EXHIBIT 10.2

 

EXECUTION VERSION

 

AMENDED AND RESTATED CREDIT AGREEMENT

 

dated as of
July 24, 2012,

 

among

 

ZALE DELAWARE, INC.,
ZALE CORPORATION,
ZGCO, LLC,
TXDC, L.P., and
ZALE PUERTO RICO, INC.,
as Borrowers,

 

The FACILITY GUARANTORS Named Herein,

 

The LENDERS Party Hereto, and

 

Z INVESTMENT HOLDINGS, LLC
as Administrative Agent

 

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TABLE OF CONTENTS

 

 

 

Page

 

 

ARTICLE I DEFINITIONS

3

 

 

 

SECTION 1.1

Defined Terms

3

SECTION 1.2

Terms Generally

30

 

 

ARTICLE II AMOUNT AND TERMS OF CREDIT

31

 

 

 

SECTION 2.1

Loans of the Lenders

31

SECTION 2.2

[Intentionally Omitted]

32

SECTION 2.3

[Intentionally Omitted]

32

SECTION 2.4

[Intentionally Omitted]

32

SECTION 2.5

[Intentionally Omitted]

32

SECTION 2.6

[Intentionally Omitted]

32

SECTION 2.7

[Intentionally Omitted]

32

SECTION 2.8

Notes; Repayment of Loans

32

SECTION 2.9

Interest on Loans

32

SECTION 2.10

Default Interest

33

SECTION 2.11

Certain Amounts

33

SECTION 2.12

[Intentionally Omitted]

33

SECTION 2.13

[Intentionally Omitted]

33

SECTION 2.14

Nature of Payable Amounts

33

SECTION 2.15

[Intentionally Omitted]

33

SECTION 2.16

[Intentionally Omitted]

33

SECTION 2.17

Prepayment Premium; Make Whole Amount

33

SECTION 2.18

Mandatory Prepayment

34

SECTION 2.19

Optional Prepayment of Loans; Reimbursement of Lenders

35

SECTION 2.20

Maintenance of Loan Account; Statements of Account

35

SECTION 2.21

Cash Management

36

SECTION 2.22

[Intentionally Omitted]

37

SECTION 2.23

Increased Costs

37

SECTION 2.24

[Intentionally Omitted]

38

SECTION 2.25

Payments; Sharing of Setoff

38

SECTION 2.26

Taxes

40

SECTION 2.27

Security Interests in Collateral

44

SECTION 2.28

Mitigation Obligations; Replacement of Lenders

45

SECTION 2.29

[Intentionally Omitted]

45

SECTION 2.30

Zale Puerto Rico; Canadian Loan Parties

45

SECTION 2.31

Defaulting Lenders

46

 

 

ARTICLE III REPRESENTATIONS AND WARRANTIES

47

 

 

 

SECTION 3.1

Organization; Powers

47

SECTION 3.2

Authorization; Enforceability

47

SECTION 3.3

Governmental Approvals; No Conflicts

48

SECTION 3.4

Financial Condition

48

 

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TABLE OF CONTENTS
(Continued)

 

SECTION 3.5

Properties

49

SECTION 3.6

Litigation and Environmental Matters

49

SECTION 3.7

Compliance with Laws and Agreements

49

SECTION 3.8

Investment Company Status

49

SECTION 3.9

Taxes

50

SECTION 3.10

ERISA; No Canadian Plans

50

SECTION 3.11

Disclosure

52

SECTION 3.12

Subsidiaries

52

SECTION 3.13

Insurance

52

SECTION 3.14

Accounts; Credit Cards

52

SECTION 3.15

Labor Matters

52

SECTION 3.16

Security Documents

53

SECTION 3.17

Federal Reserve Regulations

53

SECTION 3.18

Solvency

53

SECTION 3.19

Foreign Assets Control Regulations, Etc.

53

SECTION 3.20

Excluded Subsidiaries

54

SECTION 3.21

Insurance Subsidiaries

54

 

 

ARTICLE IV CONDITIONS

54

 

 

SECTION 4.1

Effective Date

54

 

 

ARTICLE V AFFIRMATIVE COVENANTS

57

 

 

 

SECTION 5.1

Financial Statements and Other Information

57

SECTION 5.2

Notices of Material Events

60

SECTION 5.3

Information Regarding Collateral

61

SECTION 5.4

Existence; Conduct of Business

61

SECTION 5.5

Payment of Obligations

62

SECTION 5.6

Maintenance of Properties

62

SECTION 5.7

Insurance

62

SECTION 5.8

Casualty and Condemnation

63

SECTION 5.9

Books and Records; Inspection and Audit Rights; Appraisals; Consultants for the
Administrative Agent and Lenders

64

SECTION 5.10

Compliance with Laws

64

SECTION 5.11

Employee Benefit Plans

65

SECTION 5.12

Use of Proceeds and Letters of Credit

65

SECTION 5.13

New Subsidiaries

65

SECTION 5.14

Further Assurances

65

SECTION 5.15

Physical Inventories

66

SECTION 5.16

Compliance with Terms of Leaseholds

66

SECTION 5.17

Post-Closing

66

 

 

ARTICLE VI NEGATIVE COVENANTS

66

 

 

 

SECTION 6.1

Indebtedness and Other Obligations

66

SECTION 6.2

Liens

68

SECTION 6.3

Fundamental Changes

71

SECTION 6.4

Investments, Loans, Advances, Guarantees and Acquisitions

71

 

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TABLE OF CONTENTS
(Continued)

 

SECTION 6.5

Asset Sales

74

SECTION 6.6

Restricted Payments; Certain Payments of Indebtedness

75

SECTION 6.7

Transactions with Affiliates

76

SECTION 6.8

Financial Covenants

76

SECTION 6.9

Hedging Agreement

77

SECTION 6.10

[Intentionally Omitted]

77

SECTION 6.11

Canadian Plans

77

SECTION 6.12

Burdensome Agreements

77

SECTION 6.13

Amendment of Material Documents

78

SECTION 6.14

Change in Nature of Business

78

SECTION 6.15

Certain Matters Relating to Zale Insurance Subsidiaries

78

 

 

ARTICLE VII EVENTS OF DEFAULT

79

 

 

 

SECTION 7.1

Events of Default

79

SECTION 7.2

When Continuing

82

SECTION 7.3

Remedies on Default

82

SECTION 7.4

Application of Proceeds

83

 

 

ARTICLE VIII THE ADMINISTRATIVE AGENT

84

 

 

 

SECTION 8.1

Administration by the Administrative Agent

84

SECTION 8.2

[Intentionally Omitted]

84

SECTION 8.3

[Intentionally Omitted]

84

SECTION 8.4

[Intentionally Omitted]

84

SECTION 8.5

Agreement of Applicable Lenders

84

SECTION 8.6

Liability of Administrative Agent

85

SECTION 8.7

Reimbursement and Indemnification

86

SECTION 8.8

Rights of Administrative Agent

86

SECTION 8.9

Independent Lenders and Issuing Bank

86

SECTION 8.10

Notice of Transfer

87

SECTION 8.11

Relation Among the Lenders and the Other Credit Parties

87

SECTION 8.12

Successor Administrative Agent

87

SECTION 8.13

Reports and Financial Statements

87

SECTION 8.14

Agency for Perfection

87

SECTION 8.15

[Intentionally Omitted]

88

SECTION 8.16

Collateral Matters

88

 

 

ARTICLE IX MISCELLANEOUS

89

 

 

 

SECTION 9.1

Notices

89

SECTION 9.2

Waivers; Amendments

90

SECTION 9.3

Expenses; Indemnity; Damage Waiver

92

SECTION 9.4

Successors and Assigns

93

SECTION 9.5

[Intentionally Omitted]

96

SECTION 9.6

Survival

97

SECTION 9.7

Counterparts; Integration; Effectiveness

97

SECTION 9.8

Severability

97

SECTION 9.9

Right of Setoff

98

 

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TABLE OF CONTENTS
(Continued)

 

SECTION 9.10

Governing Law; Jurisdiction; Consent to Service of Process

98

SECTION 9.11

Waiver of Jury Trial

99

SECTION 9.12

Headings

99

SECTION 9.13

Interest Rate Limitation

99

SECTION 9.14

Confidentiality

99

SECTION 9.15

Additional Waivers

100

SECTION 9.16

Press Releases and Related Matters

101

SECTION 9.17

Patriot Act; Proceeds of Crime Act

101

SECTION 9.18

Judgment Currency

102

SECTION 9.19

No Strict Construction

103

SECTION 9.20

No Advisory or Fiduciary Responsibility

103

SECTION 9.21

Payments Set Aside

103

SECTION 9.22

Intercreditor Agreement

104

SECTION 9.23

Existing Credit Agreement Amended and Restated; No Novation

104

SECTION 9.24

Acknowledgment of Prior Obligations and Continuation Thereof

104

 

 

 

EXHIBITS

 

 

 

 

A

Form of Assignment and Acceptance

 

B

Form of Note

 

C-1

Form of Security Agreement

 

C-2

Form of General Security Agreement

 

D

Form of Borrowing Base Certificate

 

E

Form of Compliance Certificate

 

F-1

Form of U.S. Tax Compliance Certificate

 

F-2

Form of U.S. Tax Compliance Certificate

 

F-3

Form of U.S. Tax Compliance Certificate

 

F-4

Form of U.S. Tax Compliance Certificate

 

 

 

 

SCHEDULES

 

 

 

 

1.1

Lenders and Existing Loans

 

2.21(a)(i)

DDAs and Concentration Accounts

 

2.21(a)(ii)

Credit Card Arrangements

 

3.5(b)

Intellectual Property

 

3.6

Litigation and Environmental Matters

 

3.12

Subsidiaries

 

3.13

Insurance

 

5.1(l)

Financial Reporting Requirements

 

5.17

Post-Closing

 

6.1

Indebtedness

 

6.2

Liens

 

 

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TABLE OF CONTENTS
(Continued)

6.4

Investments

 

6.7

Transactions with Affiliates

 

6.12

Burdensome Agreement Encumbrances

 

 

vi

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AMENDED AND RESTATED CREDIT AGREEMENT dated as of July 24, 2012 (this
“Agreement”) among

 

ZALE DELAWARE, INC., a corporation organized under the laws of the State of
Delaware having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“Zale Delaware”); and

 

ZALE CORPORATION, a corporation organized under the laws of the State of
Delaware having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“Zale”); and

 

ZGCO, LLC, a limited liability company organized under the laws of the
Commonwealth of Virginia having a place of business at 901 W. Walnut Hill Lane,
Irving, Texas 75038-1003 (“ZGCO”); and

 

TXDC, L.P., a limited partnership organized under the laws of the State of
Texas, having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“TXDC”); and

 

ZALE PUERTO RICO, INC., a Puerto Rico corporation having a place of business at
901 W. Walnut Hill Lane, Irving, Texas 75038-1003 (“Zale PR”) and together with
Zale Delaware, Zale, ZGCO, and TXDC, the “Initial Borrowers”); and

 

ZALE CANADA CO., an unlimited company organized under the laws of Nova Scotia
having a place of business at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003
(“Zale Canada”); and

 

ZALE CANADA DIAMOND SOURCING INC., a limited company organized under the laws of
Nova Scotia having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“ZCDS”); and

 

ZAP, INC., a Delaware corporation having a place of business at 901 W. Walnut
Hill Lane, Irving, Texas 75038-1003 (“Zap”); and

 

ZCSC, LLC, a Delaware limited liability company having a place of business at
901 W. Walnut Hill Lane, Irving, Texas 75038-1003 (“ZCSC”); and

 

ZALE INTERNATIONAL, INC., a Delaware corporation having a place of business at
901 W. Walnut Hill Lane, Irving, Texas 75038-1003 (“Zale International”); and

 

ZALE EMPLOYEES’ CHILD CARE ASSOCIATION, INC., a Texas corporation having a place
of business at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003 (“ZECCA”); and

 

ZALE CANADA HOLDING LP, a limited partnership organized under the laws of New
Brunswick having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“ZC Holding”); and

 

1

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ZALE CANADA FINCO 1, INC., a limited company organized under the laws of Nova
Scotia having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“Finco 1”); and

 

ZALE CANADA FINCO 2, INC., a limited company organized under the laws of Nova
Scotia having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“Finco 2”); and

 

FINCO HOLDING LP, a limited partnership organized under the laws of New
Brunswick having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“Finco Holding”); and

 

FINCO PARTNERSHIP LP, a limited partnership organized under the laws of New
Brunswick having a place of business at 901 W. Walnut Hill Lane, Irving, Texas
75038-1003 (“Finco Partnership”); and

 

ZALE CANADA FINCO, LLC, a limited liability company organized under the laws of
the State of Delaware having a place of business at 901 W. Walnut Hill Lane,
Irving, Texas 75038-1003 (“ZC Finco”, and together with Zale Canada, ZCDS, Zap,
ZCSC, Zale International, Zecca, ZC Holding, Finco 1, Finco 2, Finco Holding,
and Finco Partnership, the “Initial Facility Guarantors”); and

 

the LENDERS party hereto; and

 

Z INVESTMENT HOLDINGS, LLC, a Delaware limited liability company (“ZIH, LLC”),
as Administrative Agent.

 

W I T N E S S E T H:

 

WHEREAS, Zale, as borrower, has entered into a Credit Agreement, dated as of May
10, 2010 (as amended and in effect, the “Existing Credit Agreement”), among
Zale, each lender from time to time party thereto (each, an “Existing Lender”),
and ZIH, LLC, as administrative agent (in such capacity, the “Existing
Administrative Agent”); and

 

WHEREAS, in accordance with SECTION 10.01 of the Existing Credit Agreement,
Zale, as borrower, the Lenders, and the Administrative Agent desire to amend and
restate the Existing Credit Agreement as provided herein.

 

NOW, THEREFORE, in consideration of the mutual conditions and agreements set
forth in this Agreement, and for good and valuable consideration, the receipt of
which is hereby acknowledged, the undersigned hereby agree that the Existing
Credit Agreement shall be amended and restated in its entirety (except to the
extent that definitions from the Existing Credit Agreement are incorporated
herein by reference) to read as follows (it being agreed that this Agreement
shall not be deemed to evidence or result in a novation or repayment and
reborrowing of the Obligations under (and as defined in) the Existing Credit
Agreement):

 

2

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ARTICLE I
DEFINITIONS

 

SECTION 1.1             Defined Terms.  As used in this Agreement, the following
terms have the meanings specified below:

 

“ABL Agent” means Bank of America, N.A., as administrative agent and collateral
agent under the ABL Loan Documents or any future administrative agent or
collateral agent under the ABL Loan Documents.

 

“ABL Credit Agreement” means that certain Second Amended and Restated Credit
Agreement dated as of July 24, 2012, among the Borrowers, the Facility
Guarantors, the “Lenders” as defined therein, Bank of America, N.A. as
“Administrative Agent” and “Collateral Agent” and Bank of America, N.A. Wells
Fargo Bank, National Association and General Electric Capital Corporation, as
Co-Borrowing Base Agents, as amended, amended and restated, supplemented or
otherwise modified from time to time or any Permitted Refinancing thereof, in
each case, in accordance with the provisions of the Intercreditor Agreement.

 

“ABL Credit Extensions” means “Credit Extensions” (as defined in the ABL Credit
Agreement in effect on the date hereof).

 

“ABL Lenders” means the “Lenders” (as defined in the ABL Credit Agreement in
effect on the date hereof).

 

“ABL Line Cap” means the “Line Cap” (as defined in the ABL Credit Agreement in
effect on the date hereof).

 

“ABL Loan Documents” means the “Loan Documents” (as defined in the ABL Credit
Agreement in effect on the date hereof) as may be amended from time to time in
accordance with the provisions of the Intercreditor Agreement.

 

“ABL Loans” means the “Loans” (as defined in the ABL Credit Agreement in effect
on the date hereof).

 

“ABL Obligations” means the “Obligations” (as defined in the ABL Credit
Agreement in effect on the date hereof).

 

“ABL Priority Collateral” has the meaning set forth in the Intercreditor
Agreement.

 

“ABL Total Commitments” means the “Total Commitments” (as defined in the ABL
Credit Agreement in effect on the date hereof).

 

“Account” means any right to payment for goods sold or leased or for services
rendered, whether or not earned by performance, or any right to payment for
credit extended for goods sold or leased or services rendered.

 

“ACH” means automated clearing house transfers.

 

3

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“Administrative Agent” means ZIH, LLC, in its capacity as administrative agent
for the Lenders hereunder, or any successor administrative agent.

 

“Affiliate” means, with respect to a specified Person, another Person that
directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified; provided
that no Existing Lender (or any Affiliate of an Existing Lender) shall be deemed
to be an Affiliate of the Loan Parties.

 

“Agent” means the Administrative Agent.

 

“Aggregate FILO Commitments” means the FILO Commitments of all the FILO Lenders,
as reduced by the Borrowers pursuant to SECTION 2.15 of the ABL Credit
Agreement.  As of the Effective Date, the Aggregate FILO Commitments are in the
sum of $15,000,000.

 

“Agreement” has the meaning set forth in the preamble.

 

“Applicable Lenders” means the Required Lenders, the Required Supermajority
Lenders, all affected Lenders, or all Lenders, as applicable.

 

“Appraised Intellectual Property Liquidation Value” means the net orderly
liquidation value of the Borrowers’ Intellectual Property determined from the
then most recent appraisal of the Borrowers’ Intellectual Property undertaken at
the request of the Administrative Agent, to reflect the appraiser’s estimate of
the net recovery on the Borrowers’ Intellectual Property in the event of an
orderly liquidation of that Intellectual Property.

 

“Appraised Inventory Liquidation Value” has the meaning set forth in the ABL
Credit Agreement in effect as of the date hereof.

 

“Assignment and Acceptance” means an assignment and acceptance entered into by a
Lender and an assignee (with the consent of each party whose consent is required
by SECTION 9.4), and accepted by the Administrative Agent, substantially in the
form of Exhibit A or any other form approved by the Administrative Agent.

 

“Bank of America” means Bank of America, N.A., a national banking association,
and its Subsidiaries, Affiliates and branches.

 

“Bankruptcy Code” shall mean Title 11 of the United States Code, as now or
hereafter in effect or any successor thereto.

 

“Blocked Account Agreements” has the meaning set forth in SECTION 2.21(b).

 

“Board” means the Board of Governors of the Federal Reserve System of the United
States of America.

 

“Borrowers” means the Initial Borrowers and any other Subsidiary of Zale which
becomes a Borrower under this Agreement pursuant to a joinder agreement to this

 

4

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Agreement and the Loan Documents, as applicable, with the other parties hereto
and thereto, in form and substance satisfactory to the Administrative Agent.

 

“Borrowing” means the borrowing of the Loans on the Effective Date pursuant to
SECTION 2.1.

 

“Borrowing Base” has the meaning set forth in the ABL Credit Agreement in effect
as of the date hereof.

 

“Borrowing Base Certificate” has the meaning set forth in SECTION 5.1(f).

 

“Business Day” means any day that is not a Saturday, Sunday or other day on
which commercial banks in Boston, Massachusetts, San Francisco, California, New
York, New York or Dallas, Texas are authorized or required by law to remain
closed.

 

“Canadian Loan Party” or “Canadian Loan Parties” means each Loan Party organized
under organized under the laws of Canada or any province or territory thereof.

 

“Canadian Plan” means an employee pension benefit plan or pension plan that is
covered by the Laws of any jurisdiction in Canada including the Pension Benefits
Act (Ontario) and the Income Tax Act (Canada) or subject to minimum funding
standards and that is either (a) maintained or sponsored by any Canadian Loan
Party for its employees, (b) maintained pursuant to a collective bargaining
agreement, or other arrangement under which more than one employer makes
contributions and to which any Canadian Loan Party is making or accruing an
obligation to make contributions or has within the preceding five years made or
accrued such contributions or (c) any other plan with respect to which any
Canadian Loan Party has incurred or may incur liability, including contingent
liability either to such plan or to any Person, administration or Governmental
Authority.

 

“Canadian Restructuring” means a series of transactions undertaken after the
Effective Date to streamline Zale’s Canadian entity structure consisting of
(a) the dissolution and liquidation of ZC Partnership, (b) the conversion of
ZCDS into an unlimited company and (c) the merger, amalgamation, liquidation,
dissolution and/or distribution and contribution of ZCDS, Finco 1, Finco 2,
Finco Holding, Finco Partnership and ZC Finco, with and/or into Zale Canada as
the owner of the assets of the entities so merged, amalgamated, liquidated,
dissolved or distributed and contributed following the completion of the
restructuring.

 

“Capital Expenditures” means, for any period, (a) the additions to property,
plant and equipment and other capital expenditures of the Borrowers and their
Subsidiaries that are (or would be) set forth in a consolidated statement of
cash flows of the Borrowers and their Subsidiaries for such period prepared in
accordance with GAAP and (b) Capital Lease Obligations incurred by the Borrowers
and their Subsidiaries during such period.

 

“Capital Lease Obligations” means of any Person, the obligations of such Person
to pay rent or other amounts under any lease of (or other arrangement conveying
the right to use) real (immovable) or personal (movable) property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance

 

5

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sheet of such Person under GAAP, and the amount of such obligations shall be the
capitalized amount thereof determined in accordance with GAAP.

 

“Cash Control Event” has the meaning set forth in the ABL Credit Agreement as in
effect on the date hereof.

 

“CDN$” means Canadian Dollars.

 

“CERCLA” means the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. § 9601 et seq.

 

“CFC” means a controlled foreign corporation (as that term is defined in
Section 957(a) of the Code).

 

“Change in Control” means, at any time, (a) occupation of a majority of the
seats (other than vacant seats) on the board of directors of Zale by Persons who
were neither (i) nominated by the board of directors of Zale or (ii) appointed
by directors so nominated; or (b) the acquisition of fifty percent (50%) or more
of the Stock of Zale by any Person or group of Persons, or (c) the failure of
Zale or another Borrower to own directly 100% of the Stock or other ownership
interest of Zale Delaware, ZGCO, TXDC, Zale PR and Zale Canada.

 

“Change in Law” means (a) the adoption of any law, rule or regulation after the
date of this Agreement, (b) any change in any law, rule or regulation or in the
interpretation or application thereof by any Governmental Authority after the
date of this Agreement or (c) compliance by any Lender (or, for purposes of
SECTION 2.23(b), by any lending office of such Lender or by such Lender’s
holding company, if any) with any request, guideline or directive (whether or
not having the force of law) of any Governmental Authority made or issued after
the date of this Agreement; provided that notwithstanding anything herein to the
contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and
all requests, rules, guidelines or directives thereunder or issued in connection
therewith and (y) all requests, rules, guidelines or directives promulgated by
the Bank for International Settlements, the Basel Committee on Banking
Supervision (or any successor or similar authority) or the United States or
foreign regulatory authorities, in each case pursuant to Basel III, shall in
each case be deemed to be a “Change in Law”, regardless of the date enacted,
adopted or issued.

 

“Charges” has the meaning set forth in SECTION 9.13.

 

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

 

“Collateral” means any and all “Collateral” as defined in any applicable
Security Document.

 

“Compliance Certificate” means a certificate substantially in the form of
Exhibit E.

 

“Concentration Accounts” has the meaning set forth in SECTION 2.21(a).

 

6

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“Consolidated EBITDA” means Consolidated Net Income for any period plus
(a) without duplication, the sum of the following expenses of Zale and its
Subsidiaries for such period, in each case to the extent included in determining
said Consolidated Net Income: (i) depreciation expense, (ii) amortization
expense, excluding amortization expense attributable to a prepaid cash item,
(iii)  interest expense, (iv) total United States and foreign federal, state,
provincial and local income tax expense, (v) charges relating to the valuation
of inventory by application of the LIFO (last in/first out) method of inventory
valuation, (vi) non-cash compensation expense arising out of the grant or
exercise of stock options or other equity based compensation, (vii) the effect
of any non-cash impairment charges related to the write-off of goodwill,
property or equipment resulting from the application of GAAP, (viii) non-cash
restructuring charges, and (ix) all other non-cash charges less (b) without
duplication, in each case to the extent included in determining Consolidated Net
Income, the sum of (i) income earned during such period relating to the
valuation of inventory by the application of the LIFO method of inventory
valuation, (ii) interest income for such period, (iii) non-cash gains for such
period and (iv) total United States and foreign federal, state, provincial and
local income tax benefits provided during such period.

 

“Consolidated Net Income” means the consolidated net income (or loss) of Zale
and its Subsidiaries, after eliminating therefrom all non-cash extraordinary
items of income and all non-cash extraordinary items of loss, all determined on
a consolidated basis in accordance with GAAP; provided, however, that there
shall be excluded from Consolidated Net Income (a) the income (or loss) of any
Person in which Zale or any of its Subsidiaries has a joint interest except to
the extent of any cash dividends actually paid to Zale or its Subsidiaries,
(b) the income (or loss) of any Person accrued prior to the date it becomes a
Subsidiary of Zale or is merged into or consolidated with Zale or any of its
Subsidiaries or that Person’s assets are acquired by Zale or any of its
Subsidiaries and (c) the income of any direct or indirect Subsidiary of Zale
that is not a Loan Party or a Zale Insurance Subsidiary to the extent that, on
the date of determination, the declaration or payment of cash dividends or
similar cash distributions by such Subsidiary is not permitted without any prior
approval of any Governmental Authority that has not been obtained or is not
permitted by the operation of the terms of its charter, by-laws or other
organizational documents or any agreement or other instrument binding upon such
Subsidiary or any law applicable to such Subsidiary, unless such restrictions
with respect to the payment of cash dividends and other similar cash
distributions have been legally and effectively waived.

 

“Consolidated Total Interest Expense” means for any period, the aggregate amount
of interest required to be paid or payable in cash by Zale and its Subsidiaries
in respect of such period on all Disqualified Stock and all Indebtedness of Zale
and its Subsidiaries outstanding during all or any part of such period in
accordance with GAAP (including payments consisting of interest in respect of
Capital Lease Obligations or Synthetic Leases), but excluding all non-cash
interest expense including, but not limited to: (i) the amortization of original
issue discount associated with Indebtedness, (ii) the amortization of
capitalized issuance costs associated with Indebtedness, (iii) the amortization
of discount resulting from the valuation of any warrants issued in connection
with any Indebtedness, (iv) interest expense resulting from remaining
capitalized issuance costs associated with the Existing Credit Agreement and the
Existing ABL Credit Agreement, and (v) interest paid in the form of additional
Indebtedness.

 

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“Control” means the possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether
through the ability to exercise voting power, by contract or otherwise.  The
terms “Controlling” and “Controlled” have meanings correlative thereto.

 

“Cost” means the cost of Inventory as reported on the Loan Parties’ financial
stock ledger using the retail method of accounting based on practices which are
in effect on the date of this Agreement.

 

“Covenant Compliance Event” means that Excess Availability at any time is less
than or equal to the greater of (i) ten percent (10%) of the ABL Line Cap, or
(ii) $40,000,000. The termination of a Covenant Compliance Event as provided
herein shall in no way limit, waive or delay the occurrence of a subsequent
Covenant Compliance Event in the event that the conditions set forth in this
definition again arise.

 

“Credit Extensions” means as of any day the principal balance of all Loans then
outstanding.

 

“Credit Party” or “Credit Parties” means (a) individually, (i) each Lender and
its Affiliates, (ii) the Administrative Agent, (iii) GGC Administration, L.L.C.,
(iv) each beneficiary of each indemnification obligation undertaken by any Loan
Party under any Loan Document, (v) any other Person to whom Obligations under
this Agreement and other Loan Documents are owing, and (vi) the successors and
assigns of each of the foregoing, and (b) collectively, all of the foregoing.

 

“DDAs” means any checking or other demand deposit account maintained by the Loan
Parties.

 

“Debtor Relief Laws” means the Bankruptcy Code and all other liquidation,
conservatorship, bankruptcy, assignment for the benefit of creditors,
moratorium, rearrangement, receivership, insolvency, reorganization, or similar
debtor relief laws of the United States or other applicable jurisdictions from
time to time in effect, including, without limitation, the Bankruptcy and
Insolvency Act (Canada) and the Companies’ Creditors Arrangement Act (Canada).

 

“Default” means any event or condition that constitutes an Event of Default or
that upon notice, lapse of time or both would, unless cured or waived, become an
Event of Default.

 

“Defaulting Lender” means, subject to SECTION 2.31(b), any Lender that (a) has
failed to fund all or any portion of its Loans within two Business Days of the
date such Loans were required to be funded hereunder, or (b) has, or has a
direct or indirect parent company that has, (i) become the subject of a
proceeding under any Debtor Relief Law, or (ii) had appointed for it a receiver,
custodian, conservator, trustee, administrator, assignee for the benefit of
creditors or similar Person charged with reorganization or liquidation of its
business or assets, including the Federal Deposit Insurance Corporation or any
other state or federal regulatory authority acting in such a capacity; provided
that a Lender shall not be a

 

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Defaulting Lender solely by virtue of the ownership or acquisition of any Stock
in that Lender or any direct or indirect parent company thereof by a
Governmental Authority so long as such ownership interest does not result in or
provide such Lender with immunity from the jurisdiction of courts within the
United States or from the enforcement of judgments or writs of attachment on its
assets or permit such Lender (or such Governmental Authority) to reject,
repudiate, disavow or disaffirm any contracts or agreements made with such
Lender.  Any determination by the Administrative Agent that a Lender is a
Defaulting Lender (or if the Required Supermajority Lenders determine that the
Administrative Agent, in its capacity as a Lender, is a Defaulting Lender) under
any one or more of clauses (a) through (b) above, and of the effective date of
such status, shall be conclusive and binding absent manifest error, and such
Lender shall be deemed to be a Defaulting Lender (subject to SECTION 2.31(b)) as
of the date established therefor by the Administrative Agent (or the Required
Supermajority Lenders, if applicable) in a written notice of such determination,
which shall be delivered by the Administrative Agent (or the Required
Supermajority Lenders, if applicable) to the Borrowers and each other Lender
promptly following such determination.

 

“Discharge of ABL Obligations” has the meaning set forth in the Intercreditor
Agreement.

 

“Disqualified Stock” means any Stock (other than the Warrants and any Stock
issued in respect of the Warrants) that, by its terms (or by the terms of any
security into which it is convertible, or for which it is exchangeable for cash,
in each case at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the Maturity
Date; provided, however, that (i) only the portion of such Stock which so
matures or is mandatorily redeemable, is so convertible or exchangeable or is so
redeemable at the option of the holder thereof prior to such date shall be
deemed to be Disqualified Stock, (ii) with respect to any Stock issued to any
employee or to any plan for the benefit of employees of Zale or its Subsidiaries
or by any such plan to such employees, such Stock shall not constitute
Disqualified Stock solely because it may be required to be repurchased by Zale
or one of its Subsidiaries in order to satisfy applicable statutory or
regulatory obligations or as a result of such employee’s termination,
resignation, death or disability and (iii) if any class of Stock of such Person
by its terms authorizes such Person to satisfy its obligations thereunder by
delivery of Stock that is not Disqualified Stock, such Stock shall not be deemed
to be Disqualified Stock. Notwithstanding the preceding sentence, any Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require a Loan Party to repurchase such Stock upon the occurrence of a
change of control or an asset sale shall not constitute Disqualified Stock so
long as any rights of the holders thereof upon the occurrence of a change of
control or asset sale event shall be subject to the prior repayment in full of
the Obligations. The amount of Disqualified Stock deemed to be outstanding at
any time for purposes of this Agreement will be the maximum amount that Zale and
its Subsidiaries may become obligated to pay upon maturity of, or pursuant to
any mandatory redemption provisions of, such Disqualified Stock or portion
thereof, plus accrued dividends.

 

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“Dollars” or “$” means lawful money of the United States of America.

 

“Domestic Subsidiary” means any Subsidiary that is incorporated or formed under
the laws of the United States or any State or other political subdivision
thereof (including the District of Columbia).

 

“Effective Date” means the date on which the conditions specified in SECTION 4.1
are satisfied (or waived in accordance with SECTION 9.2).

 

“Effective Date Prepayment” means the prepayment on the Effective Date of
Existing Loans plus accrued and unpaid interest thereon in an aggregate amount
equal to $65,289,067.83 (it being understood that the Effective Date Prepayment
amount is exclusive of any amounts paid under the Side Letter).

 

“Eligible Credit Card Receivables” has the meaning set forth in the ABL Credit
Agreement in effect as of the date hereof.

 

“Eligible Inventory” has the meaning set forth in the ABL Credit Agreement in
effect as of the date hereof.

 

“Environmental Laws” means all laws, rules, regulations, codes, ordinances,
orders, decrees, judgments, injunctions, notices or binding agreements issued,
promulgated or entered into by or with any Governmental Authority, relating in
any way to the environment, preservation or reclamation of natural resources,
handling, treatment, storage, disposal, Release or threatened Release of any
Hazardous Material or to health and safety matters.

 

“Environmental Liability” means any liability, contingent or otherwise
(including any liability for damages, natural resource damage, costs of
environmental remediation, administrative oversight costs, fines, penalties or
indemnities), of any Loan Party directly or indirectly resulting from or based
upon a violation of any Environmental Law, including those resulting from
(a) the generation, use, handling, transportation, storage, treatment or
disposal of any Hazardous Materials, (b) exposure to any Hazardous Materials,
(c) the release or threatened release of any Hazardous Materials into the
environment or (d) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.

 

“Equivalent Amount” means, on any date, the rate at which Canadian dollars may
be exchanged into Dollars, determined by reference to the Bank of Canada noon
rate as published on the Reuters Screen BOFC on the immediately preceding
Business Day.  In the event that such rate does not appear on such Reuters page,
“Equivalent Amount” shall mean, on any date, the amount of Dollars into which an
amount of Canadian dollars may be converted or the amount of Canadian dollars
into which an amount of Dollars may be converted, in either case, at Bank of
America’s spot buying rate in New York as at approximately 12:00 noon (New York
City time) on the immediately preceding Business Day (as reported to the
Administrative Agent).

 

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“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time.

 

“ERISA Affiliate” means any trade or business (whether or not incorporated)
that, together with the Loan Parties, is treated as a single employer under
Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of
ERISA and Section 412 of the Code, is treated as a single employer under
Section 414 of the Code.

 

“ERISA Event” means (a) a Reportable Event with respect to a Pension Plan;
(b) the withdrawal of a Borrower or any ERISA Affiliate from a Pension Plan
subject to Section 4063 of ERISA during a plan year in which such entity was a
“substantial employer” as defined in Section 4001(a)(2) of ERISA, or a cessation
of operations of such entity that is treated as such a withdrawal under
Section 4062(e) of ERISA; (c) a complete or partial withdrawal by a Borrower or
any ERISA Affiliate from a Multiemployer Plan or notification that a
Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to
terminate a Pension Plan, the treatment of a Pension Plan amendment as a
termination under Section 4041 or 4041A of ERISA; (e) the institution by the
PBGC of proceedings to terminate a Pension Plan or a Multiemployer Plan; (f) the
determination that any Pension Plan is considered an at-risk plan or a plan in
endangered or critical status within the meaning of Sections 430, 431 and 432 of
the Code or Sections 303, 304 and 305 of ERISA; or (g) the imposition of any
liability under Title IV of ERISA, other than for PBGC premiums due but not
delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA
Affiliate.

 

“Event of Default” has the meaning set forth in SECTION 7.1.

 

“Excess Availability” means, as of any date of determination, (a) as long as the
Aggregate FILO Commitments have not been terminated or expired, the excess, if
any, of (i) the lesser of (A) the ABL Total Commitments, or (B) the sum of the
Borrowing Base and the Aggregate FILO Commitments, minus (ii) the outstanding
ABL Credit Extensions, and (b) after termination or expiration of the Aggregate
FILO Commitments, the excess, if any, of (i) the ABL Line Cap, minus (ii) the
outstanding ABL Credit Extensions.

 

“Excluded Subsidiaries” means, collectively, Zale Life Insurance Company, an
Arizona corporation, Zale Indemnity Company, a Texas corporation, Jewel
Re-Insurance Ltd., a Barbados corporation, Zale Funding Trust, a Delaware trust,
Zale Disaster Relief Fund, Inc. a Texas corporation, ZC Partnership LP, a New
Brunswick limited partnership, and Dobbins Jewelers, Inc., a Guam corporation
and any future Subsidiary which is either (a) not wholly-owned or (b) a Foreign
Subsidiary.

 

“Excluded Taxes” means any of the following Taxes imposed on or with respect to
any Recipient or required to be withheld or deducted from a payment to a
Recipient, (a) Taxes imposed on or measured by net income (however denominated),
franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result
of such Recipient being organized under the laws of, or having its principal
office or, in the case of any Lender, its lending office located in, the
jurisdiction imposing such Tax (or any political subdivision thereof) or
(ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal
withholding Taxes imposed on amounts payable to or for the account of such
Lender with respect to an applicable interest in a

 

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Loan pursuant to a law in effect on the date on which (i) such Lender acquires
such interest in the Loan (other than pursuant to an assignment request by the
Borrower under SECTION 2.28) or (ii) such Lender changes its lending office,
except in each case to the extent that, pursuant to SECTION 2.26(a)(ii) or
SECTION 2.26(c), amounts with respect to such Taxes were payable either to such
Lender’s assignor immediately before such Lender became a party hereto or to
such Lender immediately before it changed its lending office, (c) Taxes
attributable to such Recipient’s failure to comply with SECTION 2.26(e), and
(d) any U.S. federal withholding Taxes imposed pursuant to FATCA.

 

“Executive Order” has the meaning set forth in SECTION 3.19.

 

“Existing ABL Credit Agreement” means the “Existing Credit Agreement” (as
defined in the ABL Credit Agreement in effect on the date hereof).

 

“Existing Administrative Agent” has the meaning set forth in the recitals.

 

“Existing Credit Agreement” has the meaning set forth in the recitals.

 

“Existing Lender” has the meaning set forth in the recitals.

 

“Existing Guarantees” has the meaning set forth in SECTION 9.24.

 

“Existing Loans” means the term loans outstanding under the Existing Credit
Agreement immediately prior to the effectiveness of this Agreement.

 

“Existing Security Documents” has the meaning set forth in SECTION 9.24.

 

“Facility Guarantee” means each Guarantee executed by each of the Facility
Guarantors in favor of the Administrative Agent for the benefit of the Credit
Parties, as amended and in effect from time to time.

 

“Facility Guarantor” means the Initial Facility Guarantors and each other
Subsidiary of any Loan Party that is required to from time to time to execute
and deliver a Facility Guarantee pursuant to SECTION 5.13.

 

“Facility Guarantor Collateral Documents” means all security agreements,
mortgages, pledge agreements, deeds of trust, and other instruments, documents
or agreements executed and delivered by any Facility Guarantor to secure its
obligations under a Facility Guarantee and repayment and performance of the
Obligations.

 

“FATCA” means Sections 1471 through 1474 of the Code, as of the date of this
Agreement (or any amended or successor version that is substantively comparable
and not materially more onerous to comply with) and any current or future
regulations or official interpretations thereof.

 

“Federal Funds Effective Rate” means, for any day, the rate per annum equal to
the the weighted average (rounded upwards, if necessary, to the next 1/100 of
1%) of the rates on overnight Federal funds transactions with members of the
Federal Reserve System

 

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arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the quotations for such day for such
transactions received by Bank of America from three Federal funds brokers of
recognized standing selected by it.

 

“FILO Commitment” means, with respect to each FILO Lender, the commitment of
such FILO Lender to make ABL Loans to the Borrowers in the amount set forth
opposite its name on Schedule 1.1 of the ABL Credit Agreement or as may
subsequently be set forth in the Register under the ABL Credit Agreement from
time to time, as the same may be reduced from time to time pursuant to
SECTION 2.15 of the ABL Credit Agreement.

 

“FILO Lender” means each ABL Lender having a FILO Commitment as set forth on
Schedule 1.1 of the ABL Credit Agreement or in the assignment and acceptance by
which it becomes a FILO Lender.

 

“FILO Loans” means all ABL Loans at any time made by a FILO Lender.

 

“Financial Officer” means, with respect to any Borrower, the chief financial
officer, controller, treasurer or assistant treasurer of such Borrower. Any
document delivered hereunder that is signed by any Person who the Administrative
Agent reasonably believes (or has been notified by the Borrowers) is a Financial
Officer of a Loan Party shall be conclusively presumed to have been authorized
by all necessary corporate, partnership and/or other action on the part of such
Loan Party and such Financial Officer shall be conclusively presumed to have
acted on behalf of such Loan Party unless and until the Borrowers furnish
written notice to the Administrative Agent that such Person is no longer a
Financial Officer.

 

“Finco 1” has the meaning set forth in the preamble.

 

“Finco 2” has the meaning set forth in the preamble.

 

“Finco Holding” has the meaning set forth in the preamble.

 

“Finco Partnership” has the meaning set forth in the preamble.

 

“Fixed Charge Coverage Ratio” means for any Reference Period the ratio of
(a)(i) Consolidated EBITDA for such period less (ii) the sum of (A) Unfinanced
Capital Expenditures for such period and (B) federal income tax (whether U.S.,
Canadian or Puerto Rican) paid in cash during such period to (b) the sum of
(i) Consolidated Total Interest Expense for such period, (ii) the sum of all
scheduled payments of principal on Indebtedness, and all payments with respect
to Disqualified Stock, of Zale and its Subsidiaries (including without
limitation, the principal component of amounts paid on account of Capital Lease
Obligations) made or required to be made during such period, and
(iii) Restricted Payments consisting of dividends made during such period.

 

“Foreign Assets Control Regulations” has the meaning set forth in SECTION 3.19.

 

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“Foreign Lender” means any Lender that is organized under the laws of a
jurisdiction other than the United States of America or any State thereof or the
District of Columbia.

 

“Foreign Subsidiary” means any Subsidiary that is (a) not a Domestic Subsidiary;
(b) so long as Zale Puerto Rico is a Loan Party, not formed or incorporated
under the laws of Puerto Rico; (c) so long as Zale Canada is a Loan Party, not
formed or incorporated under the laws of Canada (or any political subdivision
thereof); and (d) a CFC.

 

“FSCO” means the Financial Services Commission of Ontario and any Person
succeeding to the functions thereof and includes the Superintendent under such
statute and any other Governmental Authority empowered or created by the
Supplemental Pensions Act (Québec) or the Pension Benefits Act (Ontario) or any
Governmental Authority of any other Canadian jurisdiction exercising similar
functions in respect of any Canadian Plan of the Canadian Loan Parties or any of
their Subsidiaries or Affiliates and any Governmental Authority succeeding to
the functions thereof.

 

“GAAP” means generally accepted accounting principles in the United States of
America.

 

“Governmental Authority” means the government of the United States of America,
Canada, any other nation or any political subdivision thereof, whether state,
provincial, territorial, municipal, or local, and any agency, authority,
instrumentality, regulatory body, court, central bank or other entity exercising
executive, legislative, judicial, taxing, regulatory or administrative powers or
functions of or pertaining to government.

 

“Guarantee” means, of or by any Person (the “guarantor”), any obligation,
contingent or otherwise, of the guarantor guaranteeing or having the economic
effect of guaranteeing any Indebtedness of any other Person (the “primary
obligor”) in any manner, whether directly or indirectly, and including any
obligation of the guarantor, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment thereof, (b) to purchase or lease property, securities or services
for the purpose of assuring the owner of such Indebtedness or of the payment
thereof, (c) to maintain working capital, equity capital or any other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Indebtedness or (d) as an account party in respect
of any letter of credit or letter of guaranty issued to support such
Indebtedness, provided, that the term “Guarantee” shall not include endorsements
for collection or deposit in the ordinary course of business.  The amount of any
Guarantee shall be deemed to be an amount equal to the maximum stated or
determinable amount of the related primary obligation, or portion thereof, in
respect of which such Guarantee is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof.  The term
“Guarantee” as a verb has a corresponding meaning.

 

“Hazardous Materials” means all explosive or radioactive substances or wastes
and all hazardous or toxic substances, wastes or other pollutants, including
petroleum or petroleum distillates, asbestos or asbestos containing materials,
polychlorinated biphenyls,

 

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radon gas, infectious or medical wastes and all other substances or wastes of
any nature regulated pursuant to any Environmental Law, including any material
listed as a hazardous substance under Section 101(14) of CERCLA.

 

“Hedging Agreement” means any agreement with respect to any swap, forward,
future or derivative transaction or option or similar agreement involving, or
settled by reference to, one or more rates, currencies, commodities, equity or
debt instruments or securities, or economic, financial or pricing indices or
measures of economic, financial or pricing risk or value or any similar
transaction or any combination of these transactions; provided that no phantom
stock or similar plan providing for payments only on account of services
provided by current or former directors, officers, employees or consultants of
Zale or its Subsidiaries shall be a Hedging Agreement.

 

“Incremental Availability” means two and one-half percent (2.50%) of the
Appraised Inventory Liquidation Value.

 

“Incremental Reserve” means, at any time of calculation, the difference (but not
less than zero) between the Aggregate FILO Commitments and Incremental
Availability.

 

“Indebtedness” means, of any Person, without duplication, (a) all obligations of
such Person for borrowed money, (b) all obligations of such Person evidenced by
bonds, debentures, notes or similar instruments, (c) all obligations of such
Person under conditional sale or other title retention agreements relating to
property acquired by such Person, (d) all obligations of such Person in respect
of the deferred purchase price of property or services (excluding trade payables
not more than 60 days past due or other current accounts payable incurred in the
ordinary course of business, deferred compensation and any purchase-price
adjustment or earn-out obligation), (e) all Indebtedness of others secured by
(or for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any Lien on property owned or acquired by such
Person, whether or not the Indebtedness secured thereby has been assumed,
(f) all Guarantees by such Person of Indebtedness of others (including under any
Synthetic Leases), (h) all Capital Lease Obligations of such Person, (i) all
obligations, contingent or otherwise, of such Person as an account party in
respect of letters of credit and letters of guaranty and (j) all obligations,
contingent or otherwise, of such Person in respect of bankers’ acceptances.  The
Indebtedness of any Person shall include the Indebtedness of any other entity
(including any partnership in which such Person is a general partner) to the
extent such Person is liable therefor as a result of such Person’s ownership
interest in or other relationship with such entity, except to the extent the
terms of such Indebtedness provide that such Person is not liable therefor. 
Notwithstanding clause (e) above, Indebtedness of any Excluded Subsidiary
secured by a pledge of the Stock of such Excluded Subsidiary and otherwise
without recourse to the pledgor shall not be deemed Indebtedness of the pledgor.

 

“Indemnified Taxes” means (a) Taxes other than Excluded Taxes imposed on or with
respect to any payment made by or on account of any obligation of any Loan Party
under any Loan Document and (b) to the extent not otherwise described in
clause (a), Other Taxes.

 

“Indemnitee” has the meaning set forth in SECTION 9.3(b).

 

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“Initial Borrowers” has the meaning set forth in the preamble hereto.

 

“Insurance Restructuring” means the proposed sale or other transfer of Zale Life
Insurance Company to Zale Indemnity Company, whether by means of a sale or other
transfer of Stock or a sale or other transfer of assets as approved by the
applicable regulatory authority.

 

“Initial Facility Guarantors” has the meaning set forth in the preamble hereto.

 

“Intellectual Property” has the meaning set forth in the Security Agreement.

 

“Intercompany Subordination Agreement” means the Intercompany Subordination
Agreement, dated as of the date of the Existing Credit Agreement, by and among
the obligors party thereto, in favor of the Administrative Agent for the benefit
of the Credit Parties, as amended and in effect from time to time.

 

“Intercreditor Agreement” means that certain Amended and Restated Intercreditor
Agreement dated as of the date hereof, by and between the Administrative Agent
and the ABL Agent, and acknowledged by the Loan Parties, as amended from time to
time in accordance with the terms thereof and in effect from time to time.

 

“Interest Payment Date” means the last Business Day of each Fiscal Quarter and
on the Maturity Date.

 

“Inventory” has the meaning set forth in the Security Agreement.

 

“investment” has the meaning set forth in SECTION 6.4.

 

“Judgment Conversion Date” has the meaning set forth in SECTION 9.18.

 

“Judgment Currency” has the meaning set forth in SECTION 9.18.

 

“Lenders” means the Persons identified on Schedule 1.1 and each assignee that
becomes a party to this Agreement as set forth in SECTION 9.4.

 

“Lien” means, with respect to any asset, (a) any mortgage, deed of trust,
statutory or deemed trust, lien, pledge, hypothecation, encumbrance, charge or
security interest in, on or of such asset, (b) the interest of a vendor or a
lessor under any conditional sale agreement, capital lease or title retention
agreement (or any financing lease having substantially the same economic effect
as any of the foregoing) relating to such asset and (c) in the case of
securities, any purchase option, call or similar right of a third party with
respect to such securities.

 

“Loan” means the Existing Loans that are continued, amended and restated as of
the Effective Date in the amounts set forth on Schedule 1.1.

 

“Loan Account” has the meaning set forth in SECTION 2.20(a).

 

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“Loan Agreement Obligations” means (a) the payment by the Loan Parties of
(i) the principal of, and interest on the Loans (including all interest that
accrues after the commencement of any case or proceeding by or against any Loan
Party under the Bankruptcy Code or any state, federal, provincial or foreign
bankruptcy, insolvency, receivership, reorganization or similar law, whether or
not allowed or allowable in such case or proceeding), when and as due, whether
at maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, and (ii) all other monetary obligations, including fees, costs,
expenses, indemnities and other amounts, whether primary, secondary, direct,
contingent, fixed or otherwise, of the Loan Parties to the Credit Parties under
this Agreement and the other Loan Documents (in each case, including all such
amounts that accrue after the commencement of any case or proceeding by or
against any Loan Party under the Bankruptcy Code or any state, federal,
provincial, or foreign bankruptcy, insolvency, receivership, organization or
similar law, whether or not allowed or allowable in such case or proceeding),
and (b) the payment and performance of all the covenants, agreements,
obligations and liabilities of each Loan Party under or pursuant to this
Agreement, and the other Loan Documents.

 

“Loan Documents” means this Agreement, the Notes, the Side Letter, all Borrowing
Base Certificates, the Blocked Account Agreements, the Security Documents, the
Facility Guarantee, the Facility Guarantor Collateral Documents, the
Intercreditor Agreement, the Intercompany Subordination Agreement, the Side
Letter, the Monitoring Agreement Letter, all Compliance Certificates and any
other instrument, certificate or agreement executed and delivered in connection
herewith or therewith.

 

“Loan Interest Rate” means 11.00% per annum, which is to be paid, in cash, as
set forth in SECTION 2.9.

 

“Loan Party” or “Loan Parties” means each Borrower and each Facility Guarantor.

 

“Make Whole Amount” means, on any date of prepayment of all or any portion of
the Obligations on or prior to the first anniversary of the Effective Date, an
amount in cash equal to (a) the present value, as determined by Zale and
certified by a Financial Officer of Zale to the Administrative Agent, of all
required interest payments due on the Obligations that are prepaid from the date
of prepayment through and including the first anniversary of the Effective Date
(assuming that the interest rate applicable to all such interest is 11.00%) plus
(b) the prepayment premium that would be due under SECTION 2.17 if such
prepayment were made on the day after the first anniversary of the Effective
Date, in each case, discounted to the date of prepayment on a quarterly basis
(assuming a 360-day year and actual days elapsed) at a rate equal to the sum of
the Treasury Rate plus 0.50%.

 

“Margin Stock” has the meaning set forth in Regulation U.

 

“Material Adverse Effect” means a material adverse effect on (a) the business,
operations, property, assets, or financial condition of the Loan Parties and
their Subsidiaries taken as a whole, or (b) the validity or enforceability of
this Agreement or any of the other Loan Documents or any of the material rights
or remedies of the Administrative Agent or the Lenders hereunder or thereunder;
provided, however, that no Material Adverse Effect

 

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shall be deemed to exist with respect to the Loan Parties solely as a result of
(i) the loss by any Loan Party of its investment in an Excluded Subsidiary;
(ii) the loss of that portion of the Loan Parties’ consolidated results of
operations generated by any Excluded Subsidiary; or (iii) any liability of an
Excluded Subsidiary that is not, on an unconsolidated basis, a liability of a
Loan Party.

 

“Material Indebtedness” means (i) the ABL Obligations and other Indebtedness
owed under the ABL Loan Documents (it being understood that the ABL Obligations
and such other Indebtedness under the ABL Loan Documents shall be deemed to be
“Material Indebtedness” so long as there has not been a Discharge of ABL
Obligations), and (ii) any other Indebtedness (other than the Obligations and
the ABL Obligations) of any one or more of the Loan Parties in an aggregate
principal amount exceeding $25,000,000.

 

“Maturity Date” means July 24, 2017.

 

“Maximum Rate” has the meaning set forth in SECTION 9.13.

 

“Minority Lenders” has the meaning set forth in SECTION 9.2(e).

 

“Monitoring Agreement Letter” means the letter agreement, dated as of the date
hereof, among the Borrowers, the Administrative Agent, the Existing
Administrative Agent and GGC Administration, L.L.C.

 

“Moody’s” means Moody’s Investors Service, Inc.

 

“Multiemployer Plan” means any employee benefit plan of the type described in
Section 4001(a)(3) of ERISA, to which a Loan Party or any ERISA Affiliate makes
or is obligated to make contributions, or has any continuing liability.

 

“Multiple Employer Plan” means a Plan which has two or more contributing
sponsors (including a Loan Party) at least two of whom are not under common
control, as such a plan is described in Section 4064 of ERISA.

 

“Net Proceeds” means:

 

(a)         with respect to any sale, transfer or other disposition by any Loan
Party or any Subsidiary thereof, the excess, if any, of (i) the sum of cash and
cash equivalents actually received in connection with such transaction
(including any cash or cash equivalents received by way of deferred payment
pursuant to, or by monetization of, a note receivable or otherwise, but only as
and when so received) minus (ii) the sum of (A) the principal amount of (and
accrued and unpaid interest on, and other amounts payable in connection with)
any Indebtedness that is secured by a Lien on the applicable asset which Lien is
permitted hereunder and which Lien is senior to the Administrative Agent’s Lien
on such asset and that is required to be paid or repaid (or to establish an
escrow for the future repayment thereof) in connection with such transaction
(other than Indebtedness under the Loan Documents), (B) the reasonable and
customary out-of-pocket expenses incurred by such Loan Party in connection with
such transaction (including, without limitation, appraisals, brokerage, title
and recording or transfer tax expenses and commissions, legal,

 

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accounting and other professional fees) paid or payable by such Loan Party to
third parties (other than Affiliates)), (C) cash taxes paid or reasonably
estimated to be actually payable in cash in connection therewith (provided that,
to the extent and at the time any such amounts are determined to not be payable,
such amounts shall constitute Net Proceeds), (D) amounts provided as a reserve
against any liabilities under any indemnification obligations or purchase price
adjustment associated with such asset disposition (provided that, to the extent
and at the time any such amounts are released from such reserve, such amounts
shall constitute Net Proceeds), and (E) any liabilities relating to the property
subject to such asset disposition that are retained by any Loan Party or its
Subsidiaries, provided that, at all times such liabilities remain outstanding,
the Loan Parties shall maintain an amount sufficient to satisfy such liabilities
in a segregated account established with the Administrative Agent to be used by
the Loan Parties solely to satisfy such liabilities as they become due;
provided, however, the Net Proceeds shall not include any amounts described in
this clause (a) to the extent such amounts are committed, within 180 days after
the date of receipt thereof, to be reinvested in assets to be used in the
business of the Loan Parties and are, within 365 days after the date of receipt
thereof, actually reinvested in assets that are useful in the business of the
Loan Parties;

 

(b)         with respect to the incurrence or issuance of any Indebtedness by
any Loan Party or any of its Subsidiaries (other than Indebtedness permitted to
be incurred or issued pursuant to Section 6.1), the result of (i) the sum of the
cash and cash equivalents received in connection with such incurrence or
issuance minus (ii) the underwriting discounts and commissions, and other
reasonable out-of-pocket costs, fees, commissions, premiums and expenses
incurred by the Loan Parties or their Subsidiaries in connection with such
incurrence or issuance to the extent such amounts (A) were not deducted in
determining the amount referred to in clause (i) above, (B) are, at the time of
receipt of such cash or cash equivalents, actually paid or payable to a Person
that is not an Affiliate of any Loan Party or any of its Subsidiaries, and
(C) are properly attributable to such transaction; and

 

(c)          with respect to the sale or issuance of any Stock of Zale (or
successor thereof), the result of (i) the sum of the cash and cash equivalents
received in connection with such sale or issuance minus (ii) the underwriting
discounts and commissions, and other reasonable out-of-pocket costs, fees,
commissions, premiums and expenses, incurred by Zale in connection with such
sale or issuance to the extent such amounts (A) were not deducted in determining
the amount referred to in clause (i) above, (B) are, at the time of receipt of
such cash or cash equivalents, actually paid or payable to a Person that is not
an Affiliate of any Loan Party or any of its Subsidiaries, and (C) are properly
attributable to such transaction.

 

“Non-Defaulting Lender” means, at any time, each Lender that is not a Defaulting
Lender at such time.

 

“Notes” means the promissory notes of the Borrowers substantially in the form of
Exhibit B, each payable to the order of a Lender, evidencing the Loans.

 

“Obligations” means the Loan Agreement Obligations.

 

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“Other Connection Taxes” means, with respect to any Recipient, Taxes imposed as
a result of a present or former connection between such Recipient and the
jurisdiction imposing such Tax (other than connections arising from such
Recipient having executed, delivered, become a party to, performed its
obligations under, received payments under, received or perfected a security
interest under, engaged in any other transaction pursuant to or enforced any
Loan Document, or sold or assigned an interest in any Loan or Loan Document).

 

“Other Taxes” means all present or future stamp, court or documentary,
intangible, recording, filing or similar Taxes that arise from any payment made
under, from the execution, delivery, performance, enforcement or registration
of, from the receipt or perfection of a security interest under, or otherwise
with respect to, any Loan Document, except any such Taxes that are Other
Connection Taxes imposed with respect to an assignment (other than an assignment
made pursuant to SECTION 2.28).

 

“Payment Conditions” means, at the time of determination with respect to a
specified transaction or payment, that (a) no Default or Event of Default then
exists or would arise as a result of the entering into of such transaction or
the making of such payment and (b) after giving effect to such transaction or
payment, the Pro Forma Availability Condition has been satisfied and the Fixed
Charge Coverage Ratio, on a pro-forma basis for the Reference Period immediately
preceding such transaction or payment, will be equal to or greater than
1.0:1.0.  Prior to undertaking any transaction or payment which is subject to
the Payment Conditions, the Loan Parties shall deliver to the Administrative
Agent a certificate certifying as to the absence of any Default or any Event of
Default and setting forth the calculations of the Pro Forma Availability
Condition and the Fixed Charge Coverage Ratio which evidences satisfaction of
the conditions contained in clause (b) above on a basis reasonably satisfactory
to the Administrative Agent.

 

“Participant” has the meaning provided therefor in SECTION 9.4(g).

 

“Participation Register” has the meaning provided therefor in SECTION 9.4(h).

 

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in
ERISA and any successor entity performing similar functions.

 

“Pension Act” means the Pension Protection Act of 2006.

 

“Pension Funding Rules” means the rules of the Code and ERISA regarding minimum
required contributions (including any installment payment thereof) to Pension
Plans and set forth in, with respect to plan years ending prior to the effective
date of the Pension Act, Section 412 of the Code and Section 302 of ERISA, each
as in effect prior to the Pension Act and, thereafter, Section 412, 430, 431,
432 and 436 of the Code and Sections 302, 303, 304 and 305 of ERISA.

 

“Pension Plan” means any employee pension benefit plan within the meaning of
Section 3(2) of ERISA (including a Multiple Employer Plan but excluding a
Multiemployer Plan) that is maintained or is contributed to by any Loan Party
and any ERISA Affiliate and is either covered by Title IV of ERISA or is subject
to the minimum funding standards under Section 412 of the Code.

 

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“Permitted Asset Sales” means sales and dispositions of assets that are deemed
appropriate by the Loan Parties for fair market value not to exceed $30,000,000
in any fiscal year and for which not less than seventy-five percent (75%) of the
aggregate purchase price is paid in cash.

 

“Permitted Encumbrances” means:

 

(a)                                 Liens imposed by law for taxes that are not
yet delinquent or are being contested in compliance with SECTION 5.5;

 

(b)                                 carriers’, warehousemen’s, landlord’s,
mechanics’, materialmen’s, repairmen’s, custom broker’s, and other like Liens,
arising in the ordinary course of business and securing obligations that are not
overdue by more than ninety (90) days or are being contested in compliance with
SECTION 5.5;

 

(c)                                  Liens on assets (other than Inventory,
Accounts and the proceeds thereof) incurred in the ordinary course of business
in compliance with workers’ compensation, unemployment insurance, old-age
pension and other social security laws or regulations, other than any Liens
imposed by ERISA or applicable law relating to any Canadian Plans;

 

(d)                                 Liens on assets (other than Inventory,
Accounts and the proceeds thereof) to secure the performance of bids, trade
contracts, leases, contracts (other than for the repayment of borrowed money),
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature, in each case in the ordinary course of business;

 

(e)                                  judgment Liens in respect of judgments that
do not constitute an Event of Default under SECTION 7.1(k); and

 

(f)                                   easements, zoning restrictions,
rights-of-way and similar encumbrances (and with respect to leasehold interests,
mortgages, obligations, liens and other encumbrances incurred, created, assumed
or permitted to exist and arising by, through or under or asserted by a landlord
or owner of leased property, with or without the consent of the lessee) on real
property imposed by law or arising in the ordinary course of business that do
not secure any monetary obligations and do not materially detract from the value
of the affected property or materially interfere with the ordinary conduct of
business of the Loan Parties, and such other minor title defects or survey
matters that are disclosed by current surveys that, in each case, do not
materially interfere with the ordinary conduct of business of the Loan Parties.

 

provided, that except as provided in any one or more of clauses (a) through
(f) above, the term “Permitted Encumbrances” shall not include any Lien securing
Indebtedness.

 

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“Permitted Investments” means each of the following:

 

(a)                                 marketable direct or guaranteed obligations
of the United States of America that mature within two (2) years from the date
of purchase by such Loan Party or such Subsidiary;

 

(b)                                 demand deposits, certificates of deposit,
Eurodollar deposits, time deposits and bankers acceptances issued by banking
institutions provided, that such banks have a long-term credit rating of at
least “AA” (or its then equivalent) if rated by S&P or any successor service
thereto having a substantially similar rating system or “Aa” (or its then
equivalent) if rated by Moody’s or any successor service thereto having a
substantially similar rating system, or an equivalent rating from either
Dominion Bond Rating Services Limited or CBRS, Inc.; provided, however, the Loan
Parties’ investment in any one bank shall not exceed 5% of the primary capital
of such bank;

 

(c)                                  securities commonly known as “commercial
paper” issued by the Administrative Agent, or a corporation or any other
financial institution that at the time of purchase have been rated and the
ratings for which are not less than “P1” (or its then equivalent) if rated by
Moody’s or any successor service thereto having a substantially similar rating
system, or not less than “A1” (or its then equivalent) if rated by S&P or any
successor service thereto having a substantially similar rating system, or an
equivalent rating from either Dominion Bond Rating Services Limited or
CBRS, Inc.; provided, however, the Loan Parties may invest up to 20% of their
Permitted Investments measured at the time of investment made pursuant to
paragraphs (a)-(i) hereof in commercial paper with a combined rating of
“A-2/P-2” (or its then equivalent);

 

(d)                                 demand notes issued by a corporation
organized and existing under the laws of the United States of America or any
state thereof that at that time of purchase have a rating of at least “AA” (or
its then equivalent) if rated by S&P or any successor service thereto having a
substantially similar rating system, or its equivalent by at least two
(2) nationally recognized rating services, or an equivalent rating from either
Dominion Bond Rating Services Limited or CBRS, Inc., and have a maturity date
that does not exceed one (1) year beyond the date of purchase; provided,
however, such investments will be limited to the greater of $20 million per
obligor or 20% of investments made pursuant to paragraphs (a)-(i) hereof
measured at the time of investment;

 

(e)                                  repurchase agreements, purchased through
the Administrative Agent, or a corporation organized and existing under the laws
of the United States of America or any state thereof that at the time of
purchase have been rated and the ratings for which are not less than “P1” (or
its then equivalent) if rated by Moody’s or any successor service thereto having
a substantially similar rating system, or not less than “A1” (or its then
equivalent) if rated by S&P or any successor service thereto having a
substantially similar rating system, or an equivalent rating from either
Dominion Bond Rating Services Limited or CBRS, Inc., which repurchase agreements
are collateralized by securities of the United States of America or any agency
thereof in an amount equal to at least 102% of the amount of such investment;

 

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(f)                                   shares of any so-called “money market
fund” advised, serviced or sold by any of the Lenders or by any other financial
institution provided, that such fund is registered under the Investment Company
Act of 1940, has net assets of at least $250,000,000, has an investment
portfolio with an average maturity of 365 days or less and is not considered to
be a “high-yield” fund;

 

(g)                                  municipal fixed and variable rate
short-term securities that mature within one (1) year from the date of purchase
by any Loan Party or such Subsidiary that at the time of purchase have been
rated and the ratings for which are not less than “MIG-1/VMIG-1” (or its then
equivalent) if rated by Moody’s or any successor service thereto having a
substantially similar rating system or not less than “SP-1+/A-1” (or its then
equivalent) if rated by S&P or any successor service thereto having a
substantially similar rating system, or an equivalent rating from either
Dominion Bond Rating Services Limited or CBRS, Inc.;

 

(h)                                 municipal fixed and variable rate
medium-term securities that mature between one (1) and two (2) years from the
date of purchase by such Loan Party or such Subsidiary that at the time of
purchase have been rated and the ratings for which are not less than “Aa” (or
its then equivalent) if rated by Moody’s or any successor service thereto having
a substantially similar rating system or not less than “AA” (or its then
equivalent) if rated by S&P or any successor service thereto having a
substantially similar rating system, or an equivalent rating from either
Dominion Bond Rating Services Limited or CBRS, Inc.;

 

(i)                                     marketable direct obligations of the
State of Texas or its agencies and instrumentalities that at the time of
purchase have been rated and the ratings for which are not less than “P” (or its
then equivalent) if rated by Moody’s or any successor service thereto having a
substantially similar rating system or not less than “A” (or its then
equivalent) if rated by S&P or any successor service thereto having a
substantially similar rating system; and

 

(j)                                    in the case of Foreign Subsidiaries,
short term investments comparable to the foregoing.

 

“Permitted Refinancing” means, with respect to any Person, any Indebtedness
issued in exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace, defease or refund (collectively, to “Refinance”), the
Indebtedness being Refinanced (or previous refinancings thereof constituting a
Permitted Refinancing); provided, that (a) the principal amount (or accreted
value, if applicable) of such Permitted Refinancing does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
Refinanced (plus unpaid accrued interest and premiums thereon and underwriting
discounts, defeasance costs, fees, commissions and expenses), (b) the weighted
average life to maturity of such Permitted Refinancing is greater than or equal
to the weighted average life to maturity of the Indebtedness being Refinanced,
(c) such Permitted Refinancing shall not require any scheduled principal
payments due prior to the Maturity Date in excess of, or prior to, the scheduled
principal payments due prior to such Maturity Date for the Indebtedness being
Refinanced, (d) if the Indebtedness being Refinanced is subordinated in

 

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right of payment to the Obligations under this Agreement, such Permitted
Refinancing shall be subordinated in right of payment to such Obligations on
terms at least as favorable to the Lenders as those contained in the
documentation governing the Indebtedness being Refinanced, (e) no Permitted
Refinancing shall have different direct or indirect obligors, or greater
guarantees or security, than the Indebtedness being Refinanced, (f) the interest
rate applicable to any such Permitted Refinancing shall not exceed the then
applicable market interest rate, (g) at the time thereof, both before and after
giving effect to such Refinancing, no Default or Event of Default shall have
occurred and be continuing and (h) if the Indebtedness being Refinanced is the
ABL Obligations, such Refinancing shall comply with the applicable provisions of
the Intercreditor Agreement.

 

“Person” means any natural person, corporation, limited liability company,
unlimited liability company, trust, joint venture, association, company,
partnership, Governmental Authority or other entity.

 

“Plan” means any employee benefit plan within the meaning of Section 3(3) of
ERISA maintained for employees of a Loan Party or any such Plan to which a Loan
Party or any ERISA Affiliate is required to contribute on behalf of any of its
employees.

