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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2009

Commission File Number 1-04129

Zale Corporation

A Delaware Corporation

IRS Employer Identification No. 75-0675400

901 W. Walnut Hill Lane

Irving, Texas 75038-1003

(972) 580-4000

Zale Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Zale Corporation was not required to submit electronically and post on the Company’s website Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months due to the Rule not being applicable to the Company for the current and previous periods.

Zale Corporation is a smaller reporting company and is not a well-known seasoned issuer.

Zale Corporation is not a shell company.

As of November 30, 2009, 32,040,312 shares of Zale Corporation’s Common Stock, par value $0.01 per share, were outstanding.

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ZALE CORPORATION AND SUBSIDIARIES

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PART I – FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See notes to consolidated financial statements.

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ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

See notes to consolidated financial statements.

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ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to consolidated financial statements.

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ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    BASIS OF PRESENTATION

References to the “Company,” “we,” “us,” and “our” in this Form 10-Q are references to Zale Corporation and its subsidiaries.  We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry in North America.  At October 31, 2009, we operated 1,251 specialty retail jewelry stores and 683 kiosks located mainly in shopping malls throughout the United States of America, Canada and Puerto Rico.  We report our operations under three segments: Fine Jewelry, Kiosk Jewelry and All Other.

Our Fine Jewelry segment is comprised of five brands, predominantly focused on the value-oriented consumer as our core customer target.  Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products.  Additionally, each brand differentiates itself through a customer experience with different points of emphasis.  Our brands have a centralized merchandising function that creates significant synergies and allows for teaming across brands.  Zales Jewelers® is our national brand in the U.S. providing moderately priced jewelry to a broad range of customers.  Zales Outlet® focuses on a slightly higher-income female self purchaser in outlet malls and neighborhood power centers.  Gordon’s Jewelers® is a value-oriented regional jeweler that caters to local fashions and emphasizes customer relationships.  Peoples Jewellers®, our national brand in Canada, provides customers with an affordable assortment and an accessible shopping experience.  Mappins Jewellers® offers Canadian customers a broad selection of merchandise from engagement rings to fashionable and contemporary fine jewelry.  The brands in the Fine Jewelry segment have expanded their presence in the retail market through their e-commerce sites, zales.com, zalesoutlet.com and gordonsjewelers.com.

The Kiosk Jewelry segment operates under the brand names Piercing Pagoda®, Plumb Gold™, and Silver and Gold Connection® through mall-based kiosks and reaches the opening price point customer.  The Kiosk Jewelry segment specializes in gold and silver products that capitalize on the latest fashion trends.

The All Other segment includes insurance and reinsurance operations.

We consolidate substantially all of our 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 our credit customers.  We consolidate our Canadian retail operations into Zale International, Inc., which is a wholly owned subsidiary of Zale Corporation.  All significant intercompany transactions have been eliminated.  Certain information included in the notes to the consolidated financial statements as of and for the three months ended October 31, 2008 has been restated.  The consolidated financial statements are unaudited and have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In management’s opinion, all material adjustments (consisting of normal recurring accruals and adjustments) and disclosures necessary for a fair presentation have been made.  Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.  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 Annual Report on Form 10-K for the fiscal year ended July 31, 2009 filed with Securities and Exchange Commission on October 29, 2009.

We have evaluated subsequent events through the issuance of the consolidated financial statements, which occurred on December 4, 2009.  There were no significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our consolidated financial statements.

2.    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

As discussed in more detail in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K as of July 31, 2009, the Company restated its consolidated financial statements for fiscal 2008 as a result of adjustments associated with advertising costs, intercompany accounts receivable, depository bank accounts, federal income taxes and personal property taxes.

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The tables below provide a reconciliation of our consolidated statement of operations and balance sheet for October 31, 2008 from amounts previously reported to the restated amounts.  We also have included a reconciliation of certain line items affected within our consolidated statement of cash flows for October 31, 2008 from amounts previously reported to the restated amounts.

