company’s core mall business by further penetrating markets where the Company is underrepresented and to expand into new markets such as outlet malls and selected urban settings. During the combined fiscal years 2001 and 2002, the Company anticipates spending approximately $60 million to remodel, relocate or refurbish approximately 250 additional stores. The Company also estimates it will make capital expenditures of approximately $35 million during the combined fiscal years 2001 and 2002 for enhancements to its management information systems and expansion and development of its e-commerce sites. In total, the Company anticipates spending approximately $190 million on capital expenditures during the combined fiscal years 2001 and 2002. The Revolving Credit Agreement limits the Company’s capital expenditures to $110 million for fiscal year 2001.

Other Activities Affecting Liquidity

•  Effective July 31, 2000, the Company sold, without recourse, all of the outstanding accounts receivable owned by ZFT, an indirect wholly owned subsidiary of the Company, to Associates and wholly owned subsidiary of AFCC. The accounts receivable acquired by Associates constituted substantially all of the assets of ZFT. The total purchase price for the accounts receivable was approximately $542 million. The Company recognized a pretax gain of $0.2 million, net of an allowance for final settlement and transaction costs. The purchase price is subject to post-closing adjustment for improperly classified receivables. The transaction is accounted for as a sale in accordance with SFAS No. 125. In connection with such sale, ZFT paid off all of its outstanding indebtedness and the Company’s receivables securitization facility was terminated.

      In connection with executing the Receivables Purchase Agreement, the Company entered into a ten year agreement whereby Hurley will issue private label credit cards branded with appropriate Company trademarks, and provide financing for the Company’s customers to purchase merchandise in exchange for payment by the Company of a merchant fee based upon a percentage of each credit card sale. The merchant fee is a percentage per credit sale credited to the Company under standard revolving accounts and a percentage per credit sale charged to the Company under certain promotional credit programs. The Company received a $41.8 million incentive for entering into the agreement. Portions of this payment are subject to refund for early termination of the agreement. This incentive payment will be recognized ratably over the term of the agreement.

      In connection with the Receivables Purchase Agreement, the Company agreed to merge JNB with and into Hurley (the “Merger”). The Company anticipates that the closing of merger will take place by the first calendar quarter of 2001. Until consummation of the merger of JNB with and into Hurley, the Company will sell without recourse its credit card receivables to Associates on a daily basis pursuant to an interim purchase and servicing arrangement. Following consummation of the merger, AFCC and its affiliates will assume responsibility for JNB’s previously owned credit operations, including servicing facilities in San Marcos, Texas; Clearwater, Florida; Tempe, Arizona; and San Juan, Puerto Rico.

      As a result of the sale of the Company’s customer receivables to AFCC and the Merger, the Company’s current credit processing service agreement with a third-party servicer will terminate upon conversion to AFCC’s systems, which is expected to occur by the first calendar quarter of 2001.

•  Under the terms of the Indenture governing the Senior Notes, the Company may, within 365 days of the date of the sale of its private label credit card operations to Associates and AFCC, invest the net cash proceeds from such sale (other than any net proceeds required to be applied to repay permanently any senior indebtedness of the Company) in capital expenditures, properties and other assets that replace the properties and assets that were the subject of such sale, in properties and assets that will be used in the business of the Company or in reasonably related businesses. To the extent that all or part of such net cash proceeds are not so applied prior to 365 days after the sale of the Company’s private label credit card operations, the Company

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•  On July 18, 2000, the Company announced a stock repurchase program pursuant to which the Company, from time to time at the discretion of management and the Board of Directors and in accordance with the Company’s usual policies and applicable securities laws, may purchase up to an aggregate of $50 million of the Company’s common stock on the open market through July 31, 2001. In April, 2000 the Company completed a $50 million repurchase program, which was authorized during September 1999. Under this program, the Company repurchased 1.3 million shares in fiscal 2000.

•  On August 11, 2000, the Company entered into an Agreement and Plan of Merger with Piercing Pagoda, Inc., a Delaware corporation, pursuant to which the Company through an indirect wholly owned subsidiary (Jewelry Expansion Corp.) agreed to acquire all of the outstanding shares of Piercing Pagoda.