 

“PPSA” means the Personal Property Security Act of Ontario (or any successor
statute) or similar legislation of any other Canadian jurisdiction, including,
without limitation, the Civil Code of Quebec, the laws of which are required by
such legislation to be applied in connection with the issue, perfection,
enforcement, opposability, validity or effect of security interests or
hypothecs.

 

“Prepayment Event” means the occurrence of any of the following events:

 

(a)                                 Any sale, transfer or other disposition
(including pursuant to a sale and leaseback transaction, other than (i) sales of
Inventory or equipment in the ordinary course of business, (ii) sales or
assignments of leasehold interests in real property, and (iii) dispositions of
other property resulting in Net Proceeds of not more than $1,000,000 in any
transaction or series of related transactions) of any asset of a Loan Party,
unless the proceeds therefrom are required to be paid to the holder of a Lien on
such property or asset having priority over the Lien of the Administrative
Agent;

 

(b)                                 Any casualty or other insured damage to, or
any taking under power of eminent domain or by condemnation, expropriation or
similar proceeding of, any asset of a Loan Party or any Subsidiary thereof
resulting in Net Proceeds of $1,000,000 or more, unless the proceeds therefrom
are (i) used to repair, restore or replace the assets that are subject to such
casualty or other insured damage, taking under power of eminent domain,
condemnation, expropriation or similar proceeding within 180 days of the receipt
of such proceeds by such Loan Party or such Subsidiary or (ii) required to be
paid to the holder of a Lien on such property or asset having priority over the
Lien of the Administrative Agent; provided that any casualty or other damage to,
or any taking under power of eminent domain or by condemnation, expropriation or
similar proceeding of, any asset of a non-wholly owned Subsidiary that is not a
Loan Party shall constitute a Prepayment Event only to the extent (i) the
charter, by-laws or other organizational documents of

 

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such Subsidiary permit such payment and (ii) of the proceeds distributed to a
Loan Party or a wholly-owned Subsidiary of a Loan Party;

 

(c)                                  Any incurrence of any Indebtedness by any
Loan Party or any Subsidiary thereof (excluding Indebtedness permitted to be
incurred under SECTION 6.1, other than clause (l) thereof); or

 

(d)                                 Any issuance by Zale (or successor thereof)
of any Stock (other than Stock issued upon the exercise of options, warrants or
other similar rights to purchase Stock (including, without limitation, under the
Warrant Agreement)).

 

“Pro Forma Availability Condition” shall mean, for any date of calculation with
respect to any transaction or payment, the Pro Forma Availability for each of
the twelve months following, and after giving effect to, such transaction or
payment, will be equal to or greater than fifteen percent (15%) of the ABL Line
Cap.

 

“Pro Forma Availability” shall mean, for any date of calculation, the projected
average monthly Excess Availability for each month during any projected twelve
(12) months (and measured at the end of each such month).

 

“Pro Rata Share” means, with respect to a Lender’s obligation to make certain
payments and right to receive payments of interest, fees, principal and other
amounts with respect thereto, the percentage obtained by dividing (y) the
principal amount of such Lender’s portion of the Loans by (z) the principal
amount of the Loans.

 

“PRUCC” means the Puerto Rico Commercial Transactions act, Ley de Transacciones
Comerciales, Act #214 of September 19, 1996, as amended from time to time.

 

“Ratification, Reaffirmation, Amendment and Confirmation Agreements” means
(i) that certain Confirmation and Amendment of Ancillary Loan Documents (U.S.),
dated as of the date hereof, by and among the Loan Parties and certain of their
Subsidiaries and the Administrative Agent and (ii) certain Confirmation and
Amendment of Ancillary Documents (Canada), dated as of the date hereof, by and
among the Loan Parties and certain of their Subsidiaries and the Administrative
Agent.

 

“Real Estate” means all land, together with the buildings, structures, fixtures,
parking areas, and other improvements thereon, now or hereafter owned by any
Loan Party, including all easements, rights-of-way, and similar rights relating
thereto and all leases, tenancies, and occupancies thereof.

 

“Recipient” means the Administrative Agent, any Lender, any other Credit Party
or any other recipient of any payment to be made by or on account of any
obligation of any Loan Party hereunder.

 

“Reference Period” means as of any date of determination, the period of twelve
(12) consecutive fiscal months of Zale and its Subsidiaries ending on such date,
or if such date is not a fiscal month end date, the period of twelve (12)
consecutive fiscal months most recently ended (in each case treated as a single
accounting period).

 

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“Register” has the meaning set forth in SECTION 9.4(e).

 

“Regulation U” means Regulation U of the Board as from time to time in effect
and all official rulings and interpretations thereunder or thereof.

 

“Regulation X” means Regulation X of the Board as from time to time in effect
and all official rulings and interpretations thereunder or thereof.

 

“Reinsurance Agreement” means all policies, treaties, binders, slips, other
agreements of reinsurance or retrocession and binding quotations or letters of
intent to which a Zale Insurance Subsidiary is a party, as cedant, reinsurer,
retrocedant or retrocessionaire (including all supplements, endorsements and
riders thereto and all ancillary agreements in connection therewith).

 

“Related Parties” means, with respect to any specified Person, such Person’s
Affiliates and the respective directors, officers, employees, agents and
advisors of such Person and such Person’s Affiliates.  For the avoidance of
doubt, for purposes of this Agreement, GGC Administration, L.L.C. shall be
deemed a “Related Party”.

 

“Release” has the meaning set forth in Section 101(22) of CERCLA.

 

“Reportable Event” means any of the events set forth in Section 4043(c) of
ERISA, other than events for which the 30 day notice period has been waived.

 

“Required Lenders” means, at any time, Lenders whose percentage of the Credit
Extensions aggregate not less than 51% of all such Credit Extensions, provided
that the portion of the Credit Extensions held or deemed held by, any Defaulting
Lender shall be excluded for purposes of making a determination of Required
Lenders.

 

“Required Supermajority Lenders” means, at any time, Lenders whose percentage of
the Credit Extensions aggregate not less than 66 2/3% of all such Credit
Extensions, provided that the portion of the Credit Extensions held or deemed
held by, any Defaulting Lender shall be excluded for purposes of making a
determination of Required Supermajority Lenders.

 

“Reserves” means “Reserves” (as defined in the ABL Credit Agreement in effect on
the date hereof).

 

“Responsible Officer” means the chief executive officer, president, chief
financial officer, treasurer or assistant treasurer of a Loan Party or any of
the other individuals designated in writing to the Administrative Agent by an
existing Responsible Officer of a Loan Party as an authorized signatory of any
certificate or other document to be delivered hereunder. Any document delivered
hereunder that is signed by any Person who the Administrative Agent reasonably
believes (or has been notified by the Borrowers) is a Responsible Officer of a
Loan Party shall be conclusively presumed to have been authorized by all
necessary corporate, partnership and/or other action on the part of such Loan
Party and such Responsible Officer shall be conclusively presumed to have acted
on behalf of

 

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such Loan Party unless and until the Borrowers furnish written notice to the
Administrative Agent that such Person is no longer a Responsible Officer.

 

“Restricted Payment” means any dividend or other distribution (whether in cash,
securities or other property) with respect to any shares of any class of Stock
of any Loan Party other than dividends payable solely in shares of common Stock
of such Loan Party, or any payment (whether in cash, securities or other
property), including any sinking fund or similar deposit, on account of the
purchase, redemption, retirement, acquisition, cancellation or termination of
any such shares of Stock of any Loan Party or any option, warrant or other right
to acquire any such shares of Stock of any Loan Party, other than any such
payment made solely in shares of common Stock of such Loan Party.

 

“RP Conditions” means, at the time of determination with respect to a Restricted
Payment, that (a) no Default or Event of Default then exists or would arise as a
result of the making of such Restricted Payment and (b) after giving effect to
such transaction or payment, the RP Pro Forma Availability Condition has been
satisfied and the Fixed Charge Coverage Ratio, on a pro-forma basis for the
Reference Period immediately preceding such Restricted Payment, will be equal to
or greater than 1.1:1.0.  Prior to making any Restricted Payment, the Loan
Parties shall deliver to the Administrative Agent a certificate certifying as to
the absence of any Default and any Event of Default and setting forth the
calculations of the RP Pro Forma Availability Condition and the Fixed Charge
Coverage Ratio which evidences satisfaction of the conditions contained in
clause (b) above on a basis reasonably satisfactory to the Administrative Agent.

 

“RP Pro Forma Availability Condition” means, for any date of calculation with
respect to any Restricted Payment, the Pro Forma Availability for each of the
twelve months following, and after giving effect to, such transaction or
payment, will be equal to or greater than seventeen and one-half percent (17.5%)
of the ABL Line Cap.

 

“S&P” means Standard & Poor’s Ratings Service, a division of The McGraw-Hill
Companies, Inc.

 

“Security Agreement” means, collectively, the Security Agreement, in the form of
Exhibit C-1 attached hereto and incorporated herein, among the Loan Parties and
the Administrative Agent for the benefit of the Credit Parties, and the General
Security Agreement, in the form of Exhibit C-2 attached hereto and incorporated
herein, among each Canadian Loan Party and the Administrative Agent for the
benefit of the Credit Parties, in each case as amended and in effect from time
to time.

 

“Security Documents” means the Security Agreement, the Ratification,
Reaffirmation, Amendment and Confirmation Agreements and each other security
agreement or other instrument or document executed and delivered pursuant to
SECTION 5.13 to secure any of the Obligations.

 

“Series A Preferred Stock” means the Series A Convertible Preferred Stock of
Zale issued pursuant to the Warrant Agreement.

 

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“Side Letter” means the side letter agreement, dated as of the date hereof,
among the Borrowers and ZIH, LLC, as Existing Administrative Agent and
Administrative Agent, as such letter may from time to time be amended.

 

“Solvent” means, with respect to any Person on a particular date, that on such
date (a) at fair valuations, all of the properties and assets of such Person are
greater than the sum of the debts, including contingent liabilities, of such
Person, (b) the present fair saleable value of the properties and assets of such
Person is not less than the amount that would be required to pay the probable
liability of such Person on its debts as they become absolute and matured,
(c) such Person is able to realize upon its properties and assets and pay its
debts and other liabilities, contingent obligations and other commitments as
they mature in the normal course of business, (d) such Person does not intend
to, and does not believe that it will, incur debts beyond such Person’s ability
to pay as such debts mature, and (e) such Person is not engaged in a business or
a transaction, and is not about to engage in a business or transaction, for
which such Person’s properties and assets would constitute unreasonably small
capital after giving due consideration to the prevailing practices in the
industry in which such Person is engaged.

 

“Stock” means all shares of capital stock (whether denominated as common stock
or preferred stock), equity interests, beneficial, partnership or membership
interests, joint venture interests, participations or other ownership or profit
interests in or equivalents (regardless of how designated) of or in a Person
(other than an individual), whether voting or non-voting.

 

“Store” means any retail store (including kiosk) leased, owned or operated, or
to be leased, owned or operated, by any Loan Party or any of its Subsidiaries.

 

“Subsidiary” means, with respect to any Person (the “parent”) at any date, any
corporation, limited liability company, unlimited liability company,
partnership, association or other entity the accounts of which would be
consolidated with those of the parent in the parent’s consolidated financial
statements if such financial statements were prepared in accordance with GAAP as
of such date, as well as any other corporation, limited liability company,
partnership, association or other entity of which securities or other ownership
interests representing more than 50% of the equity or more than 50% of the
ordinary voting power or, in the case of a partnership, more than 50% of the
general partnership interests are, as of such date, owned, controlled or held. 
Notwithstanding anything to the contrary, no Loan Party shall be deemed to be a
Subsidiary of any Existing Lender.

 

“Synthetic Lease” means any lease or other agreement for the use or possession
of property creating obligations which do not appear as Indebtedness on the
balance sheet of the lessee thereunder but which, upon the insolvency or
bankruptcy of such Person, would be characterized as Indebtedness of such lessee
without regard to the accounting treatment.

 

“Taxes” means all present or future taxes, levies, imposts, duties, deductions,
withholdings (including backup withholding), assessments, fees or other charges
imposed by any Governmental Authority, including any interest, additions to tax
or penalties applicable thereto.

 

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“Term Loan Borrowing Base” means an amount equal to the sum of:

 

(i) 107.5% of the Appraised Inventory Liquidation Value; plus

 

(ii) 100% of the Loan Parties’ Eligible Credit Card Receivables; plus

 

(iii) 100% of the Appraised Intellectual Property Liquidation Value; provided,
that the amount set forth in clause (iii) shall not exceed $40,000,000.

 

“Term Priority Collateral” has the meaning set forth in the Intercreditor
Agreement.

 

“Termination Date” means the earliest to occur of (i) the Maturity Date,
(ii) the date on which the maturity of the Obligations is accelerated in
accordance with SECTION 7.1 or (iii) the date of the occurrence of any Event of
Default pursuant to SECTION 7.1(h) or (i).

 

“Term Reserve” means a Reserve, calculated by reference to the most recent
Borrowing Base Certificate, in the amount by which the outstanding principal
amount of the Loan exceeds an amount equal to (a) the Term Loan Borrowing Base
less (b) the sum of (x) the amount of the Borrowing Base (excluding any Reserves
other than the Incremental Reserve) plus (y) the Aggregate FILO Commitments. The
Term Reserve shall automatically be adjusted upon delivery of each Borrowing
Base Certificate or otherwise only with the prior written consent of the
Administrative Agent and the Borrowers.

 

“Trading With the Enemy Act” has the meaning set forth in SECTION 3.19.

 

“Treasury Rate” means, with respect to the Make Whole Amount, a rate equal to
the then current yield to maturity on actively traded U.S. Treasury securities
having a constant maturity and having a duration equal to (or the nearest
available tenor) the period from the date that payment is received to the date
that falls on the first anniversary of the Effective Date.

 

“TXDC” has the meaning set forth in the preamble.

 

“Unfinanced Capital Expenditures” means all Capital Expenditures other than
those made with the proceeds of Indebtedness or Capital Lease Obligations
permitted hereunder; provided that any Capital Expenditures made with the
proceeds of the ABL Obligations shall constitute Unfinanced Capital
Expenditures.

 

“United States” and “U.S.” mean the United States of America.

 

“U.S. Person” means any Person that is a “United States Person” as defined in
Section 7701(a)(30) of the Code.

 

“U.S. Tax Compliance Certificate” has the meaning specified in
SECTION 2.26(e)(ii)(B)(III).

 

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“Warrant Agreement” means the Warrant and Registration Rights Agreement, dated
as of May 10, 2010, by and among Zale and ZIH, LLC, in its capacity as agent and
the initial warrant holder thereunder.

 

“Warrants” means the warrants to purchase shares of common stock or Series A
Preferred Stock of Zale arising under the Warrant Agreement.

 

“Zale” has the meaning set forth in the preamble.

 

“Zale Canada” has the meaning set forth in the preamble.

 

“Zale Delaware” has the meaning set forth in the preamble.

 

“Zale Insurance Subsidiaries” means Zale Life Insurance Company, an Arizona
corporation, Zale Indemnity Company, a Texas corporation, and Jewel Re-Insurance
Ltd., a Barbados corporation.

 

“Zale International” has the meaning set forth in the preamble.

 

“Zale PR” has the meaning set forth in the preamble.

 

“Zap” has the meaning set forth in the preamble.

 

“ZCDS” has the meaning set forth in the preamble.

 

“ZC Finco” has the meaning set forth in the preamble.

 

“ZC Holding” has the meaning set forth in the preamble.

 

“ZC Partnership” means ZC Partnership LP, a New Brunswick partnership.

 

“ZCSC” has the meaning set forth in the preamble.

 

“ZECCA” has the meaning set forth in the preamble.

 

“ZGCO” has the meaning set forth in the preamble.

 

“ZIH, LLC” has the meaning set forth in the preamble.

 

SECTION 1.2                                        Terms Generally.  The
definitions of terms herein shall apply equally to the singular and plural forms
of the terms defined.  Whenever the context may require, any pronoun shall
include the corresponding masculine, feminine and neuter forms.  The words
“include”, “includes” and “including” shall be deemed to be followed by the
phrase “without limitation”.  The word “will” shall be construed to have the
same meaning and effect as the word “shall”.  Unless the context requires
otherwise (a) any definition of or reference to any agreement, instrument or
other document herein shall be construed as referring to such agreement,
instrument or other document as from time to time amended, supplemented or
otherwise modified (subject to any restrictions on such amendments, supplements
or modifications set forth herein), (b) any reference herein to any Person shall
be construed to

 

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include such Person’s successors and permitted assigns, (c) the words “herein”,
“hereof” and “hereunder”, and words of similar import, shall be construed to
refer to this Agreement in its entirety and not to any particular provision
hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules
shall be construed to refer to Articles and Sections of, and Exhibits and
Schedules to, this Agreement (e) the words “asset” and “property” shall be
construed to have the same meaning and effect and to refer to any and all
tangible (corporeal) and intangible (incorporeal) assets and properties,
including cash, securities, accounts and contract rights, and (f) all references
to “$” or “Dollars” or to amounts of money and all calculations of the Borrowing
Base, Term Loan Borrowing Base, Term Loan Reserve, Incremental Availability,
Excess Availability, permitted “baskets” and other similar matters shall be
deemed to be references to the lawful currency of the United States of America
or the Equivalent Amount.

 

Except as otherwise expressly provided herein, all terms of an accounting or
financial nature shall be construed in accordance with GAAP, as in effect from
time to time, provided that if any Borrower notifies the Administrative Agent
that the Borrowers request an amendment to any provision hereof to reflect the
effect of any change occurring after the date hereof in GAAP or in the
application thereof on the operation of such provision (or if the Administrative
Agent notifies the Borrowers that the Required Lenders request an amendment to
any provision hereof for such purpose), regardless of whether any such notice is
given before or after such change in GAAP or in the application thereof, then
such provision shall be interpreted on the basis of GAAP as in effect and
applied immediately before such change shall have become effective until such
provision shall have been amended in accordance herewith.

 

Notwithstanding anything to the contrary contained herein, all financial
statements delivered hereunder or pursuant to any other Loan Document shall be
prepared, and all financial covenants contained herein shall be calculated,
without giving effect to any election under the Statement of Financial
Accounting Standards No. 159 (or any similar accounting principle) permitting a
Person to value its financial liabilities or Indebtedness at the fair value
thereof.

 

Any financial ratios shall be calculated by dividing the appropriate component
by the other component, carrying the result to one place more than the number of
places by which such ratio is expressed herein and rounding the result up or
down to the nearest number (with a rounding-up if there is no nearest number).

 

Unless otherwise specified, all references herein to times of day shall be
references to Eastern time (daylight or standard, as applicable).

 

ARTICLE II
AMOUNT AND TERMS OF CREDIT

 

SECTION 2.1                                        Loans of the Lenders. 
Subject to the terms and conditions hereof, each Lender severally agrees to
continue such Lender’s Existing Loans as Loans on the Effective Date to the
Borrowers in an amount equal to such Lender’s Existing Loans (it being
understood and agreed that the aggregate principal amount of the Loans, as of
the Effective Date, after giving effect to the Effective Date Prepayment, shall
be $80,000,000).  Any principal amount of the Loans that is repaid or prepaid
may not be reborrowed.  All principal of, interest on, and other amounts payable
in respect of the Loans shall constitute Obligations hereunder.

 

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SECTION 2.2                                        [Intentionally Omitted].

 

SECTION 2.3                                        [Intentionally Omitted].

 

SECTION 2.4                                        [Intentionally Omitted].

 

SECTION 2.5                                        [Intentionally Omitted].

 

SECTION 2.6                                        [Intentionally Omitted].

 

SECTION 2.7                                        [Intentionally Omitted].

 

SECTION 2.8                                        Notes; Repayment of Loans.

 

(a)                                 The Loans made by each Lender shall, to the
extent requested by such Lender, be evidenced by a Note duly executed by the
Borrowers, dated the Effective Date, in substantially the form attached hereto
as Exhibit B, payable to the order of each such Lender in an aggregate principal
amount equal to the aggregate principal amount of Loans outstanding held by such
Lender.

 

(b)                                 The outstanding principal balance of all
Loan Agreement Obligations shall be payable on the Termination Date (subject to
earlier repayment as provided below).  Each Note shall bear interest from the
date thereof on the outstanding principal balance thereof as set forth in this
Article II.  Each Lender is hereby authorized by the Borrowers to endorse on a
schedule attached to each Note delivered to such Lender (or on a continuation of
such schedule attached to such Note and made a part thereof), or otherwise to
record in such Lender’s internal records, an appropriate notation evidencing the
date and amount of each Loan from such Lender, each payment and prepayment of
principal of any such Loan, each payment of interest on any such Loan and the
other information provided for on such schedule; provided, however, that the
failure of any Lender to make such a notation or any error therein shall not
affect the obligation of the Borrowers to repay the Loans made by such Lender in
accordance with the terms of this Agreement and the applicable Notes.

 

SECTION 2.9                                        Interest on Loans.

 

(a)                                 Subject to SECTION 2.10, the Loans shall
bear interest at a rate per annum equal to the Loan Interest Rate.

 

(b)                                 Accrued interest on all Loans shall be
payable in arrears, in cash, on each Interest Payment Date and on the
Termination Date.

 

(c)                                  All computations of interest shall be made
on the basis of a 360-day year and actual days elapsed.  Interest shall accrue
on each Loan for the day on which the Loan is made, and shall not accrue on a
Loan, or any portion thereof, for the day on which the Loan or such portion is
paid, provided that any Loan that is repaid on the same day on which it is made
shall, subject to SECTION 2.25(a), bear interest for one day.  Each
determination by the Administrative Agent of an interest rate or fee hereunder
shall be conclusive and binding for all purposes, absent manifest error.

 

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(d)                                 For the purposes of the Interest Act
(Canada) and disclosure thereunder, whenever interest to be paid hereunder is to
be calculated on the basis of a year of 360 days or any other period of time
that is less than a calendar year, the yearly rate of interest to which the rate
determined pursuant to such calculation is equivalent is the rate so determined
multiplied by the actual number of days in the calendar year in which the same
is to be ascertained and divided by either 360 or such other period of time, as
the case may be. Calculations of interest shall be made using the nominal rate
method of calculation, and will not be calculated using the effective rate
method of calculation or any other basis that gives effect to the principle of
deemed reinvestment of interest.

 

SECTION 2.10                                 Default Interest.  Effective upon
the occurrence of any Event of Default and at all times thereafter while such
Event of Default is continuing, at the option of the Administrative Agent or
upon the direction of the Required Lenders, interest shall accrue on all
outstanding Loans (after as well as before judgment, as and to the extent
permitted by law) at a rate per annum equal to the rate in effect from time to
time plus 2.00% per annum, and such interest shall be payable on demand.

 

SECTION 2.11                                 Certain Amounts.  The Borrowers
shall pay the amounts set forth in the Side Letter, the Monitoring Agreement
Letter and the other applicable Loan Documents on the dates specified for
payment therein to the Persons specified therein.

 

SECTION 2.12                                 [Intentionally Omitted].

 

SECTION 2.13                                 [Intentionally Omitted].

 

SECTION 2.14                                 Nature of Payable Amounts.  All
amounts shall be paid on the dates due, in immediately available funds, as
provided herein, in the Side Letter, in the Monitoring Agreement Letter or in
the other applicable Loan Document to the Person specified herein, in the Side
Letter, in the Monitoring Agreement Letter or in the other applicable Loan
Document.  Once paid, such amounts shall be fully earned and shall not be
refundable under any circumstances.

 

SECTION 2.15                                 [Intentionally Omitted].

 

SECTION 2.16                                 [Intentionally Omitted].

 

SECTION 2.17                                 Prepayment Premium; Make Whole
Amount.  Notwithstanding anything herein to the contrary, in the event all or
any portion of the Obligations are prepaid or repaid for any reason (including,
without limitation, prepayment or repayment following the Borrowers’ exercise of
their rights under SECTION 2.28 or SECTION 9.2(e), an acceleration of the Loans,
upon the occurrence of an Event of Default, an early acceleration due to a
Change in Control, or any mandatory prepayment or optional prepayment) (1) on or
before the first anniversary of the Effective Date, such prepayments or
repayments shall be accompanied by the Make Whole Amount and (2) after the first
anniversary but on or prior to the fourth anniversary of the Effective Date,
such prepayments or repayments shall be accompanied by a repayment/prepayment
fee equal to (a) 4.0% of the Loans so prepaid or repaid if such prepayment or
repayment occurs at any time during the period commencing after the first
anniversary of the Effective Date and ending on (and including) the second
anniversary of the

 

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Effective Date, (b) 3.0% of the Loans so prepaid or repaid if such prepayment or
repayment occurs at any time during the period commencing after the second
anniversary of the Effective Date and ending on (and including) the third
anniversary of the Effective Date and (c) 2.0% of the Loans so prepaid or repaid
if such prepayment or repayment occurs at any time during the period commencing
after the third anniversary of the Effective Date and ending on (and including)
the fourth anniversary of the Effective Date.  The prepayment/repayment fee and
the Make Whole Amount referred to in the first sentence of this SECTION 2.17
shall be paid by the Borrowers to the Administrative Agent for distribution to
the Lenders in accordance with their Pro Rata Share (unless otherwise agreed by
the Lenders).  The parties hereto acknowledge and agree that, in light of the
impracticality and extreme difficulty of ascertaining actual damages, the
repayment/prepayment fees and the Make Whole Amount referred to in the first
sentence of this SECTION 2.17 are intended to be a reasonable calculation of the
actual damages that would be suffered by the Lenders as a result of any such
repayment/prepayment. The parties hereto further acknowledge and agree that the
repayment/prepayment fees and the Make Whole Amount referred to in the first
sentence of this SECTION 2.17 are not intended to act as a penalty or to punish
the Borrowers for any such repayment/prepayment.

 

SECTION 2.18                                 Mandatory Prepayment.  The
outstanding Obligations shall be subject to mandatory prepayment as follows:

 

(a)                                 [Intentionally omitted].

 

(b)                                 [Intentionally omitted].

 

(c)                                  Subject to the terms of the Intercreditor
Agreement, any Net Proceeds received from a Prepayment Event, whether or not a
Cash Control Event then exists, shall be paid over to the Administrative Agent
on the date of receipt by the Borrowers and shall be utilized to prepay the
Loans, together with the payment of any prepayment premium or Make Whole Amount
required by SECTION 2.17, in the order of priority set forth in SECTION 7.4, as
applicable.  The Administrative Agent shall not be obligated to release their
Liens on any Collateral included in such Prepayment Event until such Net
Proceeds have been so received.  If all Loans are paid in full (including any
prepayment premium or Make Whole Amount required to be paid pursuant to
SECTION 2.17), any excess Net Proceeds shall be remitted to the Borrowers.

 

(d)                                 In the event of any mandatory prepayment,
other than as a result of an event described in clause (d) of the definition of
Prepayment Event consisting of a public offering and sale of common stock of the
Borrower for an amount per share equal to or greater than $10.00, any Lender may
elect, by notice to the Administrative Agent by telephone (confirmed by hand or
telecopier) at least one Business Day prior to such prepayment, to decline all
or any portion of any such mandatory prepayment.

 

(e)                                  All amounts required to be applied to all
Loans hereunder shall be applied ratably in accordance with each Lender’s Pro
Rata Share (unless otherwise agreed by the Lenders).

 

(f)                                   Upon the Termination Date, the Borrowers
shall pay, in full and in cash, all outstanding Loans and all other outstanding
Obligations then owing by the Borrowers.

 

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SECTION 2.19           Optional Prepayment of Loans; Reimbursement of Lenders.

 

(a)           The Borrowers shall have the right at any time and from time to
time, subject to any prepayment premium or Make Whole Amount required to be paid
pursuant to SECTION 2.17, to prepay outstanding Loans in whole or in part, upon
three Business Days prior written notice from the Borrowers to the
Administrative Agent, which such notice shall be irrevocable unless such notice
is conditioned on a refinancing, a Change in Control or asset sale transaction
or other transaction of a similar nature, in which case such notice may be
revoked on or prior to such date, in the event such transaction is not
consummated on or prior to such date.  All prepayments of Loans are subject to
the following limitations:

 

(i)            Each partial prepayment of Loans shall be in an integral multiple
of $5,000,000.

 

(ii)           Each notice of prepayment shall specify the prepayment date and
the amount of Loans to be prepaid.  The Administrative Agent shall, promptly
after receiving notice from the Borrowers hereunder, notify each Lender of the
principal amount of the Loans held by such Lender which are to be prepaid, the
prepayment date and the manner of application of the prepayment.

 

(iii)          Prepayments made pursuant to this SECTION 2.19 shall be applied
ratably to each Lender pursuant to their Pro Rata Share (unless otherwise agreed
by the Lenders).

 

(b)           [Intentionally Omitted].

 

(c)           In the event the Borrowers fail to prepay any Loans on the date
specified in any prepayment notice delivered pursuant to SECTION 2.19(a), the
Borrowers on demand by any Lender shall pay to the Administrative Agent for the
account of such Lender any amounts required to compensate such Lender for any
actual loss incurred by such Lender as a result of such failure to prepay,
including, without limitation, any loss, cost or expenses incurred by reason of
the acquisition of deposits or other funds by such Lender to fulfill deposit
obligations incurred in anticipation of such prepayment.  Any Lender demanding
such payment shall deliver to the Borrowers simultaneously with such demand one
or more certificates setting forth the amount of such loss as determined by such
Lender and setting forth in reasonable detail the manner in which such amount
was determined.

 

SECTION 2.20           Maintenance of Loan Account; Statements of Account.

 

(a)           The Administrative Agent shall maintain an account on its books in
the name of the Borrowers (the “Loan Account”) which will reflect (i) all Loans
made by the Lenders to the Borrowers or for the Borrowers’ account, (ii) all
fees, interest and other amounts that have become payable as herein or in the
other Loan Documents set forth, and (iii) any and all other monetary Obligations
that have become payable.

 

(b)           The Loan Account will be credited with all amounts received by the
Administrative Agent from the Borrowers on the date such amounts are received. 
After the end of each month, the Administrative Agent shall send to the
Borrowers a statement accounting for

 

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the charges, loans, advances and other transactions occurring among and between
the Administrative Agent, the Lenders and the Borrowers during that month.  The
monthly statements shall, absent manifest error, be an account stated, which is
final, conclusive and binding on the Loan Parties.

 

(c)           The Administrative Agent, without the consent or request of the
Borrowers, may advance any interest, fee, service charge, cost, charge, expense,
or other payment to which any Lender or the Administrative Agent is entitled
from the Loan Parties pursuant to this Agreement or any other Loan Document and
may charge the same to the Loan Account by adding such amount to the principal
balance of the Loan Account.  The Administrative Agent shall advise the
Borrowers of any such advance or charge promptly after the making thereof;
provided, however, any failure of the Administrative Agent to so advise or
notify the Borrowers of such advance or charge shall not limit or otherwise
affect the obligation of the Borrowers hereunder to pay any such amount.  Such
action on the part of the Administrative Agent shall not constitute a waiver of
either the Administrative Agent’s or any Lender’s rights under, or the Loan
Parties’ obligations to make any payment required pursuant to, this Agreement or
any other Loan Document.

 

SECTION 2.21           Cash Management.

 

(a)           (i) Annexed hereto as Schedule 2.21(a)(i) is a list of all DDAs
and accounts maintained by the Loan Parties into which more than one DDA
deposits or transfers funds (the “Concentration Accounts”) as of the date
hereof, which Schedule includes, with respect to each Concentration Account
depository (1) the name of that depository and (2) the last four digits of the
account number(s) maintained with such depository.

 

(ii) Annexed hereto as Schedule 2.21(a)(ii) is a list describing all
arrangements to which any Loan Party or any of its Subsidiaries is a party as of
the Effective Date with respect to the payment to any Loan Party or any of its
Subsidiaries of the proceeds of all credit card charges for sales by any Loan
Party or any of its Subsidiaries.

 

(b)           Within sixty (60) days after the Effective Date, to the extent not
previously furnished to the Administrative Agent, the Loan Parties shall have
entered into agency agreements with the banks maintaining the Concentration
Accounts, which agreements (the “Blocked Account Agreements”) shall establish
control (as defined in the Uniform Commercial Code) of such account by the
Administrative Agent.

 

(c)           The Loan Parties may close Concentration Accounts and/or open new
Concentration Accounts, subject to the execution and delivery to the
Administrative Agent of appropriate Blocked Account Agreements consistent with
the provisions of this SECTION 2.21. The Loan Parties may close DDAs and/or open
new DDAs, subject to the Borrowers updating Schedule 2.21(a)(i) and otherwise
complying with the terms of this Agreement.  The Loan Parties shall each cause
each of their credit card processors to remit all proceeds of all credit card
charges to a Concentration Account.

 

(d)           [Intentionally omitted].

 

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(e)           The Loan Parties shall cause the ACH or wire transfer to a
Concentration Account, no less frequently then daily, of the then contents of
each DDA, each such transfer to be net of any minimum balance, not to exceed
$10,000, as may be required to be maintained in the subject DDA by the bank at
which such DDA is maintained; provided, however, to the extent a DDA is
maintained for the deposit of the receipts of a Store, such DDA is maintained
with a bank that either does not provide daily balance information for such DDA
or cannot accommodate daily ACH or wire transfers and there is not a suitable
replacement bank reasonably available for such Store, then such DDA may be swept
on a monthly, rather than daily basis; provided, further, that (x) the number of
such DDAs swept on a monthly basis shall not exceed five percent (5%) of all of
the Store DDAs and (y) the aggregate amounts maintained in such DDAs shall not
exceed $5,000,000 at any time.

 

SECTION 2.22           [Intentionally Omitted].

 

SECTION 2.23           Increased Costs.

 

(a)           If any Change in Law shall:

 

(i)            impose, modify or deem applicable any reserve, special deposit,
compulsory loan, insurance charge or similar requirement against assets of,
deposits with or for the account of, or credit extended or participated in by,
any Lender;

 

(ii)           subject any Recipient to any Taxes (other than (A) Indemnified
Taxes and (B)  Excluded Taxes) on its loans, loan principal, letters of credit,
commitments, or other obligations, or its deposits, reserves, other liabilities
or capital attributable thereto; or

 

(iii)          impose on any Lender any other condition, cost or expense
affecting this Agreement;

 

and the result of any of the foregoing shall be to reduce the amount of any sum
received or receivable by such Lender hereunder (whether of principal, interest
or any other amount) then, upon request of such Lender, the Borrowers will pay
to such Lender, as the case may be, such additional amount or amounts as will
compensate such Lender, as the case may be, for such additional costs incurred
or reduction suffered.

 

(b)           If any Lender determines that any Change in Law affecting such
Lender or any lending office of such Lender or such Lender’s holding company, if
any, regarding capital requirements has or would have the effect of reducing the
rate of return on such Lender’s capital or on the capital of such Lender’s
holding company, if any, as a consequence of this Agreement, the Loans made by
such Lender to a level below that which such Lender or such Lender’s holding
company could have achieved but for such Change in Law (taking into
consideration such Lender’s policies and the policies of such Lender’s holding
company with respect to capital adequacy), then from time to time the Borrowers
will pay to such Lender such additional amount or amounts as will compensate
such Lender or such Lender’s holding company for any such reduction suffered.

 

(c)           A certificate of a Lender setting forth the amount or amounts
necessary to compensate such Lender or its holding company, as the case may be,
as specified in subsection

 

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(a) or (b) of this SECTION 2.23 and delivered to the Borrowers shall be
conclusive absent manifest error.  The Borrowers shall pay such Lender the
amount shown as due on any such certificate within 10 days after receipt
thereof.

 

(d)           Failure or delay on the part of any Lender to demand compensation
pursuant to the foregoing provisions of this SECTION 2.23 shall not constitute a
waiver of such Lender’s right to demand such compensation, provided that the
Borrowers shall not be required to compensate a Lender pursuant to the foregoing
provisions of this SECTION 2.23 for any increased costs incurred or reductions
suffered more than six months prior to the date that such Lender, as the case
may be, notifies the Borrowers of the Change in Law giving rise to such
increased costs or reductions and of such Lender’s intention to claim
compensation therefor (except that, if the Change in Law giving rise to such
increased costs or reductions is retroactive, then the six-month period referred
to above shall be extended to include the period of retroactive effect thereof).

 

SECTION 2.24           [Intentionally Omitted].

 

SECTION 2.25           Payments; Sharing of Setoff.

 

(a)           The Borrowers shall make each payment required to be made by it
hereunder or under any other Loan Document (whether of principal, interest, fees
or of amounts payable under SECTION 2.17, SECTION 2.23 or SECTION 2.26, or
otherwise) prior to 12:00 noon on the date when due, in immediately available
funds, without setoff or counterclaim.  Any amounts received after such time on
any date may, in the discretion of the Administrative Agent, be deemed to have
been received on the next succeeding Business Day for purposes of calculating
interest thereon.  All such payments shall be made to the Administrative Agent
at its offices at One Embarcadero Center, Suite 3900, San Francisco, CA 94111,
except that payments pursuant to SECTION 2.17, SECTION 2.23, SECTION 2.26 and
SECTION 9.3 shall be made directly to the Persons entitled thereto and payments
pursuant to other Loan Documents shall be made to the Persons specified
therein.  The Administrative Agent shall distribute any such payments received
by it for the account of any other Person to the appropriate recipient promptly
following receipt thereof.  If any payment under any Loan Document shall be due
on a day that is not a Business Day, the date for payment shall be extended to
the next succeeding Business Day, and, in the case of any payment accruing
interest, interest thereon shall be payable for the period of such extension. 
All payments under each Loan Document shall be made in Dollars.

 

(b)           If at any time insufficient funds are received by and available to
the Administrative Agent to pay fully all amounts of principal, interest, fees
and other amounts then due hereunder, such funds shall be applied (i) first,
towards payment of interest and fees and other amounts due under the Side Letter
and the Monitoring Agreement Letter then due hereunder, ratably among the
parties entitled thereto in accordance with the amounts of interest, fees and
such other amounts then due to such parties, (ii) second, towards payment of
principal on Loans then due hereunder, ratably among the parties entitled
thereto in accordance with the amounts of principal then due to such parties and
(iii) third, towards payment of any other Obligations then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of
such other Obligations then due to such parties.

 

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(c)           Each of the Lenders, the Administrative Agent and the other Credit
Parties agrees that if it shall, through payment, foreclosure, counterclaim, the
exercise of a right of banker’s lien, setoff or counterclaim against the Loan
Parties or otherwise, including, but not limited to, a secured claim under
Section 506 of the Bankruptcy Code or other security or interest arising from,
or in lieu of, such secured claim and received by such Credit Party under any
applicable bankruptcy, insolvency or other similar law, or otherwise, obtain
payment in respect of the Obligations owed to it (an “excess payment”) as a
result of which such Lender, the Administrative Agent or such other Credit Party
receives payment of a greater proportion of the aggregate amount of its Loans
and accrued interest thereon than the proportion received by any other Lender if
all payments at any time applied to the Loans and other Obligations had been
applied in the order of priority set forth in SECTION 7.4, as applicable, then
the Lender, Administrative Agent or other Credit Party receiving such greater
proportion shall purchase (for cash at par) without recourse or warranty, (and
shall be deemed to have thereupon purchased) participations in the Loans of
other Lenders in an amount determined by the Administrative Agent in good faith
as the amount necessary to ensure that the economic benefit of such excess
payment is reallocated in such manner as to cause such excess payment and all
other payments at any time applied to the Loans and other Obligations to be
effectively applied in the order of priority set forth in SECTION 7.4, as
applicable, pro rata in proportion to its Pro Rata Share, provided, that (i) if
any such participations are purchased and all or any portion of the payment
giving rise thereto is set aside or recovered, such participations shall be
rescinded and the purchase price restored to the extent of such recovery,
without interest, and (ii) the provisions of this paragraph shall not be
construed to apply to any payment made by the Borrowers pursuant to and in
accordance with the express terms of this Agreement or any payment obtained by a
Lender as consideration for the assignment of or sale of a participation in any
of its Loans to any assignee or participant, other than to the Borrowers or any
Affiliate thereof (as to which the provisions of this paragraph shall apply). 
The Borrowers consent to the foregoing and agree, to the extent they may
effectively do so under applicable law, that any Lender acquiring a
participation pursuant to the foregoing arrangements may exercise against the
Borrowers rights of setoff and counterclaim with respect to such participation
as fully as if such Lender were a direct creditor of the Borrowers in the amount
of such participation.

 

(d)           Unless the Administrative Agent shall have received notice from
the Borrowers prior to the date on which any payment is due to the
Administrative Agent for the account of the Lenders hereunder that the Borrowers
will not make such payment, the Administrative Agent may assume that the
Borrowers have made such payment on such date in accordance herewith and may, in
reliance upon such assumption, distribute to the Lenders the amount due.  In
such event, if the Borrowers have not in fact made such payment, then each of
the Lenders severally agrees to repay to the Administrative Agent forthwith on
demand the amount so distributed to such Lender with interest thereon, for each
day from and including the date such amount is distributed to it to but
excluding the date of payment to the Administrative Agent, at the greater of the
Federal Funds Effective Rate and a rate determined by the Administrative Agent
in accordance with banking industry rules on interbank compensation.

 

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SECTION 2.26           Taxes.

 

(a)           Payments Free of Taxes; Obligation to Withhold; Payments on
Account of Taxes.

 

(i)            Any and all payments by or on account of any obligation of any
Loan Party under any Loan Document shall be made without deduction, remittance,
or withholding for any Taxes, except as required by applicable laws.  If any
applicable laws require the deduction, remittance, or withholding of any Tax
from any such payment by the Administrative Agent (as determined in the good
faith discretion of the Administrative Agent) or a Loan Party, then the
Administrative Agent or such Loan Party shall be entitled to make such
deduction, remittance or withholding, upon the basis of the information and
documentation to be delivered pursuant to subsection (e) below.

 

(ii)           If any Loan Party or the Administrative Agent shall be required
by any applicable laws to withhold, remit, or deduct any Taxes from any payment,
then (A) such Loan Party or the Administrative Agent, as required by such laws,
shall withhold, remit, or make such deductions as are determined by it to be
required based upon the information and documentation it has received pursuant
to subsection (e) below, (B) such Loan Party or the Administrative Agent, to the
extent required by such laws, shall timely pay the full amount withheld,
remitted, or deducted to the relevant Governmental Authority in accordance with
such laws, and (C) to the extent that the withholding, remittance, or deduction
is made on account of Indemnified Taxes, the sum payable by the applicable Loan
Party shall be increased as necessary so that after any required withholding or
remittance, or the making of all required deductions (including deductions
applicable to additional sums payable under this SECTION 2.26) the applicable
Recipient receives an amount equal to the sum it would have received had no such
withholding, remittance, or deduction been made.

 

(b)           Payment of Other Taxes by the Borrowers.  Without limiting the
provisions of subsection (a) above, the Borrowers shall timely pay to the
relevant Governmental Authority in accordance with applicable law, or at the
option of the Administrative Agent timely reimburse it for the payment of, any
Other Taxes.

 

(c)           Tax Indemnifications.

 

(i)            The Loan Parties shall, and each Loan Party does hereby, jointly
and severally indemnify each Recipient, and shall make payment in respect
thereof within ten (10) days after demand therefor, for the full amount of any
Indemnified Taxes (including Indemnified Taxes imposed or asserted on or
attributable to amounts payable under this SECTION 2.26) payable or paid by such
Recipient or required to be

 

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withheld or deducted from a payment to such Recipient, and any penalties,
interest and reasonable expenses arising therefrom or with respect thereto,
whether or not such Indemnified Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority.  A certificate as to the amount
of such payment or liability delivered to Zale by a Lender (with a copy to the
Administrative Agent), or by the Administrative Agent on its own behalf or on
behalf of a Lender, shall be conclusive absent manifest error.

 

(ii)           Each Lender shall, and does hereby, severally indemnify, and
shall make payment in respect thereof within ten (10) days after demand
therefor, (x) the Administrative Agent against any Indemnified Taxes
attributable to such Lender (but only to the extent that any Loan Party has not
already indemnified the Administrative Agent for such Indemnified Taxes and
without limiting the obligation of the Loan Parties to do so), (y) the
Administrative Agent and the Loan Parties, as applicable, against any Taxes
attributable to such Lender’s failure to comply with the provisions of
SECTION 9.4(h) relating to the maintenance of a Participant Register and (z) the
Administrative Agent and the Loan Parties, as applicable, against any Excluded
Taxes attributable to such Lender  that are payable or paid by the
Administrative Agent or a Loan Party in connection with any Loan Document, and
any reasonable expenses arising therefrom or with respect thereto, whether or
not such Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority.  A certificate as to the amount of such payment or
liability delivered to any Lender by the Administrative Agent shall be
conclusive absent manifest error.  Each Lender hereby authorizes the
Administrative Agent to set off and apply any and all amounts at any time owing
to such Lender under this Agreement or any other Loan Document against any
amount due to the Administrative Agent under this clause (ii).

 

(d)           Evidence of Payments.  Upon request by Zale or the Administrative
Agent, as the case may be, after any payment or remittance of Taxes by the Loan
Parties or by the Administrative Agent to a Governmental Authority as provided
in this SECTION 2.26, the Loan Parties shall deliver to the Administrative Agent
or the Administrative Agent shall deliver to Zale, as the case may be, the
original or a certified copy of a receipt issued by such Governmental Authority
evidencing such payment, a copy of any return required by Laws to report such
payment or other evidence of such payment reasonably satisfactory to Zale or the
Administrative Agent, as the case may be.

 

(e)           Status of Lenders; Tax Documentation.

 

(i)            Any Lender that is entitled to an exemption from or reduction of
withholding Tax with respect to payments made under any Loan Document shall
deliver to Zale and the Administrative Agent, at the time or times reasonably
requested by Zale or the Administrative Agent, such properly completed and
executed documentation reasonably requested by

 

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Zale or the Administrative Agent as will permit such payments to be made without
withholding or at a reduced rate of withholding.  In addition, any Lender, if
reasonably requested by Zale or the Administrative Agent, shall deliver such
other documentation prescribed by applicable Law or reasonably requested by Zale
or the Administrative Agent as will enable Zale or the Administrative Agent to
determine whether or not such Lender is subject to backup withholding or
information reporting requirements.  Notwithstanding anything to the contrary in
the preceding two sentences, the completion, execution and submission of such
documentation (other than such documentation set forth in
SECTION 2.26(e)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in
the Lender’s reasonable judgment such completion, execution or submission would
subject such Lender to any material unreimbursed cost or expense or would
materially prejudice the legal or commercial position of such Lender.

 

(ii)           Without limiting the generality of the foregoing, in the event
that Zale is a U.S. Person,

 

(A)          any Lender that is a U.S. Person shall deliver to Zale and the
Administrative Agent on or prior to the date on which such Lender becomes a
Lender under this Agreement (and from time to time thereafter upon the
reasonable request of Zale or the Administrative Agent), executed originals of
IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup
withholding tax;

 

(B)          any Foreign Lender shall, to the extent it is legally entitled to
do so, deliver to Zale and the Administrative Agent (in such number of copies as
shall be requested by the recipient) on or prior to the date on which such
Foreign Lender becomes a Lender under this Agreement (and from time to time
thereafter upon the reasonable request of Zale or the Administrative Agent),
whichever of the following is applicable:

 

(I)            in the case of a Foreign Lender claiming the benefits of an
income tax treaty to which the United States is a party (x) with respect to
payments of interest under any Loan Document, executed originals of IRS
Form W-8BEN establishing an exemption from, or reduction of, U.S. federal
withholding Tax pursuant to the “interest” article of such tax treaty and
(y) with respect to any other applicable payments under any Loan Document, IRS
Form W-8BEN establishing an exemption from, or reduction of, U.S. federal
withholding Tax pursuant to the “business profits” or “other income” article of
such tax treaty;

 

(II)          executed originals of IRS Form W-8ECI;

 

(III)        in the case of a Foreign Lender claiming the benefits of the
exemption for portfolio interest under Section

 

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881(c) of the Code, (x) a certificate substantially in the form of Exhibit F-1
to the effect that such Foreign Lender is not a “bank” within the meaning of
Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of any Borrower
within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign
corporation” described in Section 881(c)(3)(C) of the Code (a “U.S. Tax
Compliance Certificate”) and (y) executed originals of IRS Form W-8BEN; or

 

(IV)         to the extent a Foreign Lender is not the beneficial owner,
executed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS
Form W-8BEN, a U.S. Tax Compliance Certificate substantially in the form of
Exhibit F-2 or Exhibit F-3, IRS Form W-9, and/or other certification documents
from each beneficial owner, as applicable; provided that if the Foreign Lender
is a partnership and one or more direct or indirect partners of such Foreign
Lender are claiming the portfolio interest exemption, such Foreign Lender may
provide a U.S. Tax Compliance Certificate substantially in the form of
Exhibit F-4 on behalf of each such direct and indirect partner;

 

(C)          any Foreign Lender shall, to the extent it is legally entitled to
do so, deliver to Zale and the Administrative Agent (in such number of copies as
shall be requested by the recipient) on or prior to the date on which such
Foreign Lender becomes a Lender under this Agreement (and from time to time
thereafter upon the reasonable request of Zale or the Administrative Agent),
executed originals of any other form prescribed by applicable Law as a basis for
claiming exemption from or a reduction in U.S. federal withholding Tax, duly
completed, together with such supplementary documentation as may be prescribed
by applicable law to permit Zale or the Administrative Agent to determine the
withholding or deduction required to be made; and

 

(D)          if a payment made to a Lender under any Loan Document would be
subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to
fail to comply with the applicable reporting requirements of FATCA (including
those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such
Lender shall deliver to Zale and the Administrative Agent at the time or times
prescribed by law and at such time or times reasonably requested by Zale or the
Administrative Agent such documentation prescribed by applicable law (including
as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional
documentation reasonably requested by Zale or the Administrative Agent as may be
necessary for Zale and the Administrative Agent to comply with their obligations
under FATCA and to determine that such Lender has complied with such Lender’s
obligations under FATCA or to determine the amount to deduct and withhold from
such payment.  Solely for

 

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purposes of this clause (D), “FATCA” shall include any amendments made to FATCA
after the date of this Agreement.

 

(iii)          Each Lender agrees that if any form or certification it
previously delivered pursuant to this SECTION 2.26 expires or becomes obsolete
or inaccurate in any respect, it shall update such form or certification or
promptly notify Zale and the Administrative Agent in writing of its legal
inability to do so.

 

(f)            Treatment of Certain Refunds.  Unless required by applicable
laws, at no time shall the Administrative Agent have any obligation to file for
or otherwise pursue on behalf of a Lender, or have any obligation to pay to any
Lender, any refund of Taxes withheld, remitted, or deducted from funds paid for
the account of such Lender.  If any Recipient determines, in its sole discretion
exercised in good faith, that it has received a refund of any Taxes as to which
it has been indemnified by any Loan Party or with respect to which any Loan
Party has paid additional amounts pursuant to this SECTION 2.26, it shall pay to
the Loan Party an amount equal to such refund (but only to the extent of
indemnity payments made, or additional amounts paid, by a Loan Party under this
SECTION 2.26 with respect to the Taxes giving rise to such refund), net of all
out-of-pocket expenses (including Taxes) incurred by such Recipient, and without
interest (other than any interest paid by the relevant Governmental Authority
with respect to such refund), provided that the Loan Party, upon the request of
the Recipient, agrees to repay the amount paid over to the Loan Party (plus any
penalties, interest or other charges imposed by the relevant Governmental
Authority) to the Recipient in the event the Recipient is required to repay such
refund to such Governmental Authority.  Notwithstanding anything to the contrary
in this subsection, in no event will the applicable Recipient be required to pay
any amount to the Loan Party pursuant to this subsection the payment of which
would place the Recipient in a less favorable net after-Tax position than such
Recipient would have been in if the indemnification payments or additional
amounts giving rise to such refund had never been paid.  This subsection shall
not be construed to require any Recipient to make available its tax returns (or
any other information relating to its taxes that it deems confidential) to any
Loan Party or any other Person.

 

(g)           Survival.  Each party’s obligations under this SECTION 2.26 shall
survive the resignation or replacement of the Administrative Agent or any
assignment of rights by, or the replacement of, a Lender, and the repayment,
satisfaction or discharge of all other Obligations.

 

SECTION 2.27           Security Interests in Collateral.  To secure their
Obligations under this Agreement and the other Loan Documents, the Loan Parties
have granted, and shall grant, to the Administrative Agent, for its benefit and
the ratable benefit of the other Credit Parties, a first-priority Lien on all of
the Collateral pursuant hereto and to the Security Documents, subject to the
terms of the Intercreditor Agreement with respect to the ABL Priority
Collateral.

 

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SECTION 2.28           Mitigation Obligations; Replacement of Lenders.

 

(a)           If any Lender requests compensation under SECTION 2.23 or if the
Borrowers are required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to SECTION 2.26,
then such Lender shall use reasonable efforts to designate a different lending
office for funding or booking its Loans hereunder or to assign its rights and
obligations hereunder to another of its offices, branches or affiliates, if, in
the reasonable judgment of such Lender, such designation or assignment (i) would
eliminate or reduce amounts payable pursuant to SECTION 2.23 or SECTION 2.26, as
the case may be, in the future and (ii) would not subject such Lender to any
material unreimbursed cost or expense and would not otherwise be materially
disadvantageous to such Lender.  The Borrowers hereby agree to pay all
reasonable costs and expenses incurred by any Lender in connection with any such
designation or assignment; provided, however, that the Borrowers shall not be
liable for such costs and expenses of a Lender requesting compensation if
(i) such Lender becomes a party to this Agreement on a date after the Effective
Date and (ii) the relevant Change in Law occurs on a date prior to the date such
Lender becomes a party hereto.

 

(b)           If any Lender requests compensation under SECTION 2.23, or if the
Borrowers are required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to SECTION 2.26,
or if any Lender is a Defaulting Lender, then the Borrowers may upon notice to
such Lender and the Administrative Agent require such Lender to assign and
delegate, without recourse (in accordance with and subject to the restrictions
contained in SECTION 9.4), all its interests, rights and obligations under this
Agreement to an assignee that shall assume such obligations (which assignee may
be another Lender, if a Lender accepts such assignment), provided, that
(A) except in the case of an assignment to another Lender, the Borrowers shall
have received the prior written consent of the Administrative Agent, which
consent shall not unreasonably be withheld, (B) such Lender shall have received
payment of an amount equal to the outstanding principal of its Loans, accrued
interest thereon, accrued fees and all other amounts payable to it hereunder and
under the other Loan Documents (excluding any prepayment fee or Make Whole
Amount due pursuant to SECTION 2.17), from the assignee (to the extent of such
outstanding principal and accrued interest, fees and other amounts) or the
Borrowers (in the case of all other amounts) and (C) in the case of any such
assignment resulting from a claim for compensation under SECTION 2.23 or
payments required to be made pursuant to SECTION 2.26, such assignment will
result in a reduction in such compensation or payments.  A Lender shall not be
required to make any such assignment and delegation if, prior thereto, as a
result of a waiver by such Lender or otherwise, the circumstances entitling the
Borrowers to require such assignment and delegation cease to apply.

 

SECTION 2.29           [Intentionally Omitted].

 

SECTION 2.30           Zale Puerto Rico; Canadian Loan Parties.  Zale may, upon
not less than 30 days’ notice to the Administrative Agent (or such shorter
period as may be agreed by the Administrative Agent in its sole discretion),
request that Zale PR’s and/or each Canadian Loan Party’s status as a Borrower or
as Facility Guarantor and a Loan Party hereunder be terminated, provided that,
any such termination shall be conditioned upon, among other terms, the
satisfaction of the following: (a) a Lien in 100% of the Stock of Zale PR and
each Canadian

 

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Loan Party shall have been granted to the Administrative Agent; provided that,
to the extent Zale PR or a Canadian Loan Party is a CFC, the Lien granted to the
Administrative Agent on the voting Stock of such CFC shall be limited to 65% of
the voting Stock of such CFC that is held by Zale or a Domestic Subsidiary
(which pledge, shall be governed by and documented under the laws of the
jurisdiction of organization of such CFC), (b) all outstanding ABL Loans made to
Zale PR or based upon the assets of Zale PR or the Canadian Loan Parties
included in the Borrowing Base, as applicable, shall have been repaid in full in
cash, (c) after giving effect to such termination and to the release and
discharge of the Liens held by the Administrative Agent on the assets of Zale PR
or the Canadian Loan Parties, as applicable, and the removal of all assets of
Zale PR and the Canadian Loan Parties, as applicable, from the Borrowing Base,
Term Loan Borrowing Base and Incremental Availability and all component
definitions thereof, the Payment Conditions shall be satisfied, (d) the
Borrowers and the Administrative Agent shall have entered into a technical
amendment to this Agreement and the other Loan Documents to effectuate the
foregoing; and (e) all Liens on, and security interests in, the assets of Zale
PR or the Canadian Loan Parties, as applicable, to secure the ABL Obligations
have been terminated, discharged, and released to the reasonable satisfaction of
the Administrative Agent and neither Zale PR nor any Canadian Loan Party shall
Guarantee the ABL Obligations. The Administrative Agent will promptly notify the
Lenders of any such termination of Zale PR and/or the Canadian Loan Parties
status as a Borrower or as Facility Guarantors and Loan Parties hereunder. Upon
such termination, Zale PR or each Canadian Loan Party, as applicable, shall be
released from its obligations hereunder and under the Loan Documents and the
Administrative Agent shall, subject to SECTION 9.6, release and discharge all
Liens on, and security interests held by them in, the assets of Zale PR or the
Canadian Loan Parties, as applicable.

 

SECTION 2.31           Defaulting Lenders.

 

(a)           Adjustments.  Notwithstanding anything to the contrary contained
in this Agreement, if any Lender becomes a Defaulting Lender, then, until such
time as that Lender is no longer a Defaulting Lender, to the extent permitted by
applicable law:

 

(i)            Waivers and Amendments.  Such Defaulting Lender’s right to
approve or disapprove any amendment, waiver or consent with respect to this
Agreement shall be restricted as set forth in the definitions of “Required
Lenders” and “Required Supermajority Lenders” and SECTION 9.2.

 

(ii)           Defaulting Lender Waterfall.  Any payment of principal, interest,
fees or other amounts received by the Administrative Agent for the account of
such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to
Article VII or otherwise) or received by the Administrative Agent from a
Defaulting Lender pursuant to SECTION 9.9 shall be applied at such time or times
as may be determined by the Administrative Agent as follows: first, to the
payment of any amounts owing by such Defaulting Lender to the Administrative
Agent hereunder; second, to the payment of any amounts owing to the Lenders as a
result of any judgment of a court of competent jurisdiction obtained by any
Lender against such Defaulting Lender as a result of such Defaulting Lender’s

 

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breach of its obligations under this Agreement; third, so long as no Default or
Event of Default exists, to the payment of any amounts owing to the Borrowers as
a result of any judgment of a court of competent jurisdiction obtained by the
Borrowers against such Defaulting Lender as a result of such Defaulting Lender’s
breach of its obligations under this Agreement; and fourth, to such Defaulting
Lender or as otherwise directed by a court of competent jurisdiction.  Any
payments, prepayments or other amounts paid or payable to a Defaulting Lender
that are applied (or held) to pay amounts owed by a Defaulting Lender or to post
cash collateral pursuant to this SECTION 2.31(a)(ii) shall be deemed paid to and
redirected by such Defaulting Lender, and each Lender irrevocably consents
hereto.

 

(b)           Defaulting Lender Cure.  If Zale and the Administrative Agent
agree in writing that a Lender is no longer a Defaulting Lender, the
Administrative Agent will so notify the parties hereto, whereupon as of the
effective date specified in such notice and subject to any conditions set forth
therein (which may include arrangements with respect to any cash collateral),
that Lender will, to the extent applicable, purchase at par that portion of
outstanding Loans of the other Lenders or take such other actions as the
Administrative Agent may determine to be necessary to cause the Loans to be held
on a pro rata basis by the Lenders in accordance with their Pro Rata Share),
whereupon such Lender will cease to be a Defaulting Lender; provided that no
adjustments will be made retroactively with respect to fees or other amounts
accrued or payments made by or on behalf of the Borrowers while that Lender was
a Defaulting Lender; and provided, further, that except to the extent otherwise
expressly agreed by the affected parties, no change hereunder from Defaulting
Lender to Lender will constitute a waiver or release of any claim of any party
hereunder arising from that Lender’s having been a Defaulting Lender.

 

ARTICLE III
REPRESENTATIONS AND WARRANTIES

 

Each Loan Party, represents and warrants to the Administrative Agent, the
Lenders and the other Credit Parties that:

 

SECTION 3.1             Organization; Powers.  Each Loan Party, and each of its
Subsidiaries, is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, and each such Person has all
requisite power and authority to carry on its business as now conducted and,
except where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect, is qualified to
do business in, and is in good standing in, every jurisdiction where such
qualification is required.

 

SECTION 3.2             Authorization; Enforceability.  The transactions
contemplated hereby, by the other Loan Documents entered into by each Loan Party
are within such Loan Party’s corporate or partnership powers and have been duly
authorized by all necessary corporate or partnership, and, if required,
stockholder action.  This Agreement has been duly executed and delivered by each
Loan Party that is a party hereto and constitutes, and each other Loan Document
to which any Loan Party is a party, when executed and delivered by such Loan
Party

 

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will constitute, a legal, valid and binding obligation of such Loan Party (as
the case may be), enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors’ rights generally and subject to general principles of
equity, regardless of whether considered in a proceeding in equity or at law.

 

SECTION 3.3             Governmental Approvals; No Conflicts.  The transactions
to be entered into contemplated by the Loan Documents (a) do not require any
consent or approval of, registration or filing with, or any other action by, any
Governmental Authority, except (i) for such as have been obtained or made and
are in full force and effect, (ii) for those which could not reasonably be
expected to have a Material Adverse Effect, and (iii) for  filings and
recordings necessary to perfect Liens created under the Loan Documents, (b) will
not violate any applicable law or regulation or the charter, by-laws or other
organizational documents of any Loan Party or any order of any Governmental
Authority, except for such violation which could not reasonably be expected to
have a Material Adverse Effect, (c) will not violate or result in a default
under any indenture, agreement or other instrument binding upon any Loan Party
or any of its Subsidiaries or their respective assets, except for such violation
or default which could not reasonably be expected to have a Material Adverse
Effect, or give rise to a right thereunder to require any payment to be made by
any Loan Party, and (d) will not result in the creation or imposition of any
Lien on any asset of any Loan Party, except Liens created under the Loan
Documents or otherwise permitted hereby or thereby.

 

SECTION 3.4             Financial Condition. (a) There have been furnished to
each of the Lenders (i) consolidated balance sheets of Zale and its Subsidiaries
as of July 31, 2011, and a consolidated statement of operations and consolidated
statement of cash flow of Zale and its Subsidiaries for the fiscal year then
ended, certified by Ernst & Young and (ii) an unaudited consolidated and
consolidating balance sheet of Zale and its Subsidiaries as of April 30, 2012,
and an unaudited consolidated statement of operations and consolidated statement
of cash flow of Zale and its Subsidiaries for the period then ended.  Such
balance sheets, statements of operations and statements of cash flow have been
prepared in accordance with GAAP and fairly present in all material respects the
financial condition of Zale and its Subsidiaries as at the close of business on
the dates thereof and the results of operations for the periods then ended,
subject, in the case of such unaudited consolidated balance sheet, unaudited
consolidated statement of operations and unaudited consolidated statement of
cash flow, to year-end adjustments, and except that there are no notes to such
financial statements.  There are no contingent liabilities that are likely to
become fixed obligations of Zale or any of its Subsidiaries as of such dates
involving material amounts, known to the Financial Officers of the Loan Parties,
which were not disclosed in such balance sheets and the notes related thereto.

 

(b)           The projected consolidated balance sheets and cash flow statements
of Zale and its Subsidiaries have been prepared in good faith, are based upon
estimates and assumptions which the Borrowers deem reasonable as of the date
hereof, have been prepared on the basis of the assumptions stated therein and
reflect the reasonable estimates of Zale and its Subsidiaries of the results of
operations and other information projected therein.

 

(c)           From July 31, 2011, there has been no event or occurrence which
has had a Material Adverse Effect.

 

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SECTION 3.5             Properties.

 

(a)           As of the date hereof, the Loan Parties and their Subsidiaries own
all of the material assets reflected in the consolidated balance sheet of Zale
and its Subsidiaries as of July 31, 2011 or acquired since that date (except
property or assets sold or otherwise disposed of in the ordinary course of
business and other property sold as permitted by SECTION 6.5 hereof since that
date), subject to no Liens except Liens permitted by SECTION 6.2.

 

(b)           Each Loan Party owns, or is licensed to use, all trademarks, trade
names, copyrights, patents and other intellectual property material to its
business, and the use thereof by such Person does not infringe upon the rights
of any other Person, except for any such infringements that, individually or in
the aggregate, could not reasonably be expected to result in a Material Adverse
Effect.  Schedule 3.5(b) sets forth, as of the Effective Date, a listing of all
such Intellectual Property which has been registered with any Governmental
Authority including, in each case, the name of the Loan Party that is the owner
or licensee thereof.

 

SECTION 3.6             Litigation and Environmental Matters.

 

(a)           There are no actions, suits or proceedings by or before any
arbitrator or Governmental Authority pending against or, to the knowledge of any
Loan Party or any of its Subsidiaries, threatened against or affecting any such
Person (i)  as to which there is a reasonable possibility of an adverse
determination and that, if adversely determined, could reasonably be expected,
individually or in the aggregate, to result in a Material Adverse Effect (other
than those set forth on Schedule 3.6) or (ii) that involve any of the Loan
Documents.

 

(b)           Except for the matters set forth on Schedule 3.6, and except as
could not reasonably be expected to have a Material Adverse Effect, no Loan
Party or any of its Subsidiaries (i) has failed to comply with any Environmental
Law or to obtain, maintain or comply with any permit, license or other approval
required under any Environmental Law, (ii) has become subject to any
Environmental Liability, (iii) has received notice of any claim with respect to
any Environmental Liability or (iv) knows of any basis for any Environmental
Liability.

 

(c)           Since the date of this Agreement, there has been no change in the
status of the matters set forth on Schedule 3.6 that, individually or in the
aggregate, has resulted in, or could reasonably be expected to result in, a
Material Adverse Effect.

 

SECTION 3.7             Compliance with Laws and Agreements.  Each Loan Party,
and each of its Subsidiaries, is in compliance with all laws, regulations and
orders of any Governmental Authority applicable to it or its property and all
indentures, material agreements and other instruments binding upon it or its
property, except where the failure to do so, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect.  No
Default or Event of Default has occurred and is continuing.

 

SECTION 3.8             Investment Company Status.  None of the Loan Parties or
any of their Subsidiaries is an “investment company” as defined in, or subject
to regulation under, the Investment Company Act of 1940.

 

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SECTION 3.9             Taxes.  Each Loan Party, and each of its Subsidiaries,
has timely filed or caused to be filed all tax returns and reports required to
have been filed by it and has paid or caused to be paid all Taxes required to
have been paid by it, except (a) Taxes that are being contested in good faith by
appropriate proceedings, for which such Person has set aside on its books
adequate reserves, and as to which no Lien has arisen, or (b) to the extent that
the failure to do so could not reasonably be expected to result in a Material
Adverse Effect.

 

SECTION 3.10           ERISA; No Canadian Plans.

 

(a)           Each Plan has been administered in compliance with the applicable
provisions of ERISA, the Code and other Federal or state laws, except where such
non-compliance would not reasonably be expected to have a Material Adverse
Effect.  Each Pension Plan that is intended to be a qualified plan under
Section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service (or may rely upon a favorable opinion letter from
the Internal Revenue Service issued with respect to a prototype plan) to the
effect that the form of such Plan is qualified under Section 401(a) of the Code
and the trust related thereto has been determined by the Internal Revenue
Service to be exempt from federal income tax under Section 501(a) of the Code,
or an application for such a letter is currently being processed by the Internal
Revenue Service or the time for requesting such a letter has not passed.  To the
best knowledge of the Loan Parties, nothing has occurred that would prevent or
cause the loss of such tax-qualified status.