CONSOLIDATED STATEMENT OF OPERATIONS

THREE MONTHS ENDED OCTOBER 31, 2008

(in thousands, except per share amounts)

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CONSOLIDATED BALANCE SHEET

OCTOBER 31, 2008

(in thousands)

(a)  Additional inventory totaling $17.3 million was included in the “as reported” balances with a corresponding adjustment to accounts payable and accrued liabilities.  The adjustment is related to inventory in-transit as of October 31, 2008.

CONSOLIDATED CASH FLOW DATA

FOR THE THREE MONTHS ENDED OCTOBER 31, 2008

(in thousands)

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3.              FAIR VALUE MEASUREMENTS

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (previously Statement of Financial Accounting Standard No. 157), establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair values.  These tiers include:

Level 1 – Quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

Level 3 – Instruments whose significant inputs are unobservable.

As cash and short-term cash investments, trade payables and certain other short-term financial instruments are all short-term in nature, their carrying amount approximates fair value.

The fair value of the $465.5 million of borrowings under our revolving credit facility totaled approximately $453.9 million as of October 31, 2009.  The fair value was based on estimates of current interest rates for similar debt.

Investments in debt and equity securities are reported as other assets in the accompanying consolidated balance sheets.  The fair values of these investments are based on quoted market prices in an active market, a Level 1 measurement in the fair value hierarchy.  All investments are classified as available-for-sale.  All long-term debt securities outstanding at October 31, 2009 will contractually mature within 1 to 23 years.  Investments, principally related to our insurance subsidiaries as of October 31, 2009 and 2008, were as follows (in thousands):

The carrying value of investments at October 31, 2009 and 2008 included a net unrealized gain of $0.7 million and a net unrealized loss of $0.7 million, respectively, which is included in accumulated other comprehensive income.  There were no material net realized gains or losses during the three months ended October 31, 2009 and 2008, as determined on the specific identification basis.

4.              LEASE TERMINATIONS

In connection with the sale of the Bailey Banks & Biddle brand in November 2007, the buyer, Finlay Fine Jewelry Corporation (“Finlay”), assumed the obligations for the store operating leases.  As a condition of this assignment, we remained contingently liable for the leases for the remainder of the respective lease terms, which generally ranged from fiscal 2010 through fiscal 2017.  The maximum potential liability for base rent payments under the leases totaled approximately $58 million as of October 31, 2009.  As of December 4, 2009, we finalized agreements or reached agreements in principle with the landlords to settle the contingent lease obligations for 38 of 45 leases.  Settlement discussions with respect to the contingent obligations for the remaining seven locations are still under negotiation.  Base rents for the remaining seven stores totaled approximately $27 million as of October 31, 2009.  On August 5, 2009, Finlay filed for Chapter 11 bankruptcy protection and subsequently decided to liquidate.

During fiscal 2009, we recorded lease termination charges related to the Bailey Banks & Biddle contingent lease obligations and certain store closures primarily in our Fine Jewelry segment.  The charges were based on preliminary agreements reached with the landlords and expectations of future payments required to settle the remaining leases.  In estimating the lease termination charges, certain assumptions were used including the period of time that would be required to finalize agreements with the landlords and the amounts that would be required to terminate the leases.

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While we believe we have made reasonable estimates and assumptions to record these charges, it is possible a material change could occur and we may be required to record additional charges.

The activity related to lease reserves associated with the store closures and the Bailey Banks & Biddle contingent lease obligations for the three months ended October 31, 2009 is as follows (in thousands):

5.              LOSS PER COMMON SHARE

Basic loss per common share is computed by dividing net loss available to common stockholders 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.  For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted share awards determined using the treasury stock method.  There were a total of 2.6 million and 2.7 million antidilutive stock options as of October 31, 2009 and 2008, respectively.