      The Company through its subsidiary commenced a tender offer on August 22, 2000 to purchase all of the outstanding shares of Piercing Pagoda, Inc.’s $0.01 par value per share common stock for $21.50 per share in cash. The tender offer expired at 12:00 midnight, New York City time, on September 19, 2000. Based upon the report of the depository for the tender offer, at the expiration of the tender offer approximately 8,943,833 shares, representing 94.7 percent of the outstanding shares of Piercing Pagoda common stock were validly tendered and not withdrawn pursuant to the tender offer. On September 20, 2000, the Company acquired all of the shares of Piercing Pagoda common stock validly tendered pursuant to the tender offer at a purchase price of approximately $192.3 million. In order to complete its acquisition of Piercing Pagoda, the Company intends to merge Jewelry Expansion Corp., a wholly owned subsidiary of Zale Delaware, with and into Piercing Pagoda as soon as practicable. Pursuant to the merger, each share of Piercing Pagoda common stock not previously tendered in the tender offer will be converted into the right to receive $21.50 per share. The merger is not subject to the approval of the remaining outstanding shareholders of Piercing Pagoda. The total estimated purchase price for the acquisition is approximately $208 million plus the assumption of approximately $55 million in debt. The acquisition will be accounted for under the purchase method of accounting.

•  The Company has an operations services agreement for management information systems with a third-party servicer. The agreement, which began in December 1996, requires fixed payments totaling $34.4 million over a 60 month term and a variable amount based on usage.

•  Future liquidity will be enhanced to the extent that the Company is able to realize the cash benefit from utilization of its NOL against current and future tax liabilities. The cash benefit realized in fiscal year 2000 was approximately $8.9 million. As of July 31, 2000, the Company had a NOL (after limitations) of approximately $170 million, which represents up to $67 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.

      Management believes that operating cash flow and amounts available under the Revolving Credit Agreement 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 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. Since January 1, 2000, the Company has not experienced and does not expect any significant impact to its on-going business as a result of the date change. Similarly, the Company has not had any Year 2000 related problems with suppliers or service providers.

      The Company expended approximately $1.7 million indirect 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

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Inflation

      In management’s opinion, changes in net sales and net earnings that have resulted from inflation and changing prices have not been material during the periods presented. There is no assurance, however, that inflation will not materially affect the Company in the future.

      The Company is exposed to market risk from changes in interest rates which may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities. The Company does not use financial instruments for trading or other speculative purposes and is not party to any leveraged financial instruments.

      The Company is exposed to interest rate risk primarily through its borrowing activities, which are described under “Short-term Borrowings” and “Long-term Debt” in the Notes to the Consolidated Financial Statements. The majority of the Company’s borrowings are under variable rate arrangements. See “Short-term Borrowings” and “Long-term Debt” Notes to the Consolidated Financial Statements, which are incorporated herein by reference.

      The investments of the Company’s insurance subsidiaries, primarily stocks and bonds in the amount of $27.8 million, approximate market value at July 31, 2000.

      Based on the Company’s market risk sensitive instruments (including variable rate debt) outstanding at July 31, 2000, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations or cash flows as of such date.

      As a result of its Canadian operations, the Company is exposed to market risk from currency exchange rate exposure which may adversely affect the Company’s financial position, results of operations and cash flows. In seeking to minimize this risk, the Company manages exposures through its regular operating and financing activities. Based on the Company’s market risk from currency exchange rate exposure at July 31, 2000, the Company believes that there was no material market risk exposure to the Company’s consolidated financial position, results of operations or cash flows on such date.

Item 8.  Financial Statements and Supplementary Data

      The following Consolidated Financial Statements of the Company and supplementary data are included as pages F-1 through F-30 at the end of this Annual Report on Form 10-K:

      None.

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PART III

      The information required to be included in Part III of this Annual Report on Form 10-K is incorporated by reference to the Company’s Proxy Statement for the 2000 Annual Meeting of Stockholders.

PART IV

      The following documents are filed as part of this report.

1.  Financial Statements

      The list of financial statements required by this item is set forth in Item 8.

2.  Index to Financial Statement Schedules

      All other financial statements and financial statement schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are not material or are not applicable and, therefore, have been omitted or are included in the consolidated financial statements or notes thereto.