 

(b)           There are no pending or, to the best knowledge of the Loan
Parties, threatened claims, actions or lawsuits, or action by any Governmental
Authority, with respect to any Plan that could reasonably be expected to have a
Material Adverse Effect.  There has been no prohibited transaction or violation
of the fiduciary responsibility rules with respect to any Plan that has resulted
or could reasonably be expected to result in a Material Adverse Effect.

 

(c)           (i) No ERISA Event has occurred, and neither the Loan Parties nor
any ERISA Affiliate is aware of any fact, event or circumstance that could
reasonably be expected to constitute or result in an ERISA Event with respect to
any Pension Plan and which could reasonably be expected to have a Material
Adverse Effect; (ii) the Loan Parties and each ERISA Affiliate has met all
applicable requirements under the Pension Funding Rules in respect of each
Pension Plan except where such failure could not reasonably be expected to have
a Material Adverse Effect, and no waiver of the minimum funding standards under
the Pension Funding Rules has been applied for or obtained; (iii) neither the
Loan Parties nor any ERISA Affiliate has incurred any liability or expects to
incur any liability (and no event has occurred which, with the giving of notice
under Section 4219 of ERISA, would result in such liability) under Sections 4201
or 4243 of ERISA with respect to a Multiemployer Plan which could reasonably be
expected to have a Material Adverse Effect; (iv) neither the Loan Parties nor,
to the best knowledge of the Loan Parties, any ERISA Affiliate has engaged in a
transaction that could be subject to Section 4069 or Section 4212(c) of ERISA;
and (v) no Pension Plan has been terminated by the plan administrator thereof
nor by the PBGC, and no event or circumstance has occurred or exists that could
reasonably be expected to cause the PBGC to institute proceedings under Title IV
of ERISA to terminate any Pension Plan, in each case which could reasonably be
expected to have a Material Adverse Effect.

 

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(d)           (i)            None of the Loan Parties has any Canadian Plan. 
Furthermore, no Canadian Plan has been terminated or partially terminated by any
such Person, nor is it insolvent or in reorganization, nor have any proceedings
been instituted to terminate, in whole or in part, or reorganize any Canadian
Plan.

 

(ii)           None of the Loan Parties nor any of their Subsidiaries has ceased
to participate (in whole or in part) as a participating employer in any Canadian
Plan which is a pension plan or has withdrawn from any Canadian Plan which is a
pension plan in a complete or partial withdrawal, nor has a condition occurred
which if continued would result in a complete or partial withdrawal.

 

(iii)          None of the Loan Parties nor any of their Subsidiaries has any
unfunded liability on windup or withdrawal liability, including contingent
withdrawal or windup liability, to any Canadian Plan or any solvency deficiency
in respect of any Canadian Plan.

 

(iv)          None of the Loan Parties nor any of their Subsidiaries has any
unfunded liability on windup or any liability in respect of any Canadian Plan
(including to the FSCO) other than for required insurance premiums or
contributions or remittances which have been paid, contributed and remitted when
due.

 

(v)           The Loan Parties and their Subsidiaries have made all
contributions to any Canadian Plan required by law or the terms thereof to be
made by it when due, and it is not in arrears in the payment of any
contribution, payment, remittance or assessment or in default in filing any
reports, returns, statements, and similar documents in respect of such Canadian
Plan required to be made or paid by it pursuant to said Canadian Plan, any law,
act, regulation, directive or order or any employment, union, pension, deferred
profit sharing, benefit, bonus or other similar agreement or arrangement.

 

(vi)          None of the Loan Parties nor any of their Subsidiaries is liable
or, to the best of the Loan Parties’ knowledge, alleged to be liable, to any
employee or former employee, director or former director, officer or former
officer or other Person resulting from any violation or alleged violation of any
Canadian Plan, any fiduciary duty, any law or agreement in relation to any
Canadian Plan or has any unfunded pension or like obligations or solvency
deficiency (including any past service or experience deficiency funding
liabilities), other than accrued obligations not yet due, for which it has made
full provision in its books and records.

 

(vii)         All vacation pay, bonuses, salaries and wages, to the extent
accruing due, are properly reflected in the Loan Parties’ and their
Subsidiaries’ books and records in accordance with GAAP.

 

(viii)        None of the Loan Parties nor any of their Subsidiaries has made
any application for a funding waiver or extension of any amortization period in
respect of any Canadian Plan.

 

(ix)          There has been no prohibited transaction or violation of any
fiduciary responsibilities with respect to any Canadian Plan.

 

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(x)           There are no outstanding or pending or threatened investigations,
claims, suits or proceedings in respect of any Canadian Plans (including to
assert rights or claims to benefits) that could give rise to a Material Adverse
Effect.

 

SECTION 3.11           Disclosure.  The Loan Parties have disclosed to the
Lenders all agreements, instruments and corporate or other restrictions to which
any Loan Party or any of its Subsidiaries is subject, and all other matters
known to any of them, that, in each case, could reasonably be expected to result
in a Material Adverse Effect.  None of the reports, financial statements,
certificates or other information furnished by or on behalf of any Loan Party to
the Administrative Agent or any Lender in connection with the negotiation of
this Agreement or any other Loan Document or delivered hereunder or thereunder
(other than projections), taken as a whole, contains any material misstatement
of fact or omits to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
materially misleading.

 

SECTION 3.12           Subsidiaries.  Schedule 3.12 (as the same may be
supplemented from time to time pursuant to the provisions of this Agreement)
sets forth the name of, and the ownership interest of each Loan Party in each
Subsidiary as of the Effective Date and designates those Subsidiaries which are
Excluded Subsidiaries.  As of the Effective Date, no other Subsidiaries of Zale
own Inventory generally consisting of watches, gemstones, jewelry, and giftware
other than the Subsidiaries which are Loan Parties hereunder and under the other
Loan Documents. Except as set forth on Schedule 3.12 (as the same may be
supplemented from time to time pursuant to the provisions of this Agreement), as
of the Effective Date, the Loan Parties are not and each of their respective
Subsidiaries is not party to any joint venture, general or limited partnership,
or limited liability company, agreements or any other business ventures or
entities.

 

SECTION 3.13           Insurance.  Schedule 3.13 sets forth a description of all
policies of insurance which covers the Collateral maintained by or on behalf of
the Loan Parties and their Subsidiaries as of the Effective Date.  As of the
Effective Date, all premiums in respect of such insurance that are due and
payable have been paid.

 

SECTION 3.14           Accounts; Credit Cards.

 

(a)           Schedule 2.21(a)(i) lists all DDAs and Concentration Accounts
maintained by any of the Loan Parties as of the Effective Date, and such
Schedule correctly identifies the name of each depository and the last four
digits of the account number(s) maintained with such depository.

 

(b)           Schedule 2.21(a)(ii) lists all arrangements to which any Loan
Party or any Subsidiary thereof is a party with respect to the payment to any
Loan Party of the proceeds of all credit card charges for sales by any Loan
Party or any Subsidiary thereof, as of the Effective Date.

 

SECTION 3.15           Labor Matters.  As of the Effective Date, there are no
strikes, lockouts or slowdowns against any Loan Party or any Subsidiary thereof
pending or, to the knowledge of the Loan Parties, threatened that would
reasonably be expected to have a Material Adverse

 

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Effect.  The hours worked by and payments made to employees of the Loan Parties
and their Subsidiaries have not been in violation of the Fair Labor Standards
Act or any other applicable federal, state, provincial, municipal, local or
foreign law dealing with such matters to the extent that any such violation
could reasonably be expected to have a Material Adverse Effect.  All material
payments due from any Loan Party or any Subsidiary thereof, or for which any
claim may be made against any such Person, on account of wages and employee
health and welfare insurance and other benefits, have been paid or, to the
extent required by GAAP, accrued as a liability on the books of such member. 
The consummation of the transactions contemplated by the Loan Documents will not
give rise to any right of termination or right of renegotiation on the part of
any union under any collective bargaining agreement to which any Loan Party or
any Subsidiary thereof is bound.

 

SECTION 3.16           Security Documents.  The Security Documents create in
favor of the Administrative Agent, for the ratable benefit of the Credit
Parties, a legal, valid and enforceable security interest in the Collateral, and
the Security Documents constitute, or, to the extent not previously filed or
obtained, will upon the filing of Uniform Commercial Code, PPSA and PRUCC
financing statements or equivalent forms and the obtaining of “control”, in each
case with respect to the relevant Collateral as required under the applicable
Uniform Commercial Code, PPSA and PRUCC, the creation of a fully perfected first
priority Lien on, and security interest in, all right, title and interest of the
Loan Parties thereunder in such Collateral, in each case prior and superior in
right to any other Person, except as permitted hereunder, the Intercreditor
Agreement or under any other Loan Document or as provided by applicable law and
except for Liens on Collateral which the Administrative Agent has determined
does not have sufficient value to justify the cost and expense of perfection.

 

SECTION 3.17           Federal Reserve Regulations.  Neither the Loan Parties
nor any of their respective Subsidiaries is engaged principally, or as one of
its important activities, in the business of extending credit for the purpose of
buying or carrying Margin Stock.  No part of the proceeds of any Loan will be
used, whether directly or indirectly, and whether immediately, incidentally or
ultimately for any purpose that entails a violation of the provisions of the
Regulations of the Board, including Regulation U or X.

 

SECTION 3.18           Solvency.  Before and after giving effect to each Loan
and the ABL Credit Extensions, the Loan Parties and their Subsidiaries on a
consolidated basis are, and will be, Solvent.  No transfer of property is being
made by any Loan Party or by any of its Subsidiaries and no obligation is being
incurred by any Loan Party or any of its Subsidiaries in connection with the
transactions contemplated by this Agreement or the other Loan Documents with the
intent to hinder, delay, or defraud either present or future creditors of any
Loan Party or any of its Subsidiaries.

 

SECTION 3.19           Foreign Assets Control Regulations, Etc..  None of the
requesting or borrowing of the Loans or the use of the proceeds of the Loans
will violate the Trading With the Enemy Act (50 U.S.C. § 1 et seq., as amended)
(the “Trading With the Enemy Act”) or any of the foreign assets control
regulations of the United States Treasury Department (31 CFR, Subtitle B,
Chapter V, as amended) (the “Foreign Assets Control Regulations”) or any
enabling legislation or executive order relating thereto (which for the
avoidance of doubt shall include, but shall not be limited to (a) Executive
Order 13224 of September 21, 2001 Blocking Property and

 

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Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support
Terrorism (66 Fed. Reg. 49079 (2001)) (the “Executive Order”) and (b) the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56)).  Furthermore,
none of the Loan Parties nor any of their respective Subsidiaries or other
Affiliates (a) is or will become a “blocked person” as described in the
Executive Order, the Trading With the Enemy Act or the Foreign Assets Control
Regulations or (b) engages or will engage in any dealings or transactions, or be
otherwise associated, with any such “blocked person”.

 

SECTION 3.20           Excluded Subsidiaries.  No wholly-owned Subsidiary which
is an Excluded Subsidiary (other than Foreign Subsidiaries) owns or has rights
in any credit card receivables, Inventory generally consisting of watches,
gemstones, jewelry and giftware or other Eligible Inventory, or the proceeds of
any of the foregoing.

 

SECTION 3.21           Insurance Subsidiaries.  None of the Zale Insurance
Subsidiaries has made any Restricted Payments in excess of its retained
earnings.

 

ARTICLE IV
CONDITIONS

 

SECTION 4.1             Effective Date.  The effectiveness of this Agreement is
subject to the satisfaction of the following conditions precedent:

 

(a)           The Administrative Agent (or its counsel) shall have received from
each Loan Party and the Lenders either (i) a counterpart of this Agreement and
all other Loan Documents signed on behalf of such party or (ii) written evidence
satisfactory to the Administrative Agent (which may include telecopy or other
electronic image scan transmission of a signed signature page of this Agreement)
that such party has signed a counterpart of this Agreement and all other Loan
Documents.

 

(b)           The Administrative Agent shall have received a favorable written
opinion (addressed to the Administrative Agent, the Lenders and the other Credit
Parties on the Effective Date and dated the Effective Date) of (i) Troutman
Sanders LLP, U.S. counsel to the Loan Parties, (ii) Stikeman Elliott LLP,
Canadian counsel to the Loan Parties and (iii) Goldman Antonetti & Cordova, PSC,
Puerto Rican counsel to the Loan Parties, in each case, in form and covering
such matters as the Administrative Agent may reasonably request.  The Loan
Parties hereby request such counsel to deliver such opinion.

 

(c)           The Administrative Agent shall have received such documents and
certificates as the Administrative Agent or its counsel may reasonably request
relating to the organization, existence and good standing of each Loan Party,
the authorization of the transactions contemplated by the Loan Documents and any
other legal matters relating to the Loan Parties, the Loan Documents or the
transactions contemplated thereby, all in form and substance reasonably
satisfactory to the Administrative Agent and its counsel.

 

(d)           After giving effect to the continuation of the Loans and any ABL
Credit Extensions to be made on, or immediately subsequent to, the Effective
Date, Excess Availability shall be not less than $100,000,000.  The
Administrative Agent shall have received a Borrowing

 

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Base Certificate dated the Effective Date, relating to the month ended on
June 30, 2012 (but the amount of ABL Obligations and the Obligations shall be as
of the Effective Date), and executed by a Financial Officer of Zale.

 

(e)           The Administrative Agent shall have received a certificate from a
Financial Officer of Zale, reasonably satisfactory in form and substance to the
Administrative Agent, with respect to Zale and its Subsidiaries on a
consolidated basis being Solvent, as of the Effective Date.

 

(f)            All necessary consents and approvals to the transactions
contemplated hereby shall have been obtained and shall be reasonably
satisfactory to the Administrative Agent.

 

(g)           The Administrative Agent shall have received a Borrowing Base
Certificate dated the Effective Date duly executed by a Financial Officer of
Zale, relating to the month ended June 30, 2012 evidencing a Term Loan Borrowing
Base as of the Effective Date of at least $80,000,000.

 

(h)           (i) (y) the Existing ABL Credit Agreement shall have been amended
and restated in form and substance satisfactory to the Administrative Agent and
the Lenders, which shall, among other things, consent to the transactions
contemplated by the Loan Documents and provide a secured revolving credit
facility with Tranche A Commitments (as defined in the ABL Credit Agreement as
in effect on the date hereof) in an amount not less than $650,000,000 and FILO
Commitments in an amount not less than $15,000,000, and (z) a Responsible
Officer of Zale shall have delivered a certificate to the Administrative Agent,
in form and substance satisfactory to the Administrative Agent, which
certificate shall attach the ABL Credit Agreement and all other ABL Loan
Documents and certify that such documents are true, correct and complete copies
of all ABL Loan Documents; (ii) the ABL Credit Agreement shall be in full force
and effect and no default or event of default shall exist under the ABL Credit
Agreement or the other ABL Loan Documents, or would result from the making of
the ABL Loans or the consummation of the other transactions contemplated to be
made on the Effective Date thereunder or from the application of the proceeds
thereof; and (iii) the ABL Agent and the Administrative Agent shall have entered
into the Intercreditor Agreement, and the Loan Parties shall have acknowledged
such Intercreditor Agreement, on terms reasonably acceptable to the
Administrative Agent.

 

(i)            The Administrative Agent shall be reasonably satisfied that any
financial statements delivered to it fairly present the business and financial
condition of Zale and its Subsidiaries, and that there has been no material
adverse change in the assets, business, financial condition, or income of Zale
and its Subsidiaries since the date of the most recent financial information
delivered to the Administrative Agent.

 

(j)            The organizational structure of Zale and its Subsidiaries shall
be reasonably satisfactory to the Administrative Agent.  The Administrative
Agent shall have received and be satisfied with detailed financial projections
and business assumptions for Zale and its Subsidiaries (x) a monthly basis for
the twelve month period following the Effective Date, and (y) on an annual basis
for each fiscal year thereafter through the Maturity Date, including, in each
case, a consolidated income statement, balance sheet, statement of cash flows
and the

 

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Borrowing Base, the Term Loan Borrowing Base, Term Reserve and Incremental
Availability analysis.

 

(k)           No event shall have occurred after July 31, 2011 that could
reasonably be expected to have a Material Adverse Effect.

 

(l)            The Administrative Agent shall have received results of searches
or other evidence reasonably satisfactory to the Administrative Agent (in each
case dated as of a date reasonably satisfactory to the Administrative Agent)
indicating the absence of Liens on the Collateral, except for Liens permitted by
SECTION 6.2 and Liens which termination statements, discharges, and releases
reasonably satisfactory to the Administrative Agent are being tendered
concurrently with such extension of credit.

 

(m)          The Administrative Agent shall have received all documents and
instruments, including Uniform Commercial Code, PPSA and PRUCC financing
statements and Blocked Account Agreements or Assignment of Bank Account with
respect to the Concentration Accounts required by law or reasonably requested by
the Administrative Agent to be filed, registered or recorded to create or
perfect the first priority Liens intended to be created under the Loan Documents
(except with respect to the ABL Priority Collateral, as to which the
Administrative Agent’s Lien shall be a second priority Lien to the extent set
forth in the Intercreditor Agreement) and all such financing statements shall
have been so filed, registered or recorded to the satisfaction of the
Administrative Agent.

 

(n)           All fees and other amounts due at or immediately after the
Effective Date, and all reasonable costs and expenses payable hereunder, under
the Side Letter, the Monitoring Agreement Letter and under the other Loan
Documents (including the reasonable fees and expenses of appraisers, auditors
and counsel), shall have been paid in full.

 

(o)           The consummation of the transactions contemplated hereby shall not
(a) violate any applicable law, statute, rule or regulation, or (b) conflict
with, or result in a default or event of default under, any material agreement
of any Loan Party (and the Administrative Agent and the Lenders shall receive a
satisfactory opinion of Loan Parties’ counsel to that effect).

 

(p)           No material changes in governmental regulations or policies
affecting the Loan Parties, the Administrative Agent or any Lender involved in
this transaction shall have occurred prior to the Effective Date which could,
individually or in the aggregate, materially adversely affect the transaction
contemplated by this Agreement.

 

(q)           The Administrative Agent shall have received an executed
certificate from a Responsible Officer of Zale stating that (1) the conditions
set forth in this SECTION 4.1 have been satisfied and (2) the representations
and warranties made by the Loan Parties to the Administrative Agent and the
Lenders in the Loan Documents are true and correct in all material respects as
of the date of such Certificate (other than representations and warranties that
(i) relate solely to an earlier date, which shall be true and correct as of such
earlier date, or (ii) are qualified by materiality, which shall be true and
correct in all respects), and that no event has occurred which is or which,
solely with the giving of notice or passage of time (or both) would be an Event
of Default.

 

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(r)            There shall be no Default or Event of Default on the Effective
Date or immediately after giving effect to the Loan continuations hereunder and
the Effective Date Prepayment and the making of the ABL Credit Extensions.

 

(s)            The Administrative Agent shall have received a notice with
respect to such Borrowing as required by Article II.

 

(t)            All representations and warranties contained in this Agreement
and the other Loan Documents or otherwise made in writing in connection herewith
or therewith shall be true and correct in all material respects on and as of the
date of each Borrowing hereunder with the same effect as if made on and as of
such date, other than representations and warranties that (i) relate solely to
an earlier date, which shall be true and correct as of such earlier date, or
(ii) are qualified by materiality, which shall be true and correct in all
respects, and except for changes thereto which are not prohibited by the other
terms of this Agreement or the other Loan Documents.

 

(u)           The Administrative Agent shall have received a certificate, in
form and substance reasonably satisfactory to the Administrative Agent, signed
by a Responsible Officer of Zale certifying that the conditions specified in
this SECTION 4.01 have been satisfied.

 

(v)           The Administrative Agent shall have received evidence reasonably
satisfactory to to the Administrative Agent that the Effective Date Prepayment
has been made.

 

The Administrative Agent shall notify the Borrowers and the Lenders of the
Effective Date, and such notice shall be conclusive and binding.

 

ARTICLE V
AFFIRMATIVE COVENANTS

 

So long as any Lender any Loan or any other Obligation shall remain unpaid or
unsatisfied (other than contingent indemnification claims for which a claim has
not then been asserted), each Loan Party covenants and agrees with the
Administrative Agent, the Lenders and the other Credit Parties that:

 

SECTION 5.1             Financial Statements and Other Information.  The Loan
Parties will, and will cause their Subsidiaries to, furnish to the
Administrative Agent:

 

(a)           as soon as practicable, but in any event not later than
ninety-five (95) days after the end of each fiscal year of Zale, (i) the
consolidated balance sheet of Zale and its Subsidiaries as at the end of such
year, and the related consolidated statements of operations, stockholders’
equity and cash flows for such year, setting forth in each case in comparative
form the figures for the previous fiscal year, all audited and reported on by
Ernst & Young LLP or by another independent public accountants of recognized
national standing (without a “going concern” or like qualification or exception
and without a qualification or exception as to the scope of such audit) to the
effect that such consolidated financial statements present fairly in all
material respects the financial condition and results of operations of Zale and
its consolidated Subsidiaries on a consolidated basis in accordance with GAAP,
and (ii) the annual 10-K reports of Zale filed with the Securities and Exchange
Commission;

 

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(b)           as soon as practicable, but in any event not later than fifty (50)
days after the end of each of the first three fiscal quarters of each fiscal
year of Zale, (i) copies of the unaudited consolidated balance sheet of Zale and
its Subsidiaries as at the end of such quarter, and the related consolidated
statement of operations for such quarter and for the portion of Zale’s fiscal
year then elapsed, and the related consolidated statement of cash flow for the
portion of Zale’s fiscal year then elapsed, all in reasonable detail and
prepared in accordance with GAAP (subject to year-end adjustments and except for
the absence of notes), and (ii) the quarterly 10-Q reports of Zale filed with
the Securities and Exchange Commission;

 

(c)           as soon as practicable, but in any event not later than thirty
(30) days after the end of each month (which is not a fiscal quarter end),
copies of the unaudited consolidated balance sheet of Zale and its Subsidiaries
as at the end of such month, and the related consolidated statement of
operations for such month and for the Reference Period then ended, and the
related consolidated statement of cash flow for the Reference Period then ended,
all in reasonable detail and prepared in accordance with GAAP (subject to
year-end adjustments and except for the absence of notes);

 

(d)           (i) concurrently with any delivery of financial statements under
clause (a), (b) or (c) above a Compliance Certificate of a Financial Officer of
Zale (A) certifying as to whether a Default or Event of Default has occurred
and, if a Default has occurred, specifying the details thereof and any action
taken or proposed to be taken with respect thereto, (B) stating whether any
change in GAAP or in the application thereof has occurred since the date of
Zale’s audited financial statements referred to in SECTION 3.4 and, if any such
change has occurred, specifying the effect of such change on the financial
statements accompanying such certificate and (C) setting forth in reasonable
detail the computation of the Fixed Charge Coverage Ratio (even if compliance
with SECTION 6.8 is not then required), based upon the most recent monthly
financial statements delivered in accordance with clause (c) above.

 

(e)           on the last day of each fiscal year of Zale, (i) a detailed
consolidated budget by quarter for the immediately following fiscal year
(including a projected consolidated balance sheet and related statements of
projected operations and cash flow as of the end of and for such fiscal year)
and (ii) a monthly detail of projected Inventory levels and Credit Extensions
and the projected Borrowing Base, the Term Loan Borrowing Base, Term Reserve and
Excess Availability for such fiscal year; and, promptly when available, any
significant revisions to the budget and the projections; provided that, the
Borrowers shall, by no later than February 28th of each calendar year,
reforecast and update the projections delivered pursuant to the foregoing
clauses (i) and (ii) for the remaining period of each such fiscal year;

 

(f)            except as provided below, within fifteen (15) days after the end
of each month, a certificate in the form of Exhibit D (a “Borrowing Base
Certificate”) showing the Borrowing Base (including a detailed calculation of
the Term Reserve), the Term Loan Borrowing Base and Incremental Availability as
of the close of business on the last day of the immediately preceding month,
together with appropriate exhibits, schedules, supporting documentation, and
additional reports as reasonably requested by the Administrative Agent, each
such Certificate to be certified as complete and correct on behalf of the
Borrowers by a Financial Officer of Zale, provided, however, if, (i) Excess
Availability is less than $75,000,000 for three (3) consecutive Business Days,
or (ii) Excess Availability is less than $65,000,000 at any time, or (iii) an
Event of Default

 

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exists, such Borrowing Base Certificate (showing the Borrowing Base (including a
detailed calculation of the Term Reserve), the Term Loan Borrowing Base and
Incremental Availability as of the close of business on the last day of the
immediately preceding week) shall be furnished weekly on Wednesday of each week;
and (iii) if the Borrowers notify the Administrative Agent in writing that the
Borrowers have elected, during any period of any year other than the periods set
forth in clauses (i), (ii) and (iii) above, to furnish Borrowing Base
Certificates on a weekly basis, such Borrowing Base Certificate (showing the
Borrowing Base (including a detailed calculation of the Term Reserve), the Term
Loan Borrowing Base and Incremental Availability as of the close of business on
the last day of the immediately preceding week) shall be furnished weekly on
Wednesday of each week from the date of such notice and continuing during the
entire sixty (60) day period thereafter;

 

(g)           [intentionally omitted];

 

(h)           within seven (7) Business Days after the end of the month of
December of each calendar year, a modified Borrowing Base Certificate evidencing
a roll-forward of Inventory from the preceding month’s end;

 

(i)            weekly, on Wednesday of each week, a rolling 13 week cash flow,
reflecting actual results from the prior week period compared to the immediately
preceding rolling 13 week cash flow delivered to the Administrative Agent and to
the budget delivered to the Administrative Agent pursuant to
SECTION 5.1(e) hereof, and projected results for the subsequent 13 week period,
together with management’s discussion of any variances from the prior cash flow
or the budget, provided that such weekly cash flow report shall not be required
as long as (i) no Default or Event of Default exists and (ii) Excess
Availability is greater than (A) $75,000,000, or (B) if and so long as the Fixed
Charge Coverage Ratio for the most recent Reference Period is greater than
1.1:1.0, $60,000,000;

 

(j)            promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by Zale
or any of its Subsidiaries with the Securities and Exchange Commission, or any
Governmental Authority succeeding to any or all of the functions of said
Commission, or with any national securities exchange, as the case may be;

 

(k)           promptly upon receipt thereof, copies of all reports submitted to
Zale or any of its Subsidiaries by independent certified public accountants in
connection with each annual, interim or special audit of the books of Zale and
its Subsidiaries made by such accountants, including any management letter
commenting on the Borrowers’ and their Subsidiaries’ internal controls submitted
by such accountants to management in connection with their annual audit;

 

(l)            the financial and collateral reports described on
Schedule 5.1(l), at the times set forth in such Schedule;

 

(m)          prior written notice of any intended acquisition permitted under
SECTION 6.4(n) and if the total consideration for the subject acquisition is
greater than or equal to $10,000,000, when available, copies of the acquisition
documents, a summary of any due diligence undertaken by the Loan Parties in
connection with such acquisition, appropriate financial statements of the

 

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Person which is the subject of such acquisition, pro forma projected financial
statements for the twelve (12) month period following such acquisition after
giving effect to such acquisition (including balance sheets, cash flows and
income statements by month for the acquired Person, individually, and on a
consolidated basis with all Loan Parties), and such other information as the
Administrative Agent may reasonably require with respect to such acquisition;
and

 

(n)           promptly following any request therefor, such other information
regarding the operations, business affairs and financial condition of any Loan
Party, or compliance with the terms of any Loan Document, as the Administrative
Agent or any Lender may reasonably request.

 

Any document required to be furnished pursuant to this SECTION 5.1 shall be
deemed to have been furnished if such document shall have timely been made
available on the SEC’s Electronic Data Gathering Analysis and Retrieval System,
or its successor (in each case, provided that each Lender and the Administrative
Agent has access thereto) and shall be deemed to have been delivered on the date
when so made available; provided that, the Borrowers shall deliver paper or
electronic copies of such documents to the Administrative Agent if the
Administrative Agent or a Lender so requests.

 

SECTION 5.2             Notices of Material Events.  The Loan Parties will, and
will cause their Subsidiaries to, furnish to the Administrative Agent and each
Lender written notice of the following promptly following a Responsible
Officer’s obtaining knowledge thereof:

 

(a)           the occurrence of any Default or Event of Default;

 

(b)           any development that alone or together with any other developments
results in, or could reasonably be expected to result in, a Material Adverse
Effect;

 

(c)           the discharge by any Loan Party of its present independent
accountants or any withdrawal or resignation by such independent accountants;

 

(d)           any material change in accounting policies or financial reporting
practices by any Loan Party or any Subsidiary thereof, which affects or changes
the calculation of the Borrowing Base;

 

(e)           the filing of any Lien for unpaid Taxes against any Loan Party in
excess of $25,000,000;

 

(f)            any breach or non-performance of, any default under, or
termination of, a contract or agreement evidencing Material Indebtedness of any
Loan Party or any Subsidiary thereof; (including, but not limited to, notice of
any “Default” or “Event of Default” under (and as defined in) the ABL Loan
Documents); and

 

(g)           (i) notice of any amendment, supplement, modification, waiver or
consent to the ABL Loan Documents (including any reduction of the commitments or
any prepayment thereunder) and (ii) any notice or other writing that relates to
the ABL Loan Documents, in each case, received from or delivered to any party to
the ABL Loan Documents and copies thereof.

 

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The Borrowers will also furnish to the Administrative Agent and each Lender
written notice of any change in a Loan Party’s Responsible Officers or Financial
Officers at or prior to the time that any Borrowing Base Certificate, financial
statement or other report to be certified by such Person is delivered (or is
required to be delivered) to the Administrative Agent.

 

Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other Responsible Officer of Zale setting forth the
details of the event or development requiring such notice and, if applicable,
any action taken or proposed to be taken with respect thereto.

 

SECTION 5.3             Information Regarding Collateral.  The Loan Parties
will, and will cause their Subsidiaries to, furnish to the Administrative Agent
(a) prompt written notice of any change in (i) any Loan Party’s trade name used
to identify it in the conduct of its business or in the ownership of its
properties or (ii) any office in which it maintains books or records relating to
Collateral owned by it and having a value in excess of $10,000,000 or any office
or facility at which Collateral owned by it and having a value in excess of
$10,000,000 is located (including the establishment of any such new office or
facility); and (b) prior written notice of any change in (i) any Loan Party’s
corporate name or the location of any Loan Party’s chief executive office or its
principal place of business, (ii) any Loan Party’s identity or corporate
structure or (iii) any Loan Party’s jurisdiction of incorporation, Federal
Taxpayer Identification Number or state organizational number or similar
taxation or organizational number; provided, however, that if any of the
occurrences referred to in clauses (a) and (b) shall occur with respect to any
Canadian Loan Party or any of its assets, the Loan Parties shall furnish the
Administrative Agent with thirty (30) days’ prior written notice thereof;
provided further that any notices regarding the consummation of any portion of
the Canadian Restructuring shall be furnished promptly following the
consummation thereof.  The Loan Parties also agree, and agree to cause their
Subsidiaries to, promptly to notify the Administrative Agent if any material
portion of the Collateral is damaged, destroyed, or lost, stolen or otherwise
unaccounted for.

 

SECTION 5.4             Existence; Conduct of Business.

 

(a)           Except as otherwise permitted by this Agreement (including
pursuant to SECTION 6.4), each Loan Party will do or cause to be done, and will
cause each of its Subsidiaries to do or cause to be done, all things necessary
to comply with its respective charter, certificate of incorporation, articles of
organization, and/or other organizational documents, as applicable; and by-laws
and/or other instruments which deal with corporate governance, and to preserve,
renew and keep in full force and effect its legal existence and the rights,
licenses, permits, privileges, franchises, patents, copyrights, trademarks and
trade names the loss of which would reasonably be expected to have a Material
Adverse Effect.

 

(b)           The Loan Parties shall cause the Zale Insurance Subsidiaries to
conduct their business in accordance with applicable law, and, except as the
Zale Insurance Subsidiaries, or any of them, may reasonably determine from time
to time with respect to new business lines or opportunities deemed lawful and
appropriate for conduct by an insurance company licensed as are the Zale
Insurance Subsidiaries, in the ordinary course consistent with past practice in
all material respects and to use their commercially reasonable efforts to
preserve intact the Zale

 

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Insurance Subsidiaries and their relationships with customers, suppliers,
creditors and employees (it being understood that this covenant shall not
prohibit the Insurance Restructuring).

 

(c)           Except in connection with a lawful expansion in business as set
forth in clause (b) above, the Loan Parties shall cause the Zale Insurance
Subsidiaries not to change any of the material policies, practices, principles
or standards or change any of the material procedures or systems of the Zale
Insurance Subsidiaries, in each case with respect to their accounting, actuarial
determinations, underwriting, retrocession or reserving methodology (provided
that the foregoing shall not limit the ability to adjust individual case
reserves as necessary in accordance with practices and methodologies in effect
as of the date hereof) other than any such changes as are required by SAP,
applicable law or regulations or applicable actuarial or accounting standards
and practices.

 

SECTION 5.5             Payment of Obligations.  Each Loan Party will, and will
cause each of its Subsidiaries to, pay its Material Indebtedness, obligations in
connection with Hedging Agreements and Tax liabilities, before the same shall
become delinquent or in default, except where (a) the validity or amount thereof
is being contested in good faith by appropriate proceedings, (b) such Loan Party
has set aside on its books adequate reserves with respect thereto in accordance
with GAAP, (c) such contest effectively suspends collection of the contested
obligation, (d) no Lien in excess of $25,000,000 (other than a Lien permitted by
SECTION 6.2) secures such obligation and (e) the failure to make payment pending
such contest could not reasonably be expected to result in a Material Adverse
Effect; provided that any payment made by a Loan Party in good faith with
respect to any of its Tax liabilities which is subsequently determined by a
Governmental Authority to be less than the payment deemed to be owed by such
Governmental Authority shall not constitute a breach of this SECTION 5.5,
provided such Governmental Authority has not levied any Lien (other than a
Permitted Encumbrance) to secure such obligation.

 

SECTION 5.6             Maintenance of Properties.  Each Loan Party will, and
will cause each of its Subsidiaries to, keep and maintain all property material
to the conduct of its business in good working order and condition, ordinary
wear and tear excepted and with the exception of asset dispositions permitted
hereunder.

 

SECTION 5.7             Insurance.

 

(a)           Each Loan Party will, and will cause its Subsidiaries to, maintain
the following insurance under this Agreement (or, to the extent consistent with
prudent business practice, a program of self insurance): (i) worker’s
compensation and employer’s liability insurance affording (A) protection under
the workers’ compensation laws of the state(s) or province(s) in which the
service is to be provided and (B) employers’ liability protection subject to a
limit of not less than $500,000; (ii) comprehensive automobile liability
insurance providing limits of not less than $1,000,000 each occurrence for
bodily injury and property damage combined; (iii) commercial general liability
insurance providing not less than $1,000,000 each occurrence for bodily injury
and property damage combined; and (iv) umbrella liability insurance in amounts
not less than $3,000,000 in excess of primary liability coverage.  All such
insurance policies required to be maintained under this Agreement shall be
procured from insurance companies rated at least A-VIII or better by the then
current edition of Best’s Insurance Reports

 

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published by A.M. Best Co.  The Loan Parties shall provide Administrative Agent
with certificates of insurance evidencing the required coverage concurrently
with the execution of this Agreement and upon each renewal of such policies
thereafter, and, in addition to the notices required under SECTION 5.7(b), the
Loan Parties shall furnish prompt written notice of any material change or
cancellation of such policies.  Each of the Loan Parties will, and will cause
each of its Subsidiaries to, maintain with financially sound and reputable
insurers insurance with respect to the Collateral and its other properties
against such casualties as shall be consistent with past practices and in
accordance with the general practices of businesses engaged in similar
activities in similar geographic areas and in amounts, containing such terms, in
such forms and for such periods as may be reasonable and prudent.

 

(b)           The Loan Parties shall maintain for themselves and their
Subsidiaries, a Directors and Officers insurance policy, and a “Blanket Crime”
policy including employee dishonesty, forgery or alteration, theft,
disappearance and destruction, robbery and safe burglary, property, and computer
fraud coverage with responsible companies in such amounts as are customarily
carried by business entities engaged in similar businesses similarly situated,
and will upon request by the Administrative Agent furnish the Administrative
Agent certificates evidencing renewal of each such policy.

 

(c)           Fire and extended coverage policies maintained with respect to any
Collateral shall be endorsed or otherwise amended to include (i) a provision to
the effect that none of the Loan Parties, the Administrative Agent or any other
party shall be a coinsurer and (ii) such other provisions as the Administrative
Agent may reasonably require from time to time to protect the interests of the
Lenders. Each such policy referred to in this paragraph also shall provide that
it shall not be canceled or not renewed (i) by reason of nonpayment of premium
except upon not less than ten (10) days’ prior written notice thereof by the
insurer to the Administrative Agent (giving the Administrative Agent the right
to cure defaults in the payment of premiums) or (ii) for any other reason except
upon not less than thirty (30) days’ prior written notice thereof by the insurer
to the Administrative Agent. The Loan Parties shall deliver to the
Administrative Agent, prior to the cancellation, modification or nonrenewal of
any such policy of insurance, a copy of a renewal or replacement policy (or
other evidence of renewal of a policy previously delivered to the Administrative
Agent) together with evidence satisfactory to the Administrative Agent of
payment of the premium therefor.

 

(d)           Each insurance policy shall include an endorsement (in form and
substance reasonably satisfactory to the Administrative Agent) naming the
Administrative Agent as “loss payee”, “mortgagee” or “additional insured” as the
Administrative Agent may reasonably request and providing that the insurer shall
pay all proceeds otherwise payable to the Loan Party under the policies directly
to the Administrative Agent, subject to the terms of the Intercreditor
Agreement.

 

SECTION 5.8             Casualty and Condemnation.  Each Loan Party will, and
will cause its Subsidiaries to, furnish to the Administrative Agent and the
Lenders prompt written notice of any casualty or other insured damage to any
material portion of the Collateral having a value in excess of $10,000,000 or
the commencement of any action or proceeding for the taking of any material
portion of the Collateral having a value in excess of $10,000,000 under power of
eminent domain or by condemnation, expropriation, or similar proceeding.

 

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SECTION 5.9             Books and Records; Inspection and Audit Rights;
Appraisals; Consultants for the Administrative Agent and Lenders.

 

(a)           Each Loan Party will, and will cause each of its Subsidiaries to,
keep proper books of record and account in which full, true and correct entries
are made of all dealings and transactions in relation to its business and
activities. Each Loan Party will, and will cause each of its Subsidiaries to,
permit any representatives designated by the Administrative Agent, upon
reasonable prior notice, to visit and inspect its properties, to examine and
make extracts from its books and records, and to discuss its affairs, finances
and condition with its officers and independent accountants, all at such
reasonable times and as often as reasonably requested; provided, however, that
(i) so long as no Default or Event of Default shall have occurred and be
continuing, the Loan Parties shall not be obligated for expenses in connection
with more than one (1) visit per fiscal year of Zale, and (ii) when a Default or
an Event of Default has occurred and is continuing, the Administrative Agent (or
any of its representatives or independent contractors) may do any of the
foregoing at the expense of the Loan Parties at any time and without advance
notice. At any time that a Default or Event of Default exists, the Loan Parties
will, and will cause each of its Subsidiaries to, permit the Administrative
Agent or their professionals (including investment bankers, consultants,
accountants, and lawyers) retained by them to conduct evaluations of the Loan
Parties’ business plan, forecasts and cash flows

 

(b)           The Loan Parties shall promptly following receipt thereof, provide
to the Administrative Agent, at the Loan Parties’ cost, copies of all appraisals
(including, without limitation, Inventory and Intellectual Property appraisals),
commercial finance examinations and other evaluations provided to or
commissioned on behalf of the lenders party to the ABL Credit Agreement,
including of (i) the Loan Parties’ practices in the computation of the Borrowing
Base, Term Reserve and the Term Loan Borrowing Base and (ii) the assets included
in the Borrowing Base and the Term Loan Borrowing Base.  Without limiting the
foregoing, the Loan Parties agree to deliver at least one (1) appraisal of their
Intellectual Property (it being understood that (i) such appraiser shall be
approved by the Administrative Agent and (ii) such appraiser shall use a
methodology that is reasonably acceptable to the Administrative Agent) not less
frequently than once during any twelve month period. In addition to the
foregoing, the Administrative Agent, acting on its own behalf, (A) may, at any
time, undertake additional Intellectual Property appraisals at the sole expense
of the Lenders, (B) after the occurrence and during the continuance of any
Default or Event of Default, may cause such additional Intellectual Property
appraisals to be taken as the Administrative Agent determines, all at the
expense of the Loan Parties and (C) after the occurrence and during the
continuance of any Default or Event of Default, if the Administrative Agent
requests that the ABL Agent undertake additional appraisals (including, without
limitation, Inventory appraisals, but excluding Intellectual Property
appraisals) or commercial finance examinations, and the ABL Agent does not
promptly (or, in any event within fifteen (15) days) schedule such additional
appraisal or commercial finance examination or expressly rejects such request,
then the Administrative Agent may cause such additional appraisals or commercial
finance examinations to be taken, all at the expense of the Loan Parties.

 

SECTION 5.10           Compliance with Laws.  Each Loan Party will, and will
cause each of its Subsidiaries to, comply with all laws, rules, regulations, and
orders of any Governmental

 

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Authority applicable to it or its property except where the failure to do so,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect.

 

SECTION 5.11                                 Employee Benefit Plans.  The Loan
Parties will, and will cause each of its Subsidiaries to, (a) promptly upon any
request of the Administrative Agent therefor, furnish to the Administrative
Agent a copy of the most recent actuarial statement required to be submitted
under §103(d) of ERISA and Annual Report, Form 5500, with all required
attachments, in respect of each Pension Plan, (b) within ten (10) days of
receipt or dispatch, furnish to the Administrative Agent any notice, report or
demand sent to, or received from, any Governmental Authority in respect of a
Pension Plan under Sections 302, 4041, 4042, 4043, 4063, 4065, 4066 and 4068 of
ERISA, or sent to, or received from, any plan administrator in respect of a
Multiemployer Plan under Sections 4041A, 4202, 4219, 4242 or 4245 of ERISA.

 

SECTION 5.12                                 Use of Proceeds and Letters of
Credit.  The proceeds of Loans made hereunder will be used only (a) to finance
the acquisition of working capital assets of the Borrowers and their respective
Subsidiaries, including the purchase of inventory and equipment, in each case in
the ordinary course of business, (c) to finance Capital Expenditures of the
Borrowers and their respective Subsidiaries and (d) for general corporate
purposes, all to the extent permitted herein. No part of the proceeds of any
Loan will be used, whether directly or indirectly, for any purpose that entails
a violation of the Regulations of the Board, including Regulations U and X.

 

SECTION 5.13                                 New Subsidiaries.  The Loan Parties
shall each cause any Subsidiary of the Loan Parties (other than an Excluded
Subsidiary) to immediately become a Loan Party hereunder by the execution and
delivery of a Facility Guarantee and all other Facility Guarantor Collateral
Documents and a joinder agreement to this Agreement (in the case of a Subsidiary
which shall be a Borrower hereunder (as determined by the Administrative Agent))
and, in each case, a joinder to the other Loan Documents, as applicable, with
the other parties hereto and thereto, in form and substance satisfactory to the
Administrative Agent.

 

SECTION 5.14                                 Further Assurances.  Each Loan
Party will execute any and all further documents, agreements and instruments,
and take all such further actions (including the filing and recording of
financing statements and other documents), that may be required under any
applicable law, or which the Administrative Agent or the Required Lenders may
reasonably request, to effectuate the transactions contemplated by the Loan
Documents or to grant, preserve, protect or perfect the Liens created or
intended to be created by the Security Documents or the validity or priority of
any such Lien, all at the expense of the Loan Parties. The Loan Parties also
agree to provide to the Administrative Agent, from time to time upon request,
evidence reasonably satisfactory to the Administrative Agent as to the
perfection and priority of the Liens created or intended to be created by the
Security Documents.  The Loan Parties will execute and deliver to the
Administrative Agent with respect to each parcel of real property that has a
fair market value equal to or more than $1,000,000 and that is owned in fee (or
the equivalent) by a Loan Party and any newly acquired or newly formed
Subsidiary, mortgages and, upon the request of the Administrative Agent, title
reports, surveys and engineering, soils and other reports, environmental
assessment reports, and favorable opinions of local counsel to the Loan Parties
in states or other jurisdictions in which the mortgaged property is located, in
scope, form and substance reasonably satisfactory to the Administrative Agent;
provided, however, that no

 

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such mortgage shall be required to the extent it would conflict or result in a
default or event of default under any Indebtedness secured by a Lien permitted
by SECTION 6.2 (including, without limitation, SECTION 6.2(d)).

 

SECTION 5.15                                 Physical Inventories.

 

(i)                                     The Loan Parties shall cause physical
inventories to be undertaken, at the expense of the Loan Parties, as required by
GAAP (but in no event less than one each Fiscal Year).  The Loan Parties,
promptly following the completion of each such physical inventory, shall post
such results to the Loan Parties’ stock ledgers and general ledgers, as
applicable and shall deliver an updated Borrowing Base Certificate to the
Administrative Agent if and to the extent that the results of any such physical
inventory materially reduce the amounts reported under the most recent Borrowing
Base Certificate.

 

(ii)                                  The Loan Parties shall permit the
Administrative Agent, in its discretion, if any Default or Event of Default
exists, to cause additional such inventories to be taken as the Administrative
Agent may determine (each, at the expense of the Loan Parties).

 

SECTION 5.16                                 Compliance with Terms of
Leaseholds.  Except as otherwise expressly permitted hereunder and except where
the failure to do so, either individually or in the aggregate, could not be
reasonably likely to have a Material Adverse Effect, the Loan Parties shall, and
shall cause their Subsidiaries to, (a) make all payments and otherwise perform
all obligations in respect of all Leases to which any Loan Party or any of its
Subsidiaries is a party (except for bona fide disputes with lessors) and keep
such Leases in full force and effect, except upon the expiry of the term thereof
or for negotiated terminations in the ordinary course of business, and
(b) notify the Administrative Agent of any notices of default received by any
Loan Party or any Subsidiary of a Loan Party with respect to any such Leases.

 

SECTION 5.17                                 Post-Closing.  Execute and deliver
the documents and complete the tasks set forth on Schedule 5.17, in each case,
within the time limits specified on such schedule (with any such time frame
permitted to be extended by the Administrative Agent in its sole discretion).

 

ARTICLE VI
NEGATIVE COVENANTS

 

So long as any Loan or any other Obligation hereunder shall remain unpaid or
unsatisfied (other than contingent indemnification claims for which a claim has
not then been asserted), each Loan Party covenants and agrees with the
Administrative Agent, the Lenders and the other Credit Parties that:

 

SECTION 6.1                                        Indebtedness and Other
Obligations.  The Loan Parties will, and will cause their Subsidiaries to, not
create, incur, assume or permit to exist any Indebtedness, except:

 

(a)                                 Indebtedness created under the Loan
Documents;

 

(b)                                 Indebtedness set forth in Schedule 6.1 and
any Permitted Refinancing thereof;

 

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(c)                                  Indebtedness of any Loan Party to any other
Loan Party, and any guarantee by a Loan Party of Indebtedness of another Loan
Party, in each case to the extent otherwise permitted hereunder, provided that
the parties thereto are party to the Intercompany Subordination Agreement;

 

(d)                                 Indebtedness of any of the Borrowers to any
Excluded Subsidiary in an aggregate amount of all such Indebtedness for all
Excluded Subsidiaries not to exceed $25,000,000;

 

(e)                                  To the extent the Intercreditor Agreement
is in full force and effect, Indebtedness (including for purposes of this clause
(e) commitments to make ABL Loans) incurred under the ABL Credit Agreement in an
aggregate principal amount not to exceed $815,000,000 minus any permanent
reductions of the commitments thereunder, and any Permitted Refinancing thereof
permitted pursuant to the Intercreditor Agreement;

 

(f)                                   Indebtedness of any Loan Party to finance
the acquisition of any fixed or capital assets, including Capital Lease
Obligations and any Indebtedness assumed in connection with the acquisition of
any such assets or secured by a Lien on any such assets prior to the acquisition
thereof, and any Permitted Refinancing thereof, provided, that the aggregate
principal amount of Indebtedness permitted by this clause (f) shall not exceed
$50,000,000 at any time outstanding;

 

(g)                                  Indebtedness consisting of Capital Lease
Obligations and guaranties thereof by the Loan Parties, or any of them;

 

(h)                                 Indebtedness incurred to purchase or
refinance any Real Estate owned or being acquired by any Loan Party;

 

(i)                                     Indebtedness in respect of performance
bonds, bid bonds, customs and appeal bonds, surety bonds, performance and
completion guarantees and similar obligations related thereto, or, to the extent
incurred in connection with purchases from suppliers, Indebtedness in respect of
letters of credit, bank guarantees or similar instruments related thereto, in
each case provided in the ordinary course of business;

 

(j)                                    Indebtedness in respect of cash
management services, netting services, automatic clearinghouse arrangements,
overdraft protections and similar arrangements, in each case in connection with
deposit accounts and incurred in the ordinary course or business;

 

(k)                                 Indebtedness in respect of letters of
credit, bank guarantees, bankers’ acceptances or similar instruments issued or
created in the ordinary course of business in respect of workers compensation
claims, health, disability or other employee benefits or property, casualty or
liability insurance or self-insurance or other Indebtedness with respect to
reimbursement-type obligations regarding workers compensation claims; provided
that any reimbursement obligations in respect thereof are reimbursed within
thirty (30) days following the incurrence thereof;

 

(l)                                     Indebtedness of any Excluded Subsidiary
and any Guarantees thereof, provided that such Indebtedness shall not be
Guaranteed by or otherwise be recourse to any Loan Party, except as permitted by
SECTION 6.2(q);

 

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(m)                             Indebtedness in the form of any earnout or other
similar contingent payment obligation which is not overdue and incurred in
connection with an acquisition permitted hereunder;

 

(n)                                 Indebtedness incurred to pay premiums for
insurance policies maintained by the Loan Parties or any of their Subsidiaries
in the ordinary course of business not exceeding in aggregate the amount of such
unpaid premiums;

 

(o)                                 other unsecured Indebtedness (i) in an
aggregate principal amount not exceeding $25,000,000 at any time outstanding
plus (ii) so long after giving effect to the incurrence of such Indebtedness the
Fixed Charge Coverage Ratio (on a pro-forma basis for the Reference Period
immediately preceding such incurrence) will be equal to or greater than 2.0:1.0,
an additional aggregate principal amount not exceeding $50,000,000 at any time
outstanding; provided that, in the case of clauses (i) and (ii), the terms of
such Indebtedness do not contain any covenants or events of default which may be
interpreted to be or are deemed to be in, the reasonable discretion of the
Administrative Agent, more restrictive than the covenants and Events of Default
contained in this Agreement;

 

(p)                                 other Indebtedness of Subsidiaries organized
in a jurisdiction other than Canada, Puerto Rico or the United States that are
formed or acquired after the Effective Date in an aggregate principal amount not
to exceed $10,000,000 that is used and incurred solely for ordinary course
working capital purposes.

 

Notwithstanding anything to the contrary in this Agreement, the Loan Parties
shall cause the ZC Partnership not to incur any Indebtedness or any other
material obligations.

 

Notwithstanding anything to the contrary, the Loan Parties shall, and shall
cause their Subsidiaries to, cause the Zale Insurance Subsidiaries not to:
(A) incur any Indebtedness for borrowed money secured by their assets; (B) other
than in the ordinary course of business, cancel or compromise any Indebtedness
or waive any material rights without receiving a realizable benefit of similar
or greater value; or (C) change in any respect any of their policies with
respect to investments, except, in the case of clause (C), as required by
applicable law or regulation or as may be necessitated in connection with an
expansion to new business lines or opportunities deemed lawful and appropriate
for conduct by an insurance company licensed as are Zale Insurance Subsidiaries;
provided that such change would not reasonably be expected to be adverse in any
material respect to the Lenders.

 

SECTION 6.2                                        Liens.  The Loan Parties
will, and will cause their Subsidiaries to, not create, incur, assume or permit
to exist any Lien on any property or asset now owned or hereafter acquired by
it, or assign or sell any income or revenues (including accounts receivable) or
rights in respect of any thereof, except:

 

(a)                                 Liens created under the Loan Documents;

 

(b)                                 Permitted Encumbrances;

 

(c)                                  any Lien on any property or asset of any
Loan Party set forth in Schedule 6.2, and any extensions or renewals thereof;
provided, that (i) such Lien shall not apply to any other

 

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property or asset of any Loan Party other than after-acquired property affixed
or incorporated thereto and the proceeds or products thereof, and (ii) such Lien
shall secure only those obligations (including commitments in respect thereof)
that it secures as of the Effective Date, and any Permitted Refinancing thereof;

 

(d)                                 Liens on fixed or capital assets acquired,
constructed or improved by any Loan Party, provided, that (i) such Liens secure
Indebtedness permitted by clause (f) of SECTION 6.1, (ii) such Liens and the
Indebtedness secured thereby are incurred prior to or within one hundred eighty
(180) days after such acquisition or the completion of such construction or
improvement, (iii) the Indebtedness secured thereby does not exceed 100% of the
cost of acquiring, constructing or improving such fixed or capital assets and
(iv) such Liens shall not apply to any other property or assets of the Loan
Parties;

 

(e)                                  Liens to secure Indebtedness permitted by
clauses (g) or (h) of SECTION 6.1 securing Capital Lease Obligations provided,
that such Liens shall not apply to any property or assets of the Loan Parties
other than the assets so purchased or refinanced or leased or which is the
subject of a sale-leaseback transaction;

 

(f)                                   Liens on Inventory and proceeds thereof
(up to the Cost to such Loan Party of such Inventory) held on consignment from
trade vendors securing obligations to return or pay the purchase price of such
Inventory;

 

(g)                                  Voluntary options in favor of any of the
Loan Parties and their respective Subsidiaries to purchase real property subject
to operating leases;

 

(h)                                 Liens (if any) in favor of any credit card
processor on any credit card receivables (and on any returned goods the purchase
of which gave rise to a credit card receivable) (i) in the nature of chargebacks
or reserves for claims, credits or credits pending, promotional program
allowances, price adjustments, finance charges or other allowances, and (ii) to
the extent the underlying Account owed by the holder of the credit card is
deemed owned by the Loan Parties and not owned by such credit card processor, to
secure the interest of such credit card processor in such underlying Account, in
each case, to the extent arising under or in connection with the Loan Parties’
private label credit card facility, as amended or restated from time to time,
and any replacement facilities thereof and any proceeds of the foregoing;

 

(i)                                     Sales, assignments or transfers of
assets to the extent permitted by SECTION 6.5 hereof;

 

(j)                                    Liens securing the ABL Obligations
granted to the ABL Agent under the ABL Loan Documents and any Permitted
Refinancings thereof permitted under the Intercreditor Agreement, if and for so
long as the Intercreditor Agreement is in effect;

 

(k)                                 Liens arising solely by virtue of any
statutory or common law provisions relating to banker’s liens, liens in favor of
securities intermediaries, rights of setoff or similar rights and remedies as to
deposit accounts or securities accounts or other funds maintained with
depository institutions or securities intermediaries;

 

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(l)                                     Liens (if any) arising from
precautionary UCC, PPSA or PRUCC filings regarding “true” operating leases or
consignment of goods to a Loan Party; and

 

(m)                             Liens on property in existence at the time such
property is acquired by a Loan Party or on property of a Subsidiary of a Loan
Party in existence at the time such Subsidiary is acquired by a Loan Party;
provided that such Liens are not incurred in connection with, or in anticipation
of, such acquisitions and do not attach to any other assets of any Loan Party;

 

(n)                                 leases or subleases granted to others not
interfering in any material respect with the business of a Loan Party or any
Subsidiary of a Loan Party and any interest or title of a lessor under any lease
(whether a Capital Lease or an operating lease) permitted by this Agreement or
the Security Documents;

 

(o)                                 Liens arising from the granting of a lease
or license to enter into or use any asset of a Loan Party or any Subsidiary of a
Loan Party to any Person in the ordinary course of business of a Loan Party or
any Subsidiary of a Loan Party that does not interfere in any material respect
with the use or application by (i) a Loan Party or any Subsidiary of a Loan
Party of the asset subject to such license in the business of a Loan Party or
such Subsidiary, or (ii) the Administrative Agent’s rights in connection with
realization of the Collateral;

 

(p)                                 Liens attaching solely to cash earnest money
deposits made by a Loan Party or any Subsidiary of a Loan Party in connection
with any letter of intent or purchase agreement entered into it in connection
with an acquisition permitted hereunder;

 

(q)                                 Liens on the assets or stock of Excluded
Subsidiaries securing Indebtedness or obligations of such Excluded Subsidiary
otherwise permitted hereunder, so long as such Indebtedness is without recourse
to a Loan Party except to the extent of such Loan Party’s Stock in such Excluded
Subsidiary;

 

(r)                                    Liens in favor of customs and revenues
authorities imposed by applicable law arising in the ordinary course of business
in connection with the importation of goods and securing obligations (i) that
are not overdue by more than ninety (90) days, (ii)(A) that are being contested
in good faith by appropriate proceedings, (B) as to which the applicable Loan
Party or Subsidiary has set aside on its books adequate reserves with respect
thereto in accordance with GAAP and (C) such contest effectively suspends
collection of the contested obligation and enforcement of any Lien securing such
obligation, or (iii) the existence of which would not reasonably be expected to
result in a Material Adverse Effect;

 

(s)                                   Liens that are contractual rights of
set-off under agreements entered into with customers of any Loan Party or any of
its Subsidiaries in the ordinary course of business;

 

(t)                                    Liens on insurance policies and proceeds
thereof incurred in the ordinary course of business to secure premiums
thereunder; and

 

(u)                                 Other Liens on assets of the Loan Parties
(other than Inventory or accounts receivable) to the extent not otherwise
included in paragraphs (a) through (t) of this Section securing Indebtedness and
other liabilities in an aggregate amount not to exceed $10,000,000 at any time
outstanding.

 

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Notwithstanding anything to the contrary in this Agreement, the Loan Parties
shall not, and shall not permit any of their respective Subsidiaries to, create,
incur, assume or permit to exist any Lien securing Indebtedness (other than
under the Loan Documents and the ABL Loan Documents) on any Stock of (i) any
Zale Insurance Subsidiary or (ii) the ZC Partnership.

 

SECTION 6.3                                        Fundamental Changes.  The
Loan Parties will, and will cause their Subsidiaries to, not merge into,
amalgamate or consolidate with any other Person, or permit any other Person to
merge into, amalgamate or consolidate with it, or liquidate or dissolve, except
that, if at the time thereof and immediately after giving effect thereto, no
Default or Event of Default shall have occurred and be continuing, (i) any
Subsidiary (other than any Zale Insurance Subsidiary) may merge into or
amalgamate with, or liquidate or dissolve into, a Loan Party in a transaction in
which such Loan Party is the surviving entity, (ii) any Loan Party may merge or
amalgamate with, or liquidate or dissolve into, any other Person as long as the
surviving corporation is, or simultaneously therewith becomes, a Loan Party,
(iii) any Subsidiary that is not a Loan Party may merge into or amalgamate with,
or liquidate or dissolve into, any other Subsidiary that is not a Loan Party,
provided, that any such merger or amalgamation involving a Person that is not a
wholly owned Subsidiary immediately prior to such merger or amalgamation shall
not be permitted unless also permitted by SECTION 6.4, and (iv) the Borrowers
and their Subsidiaries may consummate the Canadian Restructuring and the
Insurance Restructuring so long as, in the case of the Canadian Restructuring,
notice is provided in accordance with SECTION 5.3.

 

SECTION 6.4                                        Investments, Loans, Advances,
Guarantees and Acquisitions.  The Loan Parties will, and will cause their
Subsidiaries to, not purchase, hold or acquire (including pursuant to any merger
or amalgamation with any Person that was not a wholly owned Subsidiary prior to
such merger or amalgamation) any capital stock, evidences of indebtedness or
other securities (including any option, warrant or other right to acquire any of
the foregoing) of, make or permit to exist any loans or advances to, guarantee
any obligations of, or make or permit to exist any investment or any other
interest in, any other Person, or purchase or otherwise acquire (in one
transaction or a series of transactions) any assets of any other Person
constituting a business unit (each of the foregoing, an “investment”), except
for:

 

(a)                                 Permitted Investments;

 

(b)                                 investments existing on the Effective Date,
and set forth on Schedule 6.4, and any modification, renewal or extension
thereof; provided that the amount of any investment permitted pursuant to this
clause is not increased from the amount of such investment on the Effective Date
except pursuant to the terms of such investment as of the Effective Date, as a
result of undistributed earnings of the Person in whom such investment is made,
or as otherwise permitted by this SECTION 6.4;

 

(c)                                  loans, advances, and investments by any
Loan Party to or in, and guaranties by any Loan Party of the obligations of, any
other Loan Party or purchases by a Loan Party of Stock of another Loan Party
(other than Zale) or of assets constituting a business unit from another
Borrower, provided that any Loan Party or other Subsidiary of the Borrower
(except the ZC Partnership) making a loan or advance to another Loan Party is
subject to the Intercompany Subordination Agreement;

 

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(d)                                 loans, advances, or other investments by any
of the Loan Parties to or in, and guaranties by any Loan Party of the
obligations of, any of its respective Subsidiaries or purchases by a Loan Party
of stock of any Subsidiary or of assets constituting a business unit of a
Subsidiary, all in an amount not to exceed $15,000,000 in the aggregate for all
such loans, advances, guaranties, stock or asset purchases or other investments
made since the Effective Date;

 

(e)                                  accounts receivable created or acquired,
and deposits, prepayments and other credits to suppliers made, in the ordinary
course of business;

 

(f)                                   investments consisting of transfers of
Stock in a Excluded Subsidiary to any other Excluded Subsidiary, together with
any note or other securities issued by such other Excluded Subsidiary in
consideration of such transfer;

 

(g)                                  investments in registered investment
companies which invest solely in investments otherwise permitted by this
SECTION 6.4;

 

(h)                                 investments consisting of non-cash
consideration received as proceeds of asset dispositions permitted by
SECTION 6.5;

 

(i)                                     [intentionally omitted];

 

(j)                                    investments in Zale Stock, whether or not
permitted under SECTION 6.6 in connection with the satisfaction of the
Borrowers’ or a Subsidiary’s obligations under a 401(k) plan or an employee
Stock ownership plan and/or the Zale Omnibus Stock Incentive Plan or similar
employee benefit plans maintained by the Borrowers and their respective
Subsidiaries, or any of them;

 

(k)                                 investments consisting of Indebtedness
permitted by SECTION 6.1;

 

(l)                                     investments received in connection with
the bankruptcy or reorganization of, or settlement of delinquent accounts and
disputes with, customers and suppliers of the Loan Parties, in each case in the
ordinary course of business;

 

(m)                             loans or advances to employees, officers or
directors for the purpose of travel, entertainment or relocation in the ordinary
course of business not to exceed $2,000,000 in the aggregate at any time
outstanding;

 

(n)                                 acquisitions of assets or Stock (other than
the Stock of any of the Loan Parties) so long as (i) such assets or Stock
acquired are related to the business of one of the Loan Parties or their
Subsidiaries, (ii) the Payment Conditions are satisfied at the time of and after
giving effect to such acquisition, (iii) with respect to any such acquisitions
of Stock, if the entity so acquired is not an Excluded Subsidiary,
simultaneously with the occurrence of such acquisition, the entity so acquired
shall if it owns Inventory (A) be merged, amalgamated or consolidated with and
into one of the Loan Parties, (B) transfer all of its assets (other than those
required to satisfy liabilities) to the Loan Parties, or (C) become a Loan Party
under this Agreement and the other Loan Documents in accordance with
SECTION 5.13 hereof, and (iv) such acquisition shall have been approved by the
Board of Directors of the Person (or similar governing body if such Person

 

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is not a corporation) which is the subject of such acquisition and such Person
shall not have announced that it will oppose such acquisition or shall not have
commenced any action which alleges that such acquisition shall violate
applicable law;

 

(o)                                 acquisitions of Zale Stock permitted by
SECTION 6.4(j) or repurchases of Zale Stock otherwise permitted by SECTION 6.6;

 

(p)                                 Guarantees of obligations of a Subsidiary
other than any Canadian Loan Party in an amount not to exceed $10,000,000 in the
aggregate for all such Guarantees at any time outstanding;

 

(q)                                 Guarantees of the foreign currency and
hedging obligations of Zale Canada to meet the operating needs of the business
consistent with past practices;

 

(r)                                    Guarantees and warranties of Inventory
sold to customers in the ordinary course of business consistent with past
practices;

 

(s)                                   Guarantees by any Loan Party of
obligations of one or more Excluded Subsidiaries under repair, warranty or
diamond bond contracts in connection with such Loan Party’s and its
Subsidiaries’ ordinary course jewelry warranty programs;

 

(t)                                    investments consisting of extensions of
credit in the nature of accounts receivable or notes receivable arising from the
grant of trade credit in the ordinary course of business or consisting of and
loans and advances by a Loan Party to consignment vendors, secured by a Lien on
the inventory which has been, or will be, consigned to a Loan Party, in a
principal amount not to exceed the value of such consigned inventory, and which
are repayable out of the proceeds of the sale of such consigned inventory or
upon the return of such consigned inventory to the consignment vendor;

 

(u)                                 investments consisting of Hedging Agreements
permitted under SECTION 6.9;

 

(v)                                 investments in any Person existing at the
time such Person becomes a Subsidiary of any Loan Party pursuant to an
investment otherwise permitted under this SECTION 6.4, so long as such
investments were not made in contemplation of such Person becoming a Subsidiary;

 

(w)                               Guarantees of leases that do not constitute
Indebtedness, in each case entered into in the ordinary course of business;

 

(x)                                 other investments in an aggregate amount not
to exceed $5,000,000; and

 

(y)                                 other investments, if, at the time of such
investment and after giving effect thereto, the RP Conditions are satisfied.

 

Notwithstanding anything in this Agreement to the contrary, (a) exclusive of
Indebtedness of Zale Canada Co. to ZC Partnership permitted hereunder and
contractual liability insurance policies incurred in the ordinary course of
business, the aggregate outstanding amount of any and all transactions between
any or all of the Loan Parties, on the one hand, and any or all of the Excluded
Subsidiaries, on the other hand, that are covered by any of the clauses (a)

 

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through (x) of this SECTION 6.4 (but excluding clause (y)) shall not exceed
$25,000,000 at any one time, (b) in no event may proceeds of the Term Priority
Collateral be invested in Permitted Investments or otherwise deposited in
securities accounts, and (c) the Loan Parties shall cause the ZC Partnership not
to make any Investments in any other Person, other than Investments in Zale
Canada Co. consistent with past practice and otherwise permitted hereunder.

 

Notwithstanding anything to the contrary, the Loan Parties shall, and shall
cause their Subsidiaries to, cause the Zale Insurance Subsidiaries not to make
any investments in any other Person, other than investments made in the ordinary
course of business in accordance with their investment policies, investments by
one Zale Insurance Subsidiary in another Zale Insurance Subsidiary or as may be
reasonably deemed appropriate in connection with an expansion to new business
lines or opportunities reasonably deemed lawful and appropriate for conduct by
an insurance company licensed as are the Zale Insurance Subsidiaries, provided
that, such investments are not expected to be adverse in any material respect to
the Lenders.