During the three months ended October 31, 2009 and 2008, we incurred a net loss of $59.7 million and $48.4 million, respectively.  A net loss causes all outstanding stock options and restricted share awards to be antidilutive (that is, the potential dilution would decrease the loss per share).  As a result, the basic and dilutive losses per common share are the same.

6.              COMPREHENSIVE LOSS

Comprehensive loss represents the change in equity during a period from transactions and other events, except those resulting from investments by and distributions to stockholders.  Comprehensive loss was $59.1 million and $82.6 million for the three months ended October 31, 2009 and 2008, respectively.  The following table gives further detail regarding changes in the composition of accumulated other comprehensive income (in thousands):

7.              INCOME TAXES

During the first quarter of fiscal 2010, we incurred a loss before income taxes totaling $58.5 million.  Due to uncertainties surrounding the utilization of net operating loss carryforwards generated in our U.S. subsidiaries, a valuation allowance totaling $26.1 million was recorded to fully offset the tax benefit associated with the loss.  In addition, taxable earnings were generated in our Canadian subsidiaries and in certain state tax jurisdictions resulting in the recognition of income tax expense totaling $1.2 million.

In November 2009, the Worker, Homeownership and Business Assistance Act of 2009 (the “WHBA”) was signed into law.  The WHBA includes provisions that extend the time period in which net operating loss carrybacks can be utilized from two years to five years, with certain limitations.  Pursuant to the provisions of the WHBA, we filed for a tax refund totaling approximately $17 million related to operating losses generated in fiscal 2009.

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8.              SEGMENTS

We report our business under three operating segments: Fine Jewelry, Kiosk Jewelry and All Other.  The Fine Jewelry segment consists of five principal brands, which sell diamonds, gemstone, gold jewelry and watches. These five brands have been aggregated into one reportable segment.  The Kiosk Jewelry segment operates under the brand names Piercing Pagoda®, Plumb Gold™, and Silver and Gold Connection® through mall-based kiosks and reaches the opening price point select jewelry customer.  The Kiosk Jewelry segment specializes in gold and silver products that capitalize on the latest fashion trends.  The All Other segment includes credit insurance operations, which provide offerings of insurance coverage primarily to our private label credit card customers.  Management’s expectation is that the overall economics of each of our major brands within each reportable segment will be similar over time.

We use earnings before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate segment profitability.  Unallocated costs before income taxes include corporate employee-related costs, administrative costs, information technology costs, corporate facilities and depreciation expense.

Income tax information by segment has not been included as taxes are calculated at a company-wide level and not allocated to each segment.

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9.              CONTINGENCIES

In November 2009, the Company, our Chief Executive Officer, Neal L. Goldberg, and three former officers, Rodney Carter, Mary E. Burton and Cynthia T. Gordon, were named as defendants in two purported class-action lawsuits filed in the United States District Court for the Northern District of Texas.  The suits allege various violations of securities laws arising from the financial statement errors that led to the restatement completed by the Company as part of its fiscal year 2009 Form 10-K.  The lawsuits request unspecified damages and costs.  The lawsuits are in the preliminary stage, and we intend to vigorously contest them.  However, the Company cannot predict the outcome or duration of the lawsuits.

We are involved in legal and governmental proceedings as part of the normal course of our business.  Reserves have been established based on management’s best estimates of our potential liability in these matters.  These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies.  Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

10.       DEFERRED REVENUE

We offer our customers lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period.  The revenue from the lifetime warranties is recognized on a straight-line basis over a five year period.  The change in deferred revenue associated with the sale of warranties is as follows (in thousands):

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ITEM 2.     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), and the audited consolidated financial statements of the Company (and the related notes thereto) and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Form 10-K for the fiscal year ended July 31, 2009.

Overview

We are a leading specialty retailer of fine jewelry in North America.  At October 31, 2009, we operated 1,251 fine jewelry stores and 683 kiosk locations primarily in shopping malls throughout the United States of America, Canada and Puerto Rico.  Our operations are divided into three business segments:  Fine Jewelry, Kiosk Jewelry and All Other.