3.  Exhibits

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	(1)	Previously filed as an exhibit to the registrant’s Form 10-Q (No. 1-4129) for the quarterly period ended September 30, 1993, and incorporated herein by reference.
	(2)	Incorporated by reference to the corresponding exhibit to the registrant’s Registration Statement on Form S-1 (No. 33-73310) filed with the Commission on December 23, 1993, as amended.
	(3)	Previously filed as an exhibit to the registrant’s Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1995, and incorporated herein by reference.
	(4)	Previously filed as an exhibit to the registrant’s Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1996, and incorporated herein by reference.
	(5)	Previously filed as an exhibit to the registrant’s Form 10-Q for the quarterly period ended October 31, 1996, and incorporated herein by reference.
	(6)	Previously filed as an exhibit to the registrant’s Form 10-Q for the quarterly period ended January 31, 1997, and incorporated herein by reference.
	(7)	Previously filed as an exhibit to the registrants’ Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1997, and incorporated herein by reference.
	(8)	Incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-4 (No. 33-39473) filed with the Commission on November 4, 1997.
	(9)	Previously filed as an exhibit to the registrant’s Form 10-K (No. 1-04129) for the fiscal year ended July 31, 1998, and incorporated herein by reference.

(10)	Previously filed as an exhibit to the registrant’s Form 10-Q for the quarterly period ended October 31, 1998, and incorporated herein by reference.
(11)	Previously filed as an exhibit to the registrant’s Form 10-K (No. 1-04129) for the fiscal year ended July 31, 1999, and incorporated herein by reference.
(12)	Previously filed as an exhibit to the registrant’s Form 10-Q for the quarterly period October 31, 1999, and incorporated herein by reference.
(13)	Previously filed as an exhibit to the registrant’s Form 10-Q for the quarterly period April 30, 2000, and incorporated herein by reference.
(14)	Filed herewith.
(15)	Incorporated by reference to Exhibit 10.64 to Piercing Pagoda, Inc.’s Form  10-Q for the quarter ended June 30, 2000, previously filed with the Commission on August 14, 2000.
(16)	Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-8 (33-01789) filed with the Commission on March 18, 1996.

	*	Management Contracts and Compensatory Plans.

4.  Reports on Form 8-K

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

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MANAGEMENT’S REPORT

To the Stockholders of Zale Corporation:

      The integrity and consistency of the consolidated financial statements of Zale Corporation (the “Company”), which were prepared in accordance with generally accepted accounting principles, are the responsibility of management and properly include some amounts that are based upon estimates and judgments.

      The Company maintains a system of internal accounting controls to provide reasonable assurance, at appropriate cost, that the Company’s assets are protected and transactions are properly recorded. Additionally, the integrity of the financial accounting system is based on careful selection and training of qualified personnel, organizational arrangements which provide for appropriate division of responsibilities and communication of established written policies and procedures.

      The consolidated financial statements of the Company have been audited by Arthur Andersen LLP, independent public accountants. Their report expresses their opinion as to the fair presentation, in all material respects, of the financial statements and is based upon their independent audit conducted in accordance with generally accepted auditing standards.

      The Audit Committee, composed solely of outside directors, meets periodically with the independent public accountants and representatives of management to discuss auditing and financial reporting matters. In addition, the independent public accountants meet periodically with the Audit Committee without management representatives present and have free access to the Audit Committee at any time. The Audit Committee is responsible for recommending to the Board of Directors the engagement of the independent public accountants, which is subject to stockholder approval, and the general oversight review of management’s discharge of its responsibilities with respect to the matters referred to above.

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Zale Corporation:

      We have audited the accompanying consolidated balance sheets of Zale Corporation (a Delaware corporation) and subsidiaries as of July 31, 2000 and 1999, and the related consolidated statements of operations, cash flows, and stockholders’ investment for each of the three years in the period ended July 31, 2000. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zale Corporation and subsidiaries as of July 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2000, in conformity with accounting principles generally accepted in the United States.

	ARTHUR ANDERSEN LLP

Dallas, Texas

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ZALE CORPORATION AND SUBSIDIARIES

See Notes to the Consolidated Financial Statements.

F-4

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ZALE CORPORATION AND SUBSIDIARIES

See Notes to the Consolidated Financial Statements.

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ZALE CORPORATION AND SUBSIDIARIES