 

SECTION 6.5                                        Asset Sales.  (a) The Loan
Parties will, and will cause their Subsidiaries to, not sell, transfer, lease or
otherwise dispose of any asset, including any Stock, nor will the Loan Parties
issue, nor will the Loan Parties permit their Subsidiaries to issue, any
additional shares of its Stock or other ownership interest in such Loan Party,
except:

 

(i)                                     (A) sales of Inventory in the ordinary
course of business (other than in connection with the closure of Stores), or
(B) used or surplus equipment, or (C) Permitted Investments, in each case in the
ordinary course of business;

 

(ii)                                  sales, transfers and dispositions among
the Loan Parties and their respective Subsidiaries (excluding, however, any
sales, transfers and dispositions of Inventory or proceeds thereof, from any
Loan Party except to another Loan Party), provided, that any such sales,
transfers or dispositions involving a Subsidiary that is not a Loan Party shall
be made in compliance with SECTION 6.4 or SECTION 6.7 and otherwise in
compliance with this Agreement and the other Loan Documents;

 

(iii)                               transfers constituting part of the Insurance
Restructuring permitted hereby;

 

(iv)                              [intentionally omitted];

 

(v)                                 issuances of shares of Stock of any Loan
Party to any other Loan Party or the issuance by Zale of shares of its Stock;

 

(vi)                              the natural expiration of Intellectual
Property licenses in accordance with the terms thereof;

 

(vii)                           investments permitted under SECTION 6.4;

 

(viii)                        Permitted Asset Sales provided that no Event of
Default or Cash Control Event has occurred and is continuing or would occur as a
result thereof; and

 

(ix)                              bulk sales or other dispositions of the Loan
Parties’ Inventory and Store fixtures not in the ordinary course of business in
connection with Store closures, at arm’s

 

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length; provided that such Store closures and related Inventory dispositions
shall not exceed, in any fiscal year of the Borrowers, ten percent (10%) of the
number of the Loan Parties’ Stores as of the beginning of such fiscal year (net
of new Store openings; provided further that, unless the Administrative Agent
otherwise agree, all sales of Inventory in connection with any Store closings
(in a single or series of related transactions) of five percent (5%) or more of
the number of the Loan Parties’ Stores then in existence shall be conducted at
Store locations pursuant to a going out of business, liquidation or similar
sale, in accordance with liquidation agreements and with professional
liquidators reasonably acceptable to the Administrative Agent;

 

(x)                                 leases, subleases, or space leases, in each
case in the ordinary course of business and which do not materially interfere
with the business of any Loan Party; and

 

(xi)                              following the acquisition of a Person or
business permitted by SECTION 6.4(n) hereof, the sale or other disposition
(other than any sale or other disposition of the type described in
SECTION 6.5(a)(ix)) above of (A) assets of such Person or business which are
deemed by the Loan Parties to be surplus or unnecessary or (B) the assets of the
Loan Party which overlap with the assets of such Person or business or which
such Loan Party deems to have become surplus or unnecessary as a result of such
acquisition; provided that the fair market value of such assets shall not exceed
$10,000,000 in the aggregate in any fiscal year;

 

provided, that all sales, transfers, leases and other dispositions permitted
hereby shall be made at arm’s length and for fair value (other than sales,
transfers and other dispositions permitted under clause (ii)); and further
provided, that the authority granted hereunder may be terminated in whole or in
part by the Administrative Agent upon the occurrence and during the continuance
of any Event of Default.

 

(b)                                 The Loan Parties will, and will cause their
Subsidiaries to, not sell, transfer, lease or otherwise dispose of receipts from
credit card processors of the Loan Parties.

 

SECTION 6.6                                        Restricted Payments; Certain
Payments of Indebtedness.

 

(a)                                 The Loan Parties will, and will cause their
Subsidiaries to, not declare or make, or agree to pay or make, directly or
indirectly, any Restricted Payment, except that

 

(i)                                     the Loan Parties may make Restricted
Payments so long as the RP Conditions are satisfied at the time of the making of
and after giving effect to such Restricted Payment;

 

(ii)                                  any Loan Party may make a Restricted
Payment to any other Loan Party;

 

(iii)                               any Excluded Subsidiary may make a
Restricted Payment to another Excluded Subsidiary or to a Loan Party; provided
that each Zale Insurance Subsidiary may only make Restricted Payments to a Loan
Party in any fiscal year out of such Zale Insurance Subsidiary’s retained
earnings for such fiscal year and to the extent such Restricted Payments do not
constitute extraordinary dividends;

 

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(iv)                              any Subsidiary may make Restricted Payments
ratably to the holders of the Stock of such Subsidiary;

 

(v)                                 Zale may make repurchases of Stock in Zale
deemed to occur upon exercise of stock options or warrants if such Stock
represents a portion of the exercise price of such options or warrants, in each
case, to the extent not made in cash; and

 

(vi)                              Zale may make Restricted Payments pursuant to
the transactions contemplated by the Warrant Agreement or in accordance with the
terms of the Series A Preferred Stock.

 

(b)                                 The Loan Parties will not at any time, make
or agree to pay or make, directly or indirectly any payment or other
distribution (whether in cash, securities or other property) of or in respect of
principal of or interest on any Indebtedness (other than intercompany
Indebtedness owed to any Loan Party and payments made in connection with the
Canadian Restructuring), or any payment or other distribution (whether in cash,
securities or other property), including any sinking fund or similar deposit, on
account of the purchase, redemption, retirement, acquisition, cancellation or
termination of any such Indebtedness, except (i) payment of regularly scheduled
payments or mandatory prepayments of principal, interest and premium, if any,
arising solely with respect to such payment in respect of any Indebtedness
permitted under SECTION 6.1 hereof, (ii) if the Payment Conditions are satisfied
at the time of the making of and after giving effect to such payment,
(iii) Permitted Refinancings of Indebtedness permitted under SECTION 6.1 and
(iv) voluntary prepayments of the ABL Obligations and the Obligations.

 

Notwithstanding anything to the contrary in this Agreement, the Loan Parties
shall cause the ZC Partnership to not make any Restricted Payment to any other
Person, other than Restricted Payments to any Loan Party consistent with past
practice and other than pursuant to the Canadian Restructuring.

 

SECTION 6.7                                        Transactions with
Affiliates.  Except as set forth on Schedule 6.7 hereto, the Loan Parties will,
and will cause their Subsidiaries to, not at any time sell, lease or otherwise
transfer any property or assets to, or purchase, lease or otherwise acquire any
property or assets from, or otherwise engage in any other transactions with, any
of their respective Affiliates, except (a) transactions in the ordinary course
of business that are at prices and on terms and conditions not less favorable to
the Loan Parties than could be obtained on an arm’s length basis from unrelated
third parties, (b) transactions among the Loan Parties, (c) transactions among
Excluded Subsidiaries, (d) transactions with any Person that is an Affiliate by
reason of the ownership by Zale or any of its Subsidiaries of Stock of such
Person which would not otherwise violate the provisions of the Loan Documents,
(e) customary fees paid, and reimbursement of reasonable expenses, to members of
the board of directors of Zale or any of its Subsidiaries, (f) customary
compensation (including salaries and bonuses) paid, and reimbursement of
reasonable expenses, to officers and employees of Zale or any Subsidiary of Zale
and (g) transactions set forth in the Loan Documents and in the Warrant
Agreement.

 

SECTION 6.8                                        Financial Covenants.  During
the continuance of a Covenant Compliance Event, the Loan Parties shall not
permit the Fixed Charge Coverage Ratio, calculated for any Reference Period as
of the last day of each fiscal month commencing with the

 

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fiscal month immediately prior to the date that the Covenant Compliance Event
occurs, to be less than 1.0:1.0.

 

SECTION 6.9                                        Hedging Agreement.  The Loan
Parties shall, and shall cause their Subsidiaries to, not enter into any Hedging
Agreement except for Hedging Agreements used solely as a risk management
strategy and/or hedge against changes resulting from market operations in
accordance with policies approved by the Board of Directors of Zale or Zale
Delaware.

 

SECTION 6.10                                 [Intentionally Omitted].

 

SECTION 6.11                                 Canadian Plans.  None of the Loan
Parties nor any of their Subsidiaries will permit any of the following:

 

(a)                                 become party to, or liable under, any
Canadian Plan which provides benefits on a defined benefit basis, and the
existence of any unfunded, solvency, or deficiency on windup liability or any
accumulated funding deficiency (whether or not waived), or of any amount of
unfunded benefit liabilities in respect of any Canadian Plan;

 

(b)                                 failure to pay any amounts required to be
paid by it or them when due;

 

(c)                                  the existence of any liability upon it or
them or Lien on any of its or their property in respect of any Canadian Plan;

 

(d)                                 failure to make all required contributions
to any Canadian Plan when due; and

 

(e)                                  engaging in a prohibited transaction or
violation of the fiduciary responsibility rules with respect to any Canadian
Plan that could reasonably be expected to result in liability.

 

SECTION 6.12                                 Burdensome Agreements.  None of the
Loan Parties shall nor shall their Subsidiaries enter into or permit to exist
any contractual obligation (other than this Agreement, any other Loan Document
or the ABL Loan Documents) that (a) requires the grant of a Lien to secure an
obligation of such Person if a Lien is granted to secure the Obligations, or
(b) limits the ability (i) of any Subsidiary to make Restricted Payments or
other distributions to any Loan Party or to otherwise transfer property to or
invest in a Loan Party, (ii) of any Subsidiary to Guarantee the Obligations,
(iii) of any Subsidiary to make or repay loans to a Loan Party, or (iv) of the
Loan Parties or any Subsidiary to create, incur, assume or suffer to exist Liens
on property of such Person in favor of the Administrative Agent; provided,
however, that this clause (iv) shall not prohibit (A) encumbrances or
restrictions under this Agreement and the other Loan Documents; (B) encumbrances
or restrictions under the ABL Credit Agreement or any Permitted Refinancing in
respect thereof, in each case, so long as the encumbrances and restrictions
thereunder are no more onerous, when taken as a whole, to any Loan Party or
Subsidiary than those contained in the ABL Credit Agreement as in effect on the
Effective Date);  (C) customary encumbrances or restrictions in joint venture
agreements, asset sale agreements, sale-leaseback agreements, stock sale
agreements and other similar agreements, which restrictions relate solely to the
activities of such joint venture or are otherwise applicable only to the assets
that are the subject to such agreement; (D) customary encumbrances or
restrictions contained in sales of, or in agreements relating to the sale of
Stock or assets of any Subsidiary of

 

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a Loan Party pending such sale, provided that such encumbrances and restrictions
apply only to the Subsidiary of a Loan Party to be sold and such sale is
permitted hereunder; (E) any such agreement imposed in connection with
consignment agreements entered into in the ordinary course of business; (F) any
such restriction contained in agreements pertaining to Indebtedness of Excluded
Subsidiaries permitted hereunder; (G) customary anti-assignment provisions
contained in agreements entered into in the ordinary course of business;
(H) customary subordination of subrogation, contribution and similar claims
contained in guaranties permitted hereunder; (I) encumbrances described on
Schedule 6.12; (J) on cash deposits or other deposits imposed by customers under
contracts entered into in the ordinary course of business; (K) on the transfer,
lease, or license of any property or asset of any Loan Party in effect on the
Effective Date that were entered into in the ordinary course of business, and
(L) encumbrances or restrictions in documents governing Indebtedness assumed or
incurred under SECTION 6.4(n) or existing with respect to any Person or the
property or assets of such Person acquired by a Loan Party or any Subsidiary of
a Loan Party in an acquisition permitted hereunder, provided that such
encumbrances and restrictions are not applicable to any Person or the property
or assets of any Person other than such acquired Person or the property or
assets of such acquired Person and were not made in anticipation of such
acquisition.

 

SECTION 6.13                                 Amendment of Material Documents. 
None of the Loan Parties shall nor shall their Subsidiaries amend, modify or
waive any of a Loan Party’s or any of a Loan Party’s Subsidiary’s rights under
(a) its organization documents in a manner materially adverse to the Credit
Parties, (b) any agreement or document evidencing Material Indebtedness (other
than the ABL Loan Documents) unless such amendment, modification or waiver would
not result in a Default or Event of Default, would not be materially adverse to
the Lenders or the other Credit Parties and would not be reasonably likely to
have a Material Adverse Effect or (c) any ABL Loan Document (other than on
account of any Permitted Refinancing thereof permitted by the Intercreditor
Agreement), to the extent that such amendment, modification or waiver would not
be permitted under the Intercreditor Agreement, would result in a Default or
Event of Default or otherwise would be reasonably likely to have a Material
Adverse Effect.

 

SECTION 6.14                                 Change in Nature of Business.  The
Loan Parties shall not engage in any line of business substantially other than
the sale and distribution of watches, gemstones, jewelry, giftware and related
items and services, insurance and other related financial products and any
business substantially related, ancillary or incidental thereto.

 

SECTION 6.15                                 Certain Matters Relating to Zale
Insurance Subsidiaries.

 

(a)                                 The Loan Parties shall, and shall cause
their Subsidiaries to, cause the Zale Insurance Subsidiaries not to: (A) enter
into any intercompany agreements which require approval of a Governmental
Authority or (B) modify the terms of any existing intercompany agreements, in
either case if such new agreement or amendment would reasonably be expected to
be materially adverse to the Lenders.

 

(b)                                 The Loan Parties shall, and shall cause
their Subsidiaries to, cause the Zale Insurance Subsidiaries not to issue any of
their Stock or securities convertible into or exchangeable for any such Stock
other than Stock issued to a Loan Party or to another Zale Insurance Subsidiary.

 

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(c)                                  The Loan Parties shall, and shall cause
their Subsidiaries to, cause the Zale Insurance Subsidiaries not to: (A) enter
into any commutation of or recapture of any risks under any Reinsurance
Agreement except to the extent required by the other party thereto in accordance
with the terms of such agreement or (B) other than in the ordinary course of
business and consistent with past practice, amend any existing Reinsurance
Agreement or enter into any new Reinsurance Agreement, except as (i) required by
applicable law or regulation, (ii) as is consistent with market practices and
(iii) would not reasonably be expected to be materially adverse to the Lenders.

 

(d)                                 The Loan Parties shall, and shall cause
their Subsidiaries to, cause the Zale Insurance Subsidiaries not to make or
amend any Tax election of such Zale Insurance Subsidiaries, except as required
by applicable law or regulation and except as would not reasonably be expected
to be materially adverse to the Lenders.

 

ARTICLE VII
EVENTS OF DEFAULT

 

SECTION 7.1                                        Events of Default.  If any of
the following events (“Events of Default”) shall occur:

 

(a)                                 the Loan Parties shall fail to pay any
principal of any Loan when and as the same shall become due and payable, whether
at the due date thereof or at a date fixed for prepayment thereof or otherwise;

 

(b)                                 the Loan Parties shall fail to pay any
interest on any Loan or fee or any other amount (other than an amount referred
to in clause (a) of this Article) payable under this Agreement or any other Loan
Document, within three (3) Business Days of the date when the same shall become
due and payable;

 

(c)                                  any representation, warranty, certification
or statement made or deemed made by or on behalf of any Loan Party in or in
connection with any Loan Document or any amendment or modification thereof or
waiver thereunder, or in any report, certificate, financial statement or other
document furnished pursuant to or in connection with any Loan Document or any
amendment or modification thereof or waiver thereunder, shall prove to have been
incorrect in any material respect (except that such materiality qualifier shall
not be applicable to any representations, warranties, certifications or
statements that already are qualified or modified by materiality in the text
thereof) when made or deemed made;

 

(d)                                 the Loan Parties or their Subsidiaries shall
fail to observe or perform any covenant, condition or agreement contained:

 

(i)                                     in SECTION 2.21, SECTION 5.2,
SECTION 5.3(b), SECTION 5.7, SECTION 5.9, SECTION 5.12,  SECTION 5.15,
SECTION 5.17 or in ARTICLE VI; and

 

(ii)                                  in SECTION 5.1(f), and such failure shall
continue unremedied for a period of one Business Day;

 

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(e)                                  any Loan Party or any of its Subsidiaries
shall fail to observe or perform any covenant, condition or agreement contained
in any Loan Document (other than those specified in clause (a), (b), (c), or
(d) of this Article), and such failure shall continue unremedied for a period of
thirty (30) days after the earlier of (i) the date on which such failure shall
first become known to any officer of any Loan Party or (ii) notice thereof from
the Administrative Agent to Zale (which notice will be given at the request of
any Lender);

 

(f)                                   any Loan Party or any of its Subsidiaries
shall fail to make any payment (whether of principal or interest and regardless
of amount) in respect of any Material Indebtedness (including, but not limited
to, the ABL Obligations) when and as the same shall become due and payable
(after giving effect to the expiration of any grace or cure period set forth
therein);

 

(g)                                  any event or condition occurs that results
in any Material Indebtedness (including, but not limited to, the ABL
Obligations) becoming due prior to its scheduled maturity or that enables or
permits (with or without the giving of notice, the lapse of time or both) the
holder or holders of any such Material Indebtedness or any trustee or agent on
its or their behalf to cause any such Material Indebtedness to become due, or to
require the prepayment, repurchase, redemption or defeasance thereof, prior to
its scheduled maturity; provided, however, that this clause (g) shall not apply
to (x) secured Indebtedness that becomes due as a result of the voluntary sale
or transfer of the property or assets securing such Indebtedness, if such sale
or transfer is permitted under this Agreement and under the documents providing
for such Indebtedness, or (y) to mandatory prepayments under Material
Indebtedness that are not due as a result of a default under the documents
providing for such Indebtedness and that are permitted to be paid pursuant to
the terms hereof;

 

(h)                                 an involuntary proceeding shall be commenced
or an involuntary petition shall be filed seeking (i) liquidation,
reorganization, arrangement or other relief in respect of any Loan Party or its
debts, or of a substantial part of its assets, under any Debtor Relief Law now
or hereafter in effect or (ii) the appointment of a receiver, interim receiver,
national receiver, monitor, trustee, custodian, sequestrator, conservator or
similar official for any Loan Party or for a substantial part of its assets,
and, in any such case, such proceeding or petition shall continue undismissed
for 60 days or an order or decree approving or ordering any of the foregoing
shall be entered and continue unstayed and in effect for 60 days;

 

(i)                                     any Loan Party or any of its
Subsidiaries shall (i) voluntarily commence any proceeding or file any petition,
proposal, or notice seeking liquidation, reorganization or other relief under
any Debtor Relief Law now or hereafter in effect, (ii) consent to the
institution of, or fail to contest in a timely and appropriate manner, any
proceeding or petition described in clause (h) of this Article, (iii) apply for
or consent to the appointment of a receiver, interim receiver, national
receiver, monitor, trustee, custodian, sequestrator, conservator or similar
official for any Loan Party, any of its Subsidiaries or for a substantial part
of such Loan Party’s or such Subsidiary’s assets, (iv) file an answer admitting
the material allegations of a petition filed against it in any such proceeding,
(v) make a general assignment for the benefit of creditors or (vi) take any
action for the purpose of effecting any of the foregoing;

 

(j)                                    any Loan Party or any of its Subsidiaries
shall become unable, admit in writing its inability or fail generally to pay its
debts as they become due;

 

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(k)                                 one or more uninsured judgments for the
payment of money in an aggregate amount in excess of $10,000,000 shall be
rendered against any Loan Party or any of its Subsidiary or any combination
thereof and the same shall remain undischarged for a period of 30 consecutive
days during which execution shall not be effectively stayed, or any action shall
be legally taken by a judgment creditor to attach or levy upon any material
assets of any Loan Party or any of its Subsidiaries to enforce any such
judgment;

 

(l)                                     (i)                                    
any challenge by or on behalf of any Loan Party or any of its Subsidiaries to
the validity of any Loan Document or the applicability or enforceability of any
Loan Document strictly in accordance with the subject Loan Document’s terms or
which seeks to void, avoid, limit, or otherwise adversely affect any security
interest created by or in any Loan Document or any payment made pursuant
thereto.

 

(ii)                                  any challenge by or on behalf of any other
Person to the validity of any Loan Document or the applicability or
enforceability of any Loan Document strictly in accordance with the subject Loan
Document’s terms, or which seeks to void, avoid, limit, or otherwise adversely
affect the Administrative Agent’s, the Lenders’ or the other Credit Parties’
rights under the Intercreditor Agreement or any security interest created by or
in any Loan Document or any payment made pursuant thereto, in each case, as to
which an order or judgment has been entered adverse to the Administrative Agent,
the Lenders or the other Credit Parties.

 

(iii)                               any Lien purported to be created under any
Security Document shall cease to be, or shall be asserted by any Loan Party or
any of its Subsidiaries not to be, a valid and perfected Lien on any Collateral,
with the priority required by the applicable Security Document, except as a
result of the sale or other disposition of the applicable Collateral in a
transaction permitted under the Loan Documents;

 

(m)                             a Change in Control shall occur;

 

(n)                                 [intentionally omitted];

 

(o)                                 the indictment of, or institution of any
legal process or proceeding against, any Loan Party or any of its Subsidiaries,
under any federal, state, provincial, municipal, foreign and other civil or
criminal statute, rule, regulation, order, or other requirement having the force
of law where the relief, penalties, or remedies sought or available include the
forfeiture of any material property of any Loan Party or any of its Subsidiaries
and/or the imposition of any stay or other order, the effect of which could
reasonably be to restrain in any material way the conduct by the Loan Parties
and their Subsidiaries, taken as a whole, of their business in the ordinary
course;

 

(p)                                 the termination or attempted termination of
any Facility Guarantee except as expressly permitted hereunder or under any
other Loan Document;

 

(q)                                 except as otherwise permitted hereunder, the
determination by any Loan Party or any of its Subsidiaries, whether by vote of
such Loan Party’s or such Subsidiary’s board of directors or otherwise to:
generally suspend the operation of such Loan Party’s or such Subsidiary’s
business in the ordinary course, liquidate all or a material portion of such
Loan

 

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Party’s or such Subsidiary’s assets or Store locations, or employ an agent or
other third party to conduct any so-called store closing, store liquidation or
“Going-Out-Of-Business” sales for such Loan Party’s or such Subsidiary’s Stores
generally;

 

(r)                                    (i) an ERISA Event occurs with respect to
a Pension Plan or Multiemployer Plan which has resulted or could reasonably be
expected to result in liability of any Loan Party under Title IV of ERISA to the
Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of
$10,000,000 or which would reasonably likely result in a Material Adverse
Effect, or (ii) a Loan Party or any ERISA Affiliate fails to pay when due, after
the expiration of any applicable grace period, any installment payment with
respect to its withdrawal liability under Section 4201 of ERISA under a
Multiemployer Plan in an aggregate amount in excess of $10,000,000 or which
would reasonably likely result in a Material Adverse Effect; or

 

(s)                                   any provision of the Intercreditor
Agreement shall, at any time after the delivery of such Intercreditor Agreement,
fail to be valid and binding, or enforceable;

 

then, and in every such event (other than an event with respect to any Loan
Party or any of its Subsidiaries described in clause (h) or (i) of this
SECTION 7.1), and at any time thereafter during the continuance of such event,
the Administrative Agent may, and at the request of the Required Lenders shall,
by notice to Zale, take either or both of the following actions, at the same or
different times: (i) [intentionally omitted], and (ii) declare the Loans and the
other Obligations then outstanding to be due and payable in whole (or in part,
in which case any principal not so declared to be due and payable may thereafter
be declared to be due and payable), and thereupon the principal of the Loans and
other Obligations so declared to be due and payable, together with accrued
interest thereon and all fees and other Obligations of the Loan Parties accrued
under the Loan Documents, shall become due and payable immediately, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Loan Parties; and in case of any event with respect to any
Loan Party or any of its Subsidiaries described in clause (h) or (i) of this
SECTION 7.1, the principal of the Loans then outstanding, together with accrued
interest thereon and all fees and other Obligations of the Loan Parties accrued
under the Loan Documents, shall automatically become due and payable, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Loan Parties.

 

SECTION 7.2                                        When Continuing.  For all
purposes under this Agreement, each Default and Event of Default that has
occurred shall be deemed to be continuing at all times thereafter unless it
either (a) is cured or corrected or (b) is waived in writing by the Lenders in
accordance with SECTION 9.2.

 

SECTION 7.3                                        Remedies on Default.  In case
any one or more of the Events of Default shall have occurred and be continuing,
and whether or not the maturity of the Loans shall have been accelerated
pursuant hereto, the Administrative Agent, the Lenders and the other Credit
Parties may proceed to protect and enforce their rights and remedies under this
Agreement, the Notes or any of the other Loan Documents by suit in equity,
action at law or other appropriate proceeding, whether for the specific
performance of any covenant or agreement contained in this Agreement and the
other Loan Documents or any instrument pursuant to which the Obligations are
evidenced, and, if such amount shall have become due, by declaration or
otherwise, proceed

 

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to enforce the payment thereof or any other legal or equitable right of the
Administrative Agent, the Lenders or the other Credit Parties. No remedy herein
is intended to be exclusive of any other remedy and each and every remedy shall
be cumulative and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law or in equity or by statute or any other
provision of law.

 

SECTION 7.4                                        Application of Proceeds.
After the exercise of remedies provided for in SECTIONS 7.1 or 7.3 (or after the
Obligations have automatically become immediately due and payable as set forth
in the last paragraph of SECTION 7.1) and the Administrative Agent, any Lender
or any other Credit Party, as the case may be, receives any monies in connection
with the enforcement of this Agreement, any of the Security Documents or any of
the other Loan Documents, or otherwise with respect to the realization upon, or
disposition of, any of the Collateral, such monies shall be distributed for
application as follows:

 

(a)                                 First, to the payment of, or (as the case
may be) the reimbursement of the Administrative Agent for or in respect of all
reasonable costs, expenses, disbursements, indemnities and losses which shall
have been incurred or sustained by the Administrative Agent in connection with
the collection of such monies by the Administrative Agent for the exercise,
protection or enforcement by the Administrative Agent of all or any of the
rights, remedies, powers and privileges of the Administrative Agent under this
Agreement or any of the other Loan Documents or in respect of the Collateral or
in support of any provision of adequate indemnity to the Administrative Agent
against any taxes or liens which by law shall have, or may have, priority over
the rights of the Administrative Agent to such monies and the other amounts due
to the Administrative Agent hereunder, under the Monitoring Agreement Letter and
the other Loan Documents;

 

(b)                                 Second, to payment of that portion of the
Obligations for or in respect of all reasonable costs, expenses, disbursements,
indemnities, and losses which shall have been incurred or sustained by the
Lenders and the other Credit Parties (including expenses and indemnities due
under SECTION 9.3 hereof) (other than principal, interest and fees) payable to
the Lenders and the other Credit Parties, ratably among them in proportion to
the amounts described in this clause Second payable to them;

 

(c)                                  Third, to payment of that portion of the
Obligations constituting accrued and unpaid interest, fees and other amounts on
the Loans and other Obligations, and fees (including, without limitation, any
prepayment fee or Make Whole Amount required by SECTION 2.17), ratably among the
Lenders and the other Credit Parties in proportion to the respective amounts
described in this clause Third payable to them;

 

(d)                                 Fourth, to payment of that portion of the
Obligations constituting unpaid principal of the Loans, ratably among the
Lenders in proportion to the respective amounts described in this clause Fourth
held by them;

 

(e)                                  Fifth, to payment of all other Obligations
(including without limitation the cash collateralization of unliquidated
indemnification obligations), ratably among the Credit Parties in proportion to
the respective amounts described in this clause Fifth held by them;

 

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(f)                                   Sixth, to payment of all other
Obligations, ratably among the Credit Parties in proportion to the respective
amounts described in this clause Sixth held by them;

 

(g)                                  Seventh, upon payment and satisfaction in
full, or other provisions for payment in full satisfactory to the Lenders and
the Administrative Agent of all of the Obligations, to the payment of any
obligations required to be paid pursuant to §9-608(a)(1)(C) or 9-615(a)(3) of
the Uniform Commercial Code of the State of New York and Section 64(1)(a) and
(b) of the PPSA (Ontario) and all equivalent provisions of any other PPSA
legislation; and

 

(h)                                 Last, the balance, if any, after all of the
Obligations have been indefeasibly paid in full, to the Loan Parties or as
otherwise required by law or contract.

 

ARTICLE VIII
THE ADMINISTRATIVE AGENT

 

SECTION 8.1                                        Administration by the
Administrative Agent.  Each Lender and each other Credit Party hereby
irrevocably designates ZIH, LLC as Administrative Agent under this Agreement and
the other Loan Documents. The general administration of the Loan Documents shall
be by the Administrative Agent. The Lenders and the other Credit Parties each
hereby irrevocably authorizes the Administrative Agent (i) to enter into the
Loan Documents to which it is a party, (ii) at its discretion, to take or
refrain from taking such actions as agent on its behalf and to exercise or
refrain from exercising such powers under the Loan Documents and the Notes as
are delegated by the terms hereof or thereof, as appropriate, together with all
powers reasonably incidental thereto and (iii) agree and consent to all of the
provisions of the Security Documents.  All Collateral shall be held or
administered by the Administrative Agent (or its duly-appointed agent) for its
benefit and for the ratable benefit of the other Credit Parties. Any proceeds
received by the Administrative Agent from the foreclosure, sale, lease or other
disposition of any of the Collateral and any other proceeds received pursuant to
the terms of the Security Documents or the other Loan Documents shall be applied
as provided in 0 or SECTION 7.4, as applicable.  The Administrative Agent shall
have no duties or responsibilities except as set forth in this Agreement and the
remaining Loan Documents, nor shall it have any fiduciary relationship with any
other Credit Party, and no implied covenants, responsibilities, duties,
obligations, or liabilities shall be read into the Loan Documents or otherwise
exist against the Administrative Agent.

 

SECTION 8.2                                        [Intentionally Omitted].

 

SECTION 8.3                                        [Intentionally Omitted].

 

SECTION 8.4                                        [Intentionally Omitted].

 

SECTION 8.5                                        Agreement of Applicable
Lenders.

 

(a)                                 Upon any occasion requiring or permitting an
approval, consent, waiver, election or other action on the part of only the
Applicable Lenders, action shall be taken by the Administrative Agent for and on
behalf or for the benefit of all Lenders upon the direction of the Applicable
Lenders, and any such action shall be binding on all Lenders.  No amendment,

 

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modification, consent, or waiver shall be effective except in accordance with
the provisions of SECTION 9.2.

 

(b)                                 Upon the occurrence of an Event of Default,
the Administrative Agent shall take such action with respect thereto as may be
reasonably directed by the Required Lenders; provided, that unless and until the
Administrative Agent shall have received such directions, the Administrative
Agent may (but shall not be obligated to) take such action as they shall deem
advisable in the best interests of the Lenders. In no event shall the
Administrative Agent be required to comply with any such directions to the
extent that the Administrative Agent believes that the Administrative Agent’s
compliance with such directions would be unlawful.

 

SECTION 8.6                                        Liability of Administrative
Agent.

 

(a)                                 The Administrative Agent, when acting on
behalf of the Lenders or the other Credit Parties, may execute any of its
respective duties under this Agreement by or through any of its respective
officers, agents and employees, and neither the Administrative Agent nor its
respective directors, officers, agents or employees shall be liable to the
Lenders, the other Credit Parties or any of them for any action taken or omitted
to be taken in good faith, or be responsible to the Lenders, to the other Credit
Parties or to any of them for the consequences of any oversight or error of
judgment, or for any loss, except to the extent of any liability imposed by law
by reason of the Administrative Agent’s own gross negligence or willful
misconduct as determined by a final and non-appealable judgment of a court of
competent jurisdiction. The Administrative Agent and their respective directors,
officers, agents and employees shall in no event be liable to the Lenders, the
other Credit Parties or to any of them for any action taken or omitted to be
taken by them pursuant to instructions received by them from the Applicable
Lenders, or in reliance upon the advice of counsel selected by it. Without
limiting the foregoing, neither the Administrative Agent, nor any of their
respective directors, officers, employees, or agents shall be responsible to any
Lender or any other Credit Party for the due execution, validity, genuineness,
effectiveness, sufficiency, or enforceability of, or for any statement,
certification, warranty or representation in, this Agreement, any other Loan
Document or any related agreement, document or order, or shall be required to
ascertain or to make any inquiry concerning the performance or observance by any
Loan Party of any of the terms, conditions, covenants, or agreements of this
Agreement or any of the other Loan Documents.

 

(b)                                 Neither the Administrative Agent, nor any of
their respective directors, officers, employees, or agents shall have any
responsibility to the Loan Parties on account of the failure or delay in
performance or breach by any Lender (other than by the Administrative Agent in
its capacity as a Lender) or any other Credit Party of any of their respective
obligations under this Agreement or the Notes or any of the other Loan Documents
or in connection herewith or therewith.

 

(c)                                  The Administrative Agent shall be entitled
to rely on any communication, instrument, or document reasonably believed by
such Person to be genuine or correct and to have been signed or sent by a person
or persons believed by such Person to be the proper Person or Persons, and, such
Person shall be entitled to rely on advice of legal counsel, independent public
accountants, and other professional advisers and experts selected by such
Person. The Administrative Agent shall not be responsible for the negligence or
misconduct of any Persons

 

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except to the extent that a court of competent jurisdiction determines in a
final and non-appealable judgment that the Administrative Agent acted with gross
negligence or willful misconduct in the selection of such Persons.

 

(d)                                 It is understood and agreed that the use of
the term “agent” herein or in any other Loan Documents (or any other similar
term) with reference to the Administrative Agent is not intended to connote any
fiduciary or other implied (or express) obligations arising under agency
doctrine of any applicable law. Instead such term is used as a matter of market
custom, and is intended to create or reflect only an administrative relationship
between contracting parties.

 

SECTION 8.7                                        Reimbursement and
Indemnification.  Each Lender agrees (a) to reimburse (x) the Administrative
Agent (in such capacities and not solely as a Lender) for such Lender’s Pro Rata
Share of any expenses and fees incurred by the Administrative Agent for the
benefit of the Lenders under this Agreement, the Notes and any of the other Loan
Documents, including, without limitation, counsel fees and compensation of
agents and employees paid for services rendered on behalf of the Lenders, and
any other expense incurred in connection with the operations or enforcement
thereof in each case not reimbursed by the Loan Parties and (y) the
Administrative Agent (in such capacities and not solely as a Lender) for such
Lender’s Pro Rata Share of any expenses of the Administrative Agent incurred for
the benefit of the Lenders that the Loan Parties have agreed to reimburse
pursuant to SECTION 9.3 and have failed to so reimburse and (b) to indemnify and
hold harmless the Administrative Agent and any of its directors, officers,
employees, or agents, on demand, in the amount of such Lender’s Pro Rata Share,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses, or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by, or asserted
against it or any of them in any way relating to or arising out of this
Agreement, the Notes or any of the other Loan Documents or any action taken or
omitted by it or any of them under this Agreement, the Notes or any of the other
Loan Documents to the extent not reimbursed by the Loan Parties (except such as
shall result from the Administrative Agent’s respective gross negligence or
willful misconduct as determined by a final and non-appealable judgment of a
court of competent jurisdiction).

 

SECTION 8.8                                        Rights of Administrative
Agent.  It is understood and agreed that any Person serving as the
Administrative Agent shall have the same rights and powers hereunder (including
the right to give such instructions) in its capacity as a Lender as the other
Lenders and may exercise such rights and powers, as well as its rights and
powers under other agreements and instruments to which it is or may be party,
and engage in other transactions with the Borrowers, as though it were not the
Administrative Agent of the Lenders under this Agreement.  Such Persons and
their Affiliates may accept deposits from, lend money to, and generally engage
in any kind of commercial or investment banking, trust, advisory or other
business with the Loan Parties and their Affiliates as if such Persons were not
the Administrative Agent hereunder.

 

SECTION 8.9                                        Independent Lenders and
Issuing Bank.  The Lenders each acknowledge that they have decided to enter into
this Agreement and to make the Loans hereunder based on their own analysis of
the transactions contemplated hereby and of the creditworthiness of the Loan
Parties and agrees that the Administrative Agent shall bear no responsibility
therefor.

 

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SECTION 8.10                                 Notice of Transfer.  The
Administrative Agent may deem and treat a Lender party to this Agreement as the
owner of such Lender’s portion of the Loans for all purposes, unless and until,
and except to the extent, an Assignment and Acceptance shall have become
effective as set forth in SECTION 9.4(b).

 

SECTION 8.11                                 Relation Among the Lenders and the
Other Credit Parties.  The Lenders and the other Credit Parties are not partners
or co-venturers, and no Lender or other Credit Party shall be liable for the
acts or omissions of, or (except as otherwise set forth herein in case of the
Administrative Agent) authorized to act for, any other Lender or any other
Credit Party.

 

SECTION 8.12                                 Successor Administrative Agent. 
The Administrative Agent may resign at any time by giving five (5) Business
Days’ written notice thereof to the Lenders and Zale. The Administrative Agent
which the Required Supermajority Lenders have determined to be, and continues to
be, a Defaulting Lender (subject to SECTION 2.31(b)) may be removed by the
Required Supermajority Lenders. Upon any such resignation or removal of the
Administrative Agent, the Required Lenders shall have the right to appoint a
successor Administrative Agent, which so long as there is no Default or Event of
Default existing shall be reasonably satisfactory to Zale (whose consent shall
not be unreasonably withheld or delayed).  If no successor Administrative Agent
shall have been so appointed by the Required Lenders and shall have accepted
such appointment, within 30 days after the retiring Administrative Agent’s
giving of notice of resignation, the retiring Administrative Agent may, on
behalf of the Lenders and the other Credit Parties, appoint a successor
Administrative Agent which shall be (a) a financial institution having a rating
of not less than A or its equivalent by S&P or (b) a Lender capable of complying
with all of the duties of the Administrative Agent hereunder (in the opinion of
the retiring Administrative Agent and as certified to the Lenders in writing by
such successor Administrative Agent) which, in the case of (a) and (b) above, so
long as there is no Default or Event of Default existing shall be reasonably
satisfactory to Zale (whose consent shall not be unreasonably withheld or
delayed). Upon the acceptance of any appointment as Administrative Agent by a
successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Administrative Agent and the retiring Administrative
Agent shall be discharged from its duties and obligations under this Agreement.
After any retiring Administrative Agent’s resignation hereunder as
Administrative Agent, the provisions of this Article VIII shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement.

 

SECTION 8.13                                 Reports and Financial Statements. 
Promptly after receipt thereof from the Borrowers, the Administrative Agent
shall remit to each Lender and, to the extent not previously delivered to such
Person by the Borrowers, copies of (a) all financial statements, compliance
certificates and Borrowing Base Certificates, as required to be delivered by the
Borrowers hereunder, (b) all commercial finance examinations and appraisals of
the Collateral received by the Administrative Agent and (c) such other
information regarding the operations, business affairs and financial condition
of any Borrower, or compliance with the terms of any Loan Document, as any
Lender may reasonably request.

 

SECTION 8.14                                 Agency for Perfection.  Each Credit
Party hereby appoints each other Credit Party as agent for the purpose of
perfecting Liens for the benefit of the Administrative

 

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Agent and the other Credit Parties, in assets which, in accordance with Article
9 of the UCC or any other applicable law of the United States of America or
Canada can be perfected only by possession.  Should any Credit Party (other than
the Administrative Agent) obtain possession of any such Collateral, such Credit
Party shall notify the Administrative Agent thereof, and, promptly upon the
Administrative Agent’s request therefor, shall deliver such Collateral to the
Administrative Agent, or otherwise deal with such Collateral in accordance with
the Administrative Agent’s instructions.

 

SECTION 8.15                                 [Intentionally Omitted].

 

SECTION 8.16                                 Collateral Matters.

 

(a)                                 The Credit Parties hereby irrevocably
authorize the Administrative Agent to release any Lien upon any Collateral: (i)
upon payment and satisfaction in full of all Obligations; (ii) constituting
property being sold, transferred or disposed of in a disposition permitted under
SECTION 6.5 hereof upon receipt by the Administrative Agent of the Net Proceeds
thereof (together with any prepayment fee or Make Whole Amount required by
SECTION 2.17) to the extent required by this Agreement; or (iii) constituting
property of Zale PR or a Canadian Loan Party required to be released by SECTION
2.30.  Except as provided above, the Administrative Agent will not release any
of the Administrative Agent’s Liens without the prior written authorization of
the Applicable Lenders. Upon request by the Administrative Agent or any Borrower
at any time, the Credit Parties will confirm in writing the Administrative
Agent’s authority to release any Liens upon particular types or items of
Collateral pursuant to this SECTION 8.16.

 

(b)                                 Upon at least two (2) Business Days’ prior
written request by the Borrowers, the Administrative Agent shall (and is hereby
irrevocably authorized by the Credit Parties to) execute such documents as may
be necessary to evidence the release of the Liens upon any Collateral described
in SECTION 8.16(a); provided, however, that (i) the Administrative Agent shall
not be required to execute any such document on terms which, in their reasonable
opinion, would, under applicable law, expose the Administrative Agent to
liability or create any obligation or entail any adverse consequence other than
the release of such Liens without recourse or warranty, and (ii) such release
shall not in any manner discharge, affect or impair the Obligations or any Liens
(other than those expressly being released) upon (or obligations of any Loan
Party in respect of) all interests retained by any Loan Party, including
(without limitation) the proceeds of any sale, all of which shall continue to
constitute part of the Collateral.

 

(c)                                  Anything contained in any of the Loan
Documents to the contrary notwithstanding, Loan Parties, Administrative Agent,
each Lender and each other Credit Party hereby agree that (1) no Lender or other
Credit Party (other than the Administrative Agent) shall have any right
individually to realize upon any of the Collateral under any Security Document
or to enforce the Facility Guarantee, it being understood and agreed that all
powers, rights and remedies under the Security Documents and the Facility
Guarantee may be exercised solely by Administrative Agent acting as agent for
and representative of the Lenders and the other Credit Parties in accordance
with the terms thereof, and (2) in the event of a foreclosure by Administrative
Agent on any of the Collateral pursuant to a public or private sale or a sale
under §363 of the Bankruptcy Code, Administrative Agent, any Lender or any other
Credit Party may

 

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be the purchaser of any or all of such Collateral at any such sale and
Administrative Agent, as agent for and representative of the Lenders and the
other Credit Parties (but not any Lender or Lenders or any Credit Party or
Credit Parties (other than Administrative Agent) in its or their respective
individual capacities unless Required Lenders shall otherwise agree in writing)
shall be entitled (at the direction of the Required Lenders), for the purpose of
bidding and making settlement or payment of the purchase price for all or any
portion of the Collateral sold at any such public sale, to use and apply any of
the Obligations as a credit on account of the purchase price for any Collateral
payable by Administrative Agent at such sale.

 

ARTICLE IX
MISCELLANEOUS

 

SECTION 9.1                                        Notices.  Except in the case
of notices and other communications expressly permitted to be given by
telephone, all notices and other communications provided for herein shall be in
writing and shall be delivered by hand or overnight courier service, mailed by
certified or registered mail or sent by telecopy or e-mail, as follows:

 

(a)                                 if to any Borrower (or any other Loan
Party), to such Person at Zale Corporation, 901 W. Walnut Hill Lane, Irving,
Texas 75038-1003 Attention: General Counsel (Telecopy No. (972) 580-4934),
e-mail legal@zalecorp.com, with copies to (i) Zale Corporation, 901 W. Walnut
Hill Lane, Irving, Texas 75038-1003 Attention: Treasurer (Telecopy No. (972)
580-5547), e-mail treasury@zalecorp.com and (ii) Troutman Sanders LLP, 600
Peachtree Street, N.E., Suite 5200, Atlanta, Georgia 30308-2216, Attention:
Hazen H. Dempster, Esq (Telecopy No. (404) 962-6544), e-mail
hazen.dempster@troutmansanders.com;

 

(b)                                 If to the Administrative Agent, to Z
Investment Holdings, LLC, One Embarcadero Center, Suite 3900, San Francisco, CA
94111, Attention:  Josh Olshansky, (Telecopy No. (415) 983-2828), e-mail
jolshansky@goldengatecap.com, with a copy to (i) Z Investment Holdings, LLC, One
Embarcadero Center, Suite 3900, San Francisco, CA 94111, Attention:  Josh Cohen,
(Telecopy No. (415) 983-2884), e-mail jcohen@goldengatecap.com and (ii) Kirkland
& Ellis LLP, 333 South Hope Street, 29th Floor, Los Angeles, California 90071,
Attention: David Nemecek, Esq. (Telecopy No. (213) 808-8107), e-mail
david.nemecek@kirkland.com;

 

(c)                                  If to any Lender, to it at its address (or
telecopy number or e-mail) set forth on the signature pages hereto or on any
Assignment and Acceptance for such Lender.

 

(d)                                 All notices and other communications given
to any party hereto in accordance with the provisions of this Agreement shall be
deemed to have been given on the date of receipt.

 

(e)                                  Unless the Administrative Agent otherwise
prescribes in writing, notices and other communications sent to an e-mail
address shall be deemed received upon the sender’s receipt of an acknowledgement
from the intended recipient (such as by the “return receipt requested” function,
as available, return e-mail or other written acknowledgement), provided that if
such notice or other communication is not sent during the normal business hours
of the recipient, such notice or communication shall be deemed to have been sent
at the opening of business on the next Business Day for the recipient.

 

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(f)                                   Each of the Borrowers may change its
address, telecopier or telephone number for notices and other communications
hereunder by notice to the Administrative Agent. The Administrative Agent may
change its address, telecopier or telephone number for notices and other
communications hereunder by notice to Zale.  Each Lender may change its address,
telecopier or telephone number for notices and other communications hereunder by
notice to Zale and the Administrative Agent. In addition, each Lender agrees to
notify the Administrative Agent from time to time to ensure that the
Administrative Agent has on record (i) an effective address, contact name,
telephone number, telecopier number and electronic mail address to which notices
and other communications may be sent and (ii) accurate wire instructions for
such Lender.

 

SECTION 9.2                                        Waivers; Amendments.

 

(a)                                 No failure or delay by the Administrative
Agent, any Lender or any other Credit Party in exercising any right or power
hereunder or under any other Loan Document shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Administrative Agent, the Lenders
and the other Credit Parties hereunder and under the other Loan Documents are
cumulative and are not exclusive of any rights or remedies that they would
otherwise have. No waiver of any provision of any Loan Document or consent to
any departure by any Loan Party therefrom shall in any event be effective unless
the same shall be permitted by paragraph (b) of this Section, and then such
waiver or consent shall be effective only in the specific instance and for the
purpose for which given. Without limiting the generality of the foregoing, the
making of a Loan shall not be construed as a waiver of any Default or Event of
Default, regardless of whether the Administrative Agent or any Lender may have
had notice or knowledge of such Default or Event of Default at the time.

 

(b)                                 Neither this Agreement nor any other Loan
Document nor any provision hereof or thereof may be waived, amended or modified,
and no consent with respect to any departure by a Loan Party or its Subsidiary
therefrom shall be effective, except, in the case of this Agreement, pursuant to
an agreement or agreements in writing entered into by the Borrowers and the
Required Lenders or, in the case of any other Loan Document, pursuant to an
agreement or agreements in writing entered into by the parties thereto to the
extent set forth therein, in each case with the consent of the Required Lenders,
provided, that no such agreement shall (i) [intentionally omitted], (ii) as to
any Lender, reduce the rate of interest on any Loan, or reduce any fees payable
hereunder, without the written consent of such Lender, (iii) as to any Lender,
postpone the scheduled date of payment of the principal amount of any Loan
(excluding any mandatory prepayment), or any interest thereon, or any fees
payable hereunder, or reduce the amount of, waive or excuse any such payment, or
postpone the Maturity Date, without the written consent of such Lender, (iv)
change any of the provisions of this SECTION 9.2 or the definition of the term
“Required Lenders”, “Required Supermajority Lenders” or any other provision of
any Loan Document specifying the number or percentage of Lenders required to
waive, amend or modify any rights thereunder or make any determination or grant
any consent thereunder, without the written consent of each Lender, and (v)
except for sales described in SECTION 6.5 or as permitted in the Security
Documents, release any material portion of the Collateral from the Liens of the
Security Documents, without the written consent of each Lender;

 

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provided, that the foregoing shall not limit the discretion of the Required
Supermajority Lenders to change the definition of the term “Permitted Asset
Sales”; provided, further, that, notwithstanding anything herein to the
contrary, (A) no such agreement shall amend, modify or otherwise affect the
definition of “Defaulting Lender,” the provisions of SECTION 2.31 or SECTION
8.12 or the rights or duties of the Administrative Agent, without the prior
written consent of the Administrative Agent, (B) no waiver, amendment,
modification or consent shall, unless in writing and signed by the
Administrative Agent in addition to the Lenders required above, affect the
rights or duties of the Administrative Agent under this Agreement or any other
Loan Document and (C) no waiver, amendment, modification or consent shall,
unless in writing signed by the parties thereto, be effective with respect to
the Monitoring Agreement Letter.

 

(c)                                  Notwithstanding anything to the contrary
herein, no Defaulting Lender shall have any right to approve or disapprove any
amendment, waiver or consent hereunder (and any amendment, waiver or consent
which by its terms requires the consent of all Lenders or each affected Lender
may be effected with the consent of the applicable Lenders other than Defaulting
Lenders), except that any waiver, amendment or modification requiring the
consent of all Lenders or each affected Lender that by its terms affects any
Defaulting Lender disproportionately adversely relative to other affected
Lenders shall require the consent of such Defaulting Lender.

 

(d)                                 Notwithstanding anything to the contrary in
this Agreement or any other Loan Document, any Loan Document may be amended and
waived with the consent of the Administrative Agent at the request of the
Borrower without the need to obtain the consent of any other Lender if such
amendment or waiver is delivered in order (i) to comply with local law or advice
of local counsel, (ii) to cure ambiguities or defects or (iii) to cause any Loan
Document to be consistent with this Agreement and the other Loan Documents.

 

(e)                                  Notwithstanding anything to the contrary
contained in this SECTION 9.2, in the event that the Borrowers request that this
Agreement or any other Loan Document be modified, amended or waived in a manner
which would require the consent of the Lenders pursuant to SECTION 9.2(b) and
such amendment is approved by the Required Lenders, but not by the requisite
percentage of the Lenders, the Borrowers, and the Required Lenders shall be
permitted to amend this Agreement without the consent of the Lender or Lenders
which did not agree to the modification or amendment requested by the Borrowers
(such Lender or Lenders, collectively the “Minority Lenders”) to provide for (y)
the increase in Loans by such new or increasing Lender or Lenders, as the case
may be, as may be necessary to repay in full the outstanding Loans (including
principal, interest, fees (including, without limitation, any prepayment fee or
Make Whole Amount due pursuant to SECTION 2.17) and other amounts of the
Minority Lenders immediately before giving effect to such amendment and (z) such
other modifications to this Agreement or the Loan Documents as may be
appropriate and incidental to the foregoing.

 

(f)                                   No notice to or demand on any Loan Party
shall entitle any Loan Party to any other or further notice or demand in the
same, similar or other circumstances. Each holder of a Note shall be bound by
any amendment, modification, waiver or consent authorized as provided herein,
whether or not a Note shall have been marked to indicate such amendment,
modification, waiver or consent and any consent by a Lender, or any holder of a
Note, shall bind any Person

 

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subsequently acquiring a Note, whether or not a Note is so marked. No amendment
to this Agreement shall be effective against the Borrowers unless signed by the
Borrowers or other applicable Loan Party.

 

SECTION 9.3                                        Expenses; Indemnity; Damage
Waiver.

 

(a)                                 The Loan Parties shall jointly and severally
pay (i) all reasonable and documented third-party out-of-pocket expenses
incurred by the Administrative Agent and their Affiliates, including the
reasonable and documented fees, charges and disbursements of counsel for the
Administrative Agent, outside consultants for the Administrative Agent,
appraisers, and for commercial finance examinations, in connection with the
syndication of the credit facilities provided for herein, the preparation and
administration of the Loan Documents or any amendments, modifications or waivers
of the provisions thereof (whether or not the transactions contemplated hereby
or thereby shall be consummated), and (ii) all out-of-pocket expenses incurred
by the Administrative Agent, any Lender or any other Credit Party, including the
fees, charges and disbursements of any counsel and any outside consultants for
the Administrative Agent, any Lender or any other Credit Party, for appraisers,
commercial finance examinations, and environmental site assessments, in
connection with the enforcement or protection of its rights in connection with
the Loan Documents, including its rights under this Section, or in connection
with the Loans made hereunder or the other outstanding Obligations, including
all such reasonable and documented third-party out-of-pocket expenses incurred
during any workout, restructuring or negotiations in respect of such Loans;
provided, that the Lenders who are not the Administrative Agent shall be
entitled to reimbursement for no more than one counsel representing all such
Lenders (other than any reasonably necessary local or foreign counsel or absent
a conflict of interest in which case the Lenders may engage and be reimbursed
for additional counsel).

 

(b)                                 The Loan Parties shall, jointly and
severally, indemnify the Administrative Agent, each Lender, each other Credit
Party and each Related Party of any of the foregoing Persons (each such Person
being called an “Indemnitee”) against, and hold each Indemnitee harmless from,
any and all losses, claims, damages, liabilities and related expenses, including
the reasonable and documented fees, charges and disbursements of any counsel for
any Indemnitee, incurred by or asserted against any Indemnitee arising out of,
in connection with, or as a result of (i) the execution or delivery of any Loan
Document or any other agreement or instrument contemplated hereby, the
performance by the parties to the Loan Documents of their respective obligations
thereunder or the consummation of the transactions contemplated by the Loan
Documents or any other transactions contemplated hereby, (ii) any Loan or the
use of the proceeds therefrom, (iii) any actual or alleged presence or release
of Hazardous Materials on or from any property currently or formerly owned or
operated by any Loan Party or any of its Subsidiaries, or any Environmental
Liability related in any way to any Loan Party or any of its Subsidiaries, (iv)
any claims of, or amounts paid by any Credit Party to, a Blocked Account Bank or
other Person which has entered into a control agreement with any Credit Party
hereunder; or (v) any actual or prospective claim, litigation, investigation or
proceeding relating to any of the foregoing, whether based on contract, tort or
any other theory, whether brought by a third party or by any Borrower or any
other Loan Party or any of the Loan Parties’ directors, shareholders or
creditors, and regardless of whether any Indemnitee is a party thereto,
provided, that such indemnity shall not, as to any Indemnitee, be available to
the extent that such losses,

 

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claims, damages, liabilities or related expenses resulted from the gross
negligence or willful misconduct of such Indemnitee as determined by a final and
non-appealable judgment of a court of competent jurisdiction or with respect to
a claim by one Indemnitee against another Indemnitee (other than disputes
involving the Administrative Agent in its capacity as Administrative Agent (and
the Related Parties of the Administrative Agent)).

 

(c)                                  If, for any reason, the indemnification
under paragraph (b) of this Section is unenforceable as a matter of law or with
respect to a claim by one Indemnitee against another Indemnitee (other than
disputes involving the Administrative Agent in its capacity as Administrative
Agent (and the Related Parties of the Administrative Agent)), then the Loan
Parties shall contribute to the amount paid or payable by such Indemnitee as a
result of such loss, claim, damage or liability to the maximum amount legally
permissible.  The Loan Parties also agree that no Indemnitee shall have any
liability to the Loan Parties, any Person asserting claims on behalf of or in
right of the Loan Parties or any other Person in connection with or as a result
of this Agreement or any agreement or instrument contemplated hereby, the
transactions contemplated by the Loan Documents, any Loan or the use of the
proceeds thereof, except, with respect to an Indemnitee, to the extent that the
losses, claims, damages, liabilities or expenses incurred by the Loan Parties
resulted from the gross negligence, willful misconduct, bad faith or breach of
contractual obligations of such Indemnitee as determined by a final and
non-appealable judgment of a court of competent jurisdiction.

 

(d)                                 To the extent that any Loan Party fails to
pay any amount required to be paid by it to the Administrative Agent under
paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the
Administrative Agent such Lender’s Pro Rata Share of such unpaid amount,
provided, that the unreimbursed expense or indemnified loss, claim, damage,
liability or related expense, as the case may be, was incurred by or asserted
against the Administrative Agent.

 

(e)                                  To the extent permitted by applicable law,
no Loan Party shall assert, and each hereby waives, any claim against any
Indemnitee, on any theory of liability, for special, indirect, consequential or
punitive damages (as opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement or any agreement or
instrument contemplated hereby, the transactions contemplated by the Loan
Documents, any Loan or the use of the proceeds thereof.

 

(f)                                   All amounts due under this Section shall
be payable promptly after written demand therefor.

 

(g)                                  The covenants contained in this SECTION 9.3
shall survive payment or satisfaction in full of all other Obligations.

 

SECTION 9.4                                        Successors and Assigns.

 

(a)                                 The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted hereby, except that no Loan Party may assign or
otherwise transfer any of its rights or obligations hereunder without the prior
written consent of each Lender (and any such attempted assignment or transfer
without such consent shall be null and void). Nothing in this Agreement,
expressed or implied, shall be

 

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construed to confer upon any Person (other than the parties hereto, their
respective successors and assigns permitted hereby and, to the extent expressly
contemplated hereby, the Related Parties of each of the Administrative Agent and
the Lenders) any legal or equitable right, remedy or claim under or by reason of
this Agreement.

 

(b)                                 Any Lender may assign to one or more
assignees all or a portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of the Loans at the time owing
to it), provided, that (i) except in the case of an assignment to a Lender or an
Affiliate of a Lender or any investment vehicle Controlled by the Administrative
Agent, (1) the Administrative Agent must give its prior written consent to such
assignment (which consent shall not be unreasonably withheld or delayed) and (2)
so long as no Default or Event of Default has occurred and is continuing, Zale
shall give its prior written consent to such assignment (which consent shall not
be unreasonably withheld or delayed), (ii) except in the case of an assignment
to a Lender or an Affiliate of a Lender or any investment vehicle Controlled by
the Administrative Agent or an assignment of the entire remaining amount of the
assigning Lender’s Loans, the amount of the Loans of the assigning Lender
subject to each such assignment (determined as of the date the Assignment and
Acceptance with respect to such assignment is delivered to the Administrative
Agent) shall not be less than $1,000,000 unless the Administrative Agent (and,
to the extent no Default or Event of Default has occurred and is continuing,
Zale) otherwise consent, (iii) each partial assignment shall be made as an
assignment of a proportionate part of all the assigning Lender’s rights and
obligations, and (iv) the parties to each assignment shall execute and deliver
to the Administrative Agent an Assignment and Acceptance, together with (unless
waived by the Administrative Agent or unless such assignment is to an Affiliate
of a Lender) a processing and recordation amount of $3,500 (which shall not be
payable or reimbursable by the Borrowers).  Subject to acceptance and recording
thereof pursuant to paragraph (d) of this Section, from and after the effective
date specified in each Assignment and Acceptance the assignee thereunder shall
be a party hereto and, to the extent of the interest assigned by such Assignment
and Acceptance, have the rights and obligations of a Lender under this
Agreement, and the assigning Lender thereunder shall, to the extent of the
interest assigned by such Assignment and Acceptance, be released from its
obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all of the assigning Lender’s remaining rights and
obligations under this Agreement, such Lender shall cease to be a party hereto
but shall continue to be entitled to the benefits of SECTIONS 2.23, 2.26 and
9.3); provided, that except to the extent otherwise expressly agreed by the
affected parties, no assignment by a Defaulting Lender will constitute a waiver
or release of any claim of any party hereunder arising from that Lender’s having
been a Defaulting Lender.  Any assignment or transfer by a Lender of rights or
obligations under this Agreement that does not comply with this paragraph shall
be treated for purposes of this Agreement as a sale by such Lender of a
participation in such rights and obligations in accordance with paragraph (g) of
this Section.

 

(c)                                  Notwithstanding anything to the contrary
herein contained, no such assignment shall be made (i) to the Loan Parties or
any of the Loan Parties’ Subsidiaries or Affiliates, (ii) to any Defaulting
Lender or any of its Subsidiaries or Affiliates, or any Person who, upon
becoming a Lender hereunder, would constitute any of the foregoing Persons
described in this clause (ii), or (iii) to a natural Person.

 

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(d)                                 In connection with any assignment of rights
and obligations of any Defaulting Lender hereunder, no such assignment shall be
effective unless and until, in addition to the other conditions thereto set
forth herein, the parties to the assignment shall make such additional payments
to the Administrative Agent in an aggregate amount sufficient, upon distribution
thereof as appropriate (which may be outright payment, purchases by the assignee
of participations or sub-participations, or other compensating actions,
including funding, with the consent of Zale and the Administrative Agent, the
applicable pro rata share of Loans previously requested but not funded by the
Defaulting Lender, to each of which the applicable assignee and assignor hereby
irrevocably consent), to (x) pay and satisfy in full all payment liabilities
then owed by such Defaulting Lender to the Administrative Agent or any Lender
hereunder (and interest accrued thereon) and (y) acquire (and fund as
appropriate) its full Pro Rata Share of all Loans.  Notwithstanding the
foregoing, in the event that any assignment of rights and obligations of any
Defaulting Lender hereunder shall become effective under applicable law without
compliance with the provisions of this paragraph, then the assignee of such
interest shall be deemed to be a Defaulting Lender for all purposes of this
Agreement until such compliance occurs.

 

(e)                                  The Administrative Agent, acting for this
purpose as an agent of the Loan Parties (and such agency being solely for tax
purposes), shall maintain at one of its offices in San Francisco, California a
copy of each Assignment and Acceptance delivered to it (or the equivalent
thereof in electronic form) and a register for the recordation of the names and
addresses of the Lenders and principal amount of the Loans owing to, each Lender
pursuant to the terms hereof from time to time (the “Register”). The entries in
the Register shall be conclusive absent manifest error and the Loan Parties, the
Administrative Agent and the Lenders may treat each Person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Agreement, notwithstanding notice to the contrary. The
Register shall be available for inspection by the Borrowers and any Lender, at
any reasonable time and from time to time upon reasonable prior notice.

 

(f)                                   Upon its receipt of a duly completed
Assignment and Acceptance executed by an assigning Lender and an assignee, the
processing and recordation amount referred to in paragraph (b) of this Section
and any written consent to such assignment required by paragraph (b) of this
Section, the Administrative Agent shall accept such Assignment and Acceptance
and record the information contained therein in the Register. No assignment
shall be effective for purposes of this Agreement unless it has been recorded in
the Register as provided in this paragraph.

 

(g)                                  Any Lender may sell participations to one
or more banks or other entities (a “Participant”) in all or a portion of such
Lender’s rights and obligations under this Agreement (including all or a portion
of the Loans owing to it), provided, that (i) such Lender’s obligations under
this Agreement shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations
and (iii) the Loan Parties, the Administrative Agent and the Lenders shall
continue to deal solely and directly with such Lender in connection with such
Lender’s rights and obligations under this Agreement. Any agreement or
instrument pursuant to which a Lender sells such a participation in the the
Loans shall provide that such Lender shall retain the sole right to enforce the
Loan Documents and to approve any amendment, modification or waiver of any
provision, or any consent to any departure from such

 

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provision by any Loan Party, of the Loan Documents, provided, that such
agreement or instrument may provide that such Lender will not, without the
consent of the Participant, agree to any amendment, modification, waiver or
consent described in the first proviso to SECTION 9.2(b) that affects such
Participant. Subject to paragraph (i) of this Section, the Loan Parties agree
that each Participant shall be entitled to the benefits of SECTION 2.23, SECTION
2.25 and SECTION 2.26 to the same extent as if it were a Lender and had acquired
its interest by assignment pursuant to paragraph (b) of this Section. To the
extent permitted by law, each Participant also shall be entitled to the benefits
of SECTION 9.9 as though it were a Lender, provided, such Participant agrees to
be subject to SECTION 2.25(c) and SECTION 2.28 as though it were a Lender.

 

(h)                                 Each Lender that sells a participation
shall, acting solely for this purpose as an agent of the Borrowers, maintain a
register on which it enters the name and address of each Participant and the
principal amounts (and stated interest) of each Participant’s interest in the
Loans or other obligations under the Loan Documents (the “Participation
Register”); provided that no Lender shall have any obligation to disclose all or
any portion of the Participation Register (including the identity of any
Participant or any information relating to a Participant’s interest in any Loans
or its other Obligations under any Loan Document) to any Person except to the
extent that such disclosure is necessary to establish that such Loans or other
Obligation is in registered form under Section 5f.103-1(c) of the United States
Treasury Regulations.  The entries in the Participation Register shall be
conclusive absent manifest error, and such Lender shall treat each Person whose
name is recorded in the Participation Register as the owner of such
participation for all purposes of this Agreement notwithstanding any notice to
the contrary.  For the avoidance of doubt, the Administrative Agent (in its
capacity as Administrative Agent) shall have no responsibility for maintaining a
Participation Register.

 

(i)                                     A Participant shall not be entitled to
receive any greater payment under SECTION 2.23 or SECTION 2.26 than the
applicable Lender would have been entitled to receive with respect to the
participation sold to such Participant, unless the sale of the participation to
such Participant is made with Zale’s prior written consent. A Participant that
would be a Foreign Lender if it were a Lender shall not be entitled to the
benefits of SECTION 2.26 unless (i) the Borrowers are notified of the
participation sold to such Participant and such Participant agrees, for the
benefit of the Borrowers, to comply with SECTION 2.26(e) as though it were a
Lender and (ii) such Participant is eligible for complete exemption from the
withholding tax referred to therein, following compliance with SECTION 2.26(e).

 

(j)                                    Any Lender may, without obtaining the
consent of any Loan Party, at any time pledge or assign a security interest in
all or any portion of its rights under this Agreement to secure obligations of
such Lender, including any pledge or assignment to secure obligations to a
Federal Reserve Bank, and this Section shall not apply to any such pledge or
assignment of a security interest, provided, that no such pledge or assignment
of a security interest shall release a Lender from any of its obligations
hereunder or substitute any such pledgee or assignee for such Lender as a party
hereto.

 

SECTION 9.5                                        [Intentionally Omitted].

 

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SECTION 9.6                                        Survival.  All covenants,
agreements, representations and warranties made by the Loan Parties in the Loan
Documents and in the certificates or other instruments delivered in connection
with or pursuant to this Agreement or any other Loan Document shall be
considered to have been relied upon by the other parties hereto and shall
survive the execution and delivery of the Loan Documents and the making of any
Loans, regardless of any investigation made by any such other party or on its
behalf and notwithstanding that the Administrative Agent, any Lender or any
other Credit Party may have had notice or knowledge of any Default or Event of
Default or incorrect representation or warranty at the time any credit is
extended hereunder, and shall continue in full force and effect as long as the
principal of or any accrued interest on any Loan or any fee or any other amount
or Obligation payable under this Agreement or any other Loan Document is
outstanding and unpaid. The provisions of SECTION 2.23, SECTION 2.26 and SECTION
9.3 and Article VIII shall survive and remain in full force and effect
regardless of the consummation of the transactions contemplated hereby, the
repayment of the Loans or the termination of this Agreement or any provision
hereof.  In connection with the termination of this Agreement and the release
and termination of the security interests in the Collateral, the Administrative
Agent on behalf of itself and the other Credit Parties, may require such
indemnities or collateral as it shall reasonably deem necessary or appropriate
to protect the Credit Parties against loss on account of such release and
termination, including, without limitation, with respect to credits previously
applied to the Obligations that may subsequently be reversed or revoked, and any
Obligations that may thereafter arise, including without limitation under
SECTION 9.3.

 

SECTION 9.7                                        Counterparts; Integration;
Effectiveness.  This Agreement may be executed in counterparts (and by different
parties hereto on different counterparts), each of which shall constitute an
original, but all of which when taken together shall constitute a single
contract. This Agreement and the other Loan Documents constitute the entire
contract among the parties relating to the subject matter hereof and supersede
any and all previous agreements and understandings, oral or written, relating to
the subject matter hereof. Except as provided in SECTION 4.1, this Agreement
shall become effective when it shall have been executed by the Administrative
Agent and the Lenders and when the Administrative Agent shall have received
counterparts hereof that, when taken together, bear the signatures of each of
the other parties hereto, and thereafter shall be binding upon and inure to the
benefit of the parties hereto, the other Credit Parties and their respective
successors and assigns. Delivery of an executed counterpart of a signature page
of this Agreement by telecopy or other electronic method of transmission shall
be effective as delivery of a manually executed counterpart of this Agreement.

 

SECTION 9.8                                        Severability.  Any provision
of this Agreement held to be invalid, illegal or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity, illegality or unenforceability without affecting the validity,
legality and enforceability of the remaining provisions hereof; and the
invalidity of a particular provision in a particular jurisdiction shall not
invalidate such provision in any other jurisdiction. Without limiting the
foregoing provisions of this SECTION 9.8, if and to the extent that the
enforceability of any provisions in this Agreement relating to Defaulting
Lenders shall be limited by Debtor Relief Laws, as determined in good faith by
the Administrative Agent, then such provisions shall be deemed to be in effect
only to the extent not so limited.