The Fine Jewelry segment focuses on diamond product, but differentiates its brands to the consumer through merchandise assortments and marketing.  The Kiosk Jewelry segment reaches the opening price point of fine jewelry customers primarily through mall-based kiosks in the United States of America operating primarily under the name Piercing Pagoda®.  The All Other segment consists of our insurance operations, which provide insurance and reinsurance facilities for various types of insurance coverage offered primarily to our private label credit card customers.

Comparable store sales declined by 6.8 percent during the first quarter of fiscal 2010.  Gross margin increased by 10 basis points to 48.6 percent during the first quarter of fiscal 2010 compared to the same period in the prior year.  We believe the increase in gross margin is the result of a more disciplined promotional strategy that we began in the last half of fiscal 2009.  In November 2009, comparable store sales declined by 18.6 percent compared to the same period in the prior year.  Historically, the month of November has represented approximately 25 percent of total revenues for the second quarter of our fiscal year.  During the first quarter of fiscal 2010, we made significant progress toward the initiative we began in February 2009 realizing cost savings of approximately $24 million.  The costs savings consist primarily of selling, general and administrative expenses.

We believe the three initiatives we introduced in fiscal 2008 remain critical to our long-term success.  The initiatives are: (1) focusing on our core customer by providing clarity and value through compelling merchandise assortments, cleaner in-store presentation and an improved marketing message; (2) enhancing our operational effectiveness to ensure that our people and processes are aligned and focused on providing outstanding products and customer service; and (3) maintaining financial discipline with a continued focus on free cash flow generation and prudent use of capital.  We believe the most important of these initiatives under the current economic environment is maintaining financial discipline.  Accordingly, in February 2009, we announced an inventory and cost savings initiative expected to be realized through fiscal 2010 totaling approximately $75 million and $65 million, respectively.  The inventory reductions are to be achieved by selling and not replenishing inventory in closed stores and improved productivity through more efficient store level allocation at existing stores.  As of October 31, 2009, the inventory reductions and cost savings realized since inception of the initiative totaled approximately $67 million and $50 million, respectively.  The cost savings consist primarily of selling, general and administrative expenses.  We believe that we will achieve our goals under the initiative during fiscal 2010.

During the first quarter of fiscal 2010, the Canadian currency rate appreciated by approximately seven percent relative to the U.S. dollar.  Due to our Canadian operations being reported at the average U.S. dollar equivalent, the appreciation in the currency rate resulted in a $2.5 million increase in reported revenues, substantially offset by an increase in reported cost of sales and selling, general and administrative expenses of $1.2 million and $1.1 million, respectively.

Comparable store sales include internet sales and exclude revenue recognized from warranties and insurance premiums related to credit insurance policies sold to customers who purchase merchandise under our proprietary credit program.  The sales results of new stores are included beginning their thirteenth full month of operation.  The results of stores that have been relocated, renovated or refurbished are included in the calculation of comparable store sales on the same basis as other stores.  However, stores closed for more than 90 days due to unforeseen events (hurricanes, etc.) are excluded from the calculation of comparable store sales.

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From time to time, we include non-GAAP measurements of financial information in Management’s Discussion and Analysis of Financial Condition and Results of Operations.  We use these measurements as part of our evaluation of the performance of the Company.  In addition, we believe these measures provide useful information to investors, particularly in evaluating the performance of the Company in the current fiscal year as compared to prior periods.

Results of Operations

The following table sets forth certain financial information from our unaudited consolidated statements of operations expressed as a percentage of total revenues:

Three Months Ended October 31, 2009 Compared to Three Months Ended October 31, 2008

Revenues.  Revenues for the quarter ended October 31, 2009 were $329.2 million, a decrease of 9.6 percent compared to revenues of $364.1 million for the same period in the prior year.  Comparable store sales decreased 6.8 percent as compared to the same period in the prior year.  The decline in comparable store sales was driven by an 8.7 percent decrease in the average transaction price in our fine jewelry stores, partially offset by a 1.4 percent increase in the number of customer transactions in our fine jewelry stores.  We attribute the decline in the average transaction price and increase in the number of customer transactions primarily to promotional offerings during the first quarter of fiscal 2010 that offered selected lower priced items to preferred customers.  The decline in revenue was also due to a decrease in the number of open stores, partially offset by a $4.3 million increase in revenues recognized related to lifetime warranties and a $6.1 million increase related to the appreciation of the Canadian currency rate.