 

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SECTION 9.9                                        Right of Setoff.  If an Event
of Default shall have occurred and be continuing, each Lender, each Participant,
each other Credit Party and each of their respective Affiliates is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other obligations at any time
owing by such Lender, Participant, other Credit Party or Affiliate to or for the
credit or the account of the Loan Parties against any of and all the obligations
of the Loan Parties now or hereafter existing under this Agreement held by such
Lender, irrespective of whether or not such Lender shall have made any demand
under this Agreement and although such obligations may be unmatured and/or such
Obligations may be otherwise fully secured. The rights of each Lender,
Participant, other Credit Party and Affiliate under this Section are in addition
to other rights and remedies (including other rights of setoff) that such
Lender, Participant, other Credit Party or Affiliate may have.  No Lender will,
or will permit its Participant to, and no other Credit Party (other than the
Administrative Agent) will exercise its rights under this SECTION 9.9 without
the consent of the Administrative Agent or the Required Lenders.  ANY AND ALL
RIGHTS TO REQUIRE ANY AGENT TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO
ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE
BY ANY LENDER, PARTICIPANT, OTHER CREDIT PARTY OR AFFILIATE OF ITS RIGHT OF
SETOFF UNDER THIS SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED.

 

SECTION 9.10                                 Governing Law; Jurisdiction;
Consent to Service of Process

 

(a)                                 EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN
DOCUMENTS AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK INCLUDING, WITHOUT
LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW,
AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

 

(b)                                 Each party to this Agreement irrevocably
consents to service of process in the manner provided for notices in SECTION
9.1. Nothing in this Agreement or any other Loan Document will affect the right
of any party to this Agreement to serve process in any other manner permitted by
law.

 

(c)                                  EACH OF THE LOAN PARTIES, EACH OF THE
AGENTS AND EACH LENDER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE
STATE OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN OR ANY FEDERAL COURT
SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT
IS BROUGHT IN AN INCONVENIENT COURT.

 

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SECTION 9.11                                 Waiver of Jury Trial.  EACH PARTY
HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY
OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION.

 

SECTION 9.12                                 Headings.  Article and Section
headings and the Table of Contents used herein are for convenience of reference
only, are not part of this Agreement and shall not affect the construction of,
or be taken into consideration in interpreting, this Agreement.

 

SECTION 9.13                                 Interest Rate Limitation. 
Notwithstanding anything herein to the contrary, if at any time the interest
rate applicable to any Loan, together with all fees, charges and other amounts
that are treated as interest on such Loan under applicable law (collectively the
“Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) that may
be contracted for, charged, taken, received or reserved by the Lender holding
such Loan in accordance with applicable law, the rate of interest payable in
respect of such Loan hereunder, together with all Charges payable in respect
thereof, shall be limited to the Maximum Rate and, to the extent lawful, the
interest and Charges that would have been payable in respect of such Loan but
were not payable as a result of the operation of this Section shall be cumulated
and the interest and Charges payable to such Lender in respect of other Loans or
periods shall be increased (but not above the Maximum Rate therefor) until such
cumulated amount, together with interest thereon at the Federal Funds Effective
Rate to the date of repayment, shall have been received by such Lender.

 

SECTION 9.14                                 Confidentiality.

 

(a)                                 Each of the Lenders and the Administrative
Agent agrees, on behalf of itself and each of its controlled Affiliates,
directors, officers, employees and representatives, to use reasonable
precautions to keep confidential, in accordance with their customary procedures
for handling confidential information of the same nature and in accordance with
safe and sound practices, any non-public information supplied to it by the Loan
Parties or of their Subsidiaries pursuant to this Agreement that is identified
by such Person as being confidential at the time the same is delivered to such
Lender or the Administrative Agent provided that nothing herein shall limit the
disclosure of any such information (a) after such information shall have become
public other than through a violation of this SECTION 9.14, (b) to the extent
required by statute, rule, regulation or judicial process, (c) to counsel for
any of the Lenders, the Administrative Agent or any other Credit Party, (d) to
bank examiners, the National Association of Insurance Commissioners or any other
U.S. federal or foreign regulatory authority having jurisdiction over any
Lender, the Administrative Agent or any other Credit Party, or to auditors or
accountants,

 

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(e) to the Administrative Agent, any Lender, any other Credit Party or any of
their Related Parties, (f) in connection with any litigation to which the
Administrative Agent, any Lender, any other Credit Party or any of their Related
Parties is a party, or in connection with the enforcement of rights or remedies
hereunder or under any other Loan Document, or (g) to any assignee or
participant (or prospective assignee or participant) so long as such assignee or
participant agrees to be bound by the provisions of this SECTION 9.14.

 

(b)                                 [Intentionally Omitted].

 

SECTION 9.15                                 Additional Waivers.

 

(a)                                 The Obligations are the joint and several
obligations of each Loan Party. To the fullest extent permitted by applicable
law, the obligations of each Loan Party hereunder shall not be affected by (i)
the failure of the Administrative Agent or any other Credit Party to assert any
claim or demand or to enforce or exercise any right or remedy against any other
Loan Party under the provisions of this Agreement, any other Loan Document or
otherwise, (ii) any rescission, waiver, amendment or modification of, or any
release from any of the terms or provisions of, this Agreement, any other Loan
Document, or any other agreement, including with respect to any other Loan Party
of the Obligations under this Agreement, or (iii) the failure to perfect any
security interest in, or the release of, any of the security held by or on
behalf of the Administrative Agent or any other Credit Party.

 

(b)                                 The obligations of each Loan Party hereunder
shall not be subject to any reduction, limitation, impairment or termination for
any reason (other than the indefeasible payment in full in cash of the
Obligations), including any claim of waiver, release, surrender, alteration or
compromise of any of the Obligations, and shall not be subject to any defense or
set-off, counterclaim, recoupment or termination whatsoever by reason of the
invalidity, illegality or unenforceability of the Obligations or otherwise.
Without limiting the generality of the foregoing, the obligations of each Loan
Party hereunder shall not be discharged or impaired or otherwise affected by the
failure of the Administrative Agent or any other Credit Party to assert any
claim or demand or to enforce any remedy under this Agreement, any other Loan
Document or any other agreement, by any waiver or modification of any provision
of any thereof, by any default, failure or delay, willful or otherwise, in the
performance of the Obligations, or by any other act or omission that may or
might in any manner or to any extent vary the risk of any Loan Party or that
would otherwise operate as a discharge of any Loan Party as a matter of law or
equity (other than the indefeasible payment in full in cash of all the
Obligations).

 

(c)                                  To the fullest extent permitted by
applicable law, each Loan Party waives any defense based on or arising out of
any defense of any other Loan Party or the unenforceability of the Obligations
or any part thereof from any cause, or the cessation from any cause of the
liability of any other Loan Party, other than the indefeasible payment in full
in cash of all the Obligations. The Administrative Agent and the other Credit
Parties may, at their election, foreclose on any security held by one or more of
them by one or more judicial or nonjudicial sales, accept an assignment of any
such security in lieu of foreclosure, compromise or adjust any part of the
Obligations, make any other accommodation with any other Loan Party, or exercise
any other right or remedy available to them against any other Loan Party,
without affecting or

 

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impairing in any way the liability of any Loan Party hereunder except to the
extent that all the Obligations have been indefeasibly paid in full in cash.
Pursuant to applicable law, each Loan Party waives any defense arising out of
any such election even though such election operates, pursuant to applicable
law, to impair or to extinguish any right of reimbursement or subrogation or
other right or remedy of such Loan Party against any other Loan Party, as the
case may be, or any security.

 

(d)                                 Upon payment by any Loan Party of any
Obligations, all rights of such Loan Party against any other Loan Party arising
as a result thereof by way of right of subrogation, contribution, reimbursement,
indemnity or otherwise shall in all respects be subordinate and junior in right
of payment to the prior indefeasible payment in full in cash of all the
Obligations. In addition, any indebtedness of any Loan Party now or hereafter
held by any other Loan Party is hereby subordinated in right of payment to the
prior payment in full of the Obligations. None of the Loan Parties will demand,
sue for, or otherwise attempt to collect any such indebtedness. If any amount
shall erroneously be paid to any Loan Party on account of (a) such subrogation,
contribution, reimbursement, indemnity or similar right or (b) any such
indebtedness of any Loan Party, such amount shall be held in trust for the
benefit of the Credit Parties and, subject to the terms of the Intercreditor
Agreement, shall forthwith be paid to the Administrative Agent to be credited
against the payment of the Obligations, whether matured or unmatured, in
accordance with the terms of the Loan Documents.

 

SECTION 9.16                                 Press Releases and Related
Matters.  Each Loan Party consents to the publication by the Administrative
Agent and the other Credit Parties of customary trade advertising material in
tombstone format relating to the financing transactions contemplated by this
Agreement using any Loan Party’s name logo or trademark.  The Administrative
Agent and the other Credit Parties, as applicable, shall provide a draft
reasonably in advance of any advertising material to Zale for review and comment
prior to the publication thereof.  The Administrative Agent and the other Credit
Parties reserve the right to provide to industry trade organizations information
necessary and customary for inclusion in league table measurements.

 

SECTION 9.17                                 Patriot Act; Proceeds of Crime
Act.  Each Lender hereby notifies the Loan Parties that, pursuant to the
requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into
law October 26, 2001)) (the “Act”) (including all applicable “know your
customer” rules, regulations and procedures applicable to such Lender in
Canada), it is required to obtain, verify and record information that identifies
the Loan Parties, which information includes the name and address of each Loan
Party and other information that will allow such Lender to identify such Loan
Party in accordance with the Act.  Each Loan Party is in compliance, in all
material respects, with the Patriot Act and the Proceeds of Crime (Money
Laundering) and Terrorist Financing Act (Canada) (together with any successor
statue, the “Proceeds of Crime Act”).  No part of the proceeds of the Loans will
be used by the Loan Parties, directly or indirectly, for any purpose which would
contravene or breach the Proceeds of Crime Act or for any payments to any
governmental official or employee, political party, official of a political
party, candidate for political office, or anyone else acting in an official
capacity, in order to obtain, retain or direct business or obtain any improper
advantage, in violation of the United States Foreign Corrupt Practices Act of
1977, as amended.

 

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SECTION 9.18                                 Judgment Currency.

 

(a)                                 If, for the purpose of obtaining or
enforcing judgment against any Canadian Loan Party in any court in any
jurisdiction, it becomes necessary to convert into any other currency (such
other currency being hereinafter in this SECTION 9.18 referred to as the
“Judgment Currency”) an amount due in Canadian dollars or Dollars under this
Agreement, the conversion will be made at the rate of exchange prevailing on the
Business Day immediately preceding:

 

(i)                                     the date of actual payment of the amount
due, in the case of any proceeding in the courts of the Province of Ontario or
in the courts of any other jurisdiction that will give effect to such conversion
being made on such date; or

 

(ii)                                  the date on which the judgment is given,
in the case of any proceeding in the courts of any other jurisdiction (the date
as of which such conversion is made pursuant to this SECTION 9.18 being
hereinafter in this SECTION 9.18 referred to as the “Judgment Conversion Date”).

 

(b)                                 If, in the case of any proceeding in the
court of any jurisdiction referred to in SECTION 9.18(a)(i), there is a change
in the rate of exchange prevailing between the Judgment Conversion Date and the
date of actual payment of the amount due, the applicable Canadian Loan Party
will pay such additional amount (if any, but in any event not a lesser amount)
as may be necessary to ensure that the amount paid in the Judgment Currency,
when converted at the rate of exchange prevailing on the date of payment, will
produce the amount of Canadian dollars or Dollars, as the case may be, which
could have been purchased with the amount of Judgment Currency stipulated in the
judgment or judicial order at the rate of exchange prevailing on the Judgment
Conversion Date.

 

(c)                                  Any amount due from any Canadian Loan Party
under the provisions of this SECTION 9.18 will be due as a separate debt and
will not be affected by judgment being obtained for any other amounts due under
or in respect of this Agreement.

 

(d)                                 The term “rate of exchange” in this SECTION
9.18 means:

 

(i)                                     for a conversion of Canadian dollars to
the Judgment Currency, the reciprocal of the official noon rate of exchange
published by the Bank of Canada for the date in question for the conversion of
the Judgment Currency to Canadian dollars;

 

(ii)                                  for a conversion of Dollars to the
Judgment Currency when the Judgment Currency is Canadian dollars, the official
noon rate of exchange published by the Bank of Canada for the date in question
for the conversion of Dollars to Canadian dollars;

 

(iii)                               for a conversion of Dollars to the Judgment
Currency when the Judgment Currency is not Canadian dollars, the effective rate
obtained when a given amount of Dollars is converted to Canadian dollars at the
rate determined pursuant to this SECTION 9.18 and the result thereof is then
converted to the Judgment Currency pursuant to this SECTION 9.18; or

 

(iv)                              if a required rate is not so published by the
Bank of Canada for any such date, the spot rate quoted by Bank of America
(acting through its Canada branch) at Toronto,

 

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Canada at approximately noon (Toronto time) on that date in accordance with its
normal practice for the applicable currency conversion in the wholesale market.

 

SECTION 9.19                                 No Strict Construction.  The
parties hereto have participated jointly in the negotiation and drafting of this
Agreement.  In the event an ambiguity or question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly by the parties
hereto and no presumption or burden of proof shall arise favoring or disfavoring
any party by virtue of the authorship of any provisions of this Agreement.

 

SECTION 9.20                                 No Advisory or Fiduciary
Responsibility.  In connection with all aspects of each transaction contemplated
hereby, the Loan Parties each acknowledge and agree that: (i) the credit
facility provided for hereunder and any related arranging or other services in
connection therewith (including in connection with any amendment, waiver or
other modification hereof or of any other Loan Document) are an arm’s-length
commercial transaction between the Loan Parties, on the one hand, and the Credit
Parties, on the other hand, and each of the Loan Parties is capable of
evaluating and understanding and understands and accepts the terms, risks and
conditions of the transactions contemplated hereby and by the other Loan
Documents (including any amendment, waiver or other modification hereof or
thereof); (ii) in connection with the process leading to such transaction, each
Credit Party is and has been acting solely as a principal and is not the
financial advisor, agent or fiduciary, for the Loan Parties or any of their
respective Affiliates, stockholders, creditors or employees or any other Person;
(iii) none of the Credit Parties has assumed or will assume an advisory, agency
or fiduciary responsibility in favor of the Loan Parties with respect to any of
the transactions contemplated hereby or the process leading thereto, including
with respect to any amendment, waiver or other modification hereof or of any
other Loan Document (irrespective of whether any of the Credit Parties has
advised or is currently advising any Loan Party or any of its Affiliates on
other matters) and none of the Credit Parties has any obligation to any Loan
Party or any of its Affiliates with respect to the transactions contemplated
hereby except those obligations expressly set forth herein and in the other Loan
Documents; (iv) the Credit Parties and their respective Affiliates may be
engaged in a broad range of transactions that involve interests that differ from
those of the Loan Parties and their respective Affiliates, and none of the
Credit Parties has any obligation to disclose any of such interests by virtue of
any advisory, agency or fiduciary relationship; and (v) the Credit Parties have
not provided and will not provide any legal, accounting, regulatory or tax
advice with respect to any of the transactions contemplated hereby (including
any amendment, waiver or other modification hereof or of any other Loan
Document) and each of the Loan Parties has consulted its own legal, accounting,
regulatory and tax advisors to the extent it has deemed appropriate.  Each of
the Loan Parties hereby waives and releases, to the fullest extent permitted by
law, any claims that it may have against each of the Credit Parties with respect
to any breach or alleged breach of agency or fiduciary duty.

 

SECTION 9.21                                 Payments Set Aside.  To the extent
that any payment by or on behalf of the Loan Parties is made to any Credit
Party, or any Credit Party exercises its right of setoff, and such payment or
the proceeds of such setoff or any part thereof is subsequently invalidated,
declared to be fraudulent or preferential, set aside or required (including
pursuant to any settlement entered into by such Credit Party in its discretion)
to be repaid to a trustee, receiver or any other party, in connection with any
proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of
such recovery, the obligation or part thereof originally

 

103

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intended to be satisfied shall be immediately and automatically revived and
continued in full force and effect as if such payment had not been made or such
setoff had not occurred, and (b) the Loan Parties agree to pay to the
Administrative Agent upon demand, and each Lender severally agrees to pay to the
Administrative Agent upon demand its Pro Rata Share (without duplication) of,
any amount so recovered from or repaid by the Administrative Agent, plus
interest thereon from the date of such demand to the date such payment is made
at a rate per annum equal to the Federal Funds Rate from time to time in
effect.  The obligations of the Loan Parties, the Lenders under clause (b) of
the preceding sentence shall survive the payment in full of the Obligations and
the termination of this Agreement and the other Loan Documents.

 

SECTION 9.22                                 Intercreditor Agreement.  The Loan
Parties, the Administrative Agent and the Lenders acknowledge that the exercise
of certain of the Administrative Agent’s rights and remedies hereunder may be
subject to, and restricted by, the provisions of the Intercreditor Agreement.
Except as specified herein, nothing contained in the Intercreditor Agreement
shall be deemed to modify any requirement or shall be deemed to modify any of
the provisions of this Agreement and the other Loan Documents, which, among the
Loan Parties, the Administrative Agent, the Lenders and the other Credit Parties
shall remain in full force and effect.

 

SECTION 9.23                                 Existing Credit Agreement Amended
and Restated; No Novation.  This Agreement shall, except as expressly set forth
herein, supersede the Existing Credit Agreement from and after the Effective
Date with respect to the Existing Loans outstanding under the Existing Credit
Agreement as of the Effective Date.  The parties hereto acknowledge and agree,
however, that except to the extent contemplated hereby with respect to the
prepayment of the Existing Loans by the Effective Date Prepayment (a) this
Agreement and all other Loan Documents executed and delivered herewith do not
constitute a novation, payment and reborrowing or termination of the
“Obligations” under the Existing Credit Agreement and the other Loan Documents
as in effect prior to the Effective Date, (b) such Obligations are in all
respects continuing with only the terms being modified as provided in this
Agreement and the other Loan Documents, (c) the Liens and security interests in
favor of the Administrative Agent for the benefit of the Credit Parties securing
payment of such Obligations are in all respects continuing and in full force and
effect with respect to all Obligations and (d) all references in the other Loan
Documents to the Credit Agreement shall be deemed to refer, without further
amendment, to this Agreement as in effect from time to time.

 

SECTION 9.24                                 Acknowledgment of Prior Obligations
and Continuation Thereof.  Each of Loan Parties (a) consents to the amendment
and restatement of the Existing Credit Agreement by this Agreement; (b)
acknowledges and agrees that (i) the “Obligations” under this Agreement
constitute the “Guaranteed Obligations” as defined under each Facility Guarantee
executed in connection with the Existing Credit Agreement (the “Existing
Guarantees”), and constitute “Obligations” as defined in the Intercompany
Subordination Agreement and (ii) the prior grant or grants of Liens or security
interests in favor of the Administrative Agent or any other Credit Party in its
properties and assets, under each “Security Document” as defined in the Existing
Credit Agreement (the “Existing Security Documents”), shall secure the
Obligations under this Agreement; (c) reaffirms (i) all of its obligations owing
to the Credit Parties arising under the Existing Guarantees and Existing
Security Documents to which it is a party and all of its obligations owing to
the Credit Parties under the Intercompany Subordination Agreement, and (ii) all
prior or concurrent grants of Liens or security interests in favor of the
Administrative

 

104

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Agent or any other Credit Party under each Existing Security Document; provided,
however, that such Liens or security interests shall be as modified (if
applicable) pursuant to the terms of the Loan Documents applicable thereto which
are entered into on the date hereof, if any; and (d) agrees that, except as
expressly amended hereby or unless being amended and restated concurrently
herewith, each of the Existing Guarantees and the Existing Security Documents to
which it is a party is and shall remain in full force and effect.  Each Loan
Party hereby confirms and agrees that all outstanding principal, interest, fees
and other amounts (including such accrued and unpaid principal, interest, fees
and other amounts set forth in the immediately preceding sentence) and other
“Obligations” (as defined in the Existing Credit Agreement) under the Existing
Credit Agreement and the other Existing Loan Documents immediately prior to the
Effective Date shall, to the extent not paid on the Effective Date, from and
after the Effective Date, be, without duplication, Obligations owing and payable
pursuant to this Agreement and the other Loan Documents as in effect from time
to time, shall accrue interest thereon as specified in this Agreement and shall
be secured by the Loan Documents.  Although each Loan Party has been informed of
the matters set forth herein and has acknowledged and agreed to the same, it
understands that no Credit Party shall have any obligation to inform it of such
matters in the future or to seek its acknowledgement or agreement to future
amendments, restatements, supplements or other modifications, and nothing herein
shall create such a duty.

 

[balance of page left intentionally blank; signature pages follow]

 

105

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as a sealed instrument as of
the day and year first above written.

 

 

 

ZALE DELAWARE, INC.,

 

a Delaware corporation,

 

as Borrower

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

ZALE CORPORATION,

 

a Delaware corporation,

 

as Borrower

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

ZGCO, LLC,

 

a Virginia limited liability company,

 

as Borrower

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

TXDC, L.P.,

 

a Texas limited partnership,

 

as Borrower

 

 

 

By:

ZALE DELAWARE, INC.,

 

 

a Delaware corporation,

 

 

its General Partner

 

 

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

[SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT]

 

--------------------------------------------------------------------------------

 

 

ZALE PUERTO RICO, INC.,

 

a Puerto Rico corporation,

 

as Borrower

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

ZALE CANADA CO.,

 

a Nova Scotia unlimited company,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

ZALE CANADA DIAMOND SOURCING INC.,

 

a Nova Scotia limited company,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

ZAP, INC.,

 

a Delaware corporation,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

[SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT]

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA HOLDING LP,

 

a New Brunswick limited partnership,

 

as a Facility Guarantor

 

 

 

By:

Zale International, Inc.,

 

 

a Delaware corporation,

 

 

its General Partner

 

 

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

ZCSC, LLC,

 

a Delaware limited liability company,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Kevin Rupkey

 

Name:

Kevin Rupkey

 

Title:

Vice President

 

 

 

 

 

 

 

ZALE INTERNATIONAL, INC.,

 

a Delaware corporation,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

ZALE EMPLOYEES’ CHILD CARE ASSOCIATION, INC., a Texas corporation,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

[SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT]

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA FINCO 2, INC.,

 

a Nova Scotia limited company,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

FINCO HOLDING LP,

 

a New Brunswick limited partnership,

 

as a Facility Guarantor

 

 

 

By:

Zale Canada Finco 2, Inc.,

 

 

a Nova Scotia limited company,

 

 

its General Partner

 

 

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

FINCO PARTNERSHIP LP,

 

a New Brunswick limited partnership

 

as a Facility Guarantor

 

 

 

By:

Zale Canada Finco 2, Inc.,

 

 

a Nova Scotia limited company,

 

 

its General Partner

 

 

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

 

 

 

 

 

 

ZALE CANADA FINCO, LLC,

 

a Delaware limited liability company,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

[SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT]

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA FINCO 1, INC.,

 

a Nova Scotia limited company,

 

as a Facility Guarantor

 

 

 

 

 

By:

/s/ Elizabeth J. Galloway

 

Name:

Elizabeth J. Galloway

 

Title:

Vice President and Treasurer

 

[SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT]

 

--------------------------------------------------------------------------------

 

 

Z INVESTMENT HOLDINGS, LLC,

 

as Administrative Agent and as a Lender

 

 

 

 

 

By:

/s/ Joshua Olshansky

 

Name:

Joshua Olshansky

 

Title:

Manager

 

[SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT]

 

--------------------------------------------------------------------------------

 

 

WELLS FARGO CREDIT, INC., as a Lender

 

 

 

 

 

By:

/s/ Adam D. Salter

 

Name:

Adam D. Salter

 

Title:

Managing Director

 

[SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT]

 

--------------------------------------------------------------------------------

 

EXHIBIT A

 

FORM OF
ASSIGNMENT AND ACCEPTANCE

 

This Assignment and Acceptance (including Annex 1 hereto, this “Assignment and
Acceptance”) is dated as of the Assignment Effective Date set forth below and is
entered into by and between                                  (the “Assignor”)
and                          (the “Assignee”).  Capitalized terms used but not
defined herein shall have the meanings given to them in the Credit Agreement
identified below (as amended, restated, supplemented or otherwise modified from
time to time, the “Credit Agreement”), receipt of a copy of which is hereby
acknowledged by the Assignee.  The Standard Terms and Conditions set forth in
Annex 1 attached hereto are hereby agreed to and incorporated herein by
reference and made a part of this Assignment and Acceptance as if set forth
herein in full.

 

For an agreed consideration, the Assignor hereby irrevocably sells and assigns
to the Assignee, and the Assignee hereby irrevocably purchases and assumes from
the Assignor, subject to and in accordance with the Standard Terms and
Conditions and the Credit Agreement, as of the Assignment Effective Date
inserted by the Administrative Agent as contemplated below (a) all of the
Assignor’s rights and obligations in its capacity as a Lender under the Credit
Agreement and any other documents or instruments delivered pursuant thereto to
the extent related to the amount and percentage interest identified below of all
of such outstanding rights and obligations of the Assignor under the respective
facilities identified below and (b) to the extent permitted to be assigned under
applicable law, all claims, suits, causes of action and any other right of the
Assignor (in its capacity as a Lender) against any Person, whether known or
unknown, arising under or in connection with the Loan Documents, any other
documents or instruments delivered pursuant thereto or the loan transactions
governed thereby or in any way based on or related to any of the foregoing,
including, but not limited to, contract claims, tort claims, malpractice claims,
statutory claims and all other claims at law or in equity related to the rights
and obligations sold and assigned pursuant to clause (a) above (the rights and
obligations sold and assigned pursuant to clauses (a) and (b) above being
referred to herein collectively as, the “Assigned Interest”).  Such sale and
assignment is without recourse to the Assignor and, except as expressly provided
in this Assignment and Acceptance, without representation or warranty by the
Assignor.

 

1.

Assignor:

 

 

 

 

2.

Assignee:

                                                 [and is [a Lender][an Affiliate
of a Lender][an investment vehicle Controlled by the Administrative Agent]](1)

 

 

 

3.

Borrowers:

Zale Delaware, Inc., a Delaware corporation
Zale Corporation, a Delaware corporation
ZGCO, LLC, a Virginia limited liability company
TXDC, L.P., a Texas limited partnership
Zale Puerto Rico, Inc., a Puerto Rico corporation

 

 

 

4.

Administrative Agent:

Z Investment Holdings, LLC, as the administrative agent under the Credit
Agreement

 

--------------------------------------------------------------------------------

(1) Select as applicable.

 

--------------------------------------------------------------------------------

 

5.

Credit Agreement:

The Amended and Restated Credit Agreement dated as of July 24, 2012 by, among
others, Zale Delaware, Inc., a Delaware corporation, Zale Corporation, a
Delaware corporation, ZGCO, LLC, a Virginia limited liability company, TXDC,
L.P., a Texas limited partnership and Zale Puerto Rico, Inc., a Puerto Rico
corporation (collectively, the “Borrowers”), the Facility Guarantors from time
to time party thereto, the Lenders from time to time party thereto, and Z
Investment Holdings, LLC, as Administrative Agent

 

 

 

6.

Assigned Interest:

 

 

 

 

 

 

Amount of Loans being assigned:

$                          

 

 

 

 

 

 

Percentage interest of Loans being assigned:

         %

 

 

 

 

 

 

After giving effect to the assignment contemplated by this Assignment and
Acceptance:

 

 

 

 

 

 

Assignor’s Loans:

$                             

 

 

 

 

 

 

Assignee’s Loans:

$                             

 

 

 

 

[7.

Trade Date:                                                      ] (2)

 

 

Assignment Effective Date:                              , 201  .

 

The terms set forth in this Assignment and Acceptance are hereby agreed by the
undersigned as of the Assignment Effective Date:

 

 

ASSIGNOR

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

ASSIGNEE

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

--------------------------------------------------------------------------------

(2) To be completed if the Assignor and the Assignee intend that the minimum
assignment amount is to be determined as of the Trade Date.

 

--------------------------------------------------------------------------------

 

 

[Consented to and] (3)(4) Accepted by:

 

 

 

Z INVESTMENT HOLDINGS, LLC,
as Administrative Agent

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

(3) In accordance with Section 9.4 of the Credit Agreement, except in the case
of an assignment to a Lender or an Affiliate of a Lender or any investment
vehicle Controlled by the Administrative Agent, the Administrative Agent must
give its prior written consent to such assignment (which consent shall not be
unreasonably withheld or delayed).

(4) In accordance with Section 9.4 of the Credit Agreement, for any assignment
that is less than $1,000,000, except in the case of an assignment to a Lender or
an Affiliate of a Lender or any investment vehicle Controlled by the
Administrative Agent or an assignment of the entire remaining amount of the
assigning Lender’s Loans, the Administrative Agent must give its prior written
consent to such assignment.

 

--------------------------------------------------------------------------------

 

 

[Consented to:

 

 

 

ZALE CORPORATION

 

 

 

 

By:

 

 

 

Name:

 

 

Title: ](5) (6)

 

--------------------------------------------------------------------------------

(5) In accordance with Section 9.4 of the Credit Agreement, except in the case
of an assignment to a Lender or an Affiliate of a Lender or any investment
vehicle Controlled by the Administrative Agent, so long as no Default or Event
of Default has occurred and is continuing, Zale must give its prior written
consent to such assignment (which consent shall not be unreasonably withheld or
delayed).

(6) In accordance with Section 9.4 of the Credit Agreement, for any assignment
that is less than $1,000,000, except in the case of an assignment to a Lender or
an Affiliate of a Lender or any investment vehicle Controlled by the
Administrative Agent or an assignment of the entire remaining amount of the
assigning Lender’s Loans, so long as no Default or Event of Default has occurred
and is continuing, Zale must give its prior written consent to such assignment.

 

--------------------------------------------------------------------------------

 

ANNEX 1

 

Reference is made to that certain Amended and Restated Credit Agreement (as
amended, restated, supplemented or otherwise modified from time to time, the
“Credit Agreement”) dated as of July 24, 2012 by, among others, ZALE
DELAWARE, INC., a Delaware corporation (“Zale Delaware”), ZALE CORPORATION, a
Delaware corporation (“Zale”), ZGCO, LLC, a Virginia limited liability company
(“ZGCO”), TXDC, L.P., a Texas limited partnership (“TXDC”), and ZALE PUERTO
RICO, INC., a Puerto Rico corporation (“Zale Puerto Rico”, and together with
Zale Delaware, Zale, ZGCO, and TXDC, the “Borrowers”), the Facility Guarantors
from time to time party thereto, the Lenders from time to time party thereto,
and Z INVESTMENT HOLDINGS, LLC, as Administrative Agent.  Capitalized terms used
but not defined herein shall have the meanings given to them in the Assignment
and Acceptance to which this Annex 1 is attached (the “Assignment and
Acceptance”) or if not defined therein, in the Credit Agreement.

 

STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ACCEPTANCE

 

1.             Representations and Warranties.

 

1.1          Assignor.  The Assignor (a) represents and warrants that (i) it is
the legal and beneficial owner of the Assigned Interest, (ii) the Assigned
Interest is free and clear of any lien, encumbrance or other adverse claim and
(iii) it has full power and authority, and has taken all action necessary, to
execute and deliver this Assignment and Acceptance and to consummate the
transactions contemplated hereby; and (b) assumes no responsibility with respect
to (i) any statements, warranties or representations made in or in connection
with the Credit Agreement or any other Loan Document, (ii) the execution,
legality, validity, enforceability, genuineness, sufficiency or value of the
Loan Documents or any collateral thereunder, (iii) the financial condition of
the Borrowers, any of their respective Subsidiaries or Affiliates or any other
Person obligated in respect of any Loan Document or (iv) the performance or
observance by the Borrowers, any of their respective Subsidiaries or Affiliates
or any other Person of any of their respective obligations under the Loan
Document.

 

1.2          Assignee.  The Assignee (a) represents and warrants that (i) it has
full power and authority, and has taken all action necessary, to execute and
deliver this Assignment and Acceptance and to consummate the transactions
contemplated hereby and to become a Lender under the Credit Agreement, (ii) from
and after the Assignment Effective Date, it shall be bound by the provisions of
the Credit Agreement as a Lender thereunder and, to the extent of the Assigned
Interest, shall have the obligations of a Lender thereunder, and (iii) it has
received a copy of the Credit Agreement, together with copies of the most recent
financial statements delivered pursuant to Section 5.1 thereof, as applicable,
and such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into this Assignment and
Acceptance and to purchase the Assigned Interest on the basis of which it has
made such analysis and decision independently and without reliance on the
Administrative Agent or any other Lender, and (iv) if it is a Foreign Lender,
attached to the Assignment and Acceptance is any documentation required to be
delivered by it pursuant to the terms of the Credit Agreement, duly completed
and executed by the Assignee; and (b) agrees that (i) it will, independently and
without reliance on the Administrative Agent, the Assignor or any other Lender,
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under the Loan Documents, and (ii) it will perform in accordance with their
terms all of the obligations which by the terms of the Loan Documents are
required to be performed by it as a Lender.

 

--------------------------------------------------------------------------------

 

2.             Joint Representations of Assignor and Assignee.  The Assignor and
Assignee each hereby represent and warrant that: (i) this assignment is
(a) being made to a Lender or an Affiliate of a Lender or any investment vehicle
Controlled by the Administrative Agent, (b) is an assignment of the entire
remaining amount of the Assignor’s Loans, (c) is an assignment of not less than
$1,000,000, or (d) the Administrative Agent (and, to the extent no Default or
Event of Default has occurred and is continuing, Zale)  has otherwise consented
above; and (ii) to the extent required under the Credit Agreement, the Assignor
and Assignee have delivered, or caused to be delivered, a processing and
recordation amount of $3,500 to the Administrative Agent.

 

3.             Payments.  From and after the Assignment Effective Date, the
Administrative Agent shall make all payments in respect of the Assigned Interest
(including payments of principal, interest, fees and other amounts) to the
Assignee whether such amounts have accrued prior to, on or after the Assignment
Effective Date.  The Assignor and the Assignee shall make all appropriate
adjustments in payments by the Administrative Agent for periods prior to the
Assignment Effective Date or with respect to the making of this assignment
directly between themselves.

 

4.             General Provisions.  This Assignment and Acceptance shall be
binding upon, and inure to the benefit of the parties hereto and their
respective successors and assigns.  This Assignment and Acceptance may be
executed in any number of counterparts, which together shall constitute one
instrument.  Delivery of any executed counterpart of a signature page of this
Assignment and Acceptance by telecopy or other electronic method of transmission
shall be effective as delivery of a manually executed counterpart of this
Assignment and Acceptance.  This Assignment and Acceptance shall be governed by,
and construed and enforced in accordance with, the laws of the State of New
York, including, without limitation, Sections 5-1401 and 5-1402 of the General
Obligations Law.

 

[remainder of page intentionally left blank]

 

--------------------------------------------------------------------------------

 

EXHIBIT B

 

FORM OF [AMENDED AND RESTATED](1) NOTE

 

as of                       , 20   

 

 

FOR VALUE RECEIVED, the undersigned, ZALE DELAWARE, INC. , a Delaware
corporation (“Zale Delaware”), ZALE CORPORATION, a Delaware corporation
(“Zale”), ZGCO, LLC, a Virginia limited liability company (f/k/a DDCC, Inc., a
Delaware corporation) (“ZGCO”), TXDC, L.P., a Texas limited partnership (“TXDC”)
and ZALE PUERTO RICO, INC. (“Zale Puerto Rico”, and together with Zale Delaware,
Zale, ZGCO, and TXDC, the “Borrowers”), hereby jointly and severally promise to
pay to the order of [                                                        ]
(the “Lender”) at the Administrative Agent’s office at One Embarcadero Center,
Suite 3900, San Francisco, CA 94111:

 

(a)           prior to or on the Termination Date the principal amount of
                                                                         
Dollars ($                            ) or, if less, the aggregate unpaid
principal amount of Loans advanced by the Lender to the Borrowers pursuant to
the Amended and Restated Credit Agreement dated as of July 24, 2012 (as amended,
modified, supplemented or restated and in effect from time to time, the “Credit
Agreement”), by, among others, the Borrowers, the Facility Guarantors from time
to time party thereto, the Lender, the other Lenders from time to time party
thereto, and Z Investment Holdings, LLC, as Administrative Agent;

 

(b)           the principal outstanding hereunder from time to time at the times
provided in the Credit Agreement; and

 

(c)           interest on the principal balance hereof from time to time
outstanding under the Credit Agreement through and including the Termination
Date, fees, expenses, and costs at the times and at the rates provided in the
Credit Agreement.

 

[This Amended and Restated Note (“Note”) amends and restates that certain Note
dated as of May 10, 2010 issued by Zale in favor of the Lender (the “Original
Note”).] This Note [(“Note”)] evidences borrowings under and has been issued by
the Borrowers in accordance with the terms of the Credit Agreement. The Lender
and any holder hereof is entitled to the benefits of the Credit Agreement, the
Security Documents and the other Loan Documents, and may enforce the agreements
of the Borrowers contained therein, and any holder hereof may exercise the
respective remedies provided for thereby or otherwise available in respect
thereof, all in accordance with the respective terms thereof. All capitalized
terms used in this Note and not otherwise defined herein shall have the same
meanings herein as in the Credit Agreement.

 

The Borrowers irrevocably authorize the Lender to make or cause to be made, at
or about the time of the Borrowing or continuation of the Loan or at the time of
receipt of any payment of principal of this Note, an appropriate notation on the
grid attached to this Note, or the continuation of such grid, or any other
similar record, including computer records, reflecting the making or
continuation of such Loan or (as the case may be) the receipt of such payment.
The outstanding amount of the Loans set forth on the grid attached to this Note,
or the continuation of such grid, or any other similar record, including
computer records, maintained by the Lender with respect to any Loans shall be
prima facie evidence of the principal amount thereof owing and unpaid to the
Lender, but the failure to record, or any error in so recording, any such amount
on any such grid, continuation or other record shall not limit or otherwise

 

--------------------------------------------------------------------------------

(1)  Retain bracketed language to the extent applicable.

 

--------------------------------------------------------------------------------

 

affect the obligation of the Borrowers hereunder or under the Credit Agreement
and the other Loan Documents to make payments of principal of and interest on
this Note when due.

 

Subject to any repayment/prepayment fee or Make Whole Amount required by
Section 2.17 of the Credit Agreement, the Borrowers have the right in certain
circumstances and the obligation under certain other circumstances to prepay the
whole or part of the principal of this Note on the terms and conditions
specified in the Credit Agreement.

 

If any one or more of the Events of Default shall occur, the entire unpaid
principal amount of this Note and all of the unpaid interest accrued thereon may
become or be declared due and payable in the manner and with the effect provided
in the Credit Agreement.

 

No delay or omission on the part of the Lender or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Lender or such holder, nor shall any delay, omission or
waiver on any one occasion be deemed a bar or waiver of the same or any other
right on any further occasion.

 

The Borrowers and every endorser and guarantor of this Note or the obligation
represented hereby waives presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance,
default or enforcement of this Note, and assents to any extension or
postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or Person primarily or secondarily liable.

 

[NO NOVATION.  THE BORROWERS CONSENT TO THE AMENDMENT AND RESTATEMENT OF THE
ORIGINAL NOTE BY THIS NOTE.  THE BORROWERS HEREBY CONFIRM AND AGREE THAT, TO THE
EXTENT NOT PAID ON THE EFFECTIVE DATE, ALL OUTSTANDING PRINCIPAL, INTEREST, FEES
AND OTHER AMOUNTS AND OBLIGATIONS UNDER THE ORIGINAL NOTE IMMEDIATELY PRIOR TO
THE DATE HEREOF, FROM AND AFTER THE DATE HEREOF, BE, WITHOUT DUPLICATION,
PRINCIPAL, INTEREST, FEES AND AMOUNTS AND OBLIGATIONS OWING AND PAYABLE PURSUANT
TO THIS NOTE AND SHALL ACCRUE INTEREST THEREON AS SPECIFIED IN THIS NOTE, EXCEPT
AS MODIFIED HEREBY OR BY INSTRUMENTS EXECUTED IN CONNECTION HEREWITH.  THIS NOTE
DOES NOT EXTINGUISH THE OBLIGATIONS FOR THE PAYMENT OF MONEY OUTSTANDING UNDER
THE ORIGINAL NOTE OR DISCHARGE OR RELEASE THE OBLIGATIONS UNDER THE ORIGINAL
NOTE.  NOTHING HEREIN CONTAINED SHALL BE CONSTRUED AS A SUBSTITUTION OR NOVATION
OF THE OBLIGATIONS OUTSTANDING UNDER THE ORIGINAL NOTE OR INSTRUMENTS SECURING
THE SAME, WHICH SHALL REMAIN IN FULL FORCE AND EFFECT, EXCEPT AS MODIFIED HEREBY
OR BY INSTRUMENTS EXECUTED CONCURRENTLY HEREWITH.  NOTHING EXPRESSED OR IMPLIED
IN THIS NOTE SHALL BE CONSTRUED AS A RELEASE OR OTHER DISCHARGE OF ANY BORROWER
FROM ANY OF ITS OBLIGATIONS OR LIABILITIES UNDER THE ORIGINAL NOTE.]

 

THIS NOTE AND THE OBLIGATIONS OF THE BORROWERS HEREUNDER SHALL FOR ALL PURPOSES
BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK INCLUDING, WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF
THE GENERAL OBLIGATIONS LAW. THE BORROWERS AGREE THAT ANY SUIT FOR THE
ENFORCEMENT OF THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK
SITTING IN THE BOROUGH OF MANHATTAN OR ANY FEDERAL COURT SITTING THEREIN AND
CONSENT TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF
PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWERS BY MAIL AT THE ADDRESS
SPECIFIED IN SECTION 9.1 OF

 

2

--------------------------------------------------------------------------------

 

THE CREDIT AGREEMENT. THE BORROWERS HEREBY WAIVE ANY OBJECTION THAT THEY MAY NOW
OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH
SUIT IS BROUGHT IN AN INCONVENIENT COURT.

 

[Signature Page Follows]

 

3

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each of the undersigned has caused this Note to be signed on
its behalf by its duly authorized officer as of the day and year first above
written.

 

 

ZALE DELAWARE, INC.,

 

a Delaware corporation

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

ZALE CORPORATION,

 

a Delaware corporation

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

ZGCO, LLC,

 

a Virginia limited liability company

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

TXDC, L.P.,

 

a Texas limited partnership

 

 

 

 

By:

ZALE DELAWARE, INC.,

 

 

a Delaware corporation

 

 

Its General Partner

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

ZALE PUERTO RICO, INC.,

 

a Puerto Rico corporation

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

Signature Page to [Amended and Restated] Note

 

--------------------------------------------------------------------------------

 

Exhibit C-1

 

[FORM OF]

 

SECURITY AGREEMENT

 

dated as of

 

May 10, 2010,

 

among

 

ZALE CORPORATION,

 

THE SUBSIDIARIES IDENTIFIED HEREIN

 

and

 

Z INVESTMENT HOLDINGS, LLC,

 

as Administrative Agent

 

--------------------------------------------------------------------------------

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

ARTICLE I

 

Definitions

 

SECTION 1.01.

Definition of Terms Used Herein

1

SECTION 1.02.

Definition of Certain Terms Used Herein

1

SECTION 1.03.

Rules of Interpretation

7

 

 

 

ARTICLE II

 

Security Interest

 

 

 

SECTION 2.01.

Security Interest

7

SECTION 2.02.

No Assumption of Liability

8

 

 

 

ARTICLE III

 

Representations and Warranties

 

SECTION 3.01.

Title and Authority

8

SECTION 3.02.

Filings

8

SECTION 3.03.

Validity and Priority of Security Interest

9

SECTION 3.04.

Absence of Other Liens

9

SECTION 3.05.

Bailees, Warehousemen, Etc.

9

SECTION 3.06.

Intellectual Property

10

SECTION 3.07.

Commercial Tort Claims

10

SECTION 3.08.

Pledged Collateral

10

SECTION 3.09.

Nature of Certain Consignment Filings

11

 

 

 

ARTICLE IV

 

Covenants

 

SECTION 4.01.

Change of Name; Location of Collateral; Records; Place of Business

12

SECTION 4.02.

Periodic Certification

13

SECTION 4.03.

Protection of Security

13

SECTION 4.04.

Further Assurances

13

SECTION 4.05.

Taxes; Encumbrances

13

SECTION 4.06.

Assignment of Security Interest

14

SECTION 4.07.

Continuing Obligations of the Grantors

15

SECTION 4.08.

Limitation on Modification of Accounts

15

SECTION 4.09.

Insurance

15

SECTION 4.10.

Legend

15

 

--------------------------------------------------------------------------------

 

TABLE OF CONTENTS, con’t.

 

 

 

Page

 

 

 

SECTION 4.11.

Intellectual Property

16

SECTION 4.12.

Pledged Collateral

18

SECTION 4.13.

Commercial Tort Claims

18

SECTION 4.14.

Securities Accounts

19

 

 

 

ARTICLE V

 

Collections

 

SECTION 5.01.

Deposit and Concentration Accounts

19

SECTION 5.02.

Power of Attorney

20

SECTION 5.03.

No Obligation to Act

21

 

 

 

ARTICLE VI

 

Remedies

 

SECTION 6.01.

Remedies upon Default

22

SECTION 6.02.

Grant of Non-Exclusive License

24

SECTION 6.03.

Application of Proceeds

25

SECTION 6.04.

Voting Rights

25

SECTION 6.05.

ULC Shares

27

SECTION 6.06.

Disposition of Pledged Collateral by Administrative Agent

27

 

 

 

ARTICLE VII

 

Perfection of Security Interest

 

SECTION 7.01.

Perfection by Filing

28

SECTION 7.02.

Other Perfection, etc.

28

SECTION 7.03.

Savings Clause

29

 

 

 

ARTICLE VIII

 

Miscellaneous

 

SECTION 8.01.

Notices

29

SECTION 8.02.

Security Interest Absolute

29

SECTION 8.03.

Suretyship Waivers by Grantors

29

SECTION 8.04.

Marshalling

30

SECTION 8.05.

Survival of Agreement

30

SECTION 8.06.

Binding Effect; Several Agreement; Assignments

30

SECTION 8.07.

Administrative Agent’s Fees and Expenses; Indemnification

30

 

ii

--------------------------------------------------------------------------------

 

TABLE OF CONTENTS, con’t.

 

 

 

Page

 

 

 

SECTION 8.08.

Governing Law

31

SECTION 8.09.

Waivers; Amendment

31

SECTION 8.10.

WAIVER OF JURY TRIAL

32

SECTION 8.11.

Severability

32

SECTION 8.12.

Counterparts

32

SECTION 8.13.

Headings

32

SECTION 8.14.

Jurisdiction; Consent to Service of Process

33

SECTION 8.15.

Termination; Release of Collateral

33

SECTION 8.16.

Additional Grantors

34

SECTION 8.17.

Intercreditor Agreement

34

SECTION 8.18.

Grantor Consent

34

 

iii

--------------------------------------------------------------------------------

 

Schedules

 

 

 

 

 

Schedule 1

Intellectual Property

 

Schedule 2

Initial Subsidiary Grantors

 

Schedule 3

Commercial Tort Claims

 

Schedule 4

Pledged Collateral

 

Schedule 5

Deposit Accounts and Concentration Accounts

 

 

 

 

Annexes

 

 

 

 

 

Annex 1

Form of Perfection Certificate

 

Annex 2

Form of Supplement

 

Annex 3

Form of Patent, Industrial Design and Trademark Security Agreement

 

Annex 4

Form of Copyright Security Agreement

 

Annex 5

Form of Pledged Collateral Addendum

 

 

--------------------------------------------------------------------------------

 

SECURITY AGREEMENT (this “Agreement”) dated as of May 10, 2010, by and among
each of: ZALE CORPORATION, a Delaware corporation (the “Borrower”), the
Subsidiaries from time to time party hereto and Z INVESTMENT HOLDINGS, LLC, in
its capacity as administrative agent (in such capacity, the “Administrative
Agent”) for the Credit Parties.

 

W I T N E S S E T H:

 

Reference is made to the Credit Agreement of even date herewith (as such may be
amended, modified, supplemented or restated hereafter, the “Credit Agreement”)
by and among (i) the Borrower, (ii) the Lenders party thereto and (iii) the
Administrative Agent, as administrative agent.

 

The Lenders have agreed to make Loans to the Borrower pursuant to, and upon the
terms and subject to the conditions specified in, the Credit Agreement.  The
obligations of the Lenders to make Loans are conditioned upon, among other
things, the execution and delivery by the Grantors of this Agreement to secure
the Secured Obligations (as defined herein).

 

Accordingly, the Grantors and the Administrative Agent, on behalf of itself and
each other Credit Party (and each of their respective successors or assigns),
hereby agree as follows:

 

ARTICLE I

 

Definitions

 

SECTION 1.01.  Definition of Terms Used Herein.  Unless the context otherwise
requires, all capitalized terms used but not defined herein shall have the
meanings set forth in the Credit Agreement, and all references to the UCC shall
mean the Uniform Commercial Code as in effect from time to time in the State of
New York.

 

SECTION 1.02.  Definition of Certain Terms Used Herein.  As used herein, the
following terms shall have the following meanings:

 

“ABL Agent” shall have the meaning given that term in the Intercreditor
Agreement.

 

“Account Debtor” shall have the meaning given that term in the UCC.

 

“Accounts” shall mean all accounts, accounts receivable, receivables and rights
to payment (whether or not earned by performance) arising out of the sale,
lease, license, assignment or other disposition of Inventory and/or arising out
of the use of a credit or charge card or information contained on or used with
that card.

 

“Administrative Agent’s Rights and Remedies” shall have the meaning assigned to
such term in Section 8.09(a).

 

--------------------------------------------------------------------------------

 

“Blocked Account Agreement” shall have the meaning assigned to such term in
Section 5.01.

 

“Chattel Paper” shall have the meaning given that term in the UCC.

 

“Collateral” shall mean the following assets of each Grantor: (a) all Accounts,
(b) all Inventory, (c) all Deposit Accounts, Concentration Accounts and cash,
(d) all Documents, (e) all Chattel Paper, (f) all Instruments, General
Intangibles, Supporting Obligations and Letter-of-Credit Rights, (g) all Goods,
(h) Equipment and Fixtures, (i) all Investment Property, (j) all Securities
Accounts and Commodity Accounts, (k) all Commercial Tort Claims, (l) all
Intellectual Property, (m) all other personal property not otherwise described
above, whether tangible or intangible and wherever located (except for any
property expressly excluded in this definition of “Collateral”), (n) all
policies and certificates of insurance and all insurance proceeds, refunds and
premium rebates, including proceeds of fire and credit insurance, with respect
to any of the foregoing, (o) all books, records and information relating to any
of the foregoing, and all rights of access to such books, records and
information, (p) all liens, guaranties, rights, remedies and privileges
pertaining to any of the foregoing ((a) through (o)), including the right of
stoppage in transit, and (q) any of the foregoing whether now owned or now due,
or in which any Grantor has an interest, or hereafter acquired, arising or to
become due, or in which any Grantor obtains an interest, and all products,
Proceeds, substitutions and accessions of or to any of the foregoing. 
Notwithstanding the foregoing, the term “Collateral” shall expressly exclude
(i) any Trademark applications filed on an “intent to use” basis until the
earlier of the filing of a statement of use thereon or the first use in commerce
thereof, (ii) any Inventory or other Goods that have been delivered to any
Grantor on a consignment basis to the extent that the rights of such consignor
have been properly perfected under applicable law, (iii) any property to the
extent that such grant of a security interest is prohibited by any valid
enforceable law or regulation applicable thereto, requires a consent not
obtained of any Governmental Authority pursuant to such law or regulation or is
prohibited by, or constitutes a breach or default under or results in the
termination of or gives rise to a right on the part of the parties thereto other
than such Grantor to terminate (or materially modify) or requires any consent
not obtained under, any contract, license, agreement, instrument or other
document evidencing or giving rise to such property, except to the extent that
such law or regulation or the term in such contract, license, agreement,
instrument or other document providing for such prohibition, breach, default or
right of termination or modification or requiring such consent is ineffective
under applicable law, provided, however, that such security interest shall
attach immediately at such time as the condition causing such prohibition,
breach, default or right of termination or modification or requiring such
consent, as the case may be, shall be remedied and, to the extent severable,
shall attach immediately to any portion of such contract, license, agreement,
instrument or other document that does not result in any of such consequences,
including any proceeds of such contract, license, agreement, instrument or other
document, (iv) the Equity Interests of Dobbins Jewelers, Inc., (v) the Equity
Interests of Jewel Re-Insurance Ltd. in excess of 65% of the issued and
outstanding shares of any class of Equity Interests of such Subsidiary, (vi) the
voting Equity Interests of ZC Partnership, LP in excess of 65% of the general
partnership Equity Interests of such Subsidiary and (vii) any property

 

2

--------------------------------------------------------------------------------

 

that the Administrative Agent shall determine in its reasonable discretion in
which the cost (including adverse tax consequences) of obtaining a security
interest would be excessive in relation to the value of the security to be
afforded thereby; provided, further, that in all events, all Proceeds,
substitutions or replacements of the foregoing shall constitute “Collateral”
hereunder.

 

“Commercial Tort Claim” shall have the meaning given that term in the UCC.

 

“Commodity Account” shall have the meaning given that term in the UCC.

 

“Concentration Account” shall mean all Deposit Accounts and accounts maintained
by the Grantors into which more than one Deposit Account deposits or transfers
funds.

 

“Copyright Licenses” shall mean exclusive Licenses in respect of Copyrights
where a Grantor is a licensee.

 

“Copyrights” shall mean, with respect to any Person, all of such Person’s right,
title and interest, now or hereafter acquired, in and to the following:  (a) all
copyrights, rights and interests in copyrights, works protectable by copyright,
copyright registrations and copyright applications; (b) all extensions and
renewals of any of the foregoing; (c) all income, royalties, damages, and
payments now or hereafter due and/or payable under any of the foregoing,
including damages or payments for past, present or future infringements for any
of the foregoing; (d) the right to sue for past, present and future
infringements of any of the foregoing; and (e) all rights corresponding to any
of the foregoing.

 

“Credit Agreement” shall have the meaning assigned to such term in the recitals
to this Agreement.

 

“Deposit Account” shall mean any checking or other demand deposit account into
which proceeds of Collateral are deposited.

 

“Distribution” shall have the meaning assigned to such term in Section 6.04(a).

 

“Documents” shall have the meaning given that term in the UCC.

 

“Electronic Chattel Paper” shall have the meaning given that term in the UCC.

 

“Entitlement Holder” shall have the meaning given that term in the UCC.

 

“Entitlement Orders” shall have the meaning given that term in the UCC.

 

“Equipment” shall have the meaning given that term in the UCC.

 

3

--------------------------------------------------------------------------------

 

“General Intangibles” shall have the meaning given that term in the UCC, and
shall also include all: Payment Intangibles; rights to payment for credit
extended; deposits; amounts due to any Grantor; credit memoranda in favor of any
Grantor, tax refunds and abatements; insurance refunds and premium rebates;
records; customer lists; telephone numbers; causes of action; judgments;
payments under any settlement or other agreement; licenses; internet addresses
and domain names; computer software programs; trade names, trademarks, service
marks, together with all goodwill connected with and symbolized by any of the
foregoing; all other general intangible property of any Grantor in the nature of
Intellectual Property, and any warranty claims.

 

“Goods” shall have the meaning given that term in the UCC.

 

“Grantor” shall mean, collectively, the Borrower, the Subsidiaries of the
Borrower identified as Grantors on Schedule 2 attached hereto and each other
Subsidiary of the Borrower that becomes a party to this Agreement as a Grantor
after the Closing Date pursuant to Section 6.11 of the Credit Agreement;
provided that if a Subsidiary is released from its obligations as a Grantor,
such Subsidiary shall cease to be a Grantor hereunder effective upon such
release.

 

“Industrial Designs” shall mean, with respect to any Person, all of such
Person’s right, title and interest, now owned or hereafter acquired, in and to:
(a) any and all Canadian industrial designs and industrial design applications;
(b) all income, royalties, damages, claims, and payments now or hereafter due or
payable under and with respect thereto, including damages and payments for past,
present and future infringements thereof; (c) all rights to sue for past,
present and future infringements thereof; and (d) all rights corresponding to
any of the foregoing.

 

“Instruments” shall have the meaning given that term in Article 9 of the UCC.

 

“Intellectual Property” shall mean all intellectual property and similar
property of every kind and nature now owned or hereafter acquired by any Person,
including inventions, designs, Patents, Copyrights, Trademarks, Industrial
Designs, Licenses, trade secrets, confidential or proprietary technical and
business information, know-how, show-how or other data or information and all
related documentation, and all additions and improvements to any of the
foregoing.

 

“Inventory” shall include “inventory” as defined in the UCC and also all:
(a) Goods which (i) are leased by a Person as lessor, (ii) are held by a Person
for sale or lease or to be furnished under a contract of service, (iii) are
furnished by a Person under a contract of service, or (iv) consist of raw
materials, work in process or materials used or consumed in a business;
(b) Goods of said description in transit; (c) Goods of said description which
are returned, repossessed and rejected; (d) packaging and shipping materials
related to any of the foregoing; and (e) all Documents which represent any of
the foregoing.

 

4

--------------------------------------------------------------------------------

 

“Investment Property” shall have the meaning given that term in the UCC and
shall also include all Pledged Collateral, Pledged Operating Agreements and
Pledged Partnership Agreements.

 

“IP Agreements” shall have the meaning assigned to such term in Section 3.02.

 

“License” shall mean, with respect to any Person, all of such Person’s right,
title and interest in and to (a) any and all licensing agreements or similar
arrangements in and to any other Person’s Intellectual Property, (b) all income,
royalties, damages, claims and payments now or hereafter due or payable under
and with respect thereto, including damages and payments for past, present and
future breaches thereof, and (c) all rights to sue for past, present and future
breaches thereof.

 

“Material Trademark” shall mean any Trademark of a Grantor that is material to
the conduct of such Grantor’s business.

 

“Patents” shall mean, with respect to any Person, all of such Person’s right,
title and interest, now owned or hereafter acquired, in and to:  (a) any and all
patents and patent applications or Canadian industrial design registrations and
applications; (b) all inventions and improvements described and claimed therein,
including the right to make, use and/or sell the inventions disclosed or claimed
therein; (c) all reissues, divisions, continuations, renewals, extensions, and
continuations-in-part thereof; (d) all income, royalties, damages, claims, and
payments now or hereafter due or payable under and with respect thereto,
including damages and payments for past, present and future infringements
thereof; (e) all rights to sue for past, present and future infringements
thereof; and (f) all rights corresponding to any of the foregoing.

 

“Payment Intangible” shall have the meaning given that term in the UCC, and
shall also refer to any General Intangible under which the Account Debtor’s
primary obligation is a monetary obligation.

 

“Perfection Certificate” shall mean a certificate substantially in the form of
Annex 1 hereto, completed and supplemented with the schedules and attachments
contemplated thereby, and duly executed by a Financial Officer of each of the
Grantors.

 

“Pledged Collateral” shall mean all Pledged Interests and Pledged Notes.

 

“Pledged Collateral Addendum” shall mean a Pledged Collateral Addendum
substantially in the form of Annex 5 to this Agreement.

 

“Pledged Companies” shall mean each Person listed on Schedule 4 hereto as a
“Pledged Company”, together with each other Person, all or a portion of whose
Equity Interests, is acquired or otherwise owned by a Grantor after the Closing
Date.

 

“Pledged Interests” shall mean all of each Grantor’s right, title and interest
in and to all of the Equity Interests now or hereafter owned by such Grantor
(other than such Equity Interests in Dobbins Jewelers, Inc.), regardless of
class or designation,

 

5

--------------------------------------------------------------------------------

 

including in each of the Pledged Companies owned by it, and all substitutions
therefor and replacements thereof, all proceeds thereof and all rights relating
thereto, also including any certificates representing the Equity Interests, the
right to receive any certificates representing any of the Equity Interests, all
warrants, options, share appreciation rights and other rights, contractual or
otherwise in respect thereof, and the right to receive dividends, distributions
of income, profits, surplus, or other compensation by way of income or
liquidating distributions, in cash or in kind, and all cash, instruments, and
other property from time to time received, receivable, or otherwise distributed
in respect of or in addition to, in substitution of, on account of, or in
exchange for any or all of the foregoing.

 

“Pledged Notes” shall mean with respect to any Grantor, all of the debt
securities now or hereafter owned by such Grantor and the promissory notes
evidencing such debt securities.

 

“Pledged Operating Agreements” shall mean all of each Grantor’s rights, powers,
and remedies under the limited liability company operating agreements of each of
the Pledged Companies that are limited liability companies.

 

“Pledged Partnership Agreements” shall mean all of each Grantor’s rights,
powers, and remedies under the partnership agreements of each of the Pledged
Companies that are partnerships.

 

“Proceeds” shall have the meaning given that term in the UCC.

 

“Secured Obligations” shall mean the Obligations as defined in the Credit
Agreement.

 

“Securities Account” shall have the meaning given that term in the UCC.

 

“Securities Intermediary” shall have the meaning given that term in the UCC.

 

“Security Entitlement” shall have the meaning given that term in the UCC.

 

“Security Interest” shall have the meaning assigned to such term in Section 2.01
of this Agreement.

 

“Supporting Obligation” shall have the meaning given that term in the UCC.

 

“Term Priority Collateral” shall have the meaning given that term in the
Intercreditor Agreement.

 

“Trademarks” shall mean, with respect to any Person, all of such Person’s right,
title and interest, now owned or hereafter acquired, in and to the following: 
(a) all trademarks (including service marks), trade names, trade dress, trade
styles and other source indicators and the registrations and applications for
registration thereof and the

 

6

--------------------------------------------------------------------------------

 

goodwill of the business symbolized by the foregoing; (b) all licenses of the
foregoing, whether as licensee or licensor; (c) all renewals of the foregoing;
(d) all income, royalties, damages and payments now or hereafter due or payable
with respect thereto, including damages, claims and payments for past and future
infringements thereof; (e) all rights to sue for past, present and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (f) all rights corresponding to any
of the foregoing.

 

“ULC” shall mean an unlimited company under the Companies Act (Nova Scotia).

 

“ULC Pledgor” has the meaning assigned to such term in Section 6.05.

 

“ULC Shares” shall mean shares of stock or other Equity Interests of one or more
ULCs.

 

“Zale Canada” shall mean Zale Canada Co., a Nova Scotia company.

 

SECTION 1.03.  Rules of Interpretation.  The rules of interpretation specified
in Section 1.02 of the Credit Agreement shall be applicable to this Agreement.

 

ARTICLE II

 

Security Interest

 

SECTION 2.01.  Security Interest.  As security for the payment or performance,
as the case may be, in full of the Secured Obligations, each Grantor hereby
bargains, mortgages, pledges, hypothecates, and (except in the case of ULC
Shares) transfers and assigns to the Administrative Agent, its successors and
assigns, for the benefit of the Credit Parties, and hereby grants to the
Administrative Agent, its successors and assigns, for the benefit of the Credit
Parties, a security interest in, all of such Grantor’s right, title and interest
in, to and under the Collateral, wherever located, whether now owned or
hereafter acquired (the “Security Interest”).  Without limiting the foregoing,
each Grantor hereby designates the Administrative Agent as such Grantor’s true
and lawful attorney, exercisable by the Administrative Agent whether or not an
Event of Default exists, with full power of substitution, at the Administrative
Agent’s option, to file one or more financing statements or continuation
statements, to file with the United States Patent and Trademark Office, United
States Copyright Office, Canadian Intellectual Property Office or Canadian
Industrial Design Office (or any successor office or any similar office in any
other country) such documents as may be necessary or advisable, or to sign other
documents for the purpose of perfecting, confirming, continuing or protecting
the Security Interest granted by each Grantor, without the signature of any
Grantor (each Grantor hereby appointing the Administrative Agent as such
Person’s attorney to sign such Person’s name to any such document, whether or
not an Event of Default exists), and naming any Grantor or the Grantors as
debtors and the Administrative Agent as secured party, provided that the
Administrative Agent shall have the same rights as the applicable Grantor’s true
and lawful attorney referred to above to

 

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enforce the Security Interest granted by each Grantor, but only if an Event of
Default exists.

 

SECTION 2.02.  No Assumption of Liability.  The Security Interest is granted as
security only and shall not subject the Administrative Agent or any other Credit
Party to, or in any way alter or modify, any obligation or liability of any
Grantor with respect to or arising out of the Collateral.

 

ARTICLE III

 

Representations and Warranties

 

The Grantors jointly and severally represent and warrant to the Administrative
Agent and the Credit Parties that:

 

SECTION 3.01.  Title and Authority.  Each Grantor has good and valid rights in,
and title to, the Collateral with respect to which it has purported to grant a
Security Interest hereunder and has full power and authority to grant to the
Administrative Agent the Security Interest in such Collateral pursuant hereto
and to execute, deliver and perform its obligations in accordance with the terms
of this Agreement, without the consent or approval of any other Person other
than any consent or approval which has been obtained.

 

SECTION 3.02.  Filings.  The Perfection Certificate has been duly prepared,
completed and executed, and the information set forth therein is correct and
complete in all material respects.  Fully executed UCC and PRUCC financing
statements, other than fixture filings, or other appropriate filings, recordings
or registrations containing a description of the Collateral have been, or will
be, filed in each governmental, municipal or other office as is necessary to
publish notice and protect the validity of, and to establish a legal, valid and
perfected security interest in favor of the Administrative Agent (for the
benefit of the Credit Parties) with respect to all Collateral in which the
Security Interest may be perfected by filing, recording or registration pursuant
to the UCC or the PRUCC in the United States (or any political subdivision
thereof) and its territories and possessions, and no further or subsequent
filing, refiling, recording, rerecording, registration or reregistration (other
than filings required to be made in the United States Patent and Trademark
Office, the United States Copyright Office, the Canadian Intellectual Property
Office and the Canadian Industrial Design Office in order to perfect the
Security Interest in Collateral consisting of United States and Canadian
Patents, Industrial Designs, Trademarks, Copyrights and Copyright Licenses, as
the case may be) is necessary in any such jurisdiction, except as provided under
applicable law with respect to the filing of continuation statements.  A fully
executed Patent, Industrial Design and Trademark Security Agreement, in the form
attached as Annex 3 hereto, and a fully executed Copyright Security Agreement,
in the form attached as Annex 4 hereto (such agreements being collectively
referred to as the “IP Agreements”), covering the United States and Canadian
registered Patents, Industrial Designs, United States and Canadian registered
Trademarks and United States and Canadian registered Copyrights (and
applications for any of the foregoing) and Copyright

 

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Licenses, as applicable, have been delivered to the Administrative Agent for
recording by the United States Patent and Trademark Office and the United States
Copyright Office pursuant to 35 U.S.C. § 261, 15 U.S.C. § 1060 or
17 U.S.C. § 205 and the regulations thereunder, and the Canadian Intellectual
Property Office and the Canadian Industrial Design Office, as applicable, as is
necessary to protect the validity of and to establish a legal, valid and
perfected security interest in favor of the Administrative Agent (for the
benefit of the Credit Parties) in respect of all Collateral consisting of
Intellectual Property in which a security interest may be perfected by filing,
recording or registration in the United States or Canada (or any political
subdivision, province or territory thereof) and its territories and possessions,
and no further or subsequent filing, refiling, recording, rerecording,
registration or reregistration is necessary (other than such actions as are
necessary to perfect the Security Interest with respect to any Intellectual
Property acquired or developed after the date hereof).

 

SECTION 3.03.  Validity and Priority of Security Interest.  The Security
Interest constitutes (a) a legal and valid security interest in all of the
Collateral securing the payment and performance of the Secured Obligations, and
(b) subject to the filings described in Section 3.02 above, a perfected security
interest in all of the Collateral, to the extent that perfection of the Security
Interest can be achieved by filing or recording a financing statement or
analogous document in the United States or Canada (or any political subdivision,
province or territory thereof) and its territories and possessions pursuant to
the UCC or the PRUCC or by recording of the IP Agreements with the United States
Patent and Trademark Office, the United States Copyright Office, the Canadian
Intellectual Property Office and the Canadian Industrial Design Office, as
applicable.  The Security Interest is and shall be prior to any other Lien on
any of the Collateral, subject only to those Liens expressly permitted pursuant
to Section 7.02 of the Credit Agreement.

 

SECTION 3.04.  Absence of Other Liens.  The Collateral is owned by the Grantors
free and clear of any Lien, except for Liens expressly permitted pursuant to
Section 7.02 of the Credit Agreement.  Except as provided herein and in the
Credit Agreement, disclosed in the Perfection Certificate, no Grantor has filed
or consented to the filing of (a) any financing statement or analogous document
under the UCC or the PRUCC or any other applicable law covering any Collateral,
(b) any assignment in which any Grantor assigns any Collateral or any security
agreement or similar instrument covering any Collateral with the United States
Patent and Trademark Office, the United States Copyright Office, the Canadian
Intellectual Property Office or the Canadian Industrial Design Office, or (c)
any assignment in which any Grantor assigns any Collateral or any security
agreement or similar instrument covering any Collateral with any foreign
governmental, municipal or other office, which financing statement or analogous
document, assignment, security agreement or similar instrument is still in
effect, except, in each case, for Liens expressly permitted pursuant to Section
7.02 of the Credit Agreement.

 

SECTION 3.05.  Bailees, Warehousemen, Etc.  Except as otherwise disclosed in the
Perfection Certificate, no Inventory or Equipment of any Grantor is in the care
or custody of any third party or stored or entrusted with a bailee or other
third party

 

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and none shall hereafter be placed under such care, custody, storage or
entrustment except for Equipment and Inventory (i) out for repair or replacement
in the ordinary course of business, (ii) being shipped, or in-transit, from a
supplier or to a customer or between suppliers in the ordinary course of
business or (iii) in the possession of suppliers, subcontractors and licensees
in the ordinary course of business, unless the applicable Grantor complies with
Section 4.01(c).

 

SECTION 3.06.  Intellectual Property.  Schedule 1 hereto sets forth, as of the
date hereof, (i) all of each Grantor’s registered Patents and Patent
applications (and for greater certainty, registered Industrial Designs and
Industrial Design applications), including the name of the registered owner,
type, registration or application number and the expiration date (if already
registered) of each such Patent and Patent application owned by any Grantor,
(ii) all of each Grantor’s registered Industrial Designs and Industrial Design
applications, including the name of the registered owner, registration or
application number and the expiration date (if already registered) of such
industrial design and industrial design application owned by any Grantor, (iii)
all of each Grantor’s registered Trademarks and Trademark applications,
including the name of the registered owner, the registration or application
number and the expiration date (if already registered) of each such Trademark
and Trademark application owned by any Grantor and (iv) all of each Grantor’s
registered Copyrights, Copyright applications and Copyright Licenses, including
the name of the registered owner, title and, if applicable, the registration
number of each such Copyright, Copyright application or Copyright License owned
by any Grantor.

 

SECTION 3.07.  Commercial Tort Claims.  Schedule 3 hereto sets forth, as of the
date hereof, each Commercial Tort Claim in respect of which a complaint or a
counterclaim has been filed by any Grantor seeking damages in an amount of
$1,000,000 or more.

 

SECTION 3.08.  Pledged Collateral.

 

(a)           Each Grantor is the holder of record and the legal and beneficial
owner, free and clear of all Liens other than the Security Interest granted to
the Administrative Agent for the benefit of the Credit Parties hereunder and
Permitted Encumbrances, of the Pledged Collateral indicated on Schedule 4 as
being owned by such Grantor and any Pledged Collateral owned by such Grantor and
acquired after the Closing Date.

 

(b)           All of the Pledged Collateral constituting Pledged Interests is
duly authorized, validly issued, fully paid and nonassessable (provided that
Pledged Interests which are ULC Shares will be assessable in accordance with the
provisions of the Companies Act (Nova Scotia)) and such Pledged Interests
constitute or will constitute the percentage of the issued and outstanding
Equity Interests of the Pledged Companies of each applicable Grantor identified
on Schedule 4, any Pledged Collateral Addendum or any Supplement to this
Agreement.  All of the Pledged Collateral constituting Pledged Notes is duly
authorized, validly issued and delivered by the issuer of such Pledged Note and
is the legal, valid and binding obligation of such issuer and such issuer is not
in

 

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default thereunder.  Each Grantor has the right and requisite authority to
pledge the Pledged Collateral pledged by such Grantor to the Administrative
Agent as provided herein.

 

(c)           All actions necessary to perfect or establish the first priority
of the Administrative Agent’s Liens (subject to Permitted Encumbrances) in the
Pledged Collateral, and the proceeds thereof, have been duly taken, (A) upon the
execution and delivery of this Agreement; (B)(i) upon the taking of possession
by the Administrative Agent of any certificates constituting the Pledged
Interests, to the extent such Pledged Interests are represented by certificates,
together with undated powers endorsed in blank by the applicable Grantor and
(ii) upon the taking of possession by the Administrative Agent of any promissory
notes constituting the Pledged Notes, together with undated powers endorsed in
blank by the applicable Grantor; and (C) upon the filing of Uniform Commercial
Code financing statements in the applicable jurisdiction for such Grantor with
respect to the Pledged Interests of such Grantor that are not represented by
certificates.  Each Grantor has delivered to and deposited with the
Administrative Agent (or, with respect to any Pledged Collateral created or
obtained after the Closing Date, will deliver and deposit in accordance with
Section 4.12 hereof) all certificates representing the Pledged Interests owned
by such Grantor to the extent such Pledged Interests are represented by
certificates, all promissory notes representing the Pledged Notes owned by such
Grantor, and undated powers endorsed in blank with respect to such certificates
or promissory notes.

 

(d)           None of the Pledged Collateral owned or held by such Grantor has
been issued or transferred in violation of any securities registration,
securities disclosure, or similar laws of any jurisdiction to which such
issuance or transfer may be subject.

 

SECTION 3.09.  Nature of Certain Consignment Filings.  Each of the Liens and
other filings set forth on Schedule 7.02 of the Credit Agreement which purports
to cover goods delivered to a Grantor on a consignment basis (a) evidences
arrangements entered into with such Grantor and its trade vendors in the
ordinary course of business, intended by such Grantor and vendor to be a “true”
consignment, (b) does not encumber any assets of such Grantor other than the
consigned goods to which it relates and the proceeds thereof, to the extent
owing to the vendor and (c) secures solely the obligation of such Grantor to
either return such consigned goods or pay the purchase price for such consigned
goods, in each case pursuant to a written consignment agreement on terms
substantially similar to those set forth in the Grantors’ standard form of
consignment agreement as in effect on or about the Closing Date (with the
exception of any such Liens and other filings made by any trade vendors in
connection with or relating to that certain Amendment to Existing Agreements
dated as of March 3, 2010 by and among Zale Delaware, Inc., TXDC, L.P., Rosy
Blue Jewelry, Inc. and Rosy Blue, Inc., relating to consigned goods for such
Grantor’s 2010 Spring season) , a copy of which has been provided to the
Administrative Agent.

 

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ARTICLE IV

 

Covenants

 

SECTION 4.01.  Change of Name; Location of Collateral; Records; Place of
Business.  (a)  Each Grantor agrees to furnish to the Administrative Agent (i)
prompt written notice of any change in (A) any Grantor’s trade name used to
identify it in the conduct of its business or in the ownership of its
properties, (B) any office in which it maintains books or records relating to
Collateral owned by it and having a value in excess of $1,000,000 or any office
or facility at which Collateral owned by it and having a value in excess of
$1,000,000 is located (including the establishment of any such new office or
facility), other than, in each case, (I) retail Store locations or (II)
Equipment and Inventory (1) out for repair or replacement in the ordinary course
of business, (2) being shipped, or in transit, from a supplier or to a customer
or between suppliers in the ordinary course of business or (3) in the possession
of suppliers, subcontractors and licensees in the ordinary course of business,
or (C) the acquisition by any Grantor of any property for which additional
filings or recordings are necessary to perfect and maintain the Administrative
Agent’s Security Interest therein, and (ii) prior written notice of any change
in (A) any Grantor’s corporate or partnership name or the location of any
Grantor’s chief executive office or its principal place of business, (B) any
Grantor’s identity or corporate or partnership structure or (C) any Grantor’s
jurisdiction of incorporation, amalgamation or formation, Federal Taxpayer
Identification Number or state organizational number or similar taxation or
organization number; provided, however, that if any of the occurrences referred
to in clauses (i) and (ii) shall occur with respect to Zale Canada or any of its
assets, Zale Canada shall furnish the Administrative Agent with 30 days prior
written notice thereof.  The Borrower also agrees promptly to notify the
Administrative Agent if any material portion of the Collateral is damaged,
destroyed or lost, stolen or otherwise unaccounted for.  Notwithstanding the
foregoing, if any Grantor’s Federal Taxpayer Identification Number or
organizational identification number assigned to it by its state of organization
is changed by the applicable Governmental Authority, such Grantor will furnish
to the Administrative Agent prompt written notice of any such change not later
than 10 days from the date such Grantor has been notified by such Governmental
Authority of such change.  Each Grantor agrees not to effect or permit any
change referred to in the preceding sentence unless all necessary filings have
been made under the UCC or the PRUCC or otherwise in order for the
Administrative Agent to continue at all times following such change to have a
valid, legal and perfected first priority security interest in all of the
Collateral.  Each of the Grantors organized under the laws of Canada
acknowledges and agrees that, except as disclosed on the Perfection Certificate,
such Grantor does not currently, nor will it in the future, have any assets that
constitute Collateral located in the United States.

 

(b)           Each Grantor agrees to maintain, or cause to be maintained, at its
own cost and expense, such complete and accurate records with respect to the
Collateral owned by it as is consistent with its current practices, but in any
event to include complete accounting records indicating all payments and
proceeds received with respect to any part of the Collateral.

 

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(c)           Each Grantor agrees that, to the extent it acquires any additional
leased warehouses or distribution centers after the Closing Date, the Grantors
shall provide the Administrative Agent with prompt notice thereof, and shall
obtain a waiver and collateral access agreement in form and substance reasonably
satisfactory to the Administrative Agent.

 

SECTION 4.02.  Periodic Certification.  Each year, at the time of delivery of
annual financial statements with respect to the preceding Fiscal Year pursuant
to Section 6.01(a) of the Credit Agreement, each Grantor shall deliver, or cause
to be delivered, to the Administrative Agent a certificate executed by a
Financial Officer of such Grantor confirming that there has been no change in
the information contained in the Perfection Certificate since the date of the
Perfection Certificate delivered on the Closing Date or the date of the most
recent certificate delivered pursuant to this Section 4.02 or, if any such
change has occurred, specifying such revised information.

 

SECTION 4.03.  Protection of Security.  Each Grantor shall, at its own cost and
expense, take any and all actions reasonably necessary to defend title to the
Collateral against all Persons and to defend the Security Interest of the
Administrative Agent in the Collateral and the priority thereof against any Lien
not expressly permitted pursuant to Section 7.02 of the Credit Agreement.

 

SECTION 4.04.  Further Assurances.  Each Grantor agrees, at its own expense, to
execute, acknowledge, deliver and cause to be filed all such further instruments
and documents and to take all such actions as the Administrative Agent may from
time to time reasonably request to assure, preserve, protect and perfect the
Security Interest and the rights and remedies created hereby, including the
payment of any fees and taxes required in connection with the execution and
delivery of this Agreement, the granting of the Security Interest and the filing
of any financing statements or other documents in connection herewith or
therewith.  If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any promissory note, document, draft,
chattel paper or instrument in an amount in excess of $1,000,000, such note,
document, draft, chattel paper or instrument shall be immediately pledged and
delivered to the Administrative Agent, duly endorsed in a manner satisfactory to
the Administrative Agent.

 

SECTION 4.05.  Taxes; Encumbrances.  The Administrative Agent may discharge past
due taxes, assessments, charges, fees or Liens (other than Liens permitted under
the Credit Agreement), at any time levied or placed on the Collateral, and may
take any other action which the Administrative Agent may deem necessary or
desirable to repair, maintain or preserve any of the Collateral to the extent
any Grantor fails to do so as required by the Credit Agreement or this
Agreement, and each Grantor jointly and severally agrees to reimburse the
Administrative Agent on demand for any payment made or any expense incurred by
the Administrative Agent pursuant to the foregoing authorization; provided that,
so long as no Event of Default shall have occurred and be continuing, if such
taxes, assessments, charges, fees or Liens are being contested in good faith and
by appropriate proceedings by such Grantor, the Administrative Agent shall
consult with such Grantor before making any such payment or taking any such
action;

 

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provided, however, that the Administrative Agent shall not have any obligation
to undertake any of the foregoing and shall have no liability on account of any
action so undertaken except to the extent that any liability on account of any
such action resulted from the gross negligence, bad faith or breach of the
contractual obligations of the Administrative Agent; provided further that the
making of any such payments or the taking of any such action by the
Administrative Agent shall not be deemed to constitute a waiver of any Default
or Event of Default arising from the Grantor’s failure to have made such
payments or taken such action.  Nothing in this Section 4.05 shall be
interpreted as excusing any Grantor from the performance of any covenants or
other promises of any Grantor with respect to taxes, assessments, charges, fees,
Liens, security interests or other encumbrances and maintenance as set forth
herein or in the other Loan Documents.

 

SECTION 4.06.  Assignment of Security Interest.  (a)  If at any time any Grantor
shall take a security interest in any property of an Account Debtor or any other
Person to secure payment and performance of an Account and the property securing
payment and performance of the Account has a value in excess of $1,000,000, such
Grantor shall promptly assign such security interest to the Administrative
Agent.  Such assignment need not be filed of public record unless necessary to
continue the perfected status of the security interest against creditors of, and
transferees from, the Account Debtor or other Person granting the security
interest.

 

(b)           To the extent that any Grantor is a beneficiary under any written
letter of credit relating to the Collateral in an amount in excess of $1,000,000
now or hereafter issued in favor of such Grantor, such Grantor shall deliver
such letter of credit to the Administrative Agent.  The Administrative Agent
shall from time to time, at the request and expense of such Grantor, make such
arrangements with such Grantor as are in the Administrative Agent’s reasonable
judgment necessary and appropriate so that such Grantor may make any drawing to
which such Grantor is entitled under such letter of credit, without impairment
of the Administrative Agent’s perfected security interest in such Grantor’s
rights to proceeds of such letter of credit or in the actual proceeds of such
drawing.  At the Administrative Agent’s request, such Grantor shall, for any
letter of credit relating to the Collateral in an amount in excess of
$1,000,000, whether or not written, now or hereafter issued in favor of such
Grantor as beneficiary, execute and deliver to the issuer and any confirmer of
such letter of credit an assignment of proceeds form, in favor of the
Administrative Agent and satisfactory to the Administrative Agent and such
issuer or (as the case may be) such confirmer, requiring the proceeds of any
drawing under such letter of credit to be paid directly to the Administrative
Agent.

 

(c)           If any amount payable under or in connection with any of the
Collateral shall become evidenced by any Electronic Chattel Paper or any
“transferable record” (as that term is defined in Section 201 of the Federal
Electronic Signatures in Global and National Commerce Act, or in Section 16 of
the Uniform Electronic Transactions Act, as in effect in any relevant
jurisdiction) in an amount in excess of $250,000, other than such Electronic
Chattel Paper and transferable records listed in the Perfection Certificate
attached hereto, the Grantor acquiring such Electronic Chattel Paper or
transferable record shall promptly notify the Administrative Agent thereof and
shall take such action as the Administrative Agent may reasonably request to
vest in the

 

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Administrative Agent “control” of such Electronic Chattel Paper under
Section 9-105 of the UCC, under Section 201 of the Federal Electronic Signatures
in Global and National Commerce Act or under Section 16 of the Uniform
Electronic Transactions Act, as the case may be, as in effect in such
jurisdiction, of such transferable record.

 

SECTION 4.07.  Continuing Obligations of the Grantors.  Each Grantor shall
remain liable to observe and perform all the conditions and obligations to be
observed and performed by it under each contract, agreement or instrument
relating to the Collateral, all in accordance with the terms and conditions
thereof, except where the failure to do so would not have a Material Adverse
Effect, and each Grantor jointly and severally agrees to indemnify and hold
harmless the Administrative Agent and the Credit Parties from and against any
and all liability for such performance.

 

SECTION 4.08.  Limitation on Modification of Accounts.  None of the Grantors
will, without the Administrative Agent’s prior written consent, grant any
extension of the time of payment of any of the Accounts, compromise, compound or
settle the same for less than the full amount thereof, release, wholly or
partly, any Person liable for the payment thereof or allow any credit or
discount whatsoever thereon, other than extensions, releases, credits,
discounts, compromises or settlements granted or made in the ordinary course of
business and consistent with its current practices.

 

SECTION 4.09.  Insurance.  Each Grantor hereby irrevocably makes, constitutes
and appoints the Administrative Agent (and all officers, employees or agents
designated by the Administrative Agent) as such Grantor’s true and lawful agent
(and attorney-in-fact), exercisable after the occurrence and during the
continuance of any Event of Default, for the purpose of making, settling and
adjusting claims in respect of Collateral under policies of insurance, endorsing
the name of such Grantor on any check, draft, instrument or other item of
payment for the proceeds of such policies of insurance and for making all
determinations and decisions with respect thereto.  In the event that any
Grantor at any time or times shall fail to obtain or maintain any of the
policies of insurance required hereby or to pay any premium in whole or part
relating thereto, the Administrative Agent may, without waiving or releasing any
obligation or liability of the Grantors hereunder or any Default or Event of
Default, in its sole discretion, obtain and maintain such policies of insurance
and pay such premium and take any other actions with respect thereto as the
Administrative Agent deems advisable.  All sums disbursed by the Administrative
Agent in connection with this Section 4.09, including reasonable attorneys’
fees, court costs, expenses and other charges relating thereto, shall be
payable, upon demand, by the Grantors to the Administrative Agent and shall be
additional Secured Obligations secured hereby.

 

SECTION 4.10.  Legend.  At the request of the Administrative Agent if an Event
of Default shall occur and be continuing, each Grantor shall legend, in form and
manner satisfactory to the Administrative Agent, its Accounts and its books,
records and documents evidencing or pertaining thereto with an appropriate
reference to the fact that such Accounts have been assigned to the
Administrative Agent for the benefit of the Credit Parties and that the
Administrative Agent has a security interest therein.

 

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SECTION 4.11.  Intellectual Property.

 

(a)           Each Grantor agrees that it will not do any act or omit to do any
act (and will exercise commercially reasonable efforts to prevent its licensees
and sub-licensees from doing any act or omitting to do any act) whereby any
Patent or Industrial Design may become invalidated or dedicated to the public,
and agrees that it shall continue to mark any products covered by a Patent or
Industrial Design that is material to the conduct of such Grantor’s business
with the relevant patent number as necessary and sufficient to establish and
preserve its maximum rights under applicable patent laws.

 

(b)           Each Grantor (either itself or through its licensees or its
sublicensees) will, for each Material Trademark, (i) maintain such Material
Trademark in full force free from any claim of abandonment or invalidity for
non-use, (ii) maintain the quality of products and services offered under such
Material Trademark including where applicable policing the use of such Material
Trademarks by its licensees and sublicensees, (iii) display such Material
Trademark with notice of Federal or foreign registration to the extent necessary
and sufficient to establish and preserve its maximum rights under applicable law
and (iv) not knowingly use or knowingly permit the use of such Material
Trademark in violation of any third party rights.

 

(c)           Each Grantor (either itself or through its licensees or
sublicensees) will, for each work covered by a Copyright material to the conduct
of such Grantor’s business, continue to publish, reproduce, display, adopt and
distribute the work with appropriate copyright notice as necessary and
sufficient to establish and preserve its maximum rights under applicable
copyright laws.

 

(d)           Each Grantor shall notify the Administrative Agent promptly if it
knows or has reason to know that any Material Trademark or any Patent, Copyright
or Industrial Design material to the conduct of its business may become
abandoned, lost or dedicated to the public, or of any materially adverse
determination or development (including the institution of, or any such
determination or development in, any proceeding in the United States Patent and
Trademark Office, United States Copyright Office, Canadian Intellectual Property
Office, Canadian Industrial Design Office or any court or similar office of any
country) regarding such Grantor’s ownership of any Patent, Material Trademark,
Copyright or Industrial Design material to the conduct of its business, its
right to register the same, or its right to keep and maintain the same.

 

(e)           At the time of delivery of quarterly financial statements with
respect to each Fiscal Quarter pursuant to Section 6.01(b) of the Credit
Agreement, each Grantor shall inform the Administrative Agent of any application
for any Patent, Trademark, Industrial Design or Copyright (or any registration
of any Patent, Trademark, Industrial Design or Copyright) such Grantor has filed
with the United States Patent and Trademark Office, United States Copyright
Office, Canadian Intellectual Property Office, Canadian Industrial Design Office
or any office or agency in any political subdivision of the United States,
Canada or in any other country or any political subdivision, province or
territory thereof or any Copyright License for which such Grantor has become the
licensee, in each case, during such Fiscal Quarter, and, upon request of the

 

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Administrative Agent, execute and deliver any and all agreements, instruments,
documents and papers as the Administrative Agent may reasonably request to
evidence the Administrative Agent’s Security Interest in any of the foregoing,
and each Grantor hereby appoints the Administrative Agent as its
attorney-in-fact to execute and file such writings for the foregoing purposes,
all acts of such attorney being hereby ratified and confirmed; such power, being
coupled with an interest, is irrevocable.

 

(f)            Each Grantor will take all necessary steps that are consistent
with the practice in any proceeding before the United States Patent and
Trademark Office, United States Copyright Office, Canadian Intellectual Property
Office, Canadian Industrial Design Office or any office or agency in any
political subdivision of the United States, Canada or in any other country or
any political subdivision, province or territory thereof, to maintain and pursue
each application relating to Material Trademarks and each material application
relating to the Patents and/or Copyrights and/or Industrial Designs (and to
obtain the relevant grant or registration) and to maintain each issued Patent
and each registration of Copyrights and/or Industrial Designs that is material
to the conduct of any Grantor’s business and each registration of Material
Trademarks, including timely filings of applications for renewal, affidavits of
use, affidavits of incontestability and payment of maintenance fees, and, if
consistent with good business judgment, to initiate opposition, interference and
cancelation proceedings against third parties.

 

(g)           In the event that any Grantor has reason to believe that any
Collateral consisting of a Patent, Industrial Design or Copyright material to
the conduct of any Grantor’s business or a Material Trademark has been or is
likely to be infringed, misappropriated or diluted by a third party, such
Grantor promptly shall notify the Administrative Agent and shall, if consistent
with reasonable business judgment, promptly sue for infringement,
misappropriation or dilution and to recover any and all damages for such
infringement, misappropriation or dilution, and take such other actions as are
appropriate under the circumstances to protect such Collateral.  Each Grantor
further agrees not to abandon any Material Trademark or any Patent, Industrial
Design, Copyright or Copyright License that in such Grantor’s reasonable
business judgment is material to the operation of such Grantor’s business
without the prior written consent of the Administrative Agent.

 

(h)           Upon and during the continuance of an Event of Default, each
Grantor shall use its best efforts to obtain all requisite consents or approvals
by the licensor of each Copyright License, Patent License, Industrial Design
License or Material Trademark License under which such Grantor is a licensee to
effect the assignment of all such Grantor’s right, title and interest thereunder
to the Administrative Agent or its designee.

 

(i)            Without limiting the generality of any of the foregoing, each
Grantor hereby authorizes the Administrative Agent, with prompt notice thereof
to the Grantors, to supplement this Agreement by supplementing Schedule 1 or
adding additional schedules hereto to identify specifically any asset or item
that may constitute Copyrights, Copyright Licenses, Patents, Industrial Design
or Material Trademarks;

 

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provided that any Grantor shall, within 10 days after it has been notified by
the Administrative Agent of the specific identification of such Collateral,
advise the Administrative Agent in writing of any inaccuracy of the
representations and warranties made by such Grantor hereunder with respect to
such Collateral.

 

SECTION 4.12.  Pledged Collateral.  (a)  Subject to Section 4.04 and
Section 4.12(e), if any Grantor shall receive or become entitled to receive any
Pledged Collateral after the Closing Date, it shall deliver to the
Administrative Agent (i) a duly executed Pledged Collateral Addendum identifying
such Pledged Collateral and (ii) to the extent such Pledged Collateral is
represented by certificates or promissory notes, such certificates or promissory
notes, together with undated powers endorsed in blank by such Grantor.

 

(b)           Upon the occurrence and continuance of an Event of Default, each
Grantor shall promptly deliver to the Administrative Agent a copy of each
material written notice or other material written communication received by it
in respect of any Pledged Collateral.

 

(c)           No Grantor shall make or consent to any amendment or other
modification or waiver with respect to any Pledged Collateral, Pledged Operating
Agreement, or Pledged Partnership Agreement, or enter into any agreement or
agree to any restriction with respect to any Pledged Collateral which would
materially adversely affect either the rights of the Administrative Agent or the
other Credit Parties pursuant to the Loan Documents or the value of the Pledged
Collateral, or that would result in a material violation of any provision of the
Credit Agreement or any other Loan Document.

 

(d)           Each Grantor agrees that it will assist the Administrative Agent
in obtaining all necessary approvals and making all necessary filings under
federal, state, local, or foreign law in connection with the Administrative
Agent’s Liens on the Pledged Collateral or any sale or transfer thereof.

 

(e)           As to all limited liability company or partnership interests owned
by a Grantor and issued under any Pledged Operating Agreement or Pledged
Partnership Agreement which are not certificated (the “Uncertificated
Interests”), each Grantor hereby represents, warrants and covenants that such
Uncertificated Interests issued pursuant to such agreement (A) are not and shall
not be dealt in or traded on securities exchanges or in securities markets,
(B) do not and will not constitute investment company securities, and (C) are
not and will not be held by such Grantor in a securities account.  In addition,
none of the Pledged Operating Agreements, the Pledged Partnership Agreements, or
any other agreements governing any of the Uncertificated Interests issued under
any Pledged Operating Agreement or Pledged Partnership Agreement, provide or
shall provide that such Pledged Interests are securities governed by Article 8
of the Uniform Commercial Code as in effect in any relevant jurisdiction.

 

SECTION 4.13.  Commercial Tort Claims.  If any Grantor shall at any time after
the date hereof hold or acquire a Commercial Tort Claim in respect of which a
complaint or counterclaim has been filed seeking damages in an amount in excess
of

 

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$1,000,000, the Grantor shall promptly notify the Administrative Agent thereof
in a writing signed by such Grantor, including a summary description of such
claim, and grant to the Collateral Agent in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Agreement, with
such writing to be in form and substance reasonably satisfactory to the
Administrative Agent.

 

SECTION 4.14.  Securities Accounts.  With respect to (i) the Securities Accounts
(other than Securities Accounts with an aggregate value of less than $10,000)
and (ii) any Collateral that constitutes a Security Entitlement as to which the
financial institution acting as the Administrative Agent hereunder is not the
Securities Intermediary, the relevant Grantor will cause the Securities
Intermediary with respect to each such account or Security Entitlement either
(A) to identify in its records the Administrative Agent as the Entitlement
Holder thereof or (B) to agree with such Grantor and the Administrative Agent
that such Securities Intermediary will comply with Entitlement Orders originated
by the Administrative Agent without further consent of such Grantor, such
agreement to be in form and substance reasonably satisfactory to the Borrower
and Administrative Agent (which agreement may also be for the benefit of the ABL
Agent); provided that the Administrative Agent will not give any such orders
except after the occurrence and during the continuance of an Event of Default;
provided further that no Grantor shall be required to take the foregoing actions
with respect to any Securities Account until the later of (A) 60 days after the
Closing Date and (B) in the case of Securities Accounts opened after the Closing
Date, at the time of establishment of such Securities Account (or, in each case,
such later date as the Administrative Agent shall in its reasonable discretion
agree).

 

ARTICLE V

 

Collections

 

SECTION 5.01.  Deposit and Concentration Accounts.

 

(a)           Schedule 5 hereto sets forth, as of the date hereof, each Deposit
Account and Concentration Account that each Grantor maintains.  For each
Concentration Account that any Grantor at any time opens or maintains, such
Grantor shall cause the depositary bank to agree to comply with instructions
from the Administrative Agent to such depositary bank directing the disposition
of funds from time to time credited to such Concentration Account, without
further consent of such Grantor or any other Person, pursuant to an agreement
reasonably satisfactory to the Administrative Agent (such agreement, a “Blocked
Account Agreement”) (which Blocked Account Agreement may also be for the benefit
of the ABL Agent); provided that no Grantor shall be required to take the
foregoing actions with respect to any Concentration Account until the later of
(A) 60 days after the Closing Date and (B) in the case of Concentration Accounts
opened after the Closing Date, at the time of establishment of such
Concentration Account (or, in each case, such later date as the Administrative
Agent shall in its reasonable discretion agree).  The Administrative Agent
agrees with each Grantor that the Administrative Agent shall not give any such
instructions or withhold any withdrawal rights from any Grantor unless an Event
of

 

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Default has occurred and is continuing.  Without the prior written consent of
the Administrative Agent, no Grantor shall modify or amend the instructions
pursuant to any Blocked Account Agreement.

 

(b)           The Grantors shall cause the ACH or wire transfer to a
Concentration Account, no less frequently than daily, of the then contents of
each Deposit Account, each such transfer to be net of any minimum balance, not
to exceed $10,000, as may be required to be maintained in the subject Deposit
Account by the bank at which such Deposit Account is maintained; provided,
however, to the extent a Deposit Account is maintained for the deposit of the
receipts of a Store, and such Deposit Account is maintained with a bank that
either does not provide daily balance information for such Deposit Account or
cannot accommodate daily ACH or wire transfers and there is not a suitable
replacement bank reasonably available for such Store, then such Deposit Account
may be swept on a monthly, rather than daily basis; provided, further, that
(x) the number of such Deposit Accounts swept on a monthly basis shall not
exceed 5% of all of the Store Deposit Accounts and (y) the aggregate amounts
maintained in such Deposit Accounts shall not exceed $5,000,000 at any time.

 

SECTION 5.02.  Power of Attorney.  Each Grantor hereby irrevocably makes,
constitutes and appoints the Administrative Agent (and all officers, employees
or agents designated by the Administrative Agent) as such Grantor’s true and
lawful agent and attorney-in-fact, and in such capacity the Administrative Agent
shall have the right, with power of substitution for each Grantor and in each
Grantor’s name or otherwise, for the use and benefit of the Administrative Agent
and the Credit Parties, (a) at any time, whether or not a Default or Event of
Default has occurred, to take actions required to be taken by the Grantors under
Section 2.01 of this Agreement, (b) upon the occurrence and during the
continuance of an Event of Default or as otherwise permitted under the Credit
Agreement, (i) to receive, endorse, assign and/or deliver any and all notes,
acceptances, checks, drafts, money orders or other evidences of payment relating
to the Collateral or any part thereof; (ii) to demand, collect, receive payment
of, give receipt for and give discharges and releases of all or any of the
Collateral; and (iii) to take actions required to be taken by Grantors in
Section 5.01; and (c) upon the occurrence and during the continuance of an Event
of Default or as otherwise permitted in the Credit Agreement, (i) to sign the
name of any Grantor on any invoices, schedules of Collateral, freight or express
receipts, or bills of lading storage receipts, warehouse receipts or other
documents of title relating to any of the Collateral; (ii) to sign the name of
any Grantor on any notice to such Grantor’s Account Debtors; (iii) to sign the
name of any Grantor on any proof of claim in bankruptcy against Account Debtors;
(iv) to the extent relating to the Collateral, to sign change of address forms
to change the address to which each Grantor’s mail is to be sent to such address
as the Administrative Agent shall designate; (v) to receive and open each
Grantor’s mail, remove any Proceeds of Collateral therefrom and turn over the
balance of such mail either to any of the Grantors or to any trustee in
bankruptcy or receiver of a Grantor, or other legal representative of a Grantor
whom the Administrative Agent determines to be the appropriate person to whom to
so turn over such mail; (vi) to commence and prosecute any and all suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction to collect or otherwise realize on all or any of the Collateral or
to enforce any rights in respect of any Collateral; (vii) to

 

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settle, compromise, compound, adjust or defend any actions, suits or proceedings
relating to all or any of the Collateral; (viii) to take all such action as may
be necessary to obtain the payment of any letter of credit and/or banker’s
acceptance of which any Grantor is a beneficiary to the extent relating to
Collateral; (ix) to repair, manufacture, assemble, complete, package, deliver,
alter or supply goods, if any, necessary to fulfill in whole or in part the
purchase order of any customer of any Grantor; (x) to use for the purposes
permitted by Section 6.01 hereof, any or all General Intangibles of any Grantor
relating to the Collateral; provided that the Administrative Agent’s use of such
General Intangibles will comply with all applicable law; and (xi) to use, sell,
assign, transfer, pledge, make any agreement with respect to or otherwise deal
with all or any of the Collateral, and to do all other acts and things necessary
to carry out the purposes of this Agreement, as fully and completely as though
the Administrative Agent were the absolute owner of the Collateral for all
purposes; provided, however, that nothing herein contained shall be construed as
requiring or obligating the Administrative Agent or any other Credit Party to
make any commitment or to make any inquiry as to the nature or sufficiency of
any payment received by the Administrative Agent or any other Credit Party, or
to present or file any claim or notice.  It is understood and agreed that the
appointment of the Administrative Agent as the agent and attorney-in-fact of the
Grantors for the purposes set forth above is coupled with an interest and is
irrevocable.  Notwithstanding the provisions of this Section 5.02, the power of
the Administrative Agent to act in any name other than the name of the Grantor
shall not apply to any Pledged Collateral that is ULC Shares.

 

SECTION 5.03.  No Obligation to Act.  The Administrative Agent shall not be
obligated to do any of the acts or to exercise any of the powers authorized by
Section 5.02, but if the Administrative Agent elects to do any such act or to
exercise any of such powers, it shall not be accountable for more than it
actually receives as a result of such exercise of power, and shall not be
responsible to any Grantor for any act or omission to act except for any act or
omission to act which constitutes gross negligence, bad faith or breach of the
contractual obligations of the Administrative Agent.  The Administrative Agent
shall be deemed to have exercised reasonable care in the custody and
preservation of the Pledged Collateral in its possession if such Pledged
Collateral is accorded treatment substantially equivalent to that which the
Administrative Agent in such Person’s individual capacity, accords its own
property consisting of similar instruments or interests, which shall be no less
than the treatment employed by a reasonable and prudent agent in the industry,
it being understood that none of the Administrative Agent or any of the Lenders
shall have responsibility for (i) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relating to
any Pledged Collateral, whether or not the Administrative Agent or any Lender
has or is deemed to have knowledge of such matters or (ii) taking any necessary
steps to preserve rights against any Person with respect to any Pledged
Collateral.  The provisions of Section 5.02 shall in no event relieve any
Grantor of any of its obligations hereunder or under any other Loan Document
with respect to the Collateral or any part thereof or impose any obligation on
the Administrative Agent or any other Credit Party to proceed in any particular
manner with respect to the Collateral or any part thereof, or in any way limit
the exercise by the Administrative Agent or any other Credit Party of any other
or further right which it may have on the date of this

 

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Agreement or hereafter, whether hereunder, under any other Loan Document, by law
or otherwise.

 

ARTICLE VI

 

Remedies

 

SECTION 6.01.  Remedies upon Default.  Upon the occurrence and during the
continuance of an Event of Default, it is agreed that the Administrative Agent
shall have in any jurisdiction in which enforcement hereof is sought, in
addition to all other rights and remedies, the rights and remedies of a secured
party under the UCC, the PRUCC or other applicable law.  The rights and remedies
of the Administrative Agent shall include the right to take any of or all the
following actions at the same or different times upon the occurrence and during
the continuance of an Event of Default:

 

(a)           With respect to any Collateral consisting of Accounts, General
Intangibles (including Payment Intangibles), Letter-of-Credit Rights, Chattel
Paper, Instruments and Documents, the Administrative Agent may collect the
Collateral with or without the taking of possession of any of the Collateral.

 

(b)           With respect to any Collateral consisting of Inventory, the
Administrative Agent may conduct one or more going out of business sales, in the
Administrative Agent’s own right or by one or more agents and contractors.  Such
sale(s) may be conducted upon any premises owned, leased or occupied by any
Grantor.  The Administrative Agent and any such agent or contractor, in
conjunction with any such sale, may augment the Inventory with other goods (all
of which other goods shall remain the sole property of the Administrative Agent
or such agent or contractor).  Any amounts realized from the sale of such goods
which constitute augmentations to the Inventory (net of an allocable share of
the costs and expenses incurred in their disposition) shall be the sole property
of the Administrative Agent or such agent or contractor and neither any Grantor
nor any Person claiming under or in right of any Grantor shall have any interest
therein.  Each purchaser at any such going out of business sale shall hold the
property sold absolutely, free from any claim or right on the part of any
Grantor.

 

(c)           With respect to any Collateral consisting of Intellectual
Property, on demand, to cause the Security Interest granted herein to become an
assignment, transfer and conveyance of any of or all such Collateral by the
applicable Grantors to the Administrative Agent or to license or sublicense,
whether general, special or otherwise, and whether on an exclusive or a
nonexclusive basis, any such Collateral throughout the world on such terms and
conditions and in such manner as the Administrative Agent shall reasonably
determine (other than in violation of any then-existing licensing arrangements
to the extent that waivers thereunder cannot be obtained).

 

(d)           With or without legal process and with or without prior notice or
demand for performance, the Administrative Agent may enter upon, occupy and

 

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use any premises owned or occupied by each Grantor, and may exclude the Grantors
from such premises or portion thereof as may have been so entered upon, occupied
or used by the Administrative Agent.  The Administrative Agent shall not be
required to remove any of the Collateral from any such premises upon the
Administrative Agent’s taking possession thereof, and may render any Collateral
unusable to the Grantors.  In no event shall the Administrative Agent be liable
to any Grantor for use or occupancy by the Administrative Agent of any premises
pursuant to this Section 6.01, nor for any charge (such as wages for the
Grantors’ employees and utilities) incurred in connection with the
Administrative Agent’s exercise of the Administrative Agent’s Rights and
Remedies hereunder.

 

(e)           The Administrative Agent may require any Grantor to assemble the
Collateral and make it available to the Administrative Agent at the Grantor’s
sole risk and expense at a place or places which are reasonably convenient to
both the Administrative Agent and such Grantor.

 

(f)            Each Grantor agrees that the Administrative Agent shall have the
right, subject to applicable law, to sell or otherwise dispose of all or any
part of the Collateral, at public or private sale, for cash, upon credit or for
future delivery as the Administrative Agent shall deem appropriate.  Each
purchaser at any such sale shall hold the property sold absolutely, free from
any claim or right on the part of any Grantor.

 

(g)           Unless the Collateral is perishable or threatens to decline
speedily in value, or is of a type customarily sold on a recognized market (in
which event the Administrative Agent shall provide the Grantors such notice as
may be practicable under the circumstances), the Administrative Agent shall give
the Grantors at least 10 days’ prior written notice, by authenticated record, of
the date, time and place of any proposed public sale, and of the date after
which any private sale or other disposition of the Collateral may be made.  Each
Grantor agrees that such written notice shall satisfy all requirements for
notice to that Grantor which are imposed under the UCC, the PRUCC or other
applicable law with respect to the exercise of the Administrative Agent’s Rights
and Remedies upon Default.  The Administrative Agent shall not be obligated to
make any sale or other disposition of any Collateral if it shall determine not
to do so, regardless of the fact that notice of sale or other disposition of
such Collateral shall have been given.  The Administrative Agent may, without
notice or publication, adjourn any public or private sale or cause the same to
be adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, without further notice, be made at the time and place
to which the same was so adjourned.

 

(h)           Any public sale shall be held at such time or times within
ordinary business hours and at such place or places as the Administrative Agent
may fix and state in the notice of such sale.  At any sale or other disposition,
the Collateral, or portion thereof, to be sold may be sold in one lot as an
entirety or in separate parcels, as the Administrative Agent may (in its sole
and absolute

 

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discretion) determine.  If any of the Collateral is sold, leased or otherwise
disposed of by the Administrative Agent on credit, the Secured Obligations shall
not be deemed to have been reduced as a result thereof unless and until payment
is finally received thereon by the Administrative Agent.

 

(i)            At any public (or, to the extent permitted by applicable law,
private) sale made pursuant to this Section 6.01, the Administrative Agent or
any other Credit Party may bid for or purchase, free (to the extent permitted by
applicable law) from any right of redemption, stay, valuation or appraisal on
the part of any Grantor, the Collateral or any part thereof offered for sale and
may make payment on account thereof by using any claim then due and payable to
the Administrative Agent or such other Credit Party from any Grantor on account
of the Secured Obligations as a credit against the purchase price, and the
Administrative Agent or such other Credit Party may, upon compliance with the
terms of sale, hold, retain and dispose of such property without further
accountability to any Grantor therefor.

 

(j)            For purposes hereof, a written agreement to purchase the
Collateral or any portion thereof shall be treated as a sale thereof.  The
Administrative Agent shall be free to carry out such sale pursuant to such
agreement and no Grantor shall be entitled to the return of the Collateral or
any portion thereof subject thereto, notwithstanding the fact that after the
Administrative Agent shall have entered into such an agreement all Events of
Default shall have been remedied and the Secured Obligations paid in full.

 

(k)           As an alternative to exercising the power of sale herein conferred
upon it, the Administrative Agent may proceed by a suit or suits at law or in
equity to foreclose upon the Collateral and to sell the Collateral or any
portion thereof pursuant to a judgment or decree of a court or courts having
competent jurisdiction or pursuant to a proceeding by a court-appointed
receiver.

 

(l)            To the extent permitted by applicable law, each Grantor hereby
waives all rights of redemption, stay, valuation and appraisal which such
Grantor now has or may at any time in the future have under any rule of law or
statute now existing or hereafter enacted.

 

SECTION 6.02.  Grant of Non-Exclusive License.  For the purpose of enabling the
Administrative Agent to exercise the Administrative Agent’s Rights and Remedies
under Section 6.01 (including in order to take possession of, hold, preserve,
process, assemble, prepare for sale, market for sale, sell or otherwise dispose
of the Collateral) at such time as the Administrative Agent shall be lawfully
entitled to exercise the Administrative Agent’s Rights and Remedies under
Section 6.01, each Grantor hereby (i) grants to the Administrative Agent, for
the benefit of the Administrative Agent and the other Credit Parties, a royalty
free, non-exclusive, irrevocable license, such license being with respect to the
Administrative Agent’s exercise of the Administrative Agent’s Rights and
Remedies under Section 6.01, including in connection with any completion of the
manufacture of Inventory or any sale or other disposition of Inventory

 

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(a) to use, apply and affix any Trademark, trade name, logo or the like in which
any Grantor now or hereafter has rights, (b) to use, license or sublicense any
Intellectual Property, computer software now owned, held or hereafter acquired
by such Grantor, including in such license access to all media and to the extent
to which any of the licensed items may be recorded or stored and to all such
computer software programs and to the extent used for the compilation or print
out thereof, provided that the Administrative Agent’s use of the property
described in subclauses (a) and (b) above will comply with all applicable law,
and (c) to use any and all furniture, fixtures and equipment contained in any
premises owned or occupied by any Grantor in connection with the exercise of the
Administrative Agent’s Rights and Remedies under Section 6.01, and (ii) without
limiting the provisions of Section 6.01(c), agrees to provide the Administrative
Agent and/or its agents with access to, and the right to use, any such premises
owned or occupied by any Grantor.

 

SECTION 6.03.  Application of Proceeds.  After the occurrence of an Event of
Default and acceleration of the Secured Obligations, the Administrative Agent
shall apply the proceeds of any collection or sale of the Collateral, as well as
any Collateral consisting of cash, or any Collateral granted under any other of
the Security Documents in the manner set forth in Section 8.04 of the Credit
Agreement.

 

SECTION 6.04.  Voting Rights.

 

(a)           So long as no Event of Default shall have occurred and be
continuing:

 

(i)            Each Grantor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Pledged Collateral of such Grantor or
any part thereof for any purpose.  For so long as any Grantor shall have the
right to vote the Pledged Interests of such Grantor, such Grantor covenants and
agrees that it will not, without the prior written consent of the Administrative
Agent, vote or take any consensual action with respect to the Pledged Interests
which would materially affect the rights of the Administrative Agent or any
other Credit Party or the value of the Pledged Interests.  The Administrative
Agent shall execute and deliver to each Grantor, or cause to be executed and
delivered to such Grantor, all such proxies, powers of attorney and other
instruments as such Grantor may reasonably request for the purpose of enabling
such Grantor to exercise the voting and/or consensual rights and powers it is
entitled to exercise pursuant to this Section 6.04(a)(i).

 

(ii)           Each Grantor shall be entitled to receive and retain any and all
dividends, cash, options, warrants, rights, instruments, distributions, returns
of capital or principal, income, interest, profits and other property, interests
(debt or equity) or proceeds, including as a result of a split, revision,
reclassification or other like change of the Pledged Collateral, from time to
time received, receivable or otherwise distributed to such Grantor in respect of
or in exchange for any or all of the Pledged Collateral (any of the foregoing, a
“Distribution” and collectively the “Distributions”) paid in respect of the
Pledged Collateral of such Grantor to

 

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the extent that the payment thereof is not otherwise prohibited by the terms of
the Loan Documents; provided, however, that any and all Distributions paid or
payable other than in cash (other than in connection with a partial or total
liquidation or dissolution or in connection with a reduction of capital, capital
surplus or paid-in-surplus) in respect of, and instruments and other property
received, receivable or otherwise distributed in respect of, or in exchange for,
any Pledged Collateral, shall be, and, subject to the limitations in the
definition of “Collateral”, be promptly delivered to the Administrative Agent to
hold as Pledged Collateral and shall, if received by such Grantor, be received
in trust for the benefit of the Administrative Agent, be segregated from the
other property or funds of such Grantor and be promptly delivered to the
Administrative Agent as Pledged Collateral in the same form as so received (with
any necessary endorsement).

 

(b)           Upon the occurrence and during the continuance of an Event of
Default:

 

(i)            All rights of each Grantor (x) to exercise or refrain from
exercising the voting and other consensual rights that it would otherwise be
entitled to exercise pursuant to Section 6.04(a)(i) shall automatically cease
and (y) to receive Distributions that it would otherwise be authorized to
receive and retain pursuant to 6.04(a)(ii) shall automatically cease, and all
such rights shall thereupon become vested in the Administrative Agent, which
shall thereupon have the sole right to exercise or refrain from exercising such
voting and other consensual rights and to receive and hold as Pledged Collateral
such dividends, interest and other distributions; provided that, unless
otherwise directed by the Required Lenders, the Administrative Agent shall have
the right from time to time following and during the continuance of an Event of
Default to permit the Grantors to exercise such rights.  Any and all money and
other property paid over to or received by the Administrative Agent pursuant to
the provisions of this Section 6.04(b)(i) shall be retained by the
Administrative Agent in an account to be established by the Administrative Agent
upon receipt of such money or other property and shall be applied in accordance
with the provisions of Section 6.03.  After all Events of Default have been
cured or waived and the Borrower has delivered to the Administrative Agent a
certificate to that effect, the Administrative Agent shall promptly repay to
each Grantor (without interest) all dividends or interest that such Grantor
would otherwise be permitted to retain pursuant to the terms of this Section
6.04 and that remain in such account.

 

(ii)           All Distributions that are received by any Grantor contrary to
the provisions of paragraph (i) of this Section 6.04(b) shall be received in
trust for the benefit of the Administrative Agent, shall be segregated from
other funds of such Grantor and shall be promptly paid over to the
Administrative Agent as Pledged Collateral in the same form as so received (with
any necessary endorsement).

 

(c)           This Section 6.04 shall not apply to any Pledged Collateral that
is ULC Shares or to any Distributions that are paid in respect of ULC Shares.

 

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SECTION 6.05.  ULC Shares.

 

(a)           Notwithstanding any provisions to the contrary contained in this
Agreement or any other document or agreement among all or some of the parties
hereto, each Grantor that is the registered and beneficial owner of any Pledged
Collateral which are ULC Shares (“ULC Pledgor”) will remain so until such time
as such ULC Shares are effectively transferred into the name of the
Administrative Agent, any Credit Party or any other Person on the books and
records of such ULC.  Accordingly, each ULC Pledgor shall be entitled to receive
and retain for its own account any Distribution in respect of such Pledged
Collateral (except insofar as such ULC Pledgor has granted a security interest
in such Distribution, and any shares which are Pledged Collateral shall be
delivered to the Administrative Agent to hold as Pledged Collateral hereunder)
and shall have the right to vote such Pledged Collateral and to control the
direction, management and policies of the applicable ULC issuer to the same
extent as such ULC Pledgor would if such Pledged Collateral were not pledged to
the Administrative Agent (for its own benefit and for the benefit of the Credit
Parties) pursuant hereto.  Nothing in this Agreement or any other document or
agreement among all or some of the parties hereto is intended to, and nothing in
this Agreement or any other document or agreement among all or some of the
parties hereto shall, constitute the Administrative Agent, any Credit Party or
any other Person other than a ULC Pledgor a member of a ULC for the purposes of
the Companies Act (Nova Scotia) until such time as notice is given to such ULC
Pledgor and further steps are taken pursuant hereto or thereto so as to register
the Administrative Agent, any Credit Party or any other Person as holder of the
applicable ULC Shares.  To the extent any provision hereof would have the effect
of constituting the Administrative Agent or any Credit Party as a member of any
ULC prior to such time, such provision shall be severed therefrom and shall be
ineffective with respect to Pledged Collateral which are ULC Shares without
otherwise invalidating or rendering unenforceable this Agreement or invalidating
or rendering unenforceable such provision insofar as it relates to Pledged
Collateral which are not ULC Shares.

 

(b)           Except upon the exercise of rights to sell, transfer or otherwise
dispose of the Pledged Stock issued by a ULC following the occurrence of an
Event of Default pursuant to Article VI, no ULC Pledgor shall cause or permit,
or enable any ULC in which they hold ULC Shares to cause or permit, the
Administrative Agent or any other Credit Party to:  (i) be registered as
shareholder or member of such ULC; (ii) accept or request stock powers of
attorney in respect of such Person endorsed or assigned in favor of the
Administrative Agent or other Credit Party; (iii) have any notation entered in
its favor in the share register of such ULC; (iv) be held out as a shareholder
or member of such ULC; (v) receive, directly or indirectly, any dividends,
property or other distributions from such ULC by reason of the Administrative
Agent or any other Credit Party holding a security interest in such ULC; or (vi)
act as a shareholder or member of such ULC, or exercise any rights of a
shareholder or member including the right to attend a meeting of, or to vote the
shares of, such ULC.

 

SECTION 6.06.  Disposition of Pledged Collateral by Administrative Agent.  None
of the Pledged Collateral existing as of the date of this Agreement is, and none
of the Pledged Collateral hereafter acquired on the date of acquisition thereof
will

 

27

--------------------------------------------------------------------------------

 

be, registered or qualified under the various federal or state securities laws
of the United States and disposition thereof after an Event of Default has
occurred and is continuing may be restricted to one or more private (instead of
public) sales in view of the lack of such registration.  Each Grantor
understands that in connection with such disposition, the Administrative Agent
may approach only a restricted number of potential purchasers and further
understands that a sale under such circumstances may yield a lower price for the
Pledged Collateral than if the Pledged Collateral were registered and qualified
pursuant to federal and state securities laws and sold on the open market.  Each
Grantor, therefore, agrees that:  (a) if the Administrative Agent shall,
pursuant to the terms of this Agreement, sell or cause the Pledged Collateral or
any portion thereof to be sold at a private sale, the Administrative Agent shall
have the right to rely upon the advice and opinion of any nationally recognized
brokerage or investment firm (but shall not be obligated to seek such advice and
the failure to do so shall not be considered in determining the commercial
reasonableness of such action) as to the best manner in which to offer the
Pledged Collateral or any portion thereof for sale and as to the best price
reasonably obtainable at the private sale thereof; and (b) such reliance shall
be conclusive evidence that the Administrative Agent has handled the disposition
in a commercially reasonable manner.

 

ARTICLE VII

 

Perfection of Security Interest

 

SECTION 7.01.  Perfection by Filing.  This Agreement constitutes an
authenticated record, and each Grantor hereby authorizes the Administrative
Agent, pursuant to the provisions of Sections 2.01 and 5.02, to file one or more
financing or continuation statements, and amendments thereto, relative to all or
any part of the Collateral, in such filing offices as the Administrative Agent
shall deem appropriate, including recording of the IP Agreements with the United
States Patent and Trademark Office, the United States Copyright Office, the
Canadian Intellectual Property Office and the Canadian Industrial Design Office
and the Grantors shall pay the Administrative Agent’s reasonable costs and
expenses incurred in connection therewith.  Any such financing statement may
indicate the Collateral as “all assets of the Grantor” or words of similar
effect, regardless of whether any particular asset comprised in the Collateral
falls within the scope of Article 9 of the UCC.  Each Grantor hereby further
agrees that a carbon, photographic or other reproduction of this Agreement shall
be sufficient as a financing statement and may be filed as a financing statement
in any and all jurisdictions.

 

SECTION 7.02.  Other Perfection, etc.  The Grantors shall at any time and from
time to time take such steps as the Administrative Agent may reasonably request
for the Administrative Agent (a) to obtain an acknowledgment, in form and
substance reasonably satisfactory to the Administrative Agent, of any bailee
having possession of any of the Collateral that the bailee holds such Collateral
for the Administrative Agent, (b) to obtain “control” of any Securities
Accounts, Concentration Accounts, Letter-of-Credit Rights, or Electronic Chattel
Paper, with any agreements establishing control to be in form and substance
satisfactory to the Administrative Agent (and which may also be for the benefit
of the ABL Agent), and (c) otherwise to insure the continued perfection of

 

28

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the Administrative Agent’s Security Interest in any of the Collateral with the
priority described in Section 3.03 and of the preservation of its rights
therein.

 

SECTION 7.03.  Savings Clause.  Nothing contained in this Article VII shall be
construed to narrow the scope of the Administrative Agent’s Security Interest in
any of the Collateral or the perfection or priority thereof or to impair or
otherwise limit any of the Administrative Agent’s Rights and Remedies hereunder
except (and then only to the extent) as mandated by the UCC or the PRUCC.

 

ARTICLE VIII

 

Miscellaneous

 

SECTION 8.01.  Notices.  All communications and notices hereunder shall (except
as otherwise expressly permitted herein) be in writing and given as provided in
Section 10.02 of the Credit Agreement.

 

SECTION 8.02.  Security Interest Absolute.  All rights of the Administrative
Agent hereunder, the Security Interest and all obligations of the Grantors
hereunder shall be absolute and unconditional irrespective of (a) any lack of
validity or enforceability of the Credit Agreement, any other Loan Document, any
agreement with respect to any of the Secured Obligations or any other agreement
or instrument relating to any of the foregoing, (b) any change in the time,
manner or place of payment of, or in any other term of, all or any of the
Secured Obligations, or any other amendment or waiver of or any consent to any
departure from the Credit Agreement, any other Loan Document or any other
agreement or instrument, (c) any exchange, release or non-perfection of any Lien
on other collateral, or any release or amendment or waiver of or consent under
or departure from any guarantee, securing or guaranteeing all or any of the
Secured Obligations, or (d) any other circumstance that might otherwise
constitute a defense available to, or a discharge of, any Grantor in respect of
the Secured Obligations or this Agreement.

 

SECTION 8.03.  Suretyship Waivers by Grantors.  The Grantors waive demand,
notice, protest, notice of acceptance of this Agreement, notice of loans made,
credit extended, Collateral received or delivered or other action taken in
reliance hereon and all other demands and notices of any description.  With
respect to both the Secured Obligations and the Collateral, each Grantor assents
to any extension or postponement of the time of payment or any other indulgence,
to any substitution, exchange or release of or failure to perfect any security
interest in any Collateral, to the addition or release of any party or person
primarily or secondarily liable, to the acceptance of partial payment thereon
and the settlement, compromising or adjusting of any thereof, all in such manner
and at such time or times as the Administrative Agent may deem advisable.  The
Administrative Agent shall have no duty as to the collection or protection of
the Collateral or any income therefrom, the preservation of rights against prior
parties or the preservation of any rights pertaining thereto.  Each of the
Grantors further waives any and all other suretyship defenses.

 

29

--------------------------------------------------------------------------------

 

SECTION 8.04.  Marshalling.  Neither the Administrative Agent nor any Lender
shall be required to marshal any present or future collateral security
(including the Collateral) for, or other assurances of payment of the Secured
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of the rights and
remedies of the Administrative Agent or any Lender hereunder and of the
Administrative Agent or any Lender in respect of such collateral security and
other assurances of payment shall be cumulative and in addition to all other
rights and remedies, however existing or arising.  To the extent that it
lawfully may, each Grantor hereby agrees that it will not invoke any law
relating to the marshalling of collateral which might cause delay in or impede
the enforcement of the Administrative Agent’s Rights and Remedies under this
Agreement or under any other instrument creating or evidencing any of the
Secured Obligations or under which any of the Secured Obligations is outstanding
or by which any of the Secured Obligations is secured or payment thereof is
otherwise assured, and, to the extent that it lawfully may, each Grantor hereby
irrevocably waives the benefits of all such laws.

 

SECTION 8.05.  Survival of Agreement.  All covenants, agreements,
representations and warranties made by the Grantors herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Administrative Agent and the other Credit Parties
and shall survive the execution and delivery of this Agreement and the other
Loan Documents and the making of any Loans, and shall continue in full force and
effect as long as the Secured Obligations are outstanding and unpaid, and as
long as the Commitments have not expired or terminated.

 

SECTION 8.06.  Binding Effect; Several Agreement; Assignments.  Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party (subject to the
provisions of the Credit Agreement), and all covenants, promises and agreements
by or on behalf of the Grantors that are contained in this Agreement shall bind
and inure to the benefit of each Grantor and its respective successors and
assigns.  This Agreement shall be binding upon each Grantor and the
Administrative Agent and their respective successors and assigns, and shall
inure to the benefit of each Grantor, the Administrative Agent and the other
Credit Parties and their respective successors and assigns, except that no
Grantor shall have the right to assign or transfer its rights or obligations
hereunder or any interest herein or in the Collateral (and any such attempted
assignment or transfer shall be void) except as expressly permitted by this
Agreement or the Credit Agreement.  This Agreement shall be construed as a
separate agreement with respect to each Grantor and may be amended, modified,
supplemented, waived or released with respect to any Grantor without the
approval of any other Grantor and without affecting the obligations of any other
Grantor hereunder.

 

SECTION 8.07.  Administrative Agent’s Fees and Expenses; Indemnification. 
(a)  Without limiting any of their obligations under the Credit Agreement or the
other Loan Documents, the Grantors jointly and severally agree to pay all Credit
Party Expenses incurred in connection with this Agreement.

 

30

--------------------------------------------------------------------------------

 

(b)           Without limiting any of their indemnification obligations under
the Credit Agreement or the other Loan Documents, the Grantors shall, jointly
and severally, agree to indemnify each Credit Party and their respective
Affiliates (each such Person being called an “Indemnitee”), and hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses (other than with respect to Taxes), including the reasonable
and documented fees, charges and disbursements of counsel for any Indemnitee,
incurred by or asserted against any Indemnitee arising out of, in connection
with or as a result of (i) the execution or delivery or performance of this
Agreement, the performance by any Grantor of its obligations under this
Agreement or the consummation of the transactions contemplated hereby, or (ii)
any actual or prospective claim, litigation, investigation or proceeding
relating to any of the foregoing or to the Collateral, whether based on
contract, tort or any other theory and regardless of whether any Indemnitee is a
party thereto; provided, however, that such indemnity shall not, as to any
Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses resulted from the gross negligence, willful
misconduct, bad faith or breach of the contractual obligations of such
Indemnitee or with respect to a claim by one Indemnitee against another
Indemnitee.

 

(c)           Any such amounts payable as provided hereunder shall be additional
Secured Obligations secured hereby and by the other Security Documents.  All
amounts due under this Section 8.07 shall be payable on written demand therefor.

 

SECTION 8.08.  Governing Law.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, IN
ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE,
THIS AGREEMENT AND THE SECURED OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING
SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND ANY
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

 

SECTION 8.09.  Waivers; Amendment.  (a)  The rights, remedies, powers,
privileges and discretions of the Administrative Agent hereunder (herein, the
“Administrative Agent’s Rights and Remedies”) shall be cumulative and not
exclusive of any rights or remedies which it would otherwise have.  No delay or
omission by the Administrative Agent in exercising or enforcing any of the
Administrative Agent’s Rights and Remedies shall operate as, or constitute, a
waiver thereof.  No waiver by the Administrative Agent of any Event of Default
or of any Default under any other agreement shall operate as a waiver of any
other Event of Default or other Default hereunder or under any other agreement. 
No single or partial exercise of any of the Administrative Agent’s Rights or
Remedies, and no express or implied agreement or transaction of whatever nature
entered into between the Administrative Agent and any Person, at any time, shall
preclude the other or further exercise of the Administrative Agent’s Rights and
Remedies.  No waiver by the Administrative Agent of any of the Administrative
Agent’s Rights and Remedies on any one occasion shall be deemed a waiver on any
subsequent occasion, nor shall it be deemed a continuing waiver.  The
Administrative Agent’s Rights and Remedies may be exercised at such time or
times and

 

31

--------------------------------------------------------------------------------

 

in such order of preference as the Administrative Agent may determine.  The
Administrative Agent’s Rights and Remedies may be exercised without resort or
regard to any other source of satisfaction of the Secured Obligations.  No
waiver of any provisions of this Agreement or any other Loan Document or consent
to any departure by any Grantor therefrom shall in any event be effective unless
the same shall be permitted by paragraph (b) below, and then such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given.  No notice to or demand on any Grantor in any case shall entitle
such Grantor or any other Grantor to any other or further notice or demand in
similar or other circumstances.

 

(b)           Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to a written agreement entered into between
the Administrative Agent and the Grantor or Grantors with respect to whom such
waiver, amendment or modification is to apply, subject to any consent required
in accordance with Section 10.01 of the Credit Agreement.

 

SECTION 8.10.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF
OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS SET FORTH IN THIS SECTION 8.10.

 

SECTION 8.11.  Severability.  In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired thereby
(it being understood that the invalidity of a particular provision in a
particular jurisdiction shall not in and of itself affect the validity of such
provision in any other jurisdiction).

 

SECTION 8.12.  Counterparts.  This Agreement may be executed in counterparts
(and by different parties hereto on different counterparts), each of which shall
constitute an original, but all of which when taken together shall constitute a
single contract.  Delivery of an executed counterpart of a signature page to
this Agreement by telecopy or other electronic image scan transmission (e.g.,
“pdf” or “tif” via e-mail) shall be as effective as delivery of a manually
executed counterpart to this Agreement.

 

SECTION 8.13.  Headings.  Article and Section headings and the Table of Contents
used herein are for the purpose of reference only, are not part of this
Agreement

 

32

--------------------------------------------------------------------------------

 

and are not to affect the construction of, or to be taken into consideration in
interpreting, this Agreement.

 

SECTION 8.14.  Jurisdiction; Consent to Service of Process.  (a)  EACH OF THE
GRANTORS AND THE ADMINISTRATIVE AGENT AGREES THAT ANY SUIT FOR THE ENFORCEMENT
OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE
COURTS OF THE STATE OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN OR ANY
FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF
SUCH COURTS, AND IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE VENUE OF ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT
FORUM.

 

(b)           EACH PARTY TO THIS AGREEMENT IRREVOCABLY CONSENTS TO SERVICE OF
PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 8.01.  NOTHING IN THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT WILL AFFECT THE RIGHT OF ANY PARTY TO THIS
AGREEMENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

 

SECTION 8.15.  Termination; Release of Collateral.  (a)  Except for those
provisions which expressly survive the termination thereof, this Agreement and
the Security Interest shall terminate when all the Secured Obligations have been
paid in full (excluding contingent obligations as to which no claim has been
made) and the Lenders have no further commitment to lend under the Credit
Agreement.

 

(b)           The Administrative Agent may release any Grantor (other than the
Borrower) from its obligations hereunder, and the Security Interest in the
Collateral of such Grantor shall automatically be released (i) if such Person
ceases to be a Subsidiary as a result of a transaction permitted by the Credit
Agreement; provided that, if so required by the Credit Agreement, the Required
Lenders shall have consented to such transaction and the terms of such consent
did not provide otherwise or (ii) upon the effectiveness of any written consent
to such release pursuant to Section 10.01 of the Credit Agreement.

 

(c)           Upon any disposition of Collateral in connection with any
disposition permitted under the Credit Agreement or any other Loan Document
(other than a sale or transfer to a Grantor), or upon the effectiveness of any
written consent to the release of the Security Interest granted hereby in any
Collateral pursuant to Section 10.01 of the Credit Agreement, the Security
Interest in such Collateral shall be automatically released.

 

(d)           In connection with any termination or release pursuant to
paragraph (a), (b) or (c) of this Section 8.15, the Administrative Agent shall
execute and deliver to the Grantors, at the Grantors’ expense, all UCC or PRUCC
termination

 

33

--------------------------------------------------------------------------------

 

statements and similar documents that the Grantors shall reasonably request to
evidence such termination.  Any execution and delivery of termination statements
or documents pursuant to this Section 8.15 shall be without recourse to, or
warranty by, the Administrative Agent.

 

SECTION 8.16.  Additional Grantors.  Pursuant to Section 6.11 of the Credit
Agreement, after the Closing Date, each new direct or indirect Subsidiary of the
Borrower is required to enter into this Agreement as a Grantor.  Upon execution
and delivery by the Administrative Agent and a Subsidiary of an instrument in
the form of Annex 2 hereto, such Subsidiary shall become a Grantor hereunder
with the same force and effect as if originally named as a Grantor herein.  The
execution and delivery of any such instrument shall not require the consent of
any other Loan Party hereunder.  The rights and obligations of each Loan Party
hereunder shall remain in full force and effect notwithstanding the addition of
any new Loan Party as a party to this Agreement.

 

SECTION 8.17.  Intercreditor Agreement.  Notwithstanding anything herein to the
contrary, the lien and Security Interest granted pursuant to this Agreement and
the exercise of any right or remedy hereunder are subject to the provisions of
the Intercreditor Agreement.  In the event of any conflict between the terms of
the Intercreditor Agreement and this Agreement, the terms of the Intercreditor
Agreement shall govern and control.  Without limiting the generality of the
foregoing, and notwithstanding anything herein to the contrary, all rights and
remedies of the Administrative Agent (and the other Credit Parties) with respect
to the “ABL Priority Collateral” (as defined in the Intercreditor Agreement)
shall be subject to the terms of the Intercreditor Agreement, and until the
discharge of the “ABL Obligations” (as defined in the Intercreditor Agreement),
any obligation of the Borrower and any other Grantor hereunder or under any
other Loan Document with respect to the delivery or control of any ABL Priority
Collateral, the novation of any lien on any certificate of title, bill of lading
or other document, the giving of any notice to any bailee or other Person, the
provision of voting rights, the obtaining of any consent of any Person or
otherwise, in each case in connection with any ABL Priority Collateral, shall be
deemed to be satisfied if the Borrower or such other Grantor, as applicable,
complies with the requirements of the similar provision of the applicable “ABL
Document” (as defined in the Intercreditor Agreement).  Until the discharge of
the ABL Obligations, the delivery of any ABL Priority Collateral to the “ABL
Priority Agent” (as defined in the Intercreditor Agreement) pursuant to the ABL
Documents shall satisfy any delivery requirement hereunder or under any other
Loan Document.

 

SECTION 8.18.  Grantor Consent.  Each Grantor which is not a ULC hereby consents
to the security interests granted herein by each other Grantor, including any
security interests in Equity Interests issued by such Grantor or Equity
Interests issued by any Person in which such Grantor owns any Equity Interest. 
Each Grantor which is not a ULC hereby waives any rights of such Grantor to
notice in connection with the grant of any Security Interests by any Grantor
hereunder.

 

[SIGNATURE PAGES FOLLOW]

 

34

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement under
seal as of the day and year first above written.