The Fine Jewelry segment contributed $282.7 million of revenues in the quarter ended October 31, 2009, a decrease of 10.0 percent as compared to $314.0 million for the same period in the prior year.

Revenues include $43.7 million in the Kiosk Jewelry segment compared to $47.0 million in the prior year, representing a decrease of 6.9 percent.  The decline in revenues is due primarily to a decrease in the number of open kiosks to 683 from 731 as of October 31, 2009 and 2008, respectively.

The All Other segment contributed $2.7 million in revenues for the quarter ended October 31, 2009, as compared to $3.1 million for the same period in the prior year, representing a decrease of 11.5 percent.

During the quarter ended October 31, 2009, we opened five stores in the Fine Jewelry segment.  In addition, we closed one store in the Fine Jewelry segment and one location in the Kiosk Jewelry segment.

Cost of Sales.  Cost of sales includes cost of merchandise sold, as well as receiving and distribution costs.  Cost of sales as a percentage of revenues was 51.4 percent for the quarter ended October 31, 2009, compared to 51.5 percent for the same period in the prior year.  The decrease is primarily due to an 80 basis point impact associated with a decline in store-wide discounts compared to the same period in the prior year, partially offset by an increase in the cost of merchandise.

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Selling, General and Administrative.  Included in selling, general and administrative expenses (“SG&A”) are store operating, advertising, buying and general corporate overhead expenses.  SG&A was 61.1 percent of revenues for the quarter ended October 31, 2009, compared to 61.3 percent for the same period in the prior year.  SG&A decreased by $22.0 million to $201.3 million for the quarter ended October 31, 2009.  The decrease is primarily the result of our expense reduction initiative totaling $22.5 million, including $15.1 million related to store closures, a $4.8 million decrease in promotional costs and a $2.9 million decrease in legal settlement and severance costs.  The decrease was partially offset by a $2.3 million increase in credit card fees and a $4.1 million increase in professional fees associated with the restatement of our prior year financial statements and a resulting SEC investigation.

Depreciation and Amortization.  Depreciation and amortization as a percentage of revenues for the quarters ended October 31, 2009 and 2008 was 4.1 percent.

Interest Expense.  Interest expense as a percentage of revenues for the quarters ended October 31, 2009 and 2008 was 0.6 percent and 1.0 percent, respectively.  In addition, interest expense decreased by $1.6 million to $1.9 million for the quarter ended October 31, 2009 as compared to the same period in prior year.  The decrease was the result of a decrease in the weighted average effective interest rate from 4.1 percent last year to 1.6 percent this year, partially offset by an increase in average borrowings compared to the same period in the prior year.

Income Tax Expense (Benefit).  Income tax expense totaled $1.2 million for the three months ended October 31, 2009, compared to an $18.6 million income tax benefit for the same period in the prior year.  Income tax expense for the three months ended October 31, 2009 is the result of a $26.1 million valuation allowance related to uncertainties surrounding the utilization of net operating loss carryforwards generated in our U.S. subsidiaries and taxable earnings generated primarily in our Canadian subsidiaries.  The income tax benefit for the three months ended October 31, 2008 is the result of operating losses that were expected to be utilized to offset tax expense associated with future earnings.

Liquidity and Capital Resources

Our cash requirements consist primarily of funding ongoing operations, including inventory requirements, capital expenditures for new stores, renovation of existing stores, upgrades to our information technology systems and distribution facilities and debt service.  In addition, from time to time, we have repurchased shares of our common stock.