 

GRANTORS:

 

 

ZALE CORPORATION,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE DELAWARE, INC.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE INTERNATIONAL, INC.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZAP, INC.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE PUERTO RICO, INC.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE EMPLOYEES’ CHILD CARE ASSOCIATION, INC.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZGCO, LLC,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZCSC, LLC,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

TXDC, L.P.,
by ZALE DELAWARE, INC., its general partner,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA FINCO, LLC,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA CO.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA DIAMOND SOURCING INC.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA HOLDING LP,
by ZALE INTERNATIONAL, INC., its general partner,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA FINCO 1, INC.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

ZALE CANADA FINCO 2, INC.,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

FINCO HOLDING LP,
by ZALE CANADA FINCO 2, INC., its general partner,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

 

FINCO PARTNERSHIP LP,
by ZALE CANADA FINCO 2, INC., its general partner,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

ADMINISTRATIVE AGENT:

 

 

 

 

Z INVESTMENT HOLDINGS, LLC,

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

Schedule 1 to the

Security Agreement

 

Intellectual Property

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

--------------------------------------------------------------------------------

 

Schedule 2 to the

Security Agreement

 

Initial Subsidiary Grantors

 

--------------------------------------------------------------------------------

 

Schedule 3 to the

Security Agreement

 

Commercial Tort Claims

 

--------------------------------------------------------------------------------

 

Schedule 4 to the

Security Agreement

 

Pledged Interests

 

Name of Grantor

 

Name of Pledged
Company

 

Number of
Shares/Units

 

Class of
Interests

 

Percentage of
Class Owned

 

Certificate
Nos.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pledged Notes

 

Name of Grantor

 

Name of Issuer

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

Schedule 5 to the

Security Agreement

 

Deposit Accounts and Concentration Accounts

 

Name of Grantor

 

Name of Institution

 

Account Number

 

Check here if
Account is a
Concentration
Account

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

Annex 1 to the

Security Agreement

 

Form of Perfection Certificate

 

--------------------------------------------------------------------------------

 

Annex 2 to the

Security Agreement

 

Form of Supplement

 

SUPPLEMENT NO.      dated as of [·] (this “Supplement”), to the Security
Agreement dated as of [·] (the “Security Agreement”), among ZALE CORPORATION, a
Delaware corporation (the “Borrower”), the Subsidiaries from time to time party
thereto (each, including the Borrower, a “Grantor”, and collectively, the
“Grantors”) and Z INVESTMENT HOLDINGS, LLC, in its capacity as administrative
agent (in such capacity, the “Administrative Agent”).

 

Reference is made to the Credit Agreement dated as of May 10, 2010 (as such may
be amended, modified, supplemented or restated hereafter, the “Credit
Agreement”) by and among (i) the Borrower, (ii) the Lenders party thereto and
(iii) the Administrative Agent.

 

Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement and the Security
Agreement referred to therein.

 

The Grantors have entered into the Security Agreement in order to induce the
Lenders to make Loans.  Section 8.16 of the Security Agreement provides that new
direct and indirect Subsidiaries of the Borrower may become Grantors under the
Security Agreement by execution and delivery of an instrument in the form of
this Supplement.  The undersigned Subsidiary (the “New Subsidiary”) is executing
this Supplement in accordance with the requirements of the Credit Agreement to
become a Grantor under the Security Agreement as consideration for Loans
previously under made the Credit Agreement.

 

Accordingly, the Administrative Agent and the New Subsidiary agree as follows:

 

SECTION 1.  In accordance with Section 8.16 of the Security Agreement, the New
Subsidiary by its signature below becomes a Grantor under the Security Agreement
with the same force and effect as if originally named therein as a Grantor and
the New Subsidiary hereby (a) agrees to all the terms and provisions of the
Security Agreement applicable to it as a Grantor thereunder and (b) represents
and warrants that the representations and warranties made by it as a Grantor
thereunder are true and correct on and as of the date hereof.  In furtherance of
the foregoing, the New Subsidiary, as security for the payment and performance
in full of the Secured Obligations, does hereby create and grant to the
Administrative Agent, its successors and assigns, for the benefit of the Credit
Parties, a security interest in and lien on all of the New Subsidiary’s right,
title

 

--------------------------------------------------------------------------------

 

and interest in and to the Collateral (as defined in the Security Agreement) of
the New Subsidiary.  Each reference to a “Grantor” in the Security Agreement
shall be deemed to include the New Subsidiary.  The Security Agreement is hereby
incorporated herein by reference.

 

SECTION 2.  The New Subsidiary represents and warrants to the Administrative
Agent and the other Credit Parties that this Supplement has been duly
authorized, executed and delivered by it and constitutes its legal, valid and
binding obligation, enforceable against it in accordance with its terms.

 

SECTION 3.  This Supplement may be executed in counterparts (and by different
parties hereto on different counterparts), each of which shall constitute an
original, but all of which when taken together shall constitute a single
contract.  This Supplement shall become effective when the Administrative Agent
shall have received a counterpart of this Supplement that bears the signature of
the New Subsidiary and the Administrative Agent has executed a counterpart
hereof.  Delivery of an executed signature page to this Supplement by telecopy
or other electronic image scan transmission (e.g., “pdf” or “tif” via e-mail)
shall be as effective as delivery of a manually signed counterpart to this
Supplement.

 

SECTION 4.  The New Subsidiary hereby represents and warrants that, as of the
date hereof, (a) set forth on Schedule 1 attached hereto is a schedule with the
true and correct legal name of the New Subsidiary, its jurisdiction of formation
and the location of its chief executive office, (b) set forth on Schedule 2
attached hereto is a true and correct schedule of Intellectual Property
consisting (i) all of the New Subsidiary’s United States registered Patents and
Patent applications, including the name of the registered owner, type,
registration or application number and the expiration date (if already
registered) of each such Patent and Patent application owned by the New
Subsidiary, (ii) all of the New Subsidiary’s Canadian registered Industrial
Designs and Industrial Design applications including the name of the registered
owner, registration or application number and the expiration date (if already
registered) of each Industrial Design and Industrial Design application owned by
the New Subsidiary, (iii) all of the New Subsidiary’s United States registered
Trademarks and Trademark applications, including the name of the registered
owner, the registration or application number and the expiration date (if
already registered) of each such Trademark and Trademark application owned by
the New Subsidiary and (iv) all of the New Subsidiary’s United States registered
Copyrights, Copyright applications and Copyright Licenses, including the name of
the registered owner, title and, if applicable, the registration number of each
such Copyright, Copyright application or Copyright License owned by the New
Subsidiary, (c) set forth on Schedule 3 attached hereto is each Commercial Tort
Claim in respect of which a complaint or a counterclaim has been filed by the
New Subsidiary seeking damages in an amount of $1,000,000 or more, (d) set forth
on Schedule 4 attached hereto is the Pledged Collateral held by the New
Subsidiary and (e) set forth on Schedule 5 attached hereto are the Deposit
Accounts and Concentration Accounts that the New Subsidiary maintains.

 

--------------------------------------------------------------------------------

 

SECTION 5.  Except as expressly supplemented hereby, the Security Agreement
shall remain in full force and effect.

 

SECTION 6.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS SUPPLEMENT
AND THE SECURED OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTIONS 5-1401
AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND ANY APPLICABLE LAWS OF
THE UNITED STATES OF AMERICA.

 

SECTION 7.  In the event any one or more of the provisions contained in this
Supplement should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and in the Security Agreement shall not in any way be affected or
impaired thereby (it being understood that the invalidity of a particular
provision in a particular jurisdiction shall not in and of itself affect the
validity of such provision in any other jurisdiction).

 

SECTION 8.  All communications and notices hereunder shall be in writing and
given as provided in Section 8.01 of the Security Agreement.

 

SECTION 9.  The New Subsidiary agrees to reimburse the Administrative Agent for
its reasonable out-of-pocket expenses reasonably incurred in connection with
this Supplement, including the reasonable fees, other charges and disbursements
of counsel for the Administrative Agent.

 

IN WITNESS WHEREOF, the New Subsidiary and the Administrative Agent have duly
executed this Supplement to the Security Agreement as of the day and year first
above written.

 

 

[NAME OF NEW SUBSIDIARY],

 

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

 

 

Z INVESTMENT HOLDINGS, LLC,
as Administrative Agent

 

 

 

 

by

 

 

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

Schedule 1

to Supplement No.      to the

Security Agreement

 

New Subsidiary Information

 

Name

 

Jurisdiction of Formation

 

Chief Executive Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

Schedule 2

to Supplement No.      to the

Security Agreement

 

Intellectual Property

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

--------------------------------------------------------------------------------

 

Schedule 3

to Supplement No.      to the

Security Agreement

 

Commercial Tort Claims

 

--------------------------------------------------------------------------------

 

Schedule 4

to Supplement No.      to the

Security Agreement

 

Pledged Interests

 

Name of Grantor

 

Name of Pledged
Company

 

Number of
Shares/Units

 

Class of
Interests

 

Percentage of
Class Owned

 

Certificate
Nos.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pledged Notes

 

Name of Grantor

 

Name of Issuer

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

Schedule 5

to Supplement No.      to the

Security Agreement

 

Deposit Accounts and Concentration Accounts

 

Name of Grantor

 

Name of
Institution

 

Account Number

 

Check here if
Account is a
Concentration
Account

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

Annex 3 to the

Security Agreement

 

Form of Patent, Industrial Design and Trademark Security Agreement

 

--------------------------------------------------------------------------------

 

Annex 4 to the

Security Agreement

 

Form of Copyright Security Agreement

 

--------------------------------------------------------------------------------

 

Annex 5 to the

Security Agreement

 

Form of Pledged Collateral Addendum

 

This Pledged Collateral Addendum, dated as of                          ,
20      , is delivered pursuant to Section 4.12 of the Security Agreement
referred to below.  The undersigned hereby agrees that this Pledged Collateral
Addendum may be attached to that certain Security Agreement, dated as of May 10,
2010, (as amended, restated, supplemented or otherwise modified from time to
time, the “Security Agreement”), among the undersigned, the other Grantors named
therein, to Z Investment Holdings, LLC, as Administrative Agent.  Initially
capitalized terms used but not defined herein shall have the meaning ascribed to
such terms in the Security Agreement or the Credit Agreement.  The undersigned
hereby agrees that the additional interests listed on this Pledged Collateral
Addendum as set forth below shall be and become part of the Pledged Collateral
pledged by the undersigned to the Administrative Agent in the Security Agreement
and any pledged company set forth on this Pledged Collateral Addendum as set
forth below shall be and become a “Pledged Company” under the Security
Agreement, each with the same force and effect as if originally named therein.

 

The undersigned hereby certifies that the representations and warranties set
forth in Section 3.08 of the Security Agreement of the undersigned are true and
correct as to the Pledged Collateral listed herein on and as of the date hereof.

 

 

[                                      ]

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

--------------------------------------------------------------------------------

 

Pledged Interests

 

Name of Grantor

 

Name of Pledged
Company

 

Number of
Shares/Units

 

Class of
Interests

 

Percentage of
Class Owned

 

Certificate
Nos.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pledged Notes

 

Name of Grantor

 

Name of Issuer

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

Exhibit C-2

 

THE SUBSIDIARIES OF ZALE CORPORATION IDENTIFIED HEREIN

 

and

 

Z INVESTMENT HOLDINGS, LLC,

 

as Administrative Agent

 

 

 

[FORM OF]

 

 

CANADIAN SECURITY AGREEMENT

 

May 10, 2010

 

 

 

STIKEMAN ELLIOTT LLP

 

--------------------------------------------------------------------------------

 

TABLE OF CONTENTS

 

Article I Definitions

1

 

 

 

Section 1.01

Definition of Terms Used Herein

1

Section 1.02

Definition of Certain Terms Used Herein

1

Section 1.03

Rules of Interpretation

7

 

 

Article II Security Interest

7

 

 

 

Section 2.01

Security Interest

7

Section 2.02

No Assumption of Liability

8

Section 2.03

Attachment

8

Section 2.04

Scope of Security Interest

8

 

 

Article III Representations and Warranties

8

 

 

 

Section 3.01

Title and Authority

8

Section 3.02

Filings

8

Section 3.03

Validity and Priority of Security Interest

9

Section 3.04

Absence of Other Liens

9

Section 3.05

Bailees, Warehousemen, Etc.

10

Section 3.06

Intellectual Property

10

Section 3.07

Pledged Collateral

10

 

 

Article IV Covenants

12

 

 

 

Section 4.01

Change of Name; Location of Collateral; Records; Place of Business

12

Section 4.02

Periodic Certification

12

Section 4.03

Protection of Security

13

Section 4.04

Further Assurances

13

Section 4.05

Taxes; Encumbrances

13

Section 4.06

Assignment of Security Interest

14

Section 4.07

Continuing Obligations of the Grantors

14

Section 4.08

Limitation on Modification of Accounts

15

Section 4.09

Insurance

15

Section 4.10

Legend

15

Section 4.11

Intellectual Property

15

Section 4.12

Pledged Collateral

17

Section 4.13

Securities Accounts

18

 

 

Article V Collections

19

 

 

 

Section 5.01

Deposit and Concentration Accounts

19

Section 5.02

Power of Attorney

20

Section 5.03

No Obligation to Act

21

 

i

--------------------------------------------------------------------------------

 

Article VI Remedies

21

 

 

 

Section 6.01

Remedies upon Default

21

Section 6.02

Grant of Non-Exclusive License

24

Section 6.03

Application of Proceeds

25

Section 6.04

Voting Rights

25

Section 6.05

ULC Shares

27

Section 6.06

Disposition of Pledged Collateral by Administrative Agent

28

Section 6.07

Receiver’s Powers

28

 

 

Article VII Perfection of Security Interest

28

 

 

 

Section 7.01

Perfection by Filing

28

Section 7.02

Other Perfection, etc.

29

Section 7.03

Savings Clause

29

 

 

Article VIII Miscellaneous

29

 

 

 

Section 8.01

Notices

29

Section 8.02

Security Interest Absolute

29

Section 8.03

Amalgamation

30

Section 8.04

Suretyship Waivers by Grantors

30

Section 8.05

Marshalling

30

Section 8.06

Survival of Agreement

31

Section 8.07

Binding Effect; Several Agreement; Assignments

31

Section 8.08

Administrative Agent’s Fees and Expenses; Indemnification

31

Section 8.09

Governing Law

32

Section 8.10

Waiver of The Limitation of Civil Rights Act (Saskatchewan)

32

Section 8.11

Waivers; Amendment

32

Section 8.12

Waiver of Jury Trial

33

Section 8.13

Severability

33

Section 8.14

Counterparts

33

Section 8.15

Headings

33

Section 8.16

Jurisdiction; Consent to Service of Process

34

Section 8.17

Termination; Release of Collateral

34

Section 8.18

Additional Grantors

35

Section 8.19

Intercreditor Agreement

35

Section 8.20

Grantor Consent

35

 

ii

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ADDENDA

 

SCHEDULE “1”

INTELLECTUAL PROPERTY

 

 

SCHEDULE “2”

INITIAL SUBSIDIARY GRANTORS

 

 

SCHEDULE “3”

PLEDGED INTERESTS AND PLEDGED NOTES

 

 

SCHEDULE “4”

DEPOSIT ACCOUNTS AND CONCENTRATION ACCOUNTS

 

 

ANNEX “1”

FORM OF PERFECTION CERTIFICATE

 

 

ANNEX “2”

FORM OF SUPPLEMENT

 

 

ANNEX “3”

FORM OF PATENT, INDUSTRIAL DESIGN AND TRADEMARK

 

SECURITY AGREEMENT

 

 

ANNEX “4”

FORM OF COPYRIGHT SECURITY AGREEMENT

 

 

ANNEX “5”

FORM OF PLEDGED COLLATERAL ADDENDUM

 

iii

--------------------------------------------------------------------------------

 

CANADIAN SECURITY AGREEMENT (this “Agreement”) dated as of May 10, 2010, by and
among each of: the Subsidiaries of Zale Corporation (the “Borrower”) from time
to time party hereto (each a “Grantor”, and collectively, the “Grantors”), and Z
INVESTMENT HOLDINGS, LLC, in its capacity as administrative agent (in such
capacity, the “Administrative Agent”) for the Credit Parties.

 

W I T N E S S E T H:

 

Reference is made to the Credit Agreement of even date herewith (as such may be
amended, modified, supplemented or restated hereafter, the “Credit Agreement”)
by and among (i) the Borrower, (ii) the Lenders party thereto from time to time
and (iii) the Administrative Agent, as administrative agent.

 

The Lenders have agreed to make Loans to the Borrower pursuant to, and upon the
terms and subject to the conditions specified in, the Credit Agreement.  The
obligations of the Lenders to make Loans are conditioned upon, among other
things, the execution and delivery by the Grantors of the Term Facility Canadian
Guaranty Agreement (as defined herein) and this Agreement to secure the Secured
Obligations (as defined herein).

 

Accordingly, the Grantors and the Administrative Agent, on behalf of itself and
each other Credit Party (and each of their respective successors or assigns),
hereby agree as follows:

 

ARTICLE I
Definitions

 

Section 1.01          Definition of Terms Used Herein.

 

Unless the context otherwise requires, all capitalized terms used but not
defined herein shall have the meanings set forth in the Credit Agreement, and
all references to the PPSA or the STA shall mean the Personal Property Security
Act or Securities Transfer Act , as applicable, as in effect from time to time
in the Province of Ontario.  Terms defined in the PPSA or the STA and used but
not otherwise defined herein have the same meanings.  For greater certainty, the
terms “financing statement”, “financing change statement”, “money” and “personal
property” have the meanings given to them in the PPSA; and the terms “control”
and “deliver” have the meanings given to them in the STA.

 

Section 1.02          Definition of Certain Terms Used Herein.

 

As used herein, the following terms shall have the following meanings:

 

“ABL Agent” shall have the meaning given to that term in the Intercreditor
Agreement.

 

“Accounts” shall mean all accounts, accounts receivable, receivables and rights
to payment (whether or not earned by performance) arising out of the sale,
lease, license, assignment or other disposition of Inventory and/or arising out
of the use of a credit or charge card or information contained on or used with
that card.

 

“Administrative Agent’s Rights and Remedies” shall have the meaning assigned to
such term in Section 8.11(a).

 

1

--------------------------------------------------------------------------------

 

“Blocked Account Agreement” shall have the meaning assigned to such term in
Section 5.01.

 

“Chattel Paper” shall have the meaning given that term in the PPSA.

 

“Collateral” shall mean the following assets of each Grantor: (a) all Accounts,
(b) all Inventory, (c) all Deposit Accounts, Concentration Accounts and cash,
(d) all Documents of Title, (e) all Chattel Paper, (f) all Instruments, General
Intangibles and Letter-of-Credit Rights, (g) all Goods, (h) Equipment and
fixtures, (i) all Investment Property, (i) all Securities Accounts and Futures
Accounts, (j) all Intellectual Property, (k) all other personal property not
otherwise described above (including all goods, Investment Property,
Instruments, Documents of Title, Chattel Paper, intangibles and money), whether
tangible or intangible and wherever located (except for any property expressly
excluded in this definition of “Collateral”), (l) all policies and certificates
of insurance and all insurance proceeds, refunds and premium rebates, including
proceeds of fire and credit insurance, with respect to any of the foregoing,
(m) all books, records and information relating to any of the foregoing, and all
rights of access to such books, records and information, (n) all liens,
guaranties, rights, remedies and privileges pertaining to any of the foregoing
((a) through (m)), including the right of stoppage in transit, and (o) any of
the foregoing whether now owned or now due, or in which any Grantor has an
interest, or hereafter acquired, arising or to become due, or in which any
Grantor obtains an interest, and all products, Proceeds, substitutions and
accessions of or to any of the foregoing.  Notwithstanding the foregoing, the
term “Collateral” shall expressly exclude (i) any Inventory or other Goods that
have been delivered to any Grantor on a consignment basis to the extent that the
rights of such consignor have been properly perfected under applicable law,
(ii) any property to the extent that such grant of a security interest is
prohibited by any valid enforceable law or regulation applicable thereto,
requires a consent not obtained of any Governmental Authority pursuant to such
law or regulation or is prohibited by, or constitutes a breach or default under
or results in the termination of or gives rise to a right on the part of the
parties thereto other than such Grantor to terminate (or materially modify) or
requires any consent not obtained under, any contract, license, agreement,
instrument or other document evidencing or giving rise to such property, except
to the extent that such law or regulation or the term in such contract, license,
agreement, instrument or other document providing for such prohibition, breach,
default or right of termination or modification or requiring such consent is
ineffective or is unenforceable against third parties under applicable law;
provided, however, that such security interest shall attach immediately at such
time as the condition causing such prohibition, breach, default or right of
termination or modification or requiring such consent, as the case may be, shall
be remedied and, to the extent severable, shall attach immediately to any
portion of such contract, license, agreement, instrument or other document that
does not result in any of such consequences, including any proceeds of such
contract, license, agreement, instrument or other document, (iii) the voting
Equity Interests of ZC Partnership, LP in excess of 65% of the general
partnership Equity Interests of such Subsidiary and (iv) any property that the
Administrative Agent shall determine in its reasonable discretion in which the
cost (including adverse tax consequences) of obtaining a security interest would
be excessive in relation to the value of the security to be afforded thereby;
provided, further, that in all events, all Proceeds, substitutions or
replacements of the foregoing shall constitute “Collateral” hereunder.

 

2

--------------------------------------------------------------------------------

 

“Concentration Account” shall mean all Deposit Accounts and accounts maintained
by the Grantors into which more than one Deposit Account deposits or transfers
funds.

 

“Copyright Licenses” shall mean exclusive Licenses in respect of Copyrights
where a Grantor is a licensee.

 

“Copyrights” shall mean, with respect to any Person, all of such Person’s right,
title and interest, now or hereafter acquired, in and to the following:  (a) all
copyrights, rights and interests in copyrights, works protectable by copyright,
copyright registrations and copyright applications subject to the copyright laws
of Canada; (b) all extensions and renewals of any of the foregoing; (c) all
income, royalties, damages, and payments now or hereafter due and/or payable
under any of the foregoing, including damages or payments for past, present or
future infringements for any of the foregoing; (d) the right to sue for past,
present and future infringements of any of the foregoing; and (e) all rights
corresponding to any of the foregoing.

 

“Credit Agreement” shall have the meaning assigned to such term in the recitals
to this Agreement.

 

“Deposit Account” shall mean any checking or other demand deposit account into
which proceeds of Collateral are deposited.

 

“Distribution” shall have the meaning assigned to such term in Section 6.04(a).

 

“Documents of Title” shall have the meaning given that term in the PPSA.

 

“Entitlement Holder” shall have the meaning given that term in the STA.

 

“Entitlement Orders” shall have the meaning given that term in the STA.

 

“Equipment” shall have the meaning given that term in the PPSA.

 

“Futures Accounts” shall have the meaning given that term in the PPSA.

 

“General Intangibles” shall have the meaning given the term “intangibles” in the
PPSA, except that the term does not include Accounts.  The term shall also
include all: rights to payment for credit extended; deposits; amounts due to any
Grantor; credit memoranda in favour of any Grantor, tax refunds and abatements;
insurance refunds and premium rebates; records; customer lists; telephone
numbers; causes of action; judgments; payments under any settlement or other
agreement; licenses; internet addresses and domain names; computer software
programs; trade names, trademarks, service marks, together with all goodwill
connected with and symbolized by any of the foregoing; all other general
intangible property of any Grantor in the nature of Intellectual Property, and
any warranty claims.

 

“Goods” shall have the meaning given that term in the PPSA.

 

“Governmental Authority” means (i) any international, multinational, national,
federal, provincial, state, municipal, local or other governmental or public
department, central bank, court, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) any

 

3

--------------------------------------------------------------------------------

 

subdivision or authority of any of the above, (iii) any stock exchange and
(iv) any quasi-governmental or private body exercising any regulatory,
expropriation or taxing authority under or for the account of any of the above.

 

“Grantor” shall mean, collectively, the Subsidiaries of the Borrower identified
as Grantors on Schedule “2” attached hereto and each other Subsidiary of the
Borrower that becomes a party to this Agreement as a Grantor after the Closing
Date pursuant to Section 6.11 of the Credit Agreement; provided that if a
Subsidiary is released from its obligations as a Grantor, such Subsidiary shall
cease to be a Grantor hereunder effective upon such release.

 

“Industrial Designs” shall mean, with respect to any Person, all of such
Person’s right, title and interest, now owned or hereafter acquired, in and to:
(a) any and all Canadian industrial designs and industrial design applications;
(b) all income, royalties, damages, claims, and payments now or hereafter due or
payable under and with respect thereto, including damages and payments for past,
present and future infringements thereof; (c) all rights to sue for past,
present and future infringements thereof; and (d) all rights corresponding to
any of the foregoing.

 

“Instruments” means (i) a bill, note or cheque within the meaning of the Bills
of Exchange Act (Canada) or any other writing that evidences a right to the
payment of money and is of a type that in the ordinary course of business is
transferred by delivery with any necessary endorsement or assignment, or (ii) a
letter of credit and an advice of credit if the letter or advice states that it
must be surrendered upon claiming payment thereunder, or (iii) chattel paper or
any other writing that evidences both a monetary obligation and a security
interest in or a lease of specific goods, or (iv) documents of title or any
other writing that purports to be issued by or addressed to a bailee and
purports to cover such goods in the bailee’s possession as are identified or
fungible portions of an identified mass, and that in the ordinary course of
business is treated as establishing that the Person in possession of it is
entitled to receive, hold and dispose of the document and the goods it covers,
or (v) any document or writing commonly known as an instrument, but excludes
investment property.

 

“Intellectual Property” shall mean all intellectual property and similar
property of every kind and nature now owned or hereafter acquired by any Person,
including inventions, designs, Patents, Copyrights, Trademarks, Industrial
Designs, Licenses, trade secrets, confidential or proprietary technical and
business information, know-how, show-how or other data or information and all
related documentation, and all additions and improvements to any of the
foregoing.

 

“Inventory” shall include “inventory” as defined in the PPSA and also all:
(a) Goods which (i) are leased by a Person as lessor, (ii) are held by a Person
for sale or lease or to be furnished under a contract of service, (iii) are
furnished by a Person under a contract of service, or (iv) consist of raw
materials, work in process or materials used or consumed in a business;
(b) Goods of said description in transit; (c) Goods of said description which
are returned, repossessed and rejected; (d) packaging and shipping materials
related to any of the foregoing; and (e) all Documents of Title which represent
any of the foregoing.

 

4

--------------------------------------------------------------------------------

 

“Investment Property” shall have the meaning given that term in the PPSA and
shall also include all Pledged Collateral, Pledged Operating Agreements and
Pledged Partnership Agreements.

 

“IP Agreements” shall have the meaning assigned to such term in Section 3.02.

 

“Letter of Credit Rights” means a right to payment or performance under a letter
of credit, whether or not the beneficiary has demanded or is at the time
entitled to demand payment or performance. The term does not include the right
of a beneficiary to demand payment or performance under a letter of credit.

 

“License” shall mean, with respect to any Person, all of such Person’s right,
title and interest in and to (a) any and all licensing agreements or similar
arrangements in and to any other Person’s Intellectual Property, (b) all income,
royalties, damages, claims and payments now or hereafter due or payable under
and with respect thereto, including damages and payments for past, present and
future breaches thereof, and (c) all rights to sue for past, present and future
breaches thereof.

 

“Material Trademark” shall mean any Trademark of a Grantor that is material to
the conduct of such Grantor’s business.

 

“Patents” shall mean, with respect to any Person, all of such Person’s right,
title and interest, now owned or hereafter acquired, in and to:  (a) any and all
Canadian industrial design registrations and applications, patents and patent
applications; (b) all inventions and improvements described and claimed therein,
including the right to make, use and/or sell the inventions disclosed or claimed
therein; (c) all reissues, divisions, continuations, renewals, extensions, and
continuations-in-part thereof; (d) all income, royalties, damages, claims, and
payments now or hereafter due or payable under and with respect thereto,
including damages and payments for past, present and future infringements
thereof; (e) all rights to sue for past, present and future infringements
thereof; and (f) all rights corresponding to any of the foregoing.

 

“Perfection Certificate” shall mean a certificate substantially in the form of
Annex “1” hereto, completed and supplemented with the schedules and attachments
contemplated thereby, and duly executed by a Financial Officer of each of the
Grantors.

 

“Pledged Collateral” shall mean all Pledged Interests and Pledged Notes;

 

“Pledged Collateral Addendum” shall mean a Pledged Collateral Addendum
substantially in the form of Annex “5” to this Agreement.

 

“Pledged Companies” shall mean each Person listed on Schedule “3” hereto as a
“Pledged Company”, together with each other Person, all or a portion of whose
Equity Interests, is acquired or otherwise owned by a Grantor after the Closing
Date.

 

“Pledged Interests” shall mean all of each Grantor’s right, title and interest
in and to all of the Equity Interests now or hereafter owned by such Grantor,
regardless of class or designation, including in each of the Pledged Companies
owned by it, and all substitutions therefor and

 

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replacements thereof, all proceeds thereof and all rights relating thereto, also
including any certificates representing the Equity Interests, the right to
receive any certificates representing any of the Equity Interests, all warrants,
options, share appreciation rights and other rights, contractual or otherwise in
respect thereof, and the right to receive dividends, distributions of income,
profits, surplus, or other compensation by way of income or liquidating
distributions, in cash or in kind, and all cash, instruments, and other property
from time to time received, receivable, or otherwise distributed in respect of
or in addition to, in substitution of, on account of, or in exchange for any or
all of the foregoing.

 

“Pledged Notes” shall mean with respect to any Grantor, all of the debt
securities now or hereafter owned by such Grantor and the promissory notes
evidencing such debt securities.

 

“Pledged Operating Agreements” shall mean all of each Grantor’s rights, powers,
and remedies under the limited liability company operating agreements of each of
the Pledged Companies that are limited liability companies.

 

“Pledged Partnership Agreements” shall mean all of each Grantor’s rights,
powers, and remedies under the partnership agreements of each of the Pledged
Companies that are partnerships.

 

“Proceeds” shall have the meaning given that term in the PPSA.

 

“Secured Obligations” shall mean the Guaranteed Obligations as defined in the
Term Facility Canadian Guaranty Agreement.

 

“Securities Account” shall have the meaning given that term in the STA.

 

“Securities Intermediary” shall have the meaning given that term in the STA.

 

“Security Entitlement” shall have the meaning given that term in the STA.

 

“Security Interest” shall have the meaning assigned to such term in Section 2.01
of this Agreement.

 

“Taxes” means (i) any and all taxes, duties, fees, excises, premiums,
assessments, imposts, levies and other charges or assessments of any kind
whatsoever imposed by any Governmental Authority, whether computed on a
separate, consolidated, unitary, combined or other basis, including those levied
on, or measured by, or described with respect to, income, gross receipts,
profits, gains, windfalls, capital, capital stock, production, recapture,
transfer, land transfer, license, gift, occupation, wealth, environment, net
worth, indebtedness, surplus, sales, goods and services, harmonized sales, use,
value-added, excise, special assessment, stamp, withholding, business,
franchising, real or personal property, health, employee health, payroll,
workers’ compensation, employment or unemployment, severance, social services,
social security, education, utility, surtaxes, customs, import or export, and
including all license and registration fees and all employment insurance, health
insurance and government pension plan premiums or contributions; (ii) all
interest, penalties, fines, additions to tax or other additional amounts imposed
by any Governmental Authority on or in respect of amounts of the type described
in clause (i) above or this clause (ii); (iii) any liability for the payment of
any amounts

 

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of the type described in clauses (i) or (ii) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any period; and (iv) any
liability for the payment of any amounts of the type described in clauses (i) or
(ii) as a result of any express or implied obligation to indemnify any other
Person or as a result of being a transferee or successor in interest to any
party.

 

“Term Facility Canadian Guaranty Agreement” means the term facility Canadian
guaranty agreement of even date herewith by and among the Grantors and the
Administrative Agent, as such may be amended, modified, supplemented or restated
hereafter.

 

“Term Priority Collateral” shall have the meaning given to that term in the
Intercreditor Agreement;

 

“Trademarks” shall mean, with respect to any Person, all of such Person’s right,
title and interest, now owned or hereafter acquired, in and to the following: 
(a) all Canadian trademarks (including service marks), trade names, trade dress,
trade styles and other source indicators and the registrations and applications
for registration thereof and the goodwill of the business symbolized by the
foregoing; (b) all licenses of the foregoing, whether as licensee or licensor;
(c) all renewals of the foregoing; (d) all income, royalties, damages and
payments now or hereafter due or payable with respect thereto, including
damages, claims and payments for past and future infringements thereof; (e) all
rights to sue for past, present and future infringements of the foregoing,
including the right to settle suits involving claims and demands for royalties
owing; and (f) all rights corresponding to any of the foregoing.

 

“ULC” shall mean an unlimited company under the Companies Act (Nova Scotia).

 

“ULC Pledgor” has the meaning assigned to such term in Section 6.05.

 

“ULC Shares” shall mean shares of stock or other Equity Interests in one or more
ULCs.

 

“Zale Canada” shall mean Zale Canada Co., a Nova Scotia company.

 

Section 1.03          Rules of Interpretation.

 

The rules of interpretation specified in Section 1.02 of the Credit Agreement
shall be applicable to this Agreement.

 

ARTICLE II
Security Interest

 

Section 2.01          Security Interest.

 

As security for the payment or performance, as the case may be, in full of its
Secured Obligations, each Grantor hereby bargains, mortgages, pledges, and
hypothecates and (except in the case of ULC Shares) assigns and transfers to the
Administrative Agent, its successors and assigns, for the benefit of the Credit
Parties, and hereby grants to the Administrative Agent, its successors and
assigns, for the benefit of the Credit Parties, a security interest in, all of
such Grantor’s right, title and interest in, to and under the Collateral,
wherever located whether now owned or hereafter acquired (the “Security
Interest”).

 

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Section 2.02          No Assumption of Liability.

 

The Security Interest is granted as security only and shall not subject the
Administrative Agent or any other Credit Party to, or in any way alter or
modify, any obligation or liability of any Grantor with respect to or arising
out of the Collateral.

 

Section 2.03          Attachment.

 

Each Grantor acknowledges that (i) value has been given, (ii) it has rights in
the Collateral or the power to transfer rights in the Collateral to the
Administrative Agent (other than after-acquired Collateral), and (iii) it has
not agreed to postpone the time of attachment of the Security Interest.

 

Section 2.04          Scope of Security Interest.

 

(a)           The Security Interest with respect to Trademarks constitutes a
security interest in, and a charge, hypothecation and pledge of, such Collateral
in favour of the Administrative Agent, but does not constitute an assignment or
mortgage of such Collateral to the Administrative Agent.

 

(b)           Until the Security Interest is enforceable, the grant of the
Security Interest in the Intellectual Property does not affect in any way each
of the Grantor’s rights to commercially exploit the Intellectual Property,
defend it, enforce the Grantor’s rights in it or with respect to it against
third parties in any court or claim and be entitled to receive any damages with
respect to any infringement of it.

 

(c)           The Security Interest does not extend to consumer goods.

 

(d)           The Security Interest does not extend or apply to the last day of
the term of any lease or sublease of real property or any agreement for a lease
or sublease of real property, now held or hereafter acquired by each of the
Grantors, but each of the Grantors will stand possessed of any such last day
upon trust to assign and dispose of it as the Administrative Agent may
reasonably direct.

 

ARTICLE III
Representations and Warranties

 

The Grantors jointly and severally represent and warrant to the Administrative
Agent and the Credit Parties that:

 

Section 3.01          Title and Authority.

 

Each Grantor has good and valid rights in, and title to, the Collateral with
respect to which it has purported to grant a Security Interest hereunder and has
full power and authority to grant to the Administrative Agent the Security
Interest in such Collateral pursuant hereto and to execute, deliver and perform
its obligations in accordance with the terms of this Agreement, without the
consent or approval of any other Person other than any consent or approval which
has been obtained.

 

Section 3.02          Filings.

 

The Perfection Certificate has been duly prepared, completed and executed, and
the information set forth therein is correct and complete in all material
respects.  Fully executed

 

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financing statements or financing change statements, or other appropriate
filings, recordings or registrations containing a description of the Collateral
have been, or will be, filed in each governmental, municipal or other office as
is necessary to publish notice and protect the validity of, and to establish a
legal, valid and perfected security interest in favour of the Administrative
Agent (for the benefit of the Credit Parties) with respect to all Collateral in
which the Security Interest may be perfected by filing, recording or
registration pursuant to the PPSA or equivalent legislation in any Province or
Territory of Canada, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the filing
of financing change statements.  A fully executed Patent, Industrial Design and
Trademark Security Agreement, in the form attached as Annex “3” hereto, and a
fully executed Copyright Security Agreement, in the form attached as Annex “4”
hereto (such agreements being collectively referred to as the “IP Agreements”),
covering the Canadian registered Patents, Canadian registered Industrial
Designs, Canadian registered Trademarks and Canadian registered Copyrights (and
applications for any of the foregoing) and Copyright Licenses, as applicable,
have been delivered to the Administrative Agent for recording by any relevant
offices of the Canadian Intellectual Property Office, as is necessary to protect
the validity of and to establish a legal and valid security interest in favour
of the Administrative Agent (for the benefit of the Credit Parties) in respect
of all Collateral consisting of Intellectual Property in which a security
interest may be perfected by filing, recording or registration in Canada (or any
Province or Territory thereof), and no further or subsequent filing, refiling,
recording, rerecording, registration or reregistration is necessary (other than
such actions as are necessary to perfect the Security Interest with respect to
any Intellectual Property acquired or developed after the date hereof).

 

Section 3.03          Validity and Priority of Security Interest.

 

The Security Interest constitutes (a) a legal and valid security interest in all
of the Collateral securing the payment and performance of the Secured
Obligations, and (b) a perfected security interest in all of the Collateral, to
the extent that perfection of the Security Interest can be achieved by filing or
recording a financing statement, a financing change statement or analogous
document in Canada (or any Province or Territory thereof) pursuant to the PPSA
or by recording of the IP Agreements with any relevant offices of the Canadian
Intellectual Property Office.  The Security Interest is and shall be prior to
any other Lien on any of the Collateral, subject only to those Liens expressly
permitted pursuant to Section 7.02 of the Credit Agreement.

 

Section 3.04          Absence of Other Liens.

 

The Collateral is owned by the Grantors free and clear of any Lien, except for
Liens expressly permitted pursuant to Section 7.02 of the Credit Agreement. 
Except as provided herein and in the Credit Agreement, disclosed in the
Perfection Certificate, no Grantor has filed or consented to the filing of
(a) any financing statement, a financing change statement or analogous document
under the PPSA or any other applicable law covering any Collateral, (b) any
assignment in which any Grantor assigns any Collateral or any security agreement
or similar instrument covering any Collateral with any relevant offices of the
Canadian Intellectual Property Office, or (c) any assignment in which any
Grantor assigns any Collateral or any security agreement or similar instrument
covering any Collateral with any foreign governmental, municipal or other
office, which financing statement, financing change statement

 

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or analogous document, assignment, security agreement or similar instrument is
still in effect, except, in each case, for Liens expressly permitted pursuant to
Section 7.02 of the Credit Agreement.

 

Section 3.05          Bailees, Warehousemen, Etc.

 

Except as otherwise disclosed in the Perfection Certificate, no Inventory or
Equipment of any Grantor is in the care or custody of any third party or stored
or entrusted with a bailee or other third party and none shall hereafter be
placed under such care, custody, storage or entrustment except for Equipment and
Inventory (i) out for repair or replacement in the ordinary course of business,
(ii) being shipped, or in-transit, from a supplier or to a customer or between
suppliers in the ordinary course of business or (iii) in the possession of
suppliers, subcontractors and licensees in the ordinary course of business,
unless the applicable Grantor complies with Section 4.01(c).

 

Section 3.06          Intellectual Property.

 

Schedule “1” hereto sets forth, as of the date hereof, (i) all of each Grantor’s
registered Patents and Patent applications (and for greater certainty,
registered Industrial Designs and Industrial Design applications), including the
name of the registered owner, type, registration or application number and the
expiration date (if already registered) of each registration and application
owned by any Grantor, (ii) all of each Grantor’s registered Industrial Designs
and Industrial Design applications, including the name of the registered owner,
registration or application number and the expiration date (if already
registered) of such industrial design and industrial design application owned by
any Grantor, (iii) all of each Grantor’s registered Trademarks and Trademark
applications, including the name of the registered owner, the registration or
application number and the expiration date (if already registered) of each such
Trademark and Trademark application owned by any Grantor and (iv) all of each
Grantor’s registered Copyrights, Copyright applications and Copyright Licenses,
including the name of the registered owner, title and, if applicable, the
registration number of each such Copyright, Copyright application or Copyright
License owned by any Grantor.

 

Section 3.07          Pledged Collateral.

 

(a)           Each Grantor is the holder of record and the legal and beneficial
owner, free and clear of all Liens other than the Security Interest granted to
the Administrative Agent for the benefit of the Credit Parties hereunder and
Permitted Encumbrances, of the Pledged Collateral indicated on Schedule “3” as
being owned by such Grantor and any Pledged Collateral owned by such Grantor and
acquired after the Closing Date.

 

(b)           All of the Pledged Collateral constituting Pledged Interests is
duly authorized, validly issued, fully paid and non-assessable (provided that
Pledged Interests which are ULC Shares will be assessable in accordance with the
provisions of the Companies Act (Nova Scotia)) and such Pledged Interests
constitute or will constitute the percentage of the issued and outstanding
Equity Interests of the Pledged Companies of each applicable Grantor identified
on Schedule “3”, any Pledged Collateral Addendum or any Supplement to this
Agreement.  All of the Pledged Collateral consisting of Pledged Notes is duly
authorized, validly issued and delivered by the issuer of such Pledged Note and
is the legal, valid and

 

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binding obligation of such issuer and such issuer is not in default thereunder.
Each Grantor has the right and requisite authority to pledge the Pledged
Collateral pledged by such Grantor to the Administrative Agent as provided
herein.

 

(c)           All actions necessary to perfect or establish the first priority
of the Administrative Agent’s Liens (subject to Permitted Encumbrances) in the
Pledged Collateral, and the proceeds thereof, have been duly taken, (A) upon the
execution and delivery of this Agreement; (B) (i) upon the taking of possession
by the Administrative Agent of any certificates constituting the Pledged
Interests, to the extent such Pledged Interests are represented by certificates,
together with undated powers endorsed or transfer forms endorsed in blank by the
applicable Grantor and (ii) upon the taking of possession by the Administrative
Agent of any promissory notes constituting the Pledged Notes, together with
undated powers endorsed or transfer forms endorsed in blank by the applicable
Grantor; and (C) upon the filing of financing statements or the financing change
statements in the applicable jurisdiction for such Grantor with respect to the
Pledged Collateral of such Grantor that are not represented by certificates. 
Each Grantor has delivered to and deposited with the Administrative Agent (or,
with respect to any Pledged Interests created or obtained after the Closing
Date, will deliver and deposit in accordance with Section 4.12 hereof) all
certificates representing the Pledged Interests owned by such Grantor to the
extent such Pledged Interests are represented by certificates, all promissory
notes representing the Pledged Notes owned by such Grantor and undated powers
endorsed or transfer forms endorsed in blank with respect to such certificates
or promissory notes.

 

(d)           None of the Pledged Collateral owned or held by such Grantor has
been issued or transferred in violation of any securities registration,
securities disclosure, or similar laws of any jurisdiction to which such
issuance or transfer may be subject.

 

Section 3.08          Nature of Certain Consignment Filings

 

Each of the Liens and other filings set forth on Schedule 7.02 of the Credit
Agreement which purports to cover goods delivered to a Grantor on a consignment
basis (a) evidences arrangements entered into with such Grantor and its trade
vendors in the ordinary course of business, intended by such grantor and vendor
to be a “true” consignment, (b) does not encumber any assets of such Grantor
other than the consigned goods to which it relates and the proceeds thereof to
the extent owing to the vendor and (c) secures solely the obligation of such
Grantor to either return such consigned goods or pay the purchase price for such
consigned goods, in each case pursuant to a written consignment agreement (with
the exception of any such Liens and other filings made by any trade vendors in
connection with or relating to that certain Amendment to Existing Agreements
dated as of March 3, 2010 by and among Zale Delaware, Inc., TXDC, L.P., Rosy
Blue Jewelry, Inc. and Rosy Blue, Inc., relating to consigned goods for such
Grantors’ 2010 Spring season) on terms substantially similar to those set forth
in the Grantors’ standard form of consignment agreement as in effect on or about
the Closing Date, a copy of which has been provided to the Administrative Agent.

 

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ARTICLE IV
Covenants

 

Section 4.01          Change of Name; Location of Collateral; Records; Place of
Business.

 

(a)           Each Grantor agrees to furnish to the Administrative Agent
(i) prompt written notice of any change in (A) any Grantor’s trade name or
business name used to identify it in the conduct of its business or in the
ownership of its properties, (B) any office in which it maintains books or
records relating to Collateral owned by it and having a value in excess of
$1,000,000 or any office or facility at which Collateral owned by it and having
a value in excess of $1,000,000 is located (including the establishment of any
such new office or facility) other than, in each case, (I) retail Store
locations or (II) Equipment and Inventory (1) out for repair or replacement in
the ordinary course of business, (2) being shipped, or in transit, from a
supplier or to a customer or between suppliers in the ordinary course of
business or (3) in the possession of suppliers, subcontractors and licensees in
the ordinary course of business, or (C) the acquisition by any Grantor of any
property for which additional filings or recordings are necessary to perfect and
maintain the Administrative Agent’s Security Interest therein, and (ii) prior
written notice of any change in (A) any Grantor’s corporate or partnership name
or the location of any Grantor’s chief executive office or its principal place
of business, (B) any Grantor’s identity or corporate or partnership structure or
(C) any Grantor’s jurisdiction of incorporation, amalgamation or formation;
provided however, that if any of the occurrences referred to in clauses (i) and
(ii) shall occur with respect to Zale Canada or any of its assets, Zale Canada
shall furnish to the Administrative Agent with 30 days prior written notice
thereof.  Each Grantor also agrees promptly to notify the Administrative Agent
if any material portion of the Collateral is damaged, destroyed or lost, stolen
or otherwise unaccounted for.  Each of the Grantors acknowledges and agrees
that, except as disclosed on the Perfection Certificate, such Grantor does not
currently, nor will it in the future, have any assets that constitute Collateral
located in the United States.

 

(b)           Each Grantor agrees to maintain, or cause to be maintained, at its
own cost and expense, such complete and accurate records with respect to the
Collateral owned by it as is consistent with its current practices, but in any
event to include complete accounting records indicating all payments and
proceeds received with respect to any part of the Collateral.

 

(c)           Each Grantor agrees that, to the extent it acquires any additional
leased warehouses or distribution centers after the Closing Date, the Grantors
shall provide the Administrative Agent with prompt notice thereof, and shall
obtain a waiver and collateral access agreement in form and substance reasonably
satisfactory to the Administrative Agent.

 

Section 4.02          Periodic Certification.

 

Each Grantor shall deliver to the Administrative Agent, at least thirty (30)
days prior to setting up a location in the Province of Québec in which it
intends on maintaining tangible property, a

 

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deed of movable hypothec in form and substance and on terms and conditions
reasonably satisfactory to the Administrative Agent which has been published in
each governmental, municipal or other appropriate office in the Province of
Québec to the extent necessary to protect, perfect and set-up the security
interest and hypothec.

 

Each year, at the time of delivery of annual financial statements with respect
to the preceding Fiscal Year pursuant to Section 6.01(a) of the Credit
Agreement, each Grantor shall deliver, or cause to be delivered, to the
Administrative Agent a certificate executed by a Financial Officer of such
Grantor confirming that there has been no change in the information contained in
the Perfection Certificate since the date of the Perfection Certificate
delivered on the Closing Date or the date of the most recent certificate
delivered pursuant to this Section 4.02 or, if any such change has occurred,
specifying such revised information.

 

Section 4.03          Protection of Security.

 

Each Grantor shall, at its own cost and expense, take any and all actions
reasonably necessary to defend title to the Collateral against all Persons and
to defend the Security Interest of the Administrative Agent in the Collateral
and the priority thereof against any Lien not expressly permitted pursuant to
Section 7.02.  of the Credit Agreement .

 

Section 4.04          Further Assurances.

 

Each Grantor agrees, at its own expense, to execute, acknowledge, deliver and
cause to be filed all such further instruments and documents and to take all
such actions as the Administrative Agent may from time to time reasonably
request to assure, preserve, protect and perfect the Security Interest and the
rights and remedies created hereby, including the payment of any fees and taxes
required in connection with the execution and delivery of this Agreement, the
granting of the Security Interest and the filing of any financing statements,
financing change statements or other documents in connection herewith or
therewith.  If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any promissory note, document, draft,
chattel paper or instrument in an amount in excess of $1,000,000, such note,
document, draft, chattel paper or instrument shall be immediately pledged and
delivered to the Administrative Agent, duly endorsed in a manner satisfactory to
the Administrative Agent.

 

Section 4.05          Taxes; Encumbrances.

 

The Administrative Agent may discharge past due taxes, assessments, charges,
fees or Liens (other than Liens permitted under the Credit Agreement), at any
time levied or placed on the Collateral, and may take any other action which the
Administrative Agent may deem necessary or desirable to repair, maintain or
preserve any of the Collateral to the extent any Grantor fails to do so as
required by the Credit Agreement or this Agreement, and each Grantor jointly and
severally agrees to reimburse the Administrative Agent on demand for any payment
made or any expense incurred by the Administrative Agent pursuant to the
foregoing authorization; provided that, so long as no Event of Default shall
have occurred and be continuing, if such taxes, assessments, charges, fees or
Liens are being contested in good faith and by appropriate proceedings by such
Grantor, the Administrative Agent shall consult with such Grantor before making
any such payment or taking any such action; provided, however, that the
Administrative Agent shall not have any obligation to undertake any of the
foregoing and shall have no liability on account of any action so undertaken
except to the extent that any liability on

 

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account of any such action resulted from the gross negligence, bad faith or
breach of the contractual obligations of the Administrative Agent; provided
further that the making of any such payments or the taking of any such action by
the Administrative Agent shall not be deemed to constitute a waiver of any
Default or Event of Default arising from the Grantor’s failure to have made such
payments or taken such action.  Nothing in this Section 4.05 shall be
interpreted as excusing any Grantor from the performance of any covenants or
other promises of any Grantor with respect to taxes, assessments, charges, fees,
Liens, security interests or other encumbrances and maintenance as set forth
herein or in the other Loan Documents.

 

Section 4.06          Assignment of Security Interest.

 

(a)           If at any time any Grantor shall take a security interest in any
property of an account debtor or any other Person to secure payment and
performance of an Account and the property securing payment and performance of
the Account has a value in excess of $1,000,000, such Grantor shall promptly
assign such security interest to the Administrative Agent.  Such assignment need
not be filed of public record unless necessary to continue the perfected status
of the security interest against creditors of, and transferees from, the account
debtor or other Person granting the security interest.

 

(b)           To the extent that any Grantor is a beneficiary under any written
letter of credit relating to the Collateral in an amount in excess of $1,000,000
now or hereafter issued in favour of such Grantor, such Grantor shall deliver
such letter of credit to the Administrative Agent.  The Administrative Agent
shall from time to time, at the request and expense of such Grantor, make such
arrangements with such Grantor as are in the Administrative Agent’s reasonable
judgment necessary and appropriate so that such Grantor may make any drawing to
which such Grantor is entitled under such letter of credit, without impairment
of the Administrative Agent’s perfected security interest in such Grantor’s
rights to proceeds of such letter of credit or in the actual proceeds of such
drawing.  At the Administrative Agent’s request, such Grantor shall, for any
letter of credit relating to the Collateral in an amount in excess of
$1,000,000, whether or not written, now or hereafter issued in favour of such
Grantor as beneficiary, execute and deliver to the issuer and any confirmer of
such letter of credit an assignment of proceeds form, in favour of the
Administrative Agent, and satisfactory to the Administrative Agent and such
issuer or (as the case may be) such confirmer, requiring the proceeds of any
drawing under such letter of credit to be paid directly to the Administrative
Agent.

 

Section 4.07          Continuing Obligations of the Grantors.

 

Each Grantor shall remain liable to observe and perform all the conditions and
obligations to be observed and performed by it under each contract, agreement or
instrument relating to the Collateral, all in accordance with the terms and
conditions thereof, except where the failure to do so would not have a Material
Adverse Effect, and each Grantor jointly and severally agrees to indemnify and
hold harmless the Administrative Agent and the Credit Parties from and against
any and all liability for such performance.

 

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Section 4.08          Limitation on Modification of Accounts.

 

None of the Grantors will, without the Administrative Agent’s prior written
consent, grant any extension of the time of payment of any of the Accounts,
compromise, compound or settle the same for less than the full amount thereof,
release, wholly or partly, any Person liable for the payment thereof or allow
any credit or discount whatsoever thereon, other than extensions, releases,
credits, discounts, compromises or settlements granted or made in the ordinary
course of business and consistent with its current practices.

 

Section 4.09          Insurance.

 

Each Grantor hereby irrevocably makes, constitutes and appoints the
Administrative Agent (and all officers, employees or agents designated by the
Administrative Agent) as such Grantor’s true and lawful agent (and
attorney-in-fact), exercisable after the occurrence and during the continuance
of any Event of Default, for the purpose of making, settling and adjusting
claims in respect of Collateral under policies of insurance, endorsing the name
of such Grantor on any check, draft, instrument or other item of payment for the
proceeds of such policies of insurance and for making all determinations and
decisions with respect thereto.  In the event that any Grantor at any time or
times shall fail to obtain or maintain any of the policies of insurance required
hereby or to pay any premium in whole or part relating thereto, the
Administrative Agent may, without waiving or releasing any obligation or
liability of the Grantors hereunder or any Default or Event of Default, in its
sole discretion, obtain and maintain such policies of insurance and pay such
premium and take any other actions with respect thereto as the Administrative
Agent deems advisable.  All sums disbursed by the Administrative Agent in
connection with this Section 4.09, including reasonable attorneys’ fees, court
costs, expenses and other charges relating thereto, shall be payable, upon
demand, by the Grantors to the Administrative Agent and shall be additional
Secured Obligations secured hereby.

 

Section 4.10          Legend.

 

At the request of the Administrative Agent if an Event of Default shall occur
and be continuing, each Grantor shall legend, in form and manner satisfactory to
the Administrative Agent, its Accounts and its books, records and documents
evidencing or pertaining thereto with an appropriate reference to the fact that
such Accounts have been assigned to the Administrative Agent for the benefit of
the Credit Parties and that the Administrative Agent has a security interest
therein.

 

Section 4.11          Intellectual Property.

 

(a)           Each Grantor agrees that it will not do any act or omit to do any
act (and will exercise commercially reasonable efforts to prevent its licensees
and sub-licensees from doing any act or omitting to do any act) whereby any
Patent or Industrial Design may become invalidated or dedicated to the public,
and agrees that it shall continue to mark any products covered by a Patent or
Industrial Design that is material to the conduct of such Grantor’s business
with the relevant patent number as necessary and sufficient to establish and
preserve its maximum rights under applicable patent laws.

 

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(b)           Each Grantor (either itself or through its licensees or its
sublicensees) will, for each Material Trademark, (i) maintain such Material
Trademark in full force free from any claim of abandonment or invalidity for non
use, (ii) maintain the quality of products and services offered under such
Material Trademark including where applicable policing the use of such Material
Trademarks by its licensees and sublicensees, (iii) display such Material
Trademark with notice of Federal or foreign registration to the extent necessary
and sufficient to establish and preserve its maximum rights under applicable law
and (iv) not knowingly use or knowingly permit the use of such Material
Trademark in violation of any third party rights.

 

(c)           Each Grantor (either itself or through its licensees or
sublicensees) will, for each work covered by a Copyright material to the conduct
of such Grantor’s business, continue to publish, reproduce, display, adopt and
distribute the work with appropriate copyright notice as necessary and
sufficient to establish and preserve its maximum rights under applicable
copyright laws.

 

(d)           Each Grantor shall notify the Administrative Agent promptly if it
knows or has reason to know that any Material Trademark or any Patent, Copyright
or Industrial Design material to the conduct of its business may become
abandoned, lost or dedicated to the public, or of any materially adverse
determination or development (including the institution of, or any such
determination or development in, any proceeding in the Canadian Intellectual
Property Office or any court or similar office of any country) regarding such
Grantor’s ownership of any Patent, Material Trademark, Copyright or Industrial
Design material to the conduct of its business, its right to register the same,
or its right to keep and maintain the same.

 

(e)           At the time of delivery of quarterly financial statements with
respect to each Fiscal Quarter pursuant to Section 6.01(b) of the Credit
Agreement, each Grantor shall inform the Administrative Agent of any application
for any Patent, Trademark, Industrial Design or Copyright (or any registration
of any Patent, Trademark, Industrial Design or Copyright) such Grantor has filed
with the Canadian Intellectual Property Office or in any other country or any
political subdivision thereof or any Copyright License for which such Grantor
has become the licensee, in each case, during such Fiscal Quarter, and, upon
request of the Administrative Agent, execute and deliver any and all agreements,
instruments, documents and papers as the Administrative Agent may reasonably
request to evidence the Administrative Agent’s Security Interest in any of the
foregoing, and each Grantor hereby appoints the Administrative Agent as its
attorney-in-fact to execute and file such writings for the foregoing purposes,
all acts of such attorney being hereby ratified and confirmed; such power, being
coupled with an interest, is irrevocable.

 

(f)            Each Grantor will take all necessary steps that are consistent
with the practice in any proceeding before the Canadian Intellectual Property
Office or in any other country or any political subdivision thereof, to maintain
and pursue each

 

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application relating to Material Trademarks and each material application
relating to the Patents and/or Copyrights and/or Industrial Designs (and to
obtain the relevant grant or registration) and to maintain each issued Patent
and each registration of Copyrights and/or Industrial Designs that is material
to the conduct of any Grantor’s business and each registration of Material
Trademarks, including timely filings of applications for renewal, affidavits of
use, affidavits of incontestability and payment of maintenance fees, and, if
consistent with good business judgment, to initiate opposition, interference and
cancellation proceedings against third parties.

 

(g)           In the event that any Grantor has reason to believe that any
Collateral consisting of a Patent, Industrial Design or Copyright material to
the conduct of any Grantor’s business or a Material Trademark has been or is
likely to be infringed, misappropriated or diluted by a third party, such
Grantor promptly shall notify the Administrative Agent and shall, if consistent
with reasonable business judgment, promptly sue for infringement,
misappropriation or dilution and to recover any and all damages for such
infringement, misappropriation or dilution, and take such other actions as are
appropriate under the circumstances to protect such Collateral.  Each Grantor
further agrees not to abandon any Material Trademark or any Patent, Industrial
Design, Copyright or Copyright License that in such Grantor’s reasonable
business judgment is material to the operation of such Grantor’s business
without the prior written consent of the Administrative Agent.

 

(h)           Upon and during the continuance of an Event of Default, each
Grantor shall use its best efforts to obtain all requisite consents or approvals
by the licensor of each Copyright License, Patent License, Industrial Design
License or Material Trademark License under which such Grantor is a licensee to
effect the assignment of all such Grantor’s right, title and interest thereunder
to the Administrative Agent or its designee.

 

(i)            Without limiting the generality of any of the foregoing, each
Grantor hereby authorizes the Administrative Agent, with prompt notice thereof
to the Grantors, to supplement this Agreement by supplementing Schedule “1” or
adding additional schedules hereto to identify specifically any asset or item
that may constitute Copyrights, Copyright Licenses, Patents, Industrial Designs
or Material Trademarks; provided that any Grantor shall within 10 days after it
has been notified by the Administrative Agent of the specific identification of
such Collateral, advise the Administrative Agent in writing of any Schedule “1”
inaccuracy of the representations and warranties made by such Grantor hereunder
with respect to such Collateral.

 

Section 4.12          Pledged Collateral.

 

(a)           Subject to Section 4.04 and Section 4.12, if any Grantor shall
receive or become entitled to receive any Pledged Collateral after the Closing
Date, it shall deliver to the Administrative Agent (i) a duly executed Pledged
Collateral Addendum identifying such Pledged Collateral; (ii) to the extent such
Pledged Collateral is

 

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represented by certificates or promissory notes, such certificates or promissory
notes, together with undated powers of transfer forms endorsed in blank by such
Grantor, and (iii) to the extent such Pledged Collateral is not certificated, an
executed control agreement, in form and substance satisfactory to the
Administrative Agent.

 

(b)           Upon the occurrence and continuance of an Event of Default, each
Grantor shall promptly deliver to the Administrative Agent a copy of each
material written notice or other material written communication received by it
in respect of any Pledged Collateral.

 

(c)           No Grantor shall make or consent to any amendment or other
modification or waiver with respect to any Pledged Collateral, Pledged Operating
Agreement, or Pledged Partnership Agreement, or enter into any agreement or
agree to any restriction with respect to any Pledged Collateral which would
materially adversely affect either the rights of the Administrative Agent or the
other Credit Parties pursuant to the Loan Documents or the value of the Pledged
Collateral, or that would result in a material violation of any provision of the
Credit Agreement or any other Loan Document.

 

(d)           Each Grantor agrees that it will assist the Administrative Agent
in obtaining all necessary approvals and making all necessary filings under
federal, state, local, provincial, territorial, or foreign law in connection
with the Administrative Agent’s Liens on the Pledged Collateral or any sale or
transfer thereof.

 

(e)           As to all limited liability company or partnership interests owned
by a Grantor and issued under any Pledged Operating Agreement or Pledged
Partnership Agreement which are not certificated (the “Uncertificated
Interests”), each Grantor hereby represents, warrants and covenants that such
Uncertificated Interests issued pursuant to such agreement (A) are not and shall
not be dealt in or traded on securities exchanges or in securities markets,
(B) do not and will not constitute investment company securities, and (C) are
not and will not be held by such Grantor in a securities account.  In addition,
none of the Pledged Operating Agreements, the Pledged Partnership Agreements, or
any other agreements governing any of the Uncertificated Interests issued under
any Pledged Operating Agreement or Pledged Partnership Agreement, provides or
shall provide that such Pledged Interests are securities governed by STA as in
effect in any relevant jurisdiction.  No Grantor has consented to, nor will
consent to, nor does any Grantor have any knowledge of control by any other
Person with respect to the Collateral other than the Administrative Agent.

 

Section 4.13          Securities Accounts.

 

With respect to (i) the Securities Accounts (other than Securities Accounts with
an aggregate value of less than $10,000) and (ii) any Collateral that
constitutes a Security Entitlement as to which the financial institution acting
as the Administrative Agent hereunder is not the Securities Intermediary, the
relevant Grantor will cause the Securities Intermediary with respect to each
such account or Security Entitlement either (A) to identify in its records the

 

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Administrative Agent as the Entitlement Holder thereof or (B) to agree with such
Grantor and the Administrative Agent that such Securities Intermediary will
comply with Entitlement Orders originated by the Administrative Agent without
further consent of such Grantor, such agreement to be in form and substance
reasonably satisfactory to the Borrower and Administrative Agent (which
agreement may also be for the benefit of the ABL Agent); provided that the
Administrative Agent will not give any such orders except after the occurrence
and during the continuance of an Event of Default; provided further that no
Grantor shall be required to take the foregoing actions with respect to any
Securities Account until the later of (A) 60 days after the Closing Date and
(B) in the case of Securities Accounts opened after the Closing Date, at the
time of establishment of such Securities Account (or, in each case, such later
date as the Administrative Agent shall in its reasonable discretion agree).

 

ARTICLE V
Collections

 

Section 5.01          Deposit and Concentration Accounts.

 

(a)           Schedule “4” hereto sets forth, as of the date hereof, each
Deposit Account and Concentration Account that each Grantor maintains. For each
Concentration Account that any Grantor at any time opens or maintains, such
Grantor shall cause the depositary bank to agree to comply with instructions
from the Administrative Agent to such depositary bank directing the disposition
of funds from time to time credited to such Concentration Account, without
further consent of such Grantor or any other Person, pursuant to an agreement
reasonably satisfactory to the Administrative Agent (such agreement, a “Blocked
Account Agreement”) (which Blocked Account Agreement may also be for the benefit
of the ABL Agent), provided that no Grantor shall be required to take the
foregoing actions with respect to any Concentration Account until the later of
(A) 60 days after the Closing Date and (B) in the case of Concentration Accounts
opened after the Closing Date, at the time of establishment of such
Concentration Account (or, in each case, such later date as the Administrative
Agent shall in its reasonable discretion agree).  The Administrative Agent
agrees with each Grantor that the Administrative Agent shall not give any such
instructions or withhold any withdrawal rights from any Grantor unless an Event
of Default has occurred and is continuing.  Without the prior written consent of
the Administrative Agent, no Grantor shall modify or amend the instructions
pursuant to any Blocked Account Agreement.

 

(b)           The Grantors shall cause the ACH or wire transfer to a
Concentration Account, no less frequently than daily, of the then contents of
each Deposit Account, each such transfer to be net of any minimum balance, not
to exceed $10,000, as may be required to be maintained in the subject Deposit
Account by the bank at which such Deposit Account is maintained; provided,
however, to the extent a Deposit Account is maintained for the deposit of the
receipts of a Store, and such Deposit Account is maintained with a bank that
either does not provide daily balance information for such Deposit Account or
cannot accommodate daily ACH or wire transfers and there is not a suitable
replacement bank reasonably available for such Store, then such Deposit Account
may be swept on a monthly, rather

 

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than daily basis; provided, further, that (x) the number of such Deposit
Accounts swept on a monthly basis shall not exceed 5% of all of the Store
Deposit Accounts and (y) the aggregate amounts maintained in such Deposit
Accounts shall not exceed $5,000,000 at any time.

 

Section 5.02          Power of Attorney.

 

(a)           Each Grantor hereby irrevocably makes, constitutes and appoints
the Administrative Agent (and all officers, employees or agents designated by
the Administrative Agent) as such Grantor’s true and lawful agent and
attorney-in-fact, and in such capacity the Administrative Agent shall have the
right, with power of substitution for each Grantor and in each Grantor’s name or
otherwise, for the use and benefit of the Administrative Agent and the Credit
Parties, (a) upon the occurrence and during the continuance of an Event of
Default or as otherwise permitted under the Credit Agreement, (i) to receive,
endorse, assign and/or deliver any and all notes, acceptances, checks, drafts,
money orders or other evidences of payment relating to the Collateral or any
part thereof; (ii) to demand, collect, receive payment of, give receipt for and
give discharges and releases of all or any of the Collateral; and (iii) to take
actions required to be taken by Grantors in Section 5.01 and (b) upon the
occurrence and during the continuance of an Event of Default or as otherwise
permitted in the Credit Agreement, (i) to sign the name of any Grantor on any
invoices, schedules of Collateral, freight or express receipts, or bills of
lading storage receipts, warehouse receipts or other documents of title relating
to any of the Collateral; (ii) to sign the name of any Grantor on any notice to
such Grantor’s account debtors; (iii) to sign the name of any Grantor on any
proof of claim in bankruptcy against account debtors; (iv) to the extent
relating to the Collateral, to sign change of address forms to change the
address to which each Grantor’s mail is to be sent to such address as the
Administrative Agent shall designate; (v) to receive and open each Grantor’s
mail, remove any Proceeds of Collateral therefrom and turn over the balance of
such mail either to any of the Grantors or to any trustee in bankruptcy or
receiver of a Grantor, or other legal representative of a Grantor whom the
Administrative Agent determines to be the appropriate person to whom to so turn
over such mail; (vi) to commence and prosecute any and all suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect or otherwise realize on all or any of the Collateral or to enforce any
rights in respect of any Collateral; (vii) to settle, compromise, compound,
adjust or defend any actions, suits or proceedings relating to all or any of the
Collateral; (viii) to take all such action as may be necessary to obtain the
payment of any letter of credit and/or banker’s acceptance of which any Grantor
is a beneficiary to the extent relating to Collateral; (ix) to repair,
manufacture, assemble, complete, package, deliver, alter or supply goods, if
any, necessary to fulfill in whole or in part the purchase order of any customer
of any Grantor; (x) to use for the purposes permitted by Section 6.01 hereof,
any or all General Intangibles of any Grantor relating to the Collateral;
provided that the Administrative Agent’s use of such General Intangibles will
comply with all applicable law; and (xi) to use, sell, assign, transfer, pledge,
make any agreement with respect to or otherwise deal with all

 

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or any of the Collateral, and to do all other acts and things necessary to carry
out the purposes of this Agreement, as fully and completely as though the
Administrative Agent were the absolute owner of the Collateral for all purposes;
provided, however, that nothing herein contained shall be construed as requiring
or obligating the Administrative Agent or any other Credit Party to make any
commitment or to make any inquiry as to the nature or sufficiency of any payment
received by the Administrative Agent or any other Credit Party, or to present or
file any claim or notice.  It is understood and agreed that the appointment of
the Administrative Agent as the agent and attorney-in-fact of the Grantors for
the purposes set forth above is coupled with an interest and is irrevocable.