Net cash used in operating activities increased from $58.1 million for the three months ended October 31, 2008 to $150.8 million for the three months ended October 31, 2009.  The increase of $92.7 million in the deficit is primarily the result of a $109 million decrease in accounts payable due to the timing of vendor payments compared to the same period in the prior year.  The increase was partially offset by a $60 million decrease in purchases of merchandise inventory.

Our business is highly seasonal, with a disproportionate amount of sales (approximately 35 percent) occurring in November and December of each year, the Holiday season.  Other important periods include Valentine’s Day and Mother’s Day.  We purchase inventory in anticipation of these periods and, as a result, have higher inventory and inventory financing needs immediately prior to these periods.  Owned inventory at October 31, 2009 was $902.3 million, a decrease of $99.6 million compared to inventory levels at October 31, 2008.  The decrease in inventory was primarily the result of our inventory reduction initiatives and store closures, partially offset by lower than expected sales.

Our cash requirements are funded through cash flows from operations, funds available under our revolving credit facility with a syndicate of lenders led by Bank of America, and vendor payment terms.  As of October 31, 2009, our revolving credit facility provided for borrowings up to $600 million (including $100 million in additional seasonal borrowing capacity).  Borrowings under the credit facility are capped at the lesser of: (1) 73 percent of the cost of eligible inventory during October through December and 69 percent for the remainder of the year (minus certain reserves that may be established under the credit facility), plus 85 percent of credit card receivables; or (2) 90 percent of the appraised liquidation value of eligible inventory (minus certain reserves that may be

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established under the credit facility), plus 85 percent of credit card receivables.  The credit facility provides for increased seasonal borrowing capacity of up to $100 million from October 15 through December 15 and contains an accordion feature that allows us to permanently increase the facility size in $25 million increments up to an additional $100 million, subject to approval by our lenders and certain other requirements.  Under the terms of the credit facility, we are required to maintain $50 million of borrowing availability or satisfy a minimum fixed charge coverage ratio of 1.1:1.0 for an applicable 12 month reference period.  We do not currently meet the minimum fixed charge coverage ratio.  Due to the seasonal nature of our business, borrowings under our credit facility during the Holiday season increase significantly and our borrowing availability must be closely managed.  Based on our cash flow projections for the remainder of fiscal 2010, we believe our borrowing availability will remain above $50 million, which will not trigger the fixed charge coverage ratio.  These cash flow projections are based on revenue and expenditure estimates for the remainder of fiscal 2010.  If our actual results are not consistent with our revenue and expenditure projections, our borrowing availability threshold may not remain above $50 million.  We also manage availability under the credit facility by monitoring the timing of merchandise receipts and vendor payments.  Our vendor terms are generally 30 to 60 days, but have decreased during the year due to credit-related factors.

Based on an inventory appraisal performed as of June 30, 2009, the available borrowings under the credit facility are currently determined under item (2) described above.  For the period of September 2009 through August 2010, monthly borrowing rates calculated from the cost of eligible inventory are as follows: 66 percent for September 2009, 73 percent for October 2009 through December 2009, and are projected to range from 60 percent to 63 percent for January 2010 through August 2010.  These rates are subject to periodic adjustment under the provisions of the credit facility.

Our credit facility expires in August 2011.  Conditions in the credit markets are volatile and it is unclear if, or under what terms, we will be able to extend or replace the facility.

As of October 31, 2009, we had cash and cash equivalents totaling $24.0 million.  We also had approximately $129 million of available borrowing capacity under our revolving credit facility.  As described above, if we do not maintain $50 million of available borrowing capacity, we would be required to comply with certain financial covenants that we currently do not meet.  Allowing for the $50 million, we have $79 million available under our credit facility.  We believe that we have sufficient capacity under our credit facility to meet our foreseeable financing needs.

Under arrangements with Citibank, N.A. and one of its subsidiaries (collectively, “Citibank”), Citibank provides financing for our customers to purchase merchandise through private label credit cards.  The arrangements also enable us to write credit insurance.  Customers use our Citibank arrangements to pay for approximately 40 percent of purchases in the U.S. and approximately 30 percent of purchases in Canada.  The U.S. and Canadian agreements with Citibank are scheduled to expire in March 2011.  The U.S. agreement will automatically renew for an additional five years and the Canadian agreement will automatically renew for an additional two years if neither party provides a notice of termination during fiscal 2010.  Conditions in the credit markets are volatile and it is unclear if, or under what terms, we will be able to extend or replace the arrangements with Citibank.

In connection with the sale of the Bailey Banks & Biddle brand in November 2007, the buyer, Finlay Fine Jewelry Corporation (“Finlay”), assumed the obligations for the store operating leases.  As a condition of this assignment, we remained contingently liable for the leases for the remainder of the respective lease terms, which generally ranged from fiscal 2010 through fiscal 2017.  The maximum potential liability for base rent payments under the leases totaled approximately $58 million as of October 31, 2009.  As of December 4, 2009, we finalized agreements or reached agreements in principle with the landlords to settle the contingent lease obligations for 38 of 45 leases.  Settlement discussions with respect to the contingent obligations for the remaining seven locations are still under negotiation.  Base rents for the remaining seven stores totaled approximately $27 million as of October 31, 2009.  On August 5, 2009, Finlay filed for Chapter 11 bankruptcy protection and subsequently decided to liquidate.  As of October 31, 2009, the remaining lease reserve associated with the Bailey Banks & Biddle contingent lease obligations totaled $16.9 million.  During the three months ended October 31, 2009, we made payments totaling $6.2 million related to the lease terminations.  While we believe we have made reasonable estimates and assumptions to record these charges, it is possible a material change could occur and we may be required to record additional charges.

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During fiscal 2009, we recorded lease termination charges related to certain store closures primarily in our Fine Jewelry segment.  As of October 31, 2009, the remaining lease reserve associated with the store closures totaled $14.5 million.  During the three months ended October 31, 2009, we made payments totaling $5.8 million related to the closures.

In February 2009, we announced inventory and cost savings initiatives expected to be realized through fiscal 2010 totaling approximately $75 million and $65 million, respectively.  The inventory reductions are to be achieved by selling and not replenishing inventory in closed stores and improved productivity through more efficient store level allocation at existing stores.  The inventory reductions achieved as of October 31, 2009 totaled approximately $67 million.  As of October 31, 2009, the cost savings realized since inception of the initiative totaled approximately $50 million and consisted primarily of selling, general and administrative expenses.

In November 2009, the Worker, Homeownership and Business Assistance Act of 2009 (the “WHBA”) was signed into law.  The WHBA includes provisions that extend the time period in which net operating loss carrybacks can be utilized from two years to five years, with certain limitations.  Pursuant to the provisions of the WHBA, we filed for a tax refund totaling approximately $17 million related to operating losses generated in fiscal 2009.

In fiscal 2008, the Board of Directors authorized share repurchases of $350 million.  As part of the stock repurchase program, we repurchased a total of 17.6 million shares of our common stock, or $326.7 million, in fiscal 2008.  As of October 31, 2009, we have approximately $23.3 million in remaining authorization under our repurchase program.

Capital Growth

During the three months ended October 31, 2009, we invested approximately $2.1 million in capital expenditures to open five new stores in the Fine Jewelry segment.  We invested approximately $2.1 million to remodel, relocate and refurbish four stores in our Fine Jewelry segment and to complete store enhancement projects.  We also invested $0.7 million in infrastructure, primarily related to our information technology and distribution centers.  We anticipate investing approximately $15.1 million in capital expenditures for the remainder of fiscal year 2010, including $0.9 million to open two new stores, $10.3 million in existing store refurbishments and approximately $3.9 million in capital investments related to information technology infrastructure and support operations.