 

(b)           Notwithstanding the provisions of Section 5.02, the power of the
Administrative Agent to act in any name other than the name of the Grantor shall
not apply to any Pledged Collateral that is ULC Shares.

 

Section 5.03          No Obligation to Act.

 

The Administrative Agent shall not be obligated to do any of the acts or to
exercise any of the powers authorized by Section 5.02, but if the Administrative
Agent elects to do any such act or to exercise any of such powers, it shall not
be accountable for more than it actually receives as a result of such exercise
of power, and shall not be responsible to any Grantor for any act or omission to
act except for any act or omission to act which constitutes gross negligence,
bad faith or breach of the contractual obligations of the Administrative Agent. 
The Administrative Agent shall be deemed to have exercised reasonable care in
the custody and preservation of the Pledged Collateral in its possession if such
Pledged Collateral is accorded treatment substantially equivalent to that which
the Administrative Agent in such Person’s individual capacity, accords its own
property consisting of similar instruments or interests, which shall be no less
than the treatment employed by a reasonable and prudent agent in the industry,
it being understood that none of the Administrative Agent or any of the Lenders
shall have responsibility for (i) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relating to
any Pledged Collateral, whether or not the Administrative Agent or any Lender
has or is deemed to have knowledge of such matters or (ii) taking any necessary
steps to preserve rights against any Person with respect to any Pledged
Collateral.  The provisions of Section 5.02 shall in no event relieve any
Grantor of any of its obligations hereunder or under any other Loan Document
with respect to the Collateral or any part thereof or impose any obligation on
the Administrative Agent or any other Credit Party to proceed in any particular
manner with respect to the Collateral or any part thereof, or in any way limit
the exercise by the Administrative Agent or any other Credit Party of any other
or further right which it may have on the date of this Agreement or hereafter,
whether hereunder, under any other Loan Document, by law or otherwise.

 

ARTICLE VI
Remedies

 

Section 6.01          Remedies upon Default.

 

Upon the occurrence and during the continuance of an Event of Default, the
security interest hereby constituted shall become enforceable and it is agreed
that the Administrative Agent shall

 

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have in any jurisdiction in which enforcement hereof is sought, in addition to
all other rights and remedies, the rights and remedies of a secured party under
the PPSA or other applicable law.  The rights and remedies of the Administrative
Agent shall include the right to take any of or all the following actions at the
same or different times upon the occurrence and during the continuance of an
Event of Default:

 

(a)           With respect to any Collateral consisting of Accounts, General
Intangibles, Letter-of-Credit Rights, Chattel Paper, Instruments and Documents
of Title, the Administrative Agent may collect the Collateral with or without
the taking of possession of any of the Collateral.

 

(b)           With respect to any Collateral consisting of Inventory, the
Administrative Agent may conduct one or more going out of business sales, in the
Administrative Agent’s own right or by one or more agents and contractors.  Such
sale(s) may be conducted upon any premises owned, leased or occupied by any
Grantor.  The Administrative Agent and any such agent or contractor, in
conjunction with any such sale, may augment the Inventory with other goods (all
of which other goods shall remain the sole property of the Administrative Agent
or such agent or contractor).  Any amounts realized from the sale of such goods
which constitute augmentations to the Inventory (net of an allocable share of
the costs and expenses incurred in their disposition) shall be the sole property
of the Administrative Agent or such agent or contractor and neither any Grantor
nor any Person claiming under or in right of any Grantor shall have any interest
therein.  Each purchaser at any such going out of business sale shall hold the
property sold absolutely, free from any claim or right on the part of any
Grantor.

 

(c)           With respect to any Collateral consisting of Intellectual
Property, on demand, to cause the Security Interest granted herein to become an
assignment, transfer and conveyance of any of or all such Collateral by the
applicable Grantors to the Administrative Agent or to license or sublicense,
whether general, special or otherwise, and whether on an exclusive or a
nonexclusive basis, any such Collateral throughout the world on such terms and
conditions and in such manner as the Administrative Agent shall reasonably
determine (other than in violation of any then-existing licensing arrangements
to the extent that waivers thereunder cannot be obtained).

 

(d)           With or without legal process and with or without prior notice or
demand for performance, the Administrative Agent may enter upon, occupy and use
any premises owned or occupied by each Grantor, and may exclude the Grantors
from such premises or portion thereof as may have been so entered upon, occupied
or used by the Administrative Agent.  The Administrative Agent shall not be
required to remove any of the Collateral from any such premises upon the
Administrative Agent’s taking possession thereof, and may render any Collateral
unusable to the Grantors.  In no event shall the Administrative Agent be liable
to any Grantor for use or occupancy by the Administrative Agent of any premises
pursuant to this Section 6.01, nor for any charge (such as wages for the
Grantors’

 

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employees and utilities) incurred in connection with the Administrative Agent’s
exercise of the Administrative Agent’s Rights and Remedies hereunder.

 

(e)           The Administrative Agent may require any Grantor to assemble the
Collateral and make it available to the Administrative Agent at the Grantor’s
sole risk and expense at a place or places which are reasonably convenient to
both the Administrative Agent and such Grantor.

 

(f)            Each Grantor agrees that the Administrative Agent shall have the
right, subject to applicable law, to sell or otherwise dispose of all or any
part of the Collateral, at public or private sale, for cash, upon credit or for
future delivery as the Administrative Agent shall deem appropriate.  Each
purchaser at any such sale shall hold the property sold absolutely, free from
any claim or right on the part of any Grantor.

 

(g)           Unless the Collateral is perishable or threatens to decline
speedily in value, or is of a type customarily sold on a recognized market (in
which event the Administrative Agent shall provide the Grantors such notice as
may be practicable under the circumstances), the Administrative Agent shall give
the Grantors at least 10 days’ prior written notice, by authenticated record, of
the date, time and place of any proposed public sale, and of the date after
which any private sale or other disposition of the Collateral may be made.  Each
Grantor agrees that such written notice shall satisfy all requirements for
notice to that Grantor which are imposed under the PPSA or other applicable law
with respect to the exercise of the Administrative Agent’s Rights and Remedies
upon Default.  The Administrative Agent shall not be obligated to make any sale
or other disposition of any Collateral if it shall determine not to do so,
regardless of the fact that notice of sale or other disposition of such
Collateral shall have been given.  The Administrative Agent may, without notice
or publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, without further notice, be made at the time and place
to which the same was so adjourned.

 

(h)           Any public sale shall be held at such time or times within
ordinary business hours and at such place or places as the Administrative Agent
may fix and state in the notice of such sale.  At any sale or other disposition,
the Collateral, or portion thereof, to be sold may be sold in one lot as an
entirety or in separate parcels, as the Administrative Agent may (in its sole
and absolute discretion) determine.  If any of the Collateral is sold, leased or
otherwise disposed of by the Administrative Agent on credit, the Secured
Obligations shall not be deemed to have been reduced as a result thereof unless
and until payment is finally received thereon by the Administrative Agent.

 

(i)            At any public (or, to the extent permitted by applicable law,
private) sale made pursuant to this Section 6.01, the Administrative Agent or
any other Credit Party may bid for or purchase, free (to the extent permitted by
applicable law) from any right of redemption, stay, valuation or appraisal on
the part of any Grantor,

 

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the Collateral or any part thereof offered for sale and may make payment on
account thereof by using any claim then due and payable to the Administrative
Agent or such other Credit Party from any Grantor on account of the Secured
Obligations as a credit against the purchase price, and the Administrative Agent
or such other Credit Party may, upon compliance with the terms of sale, hold,
retain and dispose of such property without further accountability to any
Grantor therefor.

 

(j)            For purposes hereof, a written agreement to purchase the
Collateral or any portion thereof shall be treated as a sale thereof.  The
Administrative Agent shall be free to carry out such sale pursuant to such
agreement and no Grantor shall be entitled to the return of the Collateral or
any portion thereof subject thereto, notwithstanding the fact that after the
Administrative Agent shall have entered into such an agreement all Events of
Default shall have been remedied and the Secured Obligations paid in full.

 

(k)           As an alternative to exercising the power of sale herein conferred
upon it, the Administrative Agent may proceed by a suit or suits at law or in
equity to foreclose upon the Collateral and to sell the Collateral or any
portion thereof pursuant to a judgment or decree of a court or courts having
competent jurisdiction or pursuant to a proceeding by a court-appointed
receiver.

 

(l)            The Administrative Agent may appoint by instrument in writing a
receiver (which term as used herein includes a receiver and manager) or agent of
all or any part of the Collateral and remove or replace from time to time any
receiver or agent;

 

(m)          The Administrative Agent may institute proceedings in any court of
competent jurisdiction to appoint a receive of all or any part of the
Collateral;

 

(n)           To the extent permitted by applicable law, each Grantor hereby
waives all rights of redemption, stay, valuation and appraisal which such
Grantor now has or may at any time in the future have under any rule of law or
statute now existing or hereafter enacted.

 

Section 6.02          Grant of Non-Exclusive License.

 

For the purpose of enabling the Administrative Agent to exercise the
Administrative Agent’s Rights and Remedies under Section 6.01 (including in
order to take possession of, hold, preserve, process, assemble, prepare for
sale, market for sale, sell or otherwise dispose of the Collateral) at such time
as the Administrative Agent shall be lawfully entitled to exercise the
Administrative Agent’s Rights and Remedies under Section 6.01, each Grantor
hereby (i) grants to the Administrative Agent, for the benefit of the
Administrative Agent and the other Credit Parties, a royalty free,
non-exclusive, irrevocable license, such license being with respect to the
Administrative Agent’s exercise of the Administrative Agent’s Rights and
Remedies under Section 6.01, including in connection with any completion of the
manufacture of Inventory or any sale or other disposition of Inventory (a) to
use, apply and affix any Trademark, trade name, logo or the like in which any
Grantor now or hereafter has rights, (b) to use, license or

 

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sublicense any Intellectual Property, computer software now owned, held or
hereafter acquired by such Grantor, including in such license access to all
media and to the extent to which any of the licensed items may be recorded or
stored and to all such computer software programs and to the extent used for the
compilation or print out thereof, provided that the Administrative Agent’s use
of the property described in subclauses (a) and (b) above will comply with all
applicable law, and (c) to use any and all furniture, fixtures and equipment
contained in any premises owned or occupied by any Grantor in connection with
the exercise of the Administrative Agent’s Rights and Remedies under
Section 6.01, and (ii) without limiting the provisions of Section 6.01(c),
agrees to provide the Administrative Agent and/or its agents with access to, and
the right to use, any such premises owned or occupied by any Grantor.

 

Section 6.03          Application of Proceeds.

 

After the occurrence of an Event of Default and acceleration of the Secured
Obligations, the Administrative Agent shall apply the proceeds of any collection
or sale of the Collateral, as well as any Collateral consisting of cash, or any
Collateral granted under any other of the Security Documents in the manner set
forth in Section 8.04 of the Credit Agreement.

 

Section 6.04          Voting Rights.

 

(a)           So long as no Event of Default shall have occurred and be
continuing:

 

(i)            Each Grantor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Pledged Collateral of such Grantor or
any part thereof for any purpose.  For so long as any Grantor shall have the
right to vote the Pledged Interests of such Grantor, such Grantor covenants and
agrees that it will not, without the prior written consent of the Administrative
Agent, vote or take any consensual action with respect to the Pledged Interests
which would materially affect the rights of the Administrative Agent, or any
other Credit Party or the value of the Pledged Interests.  The Administrative
Agent shall execute and deliver to each Grantor, or cause to be executed and
delivered to such Grantor, all such proxies, powers of attorney and other
instruments as such Grantor may reasonably request for the purpose of enabling
such Grantor to exercise the voting and/or consensual rights and powers it is
entitled to exercise pursuant to this Section 6.04(a)(i).

 

(ii)           Each Grantor shall be entitled to receive and retain any and all
dividends, cash, options, warrants, rights, instruments, distributions, returns
of capital or principal, income, interest, profits and other property, interests
(debt or equity) or proceeds, including as a result of a split, revision,
reclassification or other like change of the Pledged Interests, from time to
time received, receivable or otherwise distributed to such Grantor in respect of
or in exchange for any or all of the Pledged Collateral (any of the foregoing, a
“Distribution” and collectively the “Distributions”) paid in respect of the
Pledged Collateral of such Grantor to the extent that the payment thereof is not
otherwise prohibited by the terms of the Loan Documents; provided, however, that
any and all Distributions paid or payable other than in cash (other than in
connection with a partial or total

 

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liquidation or dissolution or in connection with a reduction of capital, capital
surplus or paid in surplus) in respect of, and instruments and other property
received, receivable or otherwise distributed in respect of, or in exchange for,
any Pledged Collateral, shall be, and, subject to the limitations in the
definition of “Collateral”, promptly delivered to the Administrative Agent to
hold as Pledged Collateral and shall, if received by such Grantor, be received
in trust for the benefit of the Administrative Agent, be segregated from the
other property or funds of such Grantor and be promptly delivered to the
Administrative Agent as Pledged Collateral in the same form as so received (with
any necessary endorsement).

 

(b)           Upon the occurrence and during the continuance of an Event of
Default:

 

(i)            All rights of each Grantor (x) to exercise or refrain from
exercising the voting and other consensual rights that it would otherwise be
entitled to exercise pursuant to Section 6.04(a)(i) shall automatically cease
and (y) to receive Distributions that it would otherwise be authorized to
receive and retain pursuant to 6.04(a)(ii) shall automatically cease, and all
such rights shall thereupon become vested in the Administrative Agent, which
shall thereupon have the sole right to exercise or refrain from exercising such
voting and other consensual rights and to receive and hold as Pledged Collateral
such dividends, interest and other distributions; provided that, unless
otherwise directed by the Required Lenders, the Administrative Agent shall have
the right from time to time following and during the continuance of an Event of
Default to permit the Grantors to exercise such rights.  Any and all money and
other property paid over to or received by the Administrative Agent pursuant to
the provisions of this Section 6.04(b)(i) shall be retained by the
Administrative Agent in an account to be established by the Administrative Agent
upon receipt of such money or other property and shall be applied in accordance
with the provisions of Section 6.03. After all Events of Default have been cured
or waived and the Borrower has delivered to the Administrative Agent a
certificate to that effect, the Administrative Agent shall promptly repay to
each Grantor (without interest) all dividends or interest that such Grantor
would otherwise be permitted to retain pursuant to the terms of this
Section 6.04 and that remain in such account.

 

(ii)           All Distributions that are received by any Grantor contrary to
the provisions of paragraph (i) of this Section 6.04(b) shall be received in
trust for the benefit of the Administrative Agent, shall be segregated from
other funds of such Grantor and shall be promptly paid over to the
Administrative Agent as Pledged Collateral in the same form as so received (with
any necessary endorsement).

 

(c)           This Section 6.04 shall not apply to any Pledged Collateral that
is ULC Shares or to any Distributions that are paid in respect of ULC Shares.

 

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Section 6.05          ULC Shares.

 

(a)           Notwithstanding any provisions to the contrary contained in this
Agreement or any other document or agreement among all or some of the parties
hereto, each Grantor that is the registered and beneficial owner of any Pledged
Collateral which are ULC Shares (“ULC Pledgor”) will remain so until such time
as such ULC Shares are effectively transferred into the name of the
Administrative Agent, any Credit Party or any other Person on the books and
records of such ULC.  Accordingly, each ULC Pledgor shall be entitled to receive
and retain for its own account any Distribution in respect of such Pledged
Collateral (except insofar as such ULC Pledgor has granted a security interest
in such Distribution, and any shares which are Pledged Collateral shall be
delivered to the Administrative Agent to hold as Pledged Collateral hereunder)
and shall have the right to vote such Pledged Collateral and to control the
direction, management and policies of the applicable ULC issuer to the same
extent as such ULC Pledgor would if such Pledged Collateral were not pledged to
the Administrative Agent (for its own benefit and for the benefit of the Credit
Parties) pursuant hereto.  Nothing in this Agreement or any other document or
agreement among all or some of the parties hereto is intended to, and nothing in
this Agreement or any other document or agreement among all or some of the
parties hereto shall constitute, the Administrative Agent, any Credit Party or
any other Person other than a ULC Pledgor a member of a ULC for the purposes of
the Companies Act (Nova Scotia) until such time as notice is given to such ULC
Pledgor and further steps are taken pursuant hereto or thereto so as to register
the Administrative Agent, any Credit Party or any other Person as holder of the
applicable ULC Shares.  To the extent any provision hereof would have the effect
of constituting the Administrative Agent or any Credit Party as a member of any
ULC prior to such time, such provision shall be severed therefrom and shall be
ineffective with respect to Pledged Collateral which are ULC Shares without
otherwise invalidating or rendering unenforceable this Agreement or invalidating
or rendering unenforceable such provision insofar as it relates to Pledged
Collateral which are not ULC Shares.

 

(b)           Except upon the exercise of rights to sell, transfer or otherwise
dispose of the Pledged Collateral issued by a ULC following the occurrence of an
Event of Default pursuant to Article VI, no ULC Pledgor shall cause or permit,
or enable any ULC in which they hold ULC Shares to cause or permit, the
Administrative Agent or any other Credit Party to:  (a) be registered as
shareholder or member of such ULC; (b) accept or request stock powers of
attorney in respect of such Person endorsed or assigned in favour of the
Administrative Agent or other Credit Party; (c) have any notation entered in its
favour in the share register of such ULC; (d) be held out as a shareholder or
member of such ULC; (e) receive, directly or indirectly, any dividends, property
or other distributions from such ULC by reason of the Administrative Agent or
any other Credit Party holding a security interest in such ULC; or (f) to act as
a shareholder or member of such ULC, or exercise any rights of a shareholder or
member including the right to attend a meeting of, or to vote the shares of,
such ULC.

 

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Section 6.06          Disposition of Pledged Collateral by Administrative Agent.

 

None of the Pledged Collateral existing as of the date of this Agreement is, and
none of the Pledged Collateral hereafter acquired on the date of acquisition
thereof will be, registered or qualified under the various provincial or
territorial securities laws of Canada and disposition thereof after an Event of
Default has occurred and is continuing may be restricted to one or more private
(instead of public) sales in view of the lack of such registration.  Each
Grantor understands that in connection with such disposition, the Administrative
Agent may approach only a restricted number of potential purchasers and further
understands that a sale under such circumstances may yield a lower price for the
Pledged Collateral than if the Pledged Collateral were registered and qualified
pursuant to provincial and territorial securities laws and sold on the open
market.  Each Grantor, therefore, agrees that:  (a) if the Administrative Agent
shall, pursuant to the terms of this Agreement, sell or cause the Pledged
Collateral or any portion thereof to be sold at a private sale, the
Administrative Agent shall have the right to rely upon the advice and opinion of
any nationally recognized brokerage or investment firm (but shall not be
obligated to seek such advice and the failure to do so shall not be considered
in determining the commercial reasonableness of such action) as to the best
manner in which to offer the Pledged Collateral or any portion thereof for sale
and as to the best price reasonably obtainable at the private sale thereof; and
(b) such reliance shall be conclusive evidence that the Administrative Agent has
handled the disposition in a commercially reasonable manner.

 

Section 6.07          Receiver’s Powers.

 

(a)           Any receiver appointed by the Administrative Agent is vested with
the rights and remedies which could have been exercised by the Administrative
Agent in respect of the Grantors or the Collateral and such other powers and
discretions as are granted in the instrument of appointment and any supplemental
instruments.  The identity of the receiver, its replacement and its remuneration
are within the sole and unfettered discretion of the Administrative Agent.

 

(b)           Any receiver appointed by the Administrative Agent will act as
agent for the Administrative Agent for the purposes of taking possession of the
Collateral, but otherwise and for all other purposes (except as provided below),
as agent for the Grantors.  The receiver may sell, lease, or otherwise dispose
of Collateral as agent for the Grantors or as agent for the Administrative Agent
as the Administrative Agent may determine in its discretion.  Each of the
Grantors agrees to ratify and confirm all actions of the receiver acting as
agent for the Grantors, and to release and indemnify the receiver in respect of
all such actions.

 

ARTICLE VII
Perfection of Security Interest

 

Section 7.01          Perfection by Filing.

 

This Agreement constitutes an authenticated record, and each Grantor hereby
authorizes the Administrative Agent to file one or more financing or financing
change statements, and amendments thereto, relative to all or any part of the
Collateral, in such filing offices as the Administrative Agent shall deem
appropriate, including recording of the IP Agreements with any relevant offices
of the Canadian Intellectual Property Office, and the Grantors shall pay the
Administrative Agent’s reasonable costs and expenses incurred in connection
therewith.  Any

 

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such financing statement may indicate the Collateral as “all assets of the
Grantor”, or words of similar effect.

 

Section 7.02          Other Perfection, etc.

 

The Grantors shall at any time and from time to time take such steps as the
Administrative Agent may reasonably request for the Administrative Agent (a) to
obtain an acknowledgment, in form and substance reasonably satisfactory to the
Administrative Agent, of any bailee having possession of any of the Collateral
that the bailee holds such Collateral for the Administrative Agent, (b) to
obtain “control” of any Collateral, with any agreements establishing control to
be in form and substance satisfactory to the Administrative Agent (and which may
also be for the benefit of the ABL Agent) and (c) otherwise to insure the
continued perfection of the Administrative Agent’s Security Interest in any of
the Collateral with the priority described in Section 3.03 and of the
preservation of its rights therein.  After the Security Interest becomes
enforceable, the Grantors will do all acts and things and execute and deliver
all documents and instruments that the Administrative Agent may require for
facilitating the sale or other disposition of the Collateral in connection with
its realization.

 

Section 7.03          Savings Clause.

 

Nothing contained in this Article VII shall be construed to narrow the scope of
the Administrative Agent’s Security Interest in any of the Collateral or the
perfection or priority thereof or to impair or otherwise limit any of the
Administrative Agent’s Rights and Remedies hereunder except (and then only to
the extent) as mandated by the PPSA.

 

ARTICLE VIII
Miscellaneous

 

Section 8.01          Notices.

 

All communications and notices hereunder shall (except as otherwise expressly
permitted herein) be in writing and given as provided in Section 10.02 of the
Credit Agreement.

 

Section 8.02          Security Interest Absolute.

 

All rights of the Administrative Agent hereunder, the Security Interest and all
obligations of the Grantors hereunder shall be absolute and unconditional
irrespective of (a) any lack of validity or enforceability of the Credit
Agreement, any other Loan Document, any agreement with respect to any of the
Secured Obligations or any other agreement or instrument relating to any of the
foregoing, (b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations, or any other amendment or
waiver of or any consent to any departure from the Credit Agreement, any other
Loan Document or any other agreement or instrument, (c) any exchange, release or
non-perfection of any Lien on other collateral, or any release or amendment or
waiver of or consent under or departure from any guarantee, securing or
guaranteeing all or any of the Secured Obligations, or (d) any other
circumstance that might otherwise constitute a defence available to, or a
discharge of, any Grantor in respect of the Secured Obligations or this
Agreement.

 

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Section 8.03          Amalgamation.

 

Each Grantor acknowledges and agrees that in the event it amalgamates with any
other corporation or corporations, it is the intention of the parties that the
Security Interest (i) extends to: (A) all of the property and undertaking that
any of the amalgamating corporations then owns, (B) all of the property and
undertaking that the amalgamated corporation thereafter acquires, (C) all of the
property and undertaking in which any of the amalgamating corporations then has
any interest and (D) all of the property and undertaking in which the
amalgamated corporation thereafter acquires any interest; and (ii) secures the
payment and performance of all debts, liabilities and obligations, present or
future, direct or indirect, absolute or contingent, matured or unmatured, at any
time or from time to time due or accruing due and owing by or otherwise payable
by each of the amalgamating corporations and the amalgamated corporation to the
Credit Parties in any currency, however or wherever incurred, and whether
incurred alone or jointly with another or others and whether as principal,
guarantor or surety and whether incurred prior to, at the time of or subsequent
to the amalgamation.  The Security Interest attaches to the additional
collateral at the time of amalgamation and to any collateral thereafter owned or
acquired by the amalgamated corporation when such becomes owned or is acquired. 
Upon any such amalgamation, the defined term “Grantor” means, collectively, each
of the amalgamating corporations and the amalgamated corporation, the defined
term “Collateral” means all of the property and undertaking and interests
described in (i) above, and the defined term “Secured Obligations” means the
obligations described in (ii) above.

 

Section 8.04          Suretyship Waivers by Grantors.

 

The Grantors waive demand, notice, protest, notice of acceptance of this
Agreement, notice of loans made, credit extended, Collateral received or
delivered or other action taken in reliance hereon and all other demands and
notices of any description.  With respect to both the Secured Obligations and
the Collateral, each Grantor assents to any extension or postponement of the
time of payment or any other indulgence, to any substitution, exchange or
release of or failure to perfect any security interest in any Collateral, to the
addition or release of any party or person primarily or secondarily liable, to
the acceptance of partial payment thereon and the settlement, compromising or
adjusting of any thereof, all in such manner and at such time or times as the
Administrative Agent may deem advisable.  The Administrative Agent shall have no
duty as to the collection or protection of the Collateral or any income
therefrom, the preservation of rights against prior parties or the preservation
of any rights pertaining thereto.  Each of the Grantors further waives any and
all other suretyship defences.

 

Section 8.05          Marshalling.

 

Neither the Administrative Agent nor any Lender shall be required to marshal any
present or future collateral security (including the Collateral) for, or other
assurances of payment of the Secured Obligations or any of them or to resort to
such collateral security or other assurances of payment in any particular order,
and all of the rights and remedies of the Administrative Agent or any Lender
hereunder and of the Administrative Agent or any Lender in respect of such
collateral security and other assurances of payment shall be cumulative and in
addition to all other rights and remedies, however existing or arising.  To the
extent that it lawfully may, each Grantor hereby agrees that it will not invoke
any law relating to the marshalling of collateral which might cause delay in or
impede the enforcement of the Administrative Agent’s Rights and Remedies under
this Agreement or under any other instrument creating or evidencing any

 

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of the Secured Obligations or under which any of the Secured Obligations is
outstanding or by which any of the Secured Obligations is secured or payment
thereof is otherwise assured, and, to the extent that it lawfully may, each
Grantor hereby irrevocably waives the benefits of all such laws.

 

Section 8.06          Survival of Agreement.

 

All covenants, agreements, representations and warranties made by the Grantors
herein and in the certificates or other instruments prepared or delivered in
connection with or pursuant to this Agreement or any other Loan Document shall
be considered to have been relied upon by the Administrative Agent and the other
Credit Parties and shall survive the execution and delivery of this Agreement
and the other Loan Documents and the making of any Loans, and shall continue in
full force and effect as long as the Secured Obligations are outstanding and
unpaid, and as long as the Commitments have not expired or terminated.

 

Section 8.07          Binding Effect; Several Agreement; Assignments.

 

Whenever in this Agreement any of the parties hereto is referred to, such
reference shall be deemed to include the successors and assigns of such party
(subject to the provisions of the Credit Agreement), and all covenants, promises
and agreements by or on behalf of the Grantors that are contained in this
Agreement shall bind and inure to the benefit of each Grantor and its respective
successors and assigns.  This Agreement shall be binding upon each Grantor and
the Administrative Agent and their respective successors and assigns, and shall
inure to the benefit of each Grantor, the Administrative Agent and the other
Credit Parties and their respective successors and assigns, except that no
Grantor shall have the right to assign or transfer its rights or obligations
hereunder or any interest herein or in the Collateral (and any such attempted
assignment or transfer shall be void) except as expressly permitted by this
Agreement or the Credit Agreement.  This Agreement shall be construed as a
separate agreement with respect to each Grantor and may be amended, modified,
supplemented, waived or released with respect to any Grantor without the
approval of any other Grantor and without affecting the obligations of any other
Grantor hereunder.

 

Section 8.08          Administrative Agent’s Fees and Expenses; Indemnification.

 

(a)           Without limiting any of their obligations under the Credit
Agreement or the other Loan Documents, the Grantors jointly and severally agree
to pay all Credit Party Expenses incurred in connection with this Agreement.

 

(b)           Without limiting any of their indemnification obligations under
the Credit Agreement or the other Loan Documents, the Grantors shall, jointly
and severally, agree to indemnify each Credit Party and their respective
Affiliates (each such Person being called an “Indemnitee”), and hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses (other than with respect to Taxes), including the reasonable
and documented fees, charges and disbursements of counsel for any Indemnitee,
incurred by or asserted against any Indemnitee arising out of, in connection
with or as a result of (i) the execution or delivery or performance of this
Agreement, the performance by any Grantor of its obligations under this
Agreement or the consummation of the transactions contemplated hereby, or
(ii) any actual or prospective claim, litigation, investigation or proceeding
relating to any of the

 

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foregoing or to the Collateral, whether based on contract, tort or any other
theory and regardless of whether any Indemnitee is a party thereto; provided,
however, that such indemnity shall not, as to any Indemnitee, be available to
the extent that such losses, claims, damages, liabilities or related expenses
resulted from the gross negligence, willful misconduct, bad faith or breach of
the contractual obligations of such Indemnitee or with respect to a claim by one
Indemnitee against another Indemnitee.

 

(c)           Any such amounts payable as provided hereunder shall be additional
Secured Obligations secured hereby and by the other Security Documents.  All
amounts due under this Section 8.08 shall be payable on written demand therefor.

 

Section 8.09          Governing Law.

 

EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, IN ALL RESPECTS, INCLUDING ALL
MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE
SECURED OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF ONTARIO, AND THE FEDERAL LAWS OF
CANADA APPLICABLE THEREIN.

 

Section 8.10          Waiver of The Limitation of Civil Rights Act
(Saskatchewan)

 

Without limiting the generality of the foregoing, the Grantor agrees that The
Limitation of Civil Rights Act (Saskatchewan) will not apply to this Security
Agreement or any rights, remedies or powers of the Collateral Agent, any Secured
Party or any Receiver hereunder.

 

Section 8.11          Waivers; Amendment.

 

(a)           The rights, remedies, powers, privileges and discretions of the
Administrative Agent hereunder (herein, the “Administrative Agent’s Rights and
Remedies”) shall be cumulative and not exclusive of any rights or remedies which
it would otherwise have.  No delay or omission by the Administrative Agent in
exercising or enforcing any of the Administrative Agent’s Rights and Remedies
shall operate as, or constitute, a waiver thereof.  No waiver by the
Administrative Agent of any Event of Default or of any Default under any other
agreement shall operate as a waiver of any other Event of Default or other
Default hereunder or under any other agreement.  No single or partial exercise
of any of the Administrative Agent’s Rights or Remedies, and no express or
implied agreement or transaction of whatever nature entered into between the
Administrative Agent and any Person, at any time, shall preclude the other or
further exercise of the Administrative Agent’s Rights and Remedies.  No waiver
by the Administrative Agent of any of the Administrative Agent’s Rights and
Remedies on any one occasion shall be deemed a waiver on any subsequent
occasion, nor shall it be deemed a continuing waiver.  The Administrative
Agent’s Rights and Remedies may be exercised at such time or times and in such
order of preference as the Administrative Agent may determine.  The
Administrative Agent’s Rights and Remedies may be exercised without resort or
regard to any other source of satisfaction of the Secured Obligations.  No
waiver of any provisions of this Agreement or any other Loan Document or consent
to any departure by any Grantor therefrom shall in any event be effective unless
the

 

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same shall be permitted by paragraph (b) below, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given.  No notice to or demand on any Grantor in any case shall entitle such
Grantor or any other Grantor to any other or further notice or demand in similar
or other circumstances.

 

(b)           Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to a written agreement entered into between
the Administrative Agent and the Grantor or Grantors with respect to whom such
waiver, amendment or modification is to apply, subject to any consent required
in accordance with Section 10.01 of the Credit Agreement.

 

Section 8.12          Waiver of Jury Trial.

 

EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR
ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT
OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS SET FORTH IN THIS SECTION 8.12.

 

Section 8.13          Severability.

 

In the event any one or more of the provisions contained in this Agreement
should be held invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision in a particular jurisdiction shall not in
and of itself affect the validity of such provision in any other jurisdiction).

 

Section 8.14          Counterparts.

 

This Agreement may be executed in counterparts (and by different parties hereto
on different counterparts), each of which shall constitute an original, but all
of which when taken together shall constitute a single contract. Delivery of an
executed counterpart of a signature page to this Agreement by telecopy or other
electronic image scan transmission (e.g., “pdf” or “tif” via e-mail) shall be as
effective as delivery of a manually executed counterpart to this Agreement.

 

Section 8.15          Headings.

 

Article and Section headings and the Table of Contents used herein are for the
purpose of reference only, are not part of this Agreement and are not to affect
the construction of, or to be taken into consideration in interpreting, this
Agreement.

 

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Section 8.16          Jurisdiction; Consent to Service of Process.

 

(a)           EACH OF THE GRANTORS AND THE ADMINISTRATIVE AGENT IRREVOCABLY
ATTORNS AND SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY COURT OF COMPETENT
JURISDICTION OF THE PROVINCE OF ONTARIO SITTING IN TORONTO, ONTARIO IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.  THE GRANTOR
IRREVOCABLY WAIVES OBJECTION TO THE VENUE OF ANY ACTION OR PROCEEDING IN SUCH
COURT OR THAT SUCH COURT PROVIDES AN INCONVENIENT FORUM.

 

(b)           EACH PARTY TO THIS AGREEMENT IRREVOCABLY CONSENTS TO SERVICE OF
PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 8.01.  NOTHING IN THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT WILL AFFECT THE RIGHT OF ANY PARTY TO THIS
AGREEMENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

 

Section 8.17          Termination; Release of Collateral.

 

(a)           Except for those provisions which expressly survive the
termination thereof, this Agreement and the Security Interest shall terminate
when all the Secured Obligations have been paid in full (excluding contingent
obligations as to which no claim has been made) and the Lenders have no further
commitment to lend under the Credit Agreement.

 

(b)           The Administrative Agent may release any Grantor from its
obligations hereunder, and the Security Interest in the Collateral of such
Grantor shall automatically be released (i) if such Person ceases to be a
Subsidiary as a result of a transaction permitted by the Credit Agreement;
provided that, if so required by the Credit Agreement, the Required Lenders
shall have consented to such transaction and the terms of such consent did not
provide otherwise or (ii) upon the effectiveness of any written consent to such
release pursuant to Section 10.01 of the Credit Agreement.

 

(c)           Upon any disposition of Collateral in connection with any
disposition permitted under the Credit Agreement or any other Loan Document
(other than a sale or transfer to a Grantor), or upon the effectiveness of any
written consent to the release of the Security Interest granted hereby in any
Collateral pursuant to Section 10.01 of the Credit Agreement, the Security
Interest in such Collateral shall be automatically released.

 

(d)           In connection with any termination or release pursuant to
paragraph (a), (b) or (c) of this Section 8.17, the Administrative Agent shall
execute and deliver to the Grantors, at the Grantors’ expense, all releases,
discharges, financing statements and similar documents that the Grantors shall
reasonably request to evidence such termination or release.  Any execution and
delivery of releases, discharges, financing statements or documents pursuant to
the Section 8.17 shall be without recourse to, or warranty by, the
Administrative Agent.

 

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Section 8.18          Additional Grantors.

 

Pursuant to Section 6.11 of the Credit Agreement, after the Closing Date, each
new direct or indirect Canadian incorporated or created Subsidiary of the
Borrower is required to enter into this Agreement as a Grantor.  Upon execution
and delivery by the Administrative Agent and a Subsidiary of an instrument in
the form of Annex “2” hereto, such Subsidiary shall become a Grantor hereunder
with the same force and effect as if originally named as a Grantor herein.  The
execution and delivery of any such instrument shall not require the consent of
any other Loan Party hereunder.  The rights and obligations of each Loan Party
hereunder shall remain in full force and effect notwithstanding the addition of
any new Loan Party as a party to this Agreement.

 

Section 8.19          Intercreditor Agreement.

 

Notwithstanding anything herein to the contrary, the lien and Security Interest
granted pursuant to this Agreement and the exercise of any right or remedy
hereunder are subject to the provisions of the Intercreditor Agreement.  In the
event of any conflict between the terms of the Intercreditor Agreement and this
Agreement, the terms of the Intercreditor Agreement shall govern and control. 
Without limiting the generality of the foregoing, and notwithstanding anything
herein to the contrary, all rights and remedies of the Administrative Agent (and
the other Credit Parties) with respect to the ABL Priority Collateral (as
defined in the Intercreditor Agreement) shall be subject to the terms of the
Intercreditor Agreement, and until the discharge of the ABL Obligations (as
defined in the Intercreditor Agreement), any obligation of the Borrower and any
Grantor hereunder or under any other Loan Document with respect to the delivery
or control of any ABL Priority Collateral, the novation of any lien on any
certificate of title, bill of lading or other document, the giving of any notice
to any bailee or other Person, the provision of voting rights, the obtaining of
any consent of any Person, or otherwise, in each case in connection with any ABL
Priority Collateral, shall be deemed to be satisfied if the Borrower or such
Grantor, as applicable, complies with the requirements of the similar provision
of the applicable ABL Document (as defined in the Intercreditor Agreement). 
Until the discharge of the ABL Obligations, the delivery of any ABL Priority
Collateral to the ABL Priority Agent (as defined in the Intercreditor Agreement)
pursuant to the ABL Documents shall satisfy any delivery requirement hereunder
or under any other Loan Document.

 

Section 8.20          Grantor Consent.

 

Each Grantor which is not a ULC hereby consents to the security interests
granted herein by each other Grantor, including any security interests in Equity
Interests issued by such Grantor or Equity Interests issued by any Person in
which such Grantor owns any Equity Interest.  Each Grantor which is not a ULC
hereby waives any rights of such Grantor to notice in connection with the grant
of any Security Interests by any Grantor hereunder.

 

[SIGNATURE PAGES FOLLOW]

 

35

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement under
seal as of the day and year first above written.

 

GRANTORS:

 

 

ZALE CANADA CO.

 

 

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

GRANTORS:

 

 

ZALE CANADA DIAMOND SOURCING INC.

 

 

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

GRANTORS:

 

 

ZALE CANADA FINCO 1, INC.

 

 

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

GRANTORS:

 

 

ZALE CANADA FINCO 2, INC.

 

 

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

GRANTORS:

 

 

ZALE CANADA FINCO 2, INC. acting in its capacity as general partner of Finco
Holding LP

 

 

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

GRANTORS:

 

 

ZALE CANADA FINCO 2, INC. acting in its capacity as general partner of Finco
Partnership LP

 

 

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

GRANTORS:

 

 

ZALE INTERNATIONAL, INC. in its capacity as general partner of Zale Canada
Holding LP

 

 

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

ADMINISTRATIVE AGENT:

 

 

Z INVESTMENT HOLDINGS, LLC

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

SCHEDULE “1”

 

INTELLECTUAL PROPERTY

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

1

--------------------------------------------------------------------------------

 

SCHEDULE “2”

 

INITIAL SUBSIDIARY GRANTORS

 

1

--------------------------------------------------------------------------------

 

SCHEDULE “3”

 

PLEDGED INTERESTS AND PLEDGED NOTES

 

PLEDGED INTERESTS

 

Name of 
Grantor

 

Name of
Pledged
Company

 

Number of
Shares/Units

 

Class of
Interests

 

Percentage
of Class
Owned

 

Certificate
Nos.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PLEDGED NOTES

 

Name of Grantor

 

Name of Issuer

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

--------------------------------------------------------------------------------

 

SCHEDULE “4”

 

DEPOSIT ACCOUNTS AND CONCENTRATION ACCOUNTS

 

NAME OF LOAN PARTY

 

NAME OF INSTITUTION

 

ACCOUNT
NUMBER

 

CHECK HERE IF
ACCOUNT IS A
CONCENTRATION
ACCOUNT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

--------------------------------------------------------------------------------

 

ANNEX “1”

 

FORM OF PERFECTION CERTIFICATE

 

[Attached.]

 

--------------------------------------------------------------------------------

 

ANNEX “2”

 

FORM OF SUPPLEMENT

 

SUPPLEMENT NO.      dated as of [·] (this “Supplement”), to the Canadian
Security Agreement dated as of May 10, 2010 (the “Security Agreement”), among
each of the Subsidiaries of Zale Corporation (the “Borrower”) from time to time
party thereto (each a “Grantor”, and collectively, the “Grantors”) and Z
Investment Holdings, LLC, in its capacity as administrative agent (in such
capacity, the “Administrative Agent”).

 

Reference is made to the Credit Agreement dated as of May 10, 2010 (as such may
be amended, modified, supplemented or restated hereafter, the “Credit
Agreement”) by and among (i) the Borrower, (ii) the Lenders party thereto and
(iii) the Administrative Agent.

 

Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement and the Security
Agreement referred to therein.

 

The Grantors have entered into the Security Agreement in order to induce the
Lenders to make Loans.  Section 8.18 of the Security Agreement provides that new
direct and indirect Subsidiaries of the Borrower may become Grantors under the
Security Agreement by execution and delivery of an instrument in the form of
this Supplement.  The undersigned Subsidiary (the “New Subsidiary”) is executing
this Supplement in accordance with the requirements of the Credit Agreement to
become a Grantor under the Security Agreement as consideration for Loans
previously under made the Credit Agreement.

 

Accordingly, the Administrative Agent and the New Subsidiary agree as follows:

 

1.                                      In accordance with Section 8.18 of the
Security Agreement, the New Subsidiary by its signature below becomes a Grantor
under the Security Agreement with the same force and effect as if originally
named therein as a Grantor and the New Subsidiary hereby (a) agrees to all the
terms and provisions of the Security Agreement applicable to it as a Grantor
thereunder and (b) represents and warrants that the representations and
warranties made by it as a Grantor thereunder are true and correct on and as of
the date hereof.  In furtherance of the foregoing, the New Subsidiary, as
security for the payment and performance in full of the Secured Obligations,
does hereby create and grant to the Administrative Agent, its successors and
assigns, for the benefit of the Credit Parties, a security interest in and lien
on all of the New Subsidiary’s right, title and interest in and to the
Collateral (as defined in the Security Agreement) of the New Subsidiary.  Each
reference to a “Grantor” in the Security Agreement shall be deemed to include
the New Subsidiary.  The Security Agreement is hereby incorporated herein by
reference.

 

2.                                      The New Subsidiary represents and
warrants to the Administrative Agent and the other Credit Parties that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms.

 

1

--------------------------------------------------------------------------------

 

3.                                      This Supplement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This Supplement shall become effective when
the Administrative Agent shall have received a counterpart of this Supplement
that bears the signature of the New Subsidiary and the Administrative Agent has
executed a counterpart hereof.  Delivery of an executed signature page to this
Supplement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually signed
counterpart to this Supplement.

 

4.                                      The New Subsidiary hereby represents and
warrants that, as of the date hereof, (a) set forth on Schedule “1”  attached
hereto is a Schedule with the true and correct legal name of the New Subsidiary,
its jurisdiction of formation and the location of its chief executive office,
(b) set forth on Schedule “2” attached hereto is a true and correct Schedule of
Intellectual Property consisting (i) all of the New Subsidiary’s Canadian
registered Patents and Patent applications, including the name of the registered
owner, type, registration or application number and the expiration date (if
already registered) of each such Patent and Patent application owned by the New
Subsidiary, (ii) all of the New Subsidiary’s Canadian registered Industrial
Designs and Industrial Design applications including the name of the registered
owner, registration or application number and the expiration date (if already
registered) of each such Industrial Design and Industrial Design application
owned by the New Subsidiary, (iii) all of the New Subsidiary’s Canadian
registered Trademarks and Trademark applications, including the name of the
registered owner, the registration or application number and the expiration date
(if already registered) of each such Trademark and Trademark application owned
by the New Subsidiary and (iv) all of the New Subsidiary’s Canadian registered
Copyrights, Copyright applications and Copyright Licenses, including the name of
the registered owner, title and, if applicable, the registration number of each
such Copyright, Copyright application or Copyright License owned by the New
Subsidiary, (c) set forth on Schedule “3” attached hereto is the Pledged
Collateral held by the New Subsidiary, and (d) set forth on Schedule “4”
attached hereto are the Deposit Accounts and Concentration Accounts that the New
Subsidiary maintains.

 

5.                                      Except as expressly supplemented hereby,
the Security Agreement shall remain in full force and effect.

 

6.                                      EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS SUPPLEMENT AND THE SECURED OBLIGATIONS SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF
ONTARIO AND THE FEDERAL LAWS OF CANADA APPLICABLE THEREIN.

 

7.                                      In the event any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and in the Security Agreement shall not in
any way be affected or impaired thereby (it being understood

 

2

--------------------------------------------------------------------------------

 

that the invalidity of a particular provision in a particular jurisdiction shall
not in and of itself affect the validity of such provision in any other
jurisdiction).

 

8.                                      All communications and notices hereunder
shall be in writing and given as provided in Section 8.01 of the Security
Agreement.

 

9.                                      The New Subsidiary agrees to reimburse
the Administrative Agent for its reasonable out-of-pocket expenses reasonably
incurred in connection with this Supplement, including the reasonable fees,
other charges and disbursements of counsel for the Administrative Agent.

 

IN WITNESS WHEREOF, the New Subsidiary and the Administrative Agent have duly
executed this Supplement to the Security Agreement as of the day and year first
above written.

 

 

 

[NAME OF NEW SUBSIDIARY]

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

 

 

 

 

 

 

Z INVESTMENT HOLDINGS, LLC, as Administrative Agent

 

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

3

--------------------------------------------------------------------------------

 

Schedule 1

 

New Subsidiary Information

 

Name

 

Jurisdiction of Formation

 

Chief Executive Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

--------------------------------------------------------------------------------

 

Schedule 2

 

Intellectual Property

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

5

--------------------------------------------------------------------------------

 

Schedule 3

 

Pledged Interests and Pledged Notes

 

PLEDGED INTERESTS

 

Name of 
Grantor

 

Name of
Pledged
Company

 

Number of
Shares/Units

 

Class of
Interests

 

Percentage
of Class
Owned

 

Certificate
Nos.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PLEDGED NOTES

 

Name of Grantor

 

Name of Issuer

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

--------------------------------------------------------------------------------

 

Schedule 4

 

Deposits Accounts and Concentration Accounts

 

NAME OF LOAN PARTY

 

NAME OF INSTITUTION

 

ACCOUNT
NUMBER

 

CHECK HERE IF
ACCOUNT IS A
CONCENTRATION
ACCOUNT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

--------------------------------------------------------------------------------

 

ANNEX “3”

 

FORM OF PATENT, INDUSTRIAL DESIGN

AND TRADEMARK SECURITY AGREEMENT

 

[Attached.]

 

--------------------------------------------------------------------------------

 

ANNEX “4”

 

FORM OF COPYRIGHT SECURITY AGREEMENT

 

[Attached.]

 

--------------------------------------------------------------------------------

 

ANNEX “5”

 

FORM OF PLEDGED COLLATERAL ADDENDUM

 

This Pledged Collateral Addendum, dated as of ·, 20··, is delivered pursuant to
Section 4.12  of the Canadian Security Agreement referred to below.  The
undersigned hereby agrees that this Pledged Collateral Addendum may be attached
to that certain Canadian Security Agreement, dated as of May 10, 2010, (as
amended, restated, supplemented or otherwise modified from time to time, the
“Security Agreement”), among the undersigned, the other Grantors named therein,
to Z Investment Holdings, LLC, as Administrative Agent.  Initially capitalized
terms used but not defined herein shall have the meaning ascribed to such terms
in the Security Agreement or the Credit Agreement.  The undersigned hereby
agrees that the additional interests listed on this Pledged Collateral Addendum
as set forth below shall be and become part of the Pledged Collateral pledged by
the undersigned to the Administrative Agent in the Security Agreement and any
pledged company set forth on this Pledged Collateral Addendum as set forth below
shall be and become a “Pledged Company” under the Security Agreement, each with
the same force and effect as if originally named therein.

 

The undersigned hereby certifies that the representations and warranties set
forth in Section 3.07 of the Security Agreement of the undersigned are true and
correct as to the Pledged Collateral listed herein on and as of the date hereof.

 

 

 

 

 

 

By:

Name:

 

 

Title:

 

1

--------------------------------------------------------------------------------

 

PLEDGED INTERESTS

 

Name of 
Grantor

 

Name of
Pledged
Company

 

Number of
Shares/Units

 

Class of
Interests

 

Percentage
of Class
Owned

 

Certificate
Nos.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PLEDGED NOTES

 

Name of Grantor

 

Name of Issuer

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

--------------------------------------------------------------------------------

 

Zale Corporation

REVOLVING LINE OF CREDIT AVAILABILITY CALCULATION AT COST (000’s)

Cert. No.                    

 

 

 

Retail

 

Cost

 

 

 

 

 

 

 

Beg. Inventory as of:

 

 

 

$

—

 

$

—

 

 

 

 

 

 

 

ADD

Receiving/Purchases

 

$

—

 

$

—

 

 

Vendor Returns

 

$

—

 

$

—

 

 

Markups/Markup Cancellations

 

$

—

 

$

—

 

 

Inter-Co. transfers

 

$

—

 

$

—

 

 

Other (Explain)

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

INVENTORY AVAILABLE FOR SALE

 

$

—

 

$

—

 

 

 

 

 

 

 

 

LESS

Net Sales @ Retail

 

$

—

 

 

 

 

Cost of Goods Sold @ Cost

 

 

 

$

—

 

 

POS Markdowns

 

$

—

 

$

—

 

 

Perm Markdowns

 

$

—

 

$

—

 

 

Shrink

 

$

—

 

$

—

 

 

Prior Period Adjustments

 

 

 

$

—

 

 

 

 

 

 

 

 

 

Total Reductions

 

$

—

 

$

—

 

 

 

 

 

 

 

Ending inventory as of

 

 

 

$

—

 

$

—

 

 

 

 

 

 

 

 

ADD:

Zap Inventory (Gemstones, Shanks, and Mounts)

 

 

 

$

—

 

 

Inventory receipts not fully processed in D.C.

 

 

 

$

—

 

 

 

 

 

 

 

 

LESS:

Shrink Reserve @ EOM

 

 

 

$

—

 

 

Form 400 & Damaged Inventory

 

 

 

$

—

 

 

Consignment

 

 

 

$

—

 

 

 

 

 

 

 

Eligible Inventory, as of:

 

 

 

 

 

—

(A)

NOLV:

 

 

 

 

 

 

 

Inventory Advance Rate:

 

 

 

 

 

 

(B)

 

 

 

 

 

 

Inventory Borrowing Base (A*B)

 

 

 

$

—

(C)

 

 

 

 

 

 

Credit Card Receivables, as of:

 

 

 

 

 

$

—

 

 

 

 

 

 

 

LESS:

Credit card reserves being held by card companies

 

 

 

$

—

 

 

 

 

 

 

 

Eligible Credit Card Receivables, as of:

 

 

 

 

 

$

—

(D)

 

 

 

 

 

 

Receivable Advance Rate:

 

 

 

 

(E)

 

 

 

 

 

 

Receivable Borrowing Base (D*E)

 

 

 

—

(F)

 

 

 

 

 

 

Less Availability Reserves:

 

 

 

 

 

 

Merchandise Credits (50% of outstanding Store Credit Liability and 100% Customer
Refund Liability)

 

 

 

$

—

 

 

Gift Certificates (50% of outstanding)

 

 

 

$

—

 

 

Landlord Lien Reserve (2 Months)

 

 

 

$

—

 

 

Customer Deposits (100% of outstanding layaways)

 

 

 

$

—

 

 

Canadian Sales Tax Reserve (previous month’s tax payment for all provinces)

 

 

 

$

—

 

 

Canadian Store Rent Reserve (previous month’s rent liability)

 

 

 

$

—

 

 

Canadian Employee Payroll Reserve (50% of previous months payroll)

 

 

 

$

—

 

 

Consignment A/R Reserve (Memo Sales / Total Sales * Receivables * 50%)

 

 

 

$

—

 

 

Incremental Reserve

 

 

 

$

—

 

 

Term Reserve (term loan reserve)

 

 

 

$

—

 

Total Availability Reserves

 

 

 

$

—

(H)

 

 

 

 

 

 

Borrowing Base (not to exceed $650MM)

 

 

 

$

—

(I)

Incremental Availability

 

 

 

 

 

 

 

 

 

 

 

Eligible Inventory, as of:

 

 

 

 

 

—

(A)

NOLV

 

 

 

 

 

 

 

Inventory Advance Rate:

 

 

 

 

 

 

(B)

 

 

 

 

 

 

Incremental Availability (Not to exceed $15MM)

 

 

 

$

—

 

 

 

 

 

 

 

Borrowing Base + Aggregate FILO Commitments ($15MM)

 

 

 

$

—

 

AVAILABILITY CALCULATION

 

 

 

 

 

Beginning Revolver Principal Balance

 

 

 

$

—

 

ADD:

Prior days advance

 

 

 

$

—

 

ADD:

Fees charged today

 

 

 

$

—

 

ADD:

LC’S CHARGED

 

 

 

$

—

 

LESS:

Prior day’s paydown

 

 

 

$

—

 

 

 

 

 

 

 

 

Ending Revolver principal balance (includes $15MM FILO Tranche)

 

 

 

$

—

 

 

 

 

 

 

 

 

ADD:

Est. accrued interest month to date

 

 

 

$

—

 

ADD:

Standby Letters of Credit

 

 

 

$

—

 

ADD:

Documentary Letters of Credit

 

 

 

$

—

 

 

 

 

 

 

 

Total loan balance prior to request

 

 

 

$

—

(J)

 

 

 

 

 

 

Net availability prior to today’s request (I-J)

 

 

 

$

—

(K)

 

 

 

 

 

 

ADVANCE REQUEST

 

 

 

$

—

(L)

 

 

 

 

 

 

Paydown

 

 

 

$

—

 

 

 

 

 

 

 

Availability before Covenant Compliance Event (K-L)

 

 

 

$

—

(M)

 

 

 

 

 

 

Covenant Compliance Event requirement

 

 

 

$

—

 

 

 

 

 

 

 

Covenant Compliance Event?

 

 

 

 

 

 

The undersigned represents and warrants that the information set forth above has
been prepared in accordance with the requirements of (a) the Second Amended and
Restated Credit Agreement, dated as of July 24, 2012 (as amended or otherwise
modified) by and among Zale Corporation and the other Borrowers and Facility
Guarantors party thereto, the Lenders Party thereto, and Bank of America, N.A.,
as Administrative Agent, and (b) the Amended and Restated Credit Agreement,
dated as of July 24, 2012 (as amended or otherwise modified) by and among Zale
Corporation, the other Borrowers and Facility Guarantors party thereto, the
Lenders Party thereto, and Z Investment Holdings, LLC, as Administrative Agent.

 

Authorized Signer

 

 

 

--------------------------------------------------------------------------------

 

Term Loan Borrowing Base and Term Reserve Calculation (000’s)

 

Term Loan Borrowing Base

 

 

 

 

 

 

 

Eligible Inventory

 

$

—

 

Appraised Inventory Liquidation Value

 

 

 

Term Loan Borrowing Base Inventory Advance Rate

 

 

 

Inventory Borrowing Base

 

$

—

 

 

 

 

 

Eligible Credit Card Receivables

 

$

—

 

Net Orderly Liquidation Value of IP (maximum of $40M)

 

$

—

 

Term Loan Borrowing Base

 

$

—

 

 

 

 

 

Term Reserve Calculation

 

 

 

 

 

 

 

ABL Borrowing Base

 

$

—

 

Availability Reserves:

 

 

 

Merchandise Credits (50% of outstanding Store Credit Liability and 100% Customer
Refund Liability)

 

$

—

 

Gift Certificates (50% of outstanding)

 

$

—

 

Landlord Lien Reserve (2 Months)

 

$

—

 

Customer Deposits (100% of outstanding layaways)

 

$

—

 

Canadian Sales Tax Reserve (previous month’s tax payment for all provinces)

 

$

—

 

Canadian Store Rent Reserve (previous month’s rent liability)

 

$

—

 

Canadian Employee Payroll Reserve (50% of previous months payroll)

 

$

—

 

Consignment A/R Reserve (Memo Sales / Total Sales * Receivables * 50%)

 

$

—

 

Total Availability Reserves

 

$

—

 

 

 

 

 

ABL Borrowing Base without Reserves

 

$

—

 

Aggregrate FILO Commitment

 

$

—

 

ABL Borrowing Base Including FILO Commitment and Availability Reserves

 

$

—

 

 

 

 

 

Threshold for Term Reserve

 

$

—

 

 

 

 

 

Term Loan

 

$

—

 

 

 

 

 

Term Reserve (applicable to the extent the Term Loan is greater than the
Threshold for Term Reserve)

 

$

—

 

 

--------------------------------------------------------------------------------

 

EXHIBIT E

 

FORM OF COMPLIANCE CERTIFICATE

 

To:                              Z Investment Holdings, LLC

Date:

 

One Embarcadero Center, Suite 3900

 

San Francisco, CA 94111

 

Attention: Josh Olshansky

 

 

Reference is made to that certain Amended and Restated Credit Agreement dated as
of July 24, 2012 (as amended, modified, supplemented or restated, the “Credit
Agreement”) by and among (i) ZALE DELAWARE, INC., a Delaware corporation, ZALE
CORPORATION, a Delaware corporation (“Zale”),  ZGCO, LLC, a Virginia limited
liability company, TXDC, L.P., a Texas limited partnership, and ZALE PUERTO
RICO, INC., a Puerto Rico corporation (collectively, the “Borrowers”) (ii) the
Facility Guarantors from time to time party thereto, (iii) the Lenders from time
to time party thereto, and (iv) Z Investment Holdings, LLC, as administrative
agent (in such capacity, the “Administrative Agent”) for its own benefit and the
benefit of the other Credit Parties.  All capitalized terms used in this
Compliance Certificate (this “Certificate”) and not otherwise defined shall have
the same meaning herein as in the Credit Agreement.

 

The undersigned, a duly authorized and acting Financial Officer of Zale, hereby
certifies to you as of the date hereof as follows:

 

1.                                       No Default.

 

a.                                       Except as set forth in Appendix I, no
Default or Event of Default has occurred and is continuing.

 

b.                                      If a Default or Event of Default has
occurred and is continuing, the Borrowers have taken or propose to take action
as set forth in Appendix I with respect to such Default or Event of Default.

 

2.                                       No Material Accounting Changes, Etc. 
The financial statements furnished to the Administrative Agent for the
month/fiscal quarter/fiscal year ending [          ] were prepared in accordance
with GAAP consistently applied and present fairly in all material respects the
financial condition of Zale and its Subsidiaries on a consolidated basis at the
close of, and the results of the Borrowers’ operations and cash flows for, the
period(s) covered, subject to, with respect to the monthly/quarterly financial
statements, normal year end audit adjustments and the absence of footnotes.
There has been no change in GAAP or the application thereof since the date of
the audited financial statements furnished  to the Administrative Agent for the
year ending [          ], other than the material accounting changes as
disclosed on Appendix II hereto.

 

3.                                       Financial Calculations.   Attached
hereto as Appendix III are reasonably detailed calculations necessary to
determine the Fixed Charge Coverage Ratio for the period ending
[                                  ].

 

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IN WITNESS WHEREOF, I have executed this Certificate as of the date first
written above.

 

 

 

By:

 

 

 

Financial Officer of Zale

 

 

 

Name:

 

 

Title:

 

 

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APPENDIX I

 

Except as set forth below, no Default or Event of Default has occurred and is
continuing. [If a Default or Event of Default has occurred and is continuing,
the following describes the nature of the Default or Event of Default in
reasonable detail and the steps taken, being taken or contemplated by the
Borrowers to be taken on account thereof.]

 

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APPENDIX II

 

Except as set forth below, no material changes in GAAP or the application
thereof have occurred since [the date of the most recently delivered audited
financial statements to the Administrative Agent prior to the date of this
Certificate]. [If material changes in GAAP or in application thereof have
occurred, the following describes the nature of the changes in reasonable detail
and the effect, if any, of each such material change in GAAP or in application
thereof in the determination of (i) the calculation of the financial statements
described in the Credit Agreement and (ii) in the Fixed Charge Coverage Ratio].

 

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APPENDIX III

 

Calculation of Fixed Charge Coverage Ratio

 

1.

Consolidated EBITDA for such period

 

 

 

(see detailed calculation of Consolidated EBITDA attached hereto):

 

 

 

 

 

 

2.

Minus the following:

 

 

 

 

 

 

 

(a)

Unfinanced Capital Expenditures for such period:

 

 

 

 

 

 

 

 

(b)

federal income tax (whether U.S., Canadian or Puerto Rican) paid in cash during
such period:

 

 

 

 

 

 

3.

Line 1, minus Lines 2(a) and 2(b):

 

 

 

 

 

 

4.

The sum of the following:

 

 

 

 

 

 

 

(a)

Consolidated Total Interest Expense for such period:

 

 

 

 

 

 

 

 

 

plus

 

 

 

 

 

 

 

 

(b)

the sum of all scheduled payments of principal on Indebtedness of Zale and its
Subsidiaries (including without limitation, the principal component of amounts
paid on account of Capital Lease Obligations) made or required to be made during
such period:

 

 

 

 

 

 

 

 

 

plus

 

 

 

 

 

 

 

 

(c)

Restricted Payments consisting of dividends made during such period:

 

 

 

 

 

 

 

 

(d)

The sum of Lines 4(a) through 4(c):

 

 

 

 

 

 

5.

FIXED CHARGE COVERAGE RATIO AS OF THE LAST TWELVE MONTHS PERIOD ENDED
                         (Line 3 divided by Line 4(d)):

 

 

 

 

B.  Fixed Charge Coverage Ratio Covenant:  During the continuance of a Covenant
Compliance Event, the Loan Parties shall not permit the Fixed Charge Coverage
Ratio, calculated for any Reference Period as of the last day of each fiscal
month commencing with the fiscal month immediately prior to the date that the
Covenant Compliance Event occurs, to be less than 1.0:1.0.

 

1.

Is covenant required to be tested?

Yes o

No o

2.

If covenant is required to be tested, in compliance?

Yes o

No o

 

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EXHIBIT F-1

 

FORM OF U.S. TAX COMPLIANCE CERTIFICATE

 

(For Foreign Lenders That Are Not Partnerships For U.S. Federal Income Tax
Purposes)

 

Reference is hereby made to the Amended and Restated Credit Agreement dated as
of July 24, 2012 (as amended, modified, supplemented or restated hereafter, the
“ Credit Agreement”) by and among (i) ZALE DELAWARE, INC., a Delaware
corporation, ZALE CORPORATION, a Delaware corporation (“Zale”),  ZGCO, LLC, a
Virginia limited liability company, TXDC, L.P., a Texas limited partnership, and
ZALE PUERTO RICO, INC., a Puerto Rico corporation (collectively, the
“Borrowers”) (ii) the Facility Guarantors from time to time party thereto,
(iii) the Lenders party thereto from time to time, and (iv) Z Investment
Holdings, LLC, as administrative agent (in such capacity, the “Administrative
Agent”) for its own benefit and the benefit of the other Credit Parties.  All
capitalized terms used in this U.S. Tax Compliance Certificate (this
“Certificate”) and not otherwise defined shall have the same meaning herein as
in the Credit Agreement.

 

Pursuant to the provisions of Section 2.26(e) of the Credit Agreement, the
undersigned hereby certifies that (i) it is the sole record and beneficial owner
of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of
which it is providing this Certificate, (ii) it is not a “bank” within the
meaning of Section 881(c)(3)(A) of the Code, (iii) it is not a “10 percent
shareholder” of any Borrower within the meaning of Section 881(c)(3)(B) of the
Code and (iv) it is not a “controlled foreign corporation” related to any
Borrower as described in Section 881(c)(3)(C) of the Code.

 

The undersigned has furnished the Administrative Agent and Zale with a
certificate of its non-U.S. Person status on IRS Form W-8BEN (or any successor
form thereto).  By executing this Certificate, the undersigned agrees that
(1) if the information provided on this Certificate changes, the undersigned
shall promptly so inform Zale and the Administrative Agent, and, to the extent
it is legally entitled to do so, (2) the undersigned shall have at all times
furnished Zale and the Administrative Agent with a properly completed and
currently effective U.S. Tax Compliance Certificate in either the calendar year
in which each payment is to be made to the undersigned, or in either of the two
calendar years preceding such payments.

 

[NAME OF LENDER]

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

 

 

 

Date:                      , 20[ ]

 

 

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EXHIBIT F-2

 

FORM OF U.S. TAX COMPLIANCE CERTIFICATE

 

(For Foreign Participants That Are Not Partnerships For U.S. Federal Income Tax
Purposes)

 

Reference is hereby made to the Amended and Restated Credit Agreement dated as
of July 24, 2012 (as amended, modified, supplemented or restated hereafter, the
“ Credit Agreement”) by and among (i) ZALE DELAWARE, INC., a Delaware
corporation, ZALE CORPORATION, a Delaware corporation (“Zale”),  ZGCO, LLC, a
Virginia limited liability company, TXDC, L.P., a Texas limited partnership, and
ZALE PUERTO RICO, INC., a Puerto Rico corporation (collectively, the
“Borrowers”) (ii) the Facility Guarantors from time to time party thereto,
(iii) the Lenders party thereto from time to time, and (iv) Z Investment
Holdings, LLC, as administrative agent (in such capacity, the “Administrative
Agent”) for its own benefit and the benefit of the other Credit Parties.  All
capitalized terms used in this U.S. Tax Compliance Certificate (this
“Certificate”) and not otherwise defined shall have the same meaning herein as
in the Credit Agreement.

 

Pursuant to the provisions of Section 2.26(e) of the Credit Agreement, the
undersigned hereby certifies that (i) it is the sole record and beneficial owner
of the participation in respect of which it is providing this Certificate,
(ii) it is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code,
(iii) it is not a “10 percent shareholder” of any Borrower within the meaning of
Section 881(c)(3)(B) of the Code, and (iv) it is not a “controlled foreign
corporation” related to any Borrower as described in Section 881(c)(3)(C) of the
Code.

 

The undersigned has furnished its participating Lender with a certificate of its
non-U.S. Person status on IRS Form W-8BEN (or any successor form thereto).  By
executing this Certificate, the undersigned agrees that (1) if the information
provided on this Certificate changes, the undersigned shall promptly so inform
such Lender in writing, and, to the extent it is legally entitled to do so,
(2) the undersigned shall have at all times furnished such Lender with a
properly completed and currently effective U.S. Tax Compliance Certificate in
either the calendar year in which each payment is to be made to the undersigned,
or in either of the two calendar years preceding such payments.

 

[NAME OF PARTICIPANT]

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

 

 

 

Date:                      , 20[ ]

 

 

--------------------------------------------------------------------------------

 

EXHIBIT F-3

 

FORM OF U.S. TAX COMPLIANCE CERTIFICATE

 

(For Foreign Participants That Are Partnerships For U.S. Federal Income Tax
Purposes)

 

Reference is hereby made to the Amended and Restated Credit Agreement dated as
of July 24, 2012 (as amended, modified, supplemented or restated hereafter, the
“ Credit Agreement”) by and among (i) ZALE DELAWARE, INC., a Delaware
corporation, ZALE CORPORATION, a Delaware corporation (“Zale”),  ZGCO, LLC, a
Virginia limited liability company, TXDC, L.P., a Texas limited partnership, and
ZALE PUERTO RICO, INC., a Puerto Rico corporation (collectively, the
“Borrowers”) (ii) the Facility Guarantors from time to time party thereto,
(iii) the Lenders party thereto from time to time, and (iv) Z Investment
Holdings, LLC, as administrative agent (in such capacity, the “Administrative
Agent”) for its own benefit and the benefit of the other Credit Parties.  All
capitalized terms used in this U.S. Tax Compliance Certificate (this
“Certificate”) and not otherwise defined shall have the same meaning herein as
in the Credit Agreement.

 

Pursuant to the provisions of Section 2.26(e) of the Credit Agreement, the
undersigned hereby certifies that (i) it is the sole record owner of the
participation in respect of which it is providing this Certificate, (ii) its
direct or indirect partners/members are the sole beneficial owners of such
participation, (iii) with respect such participation, neither the undersigned
nor any of its direct or indirect partners/members is a “bank” extending credit
pursuant to a loan agreement entered into in the ordinary course of its trade or
business within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of
its direct or indirect partners/members is a “10 percent shareholder” of any
Borrower within the meaning of Section 881(c)(3)(B) of the Code and (v) none of
its direct or indirect partners/members is a “controlled foreign corporation”
related to any Borrower as described in Section 881(c)(3)(C) of the Code.

 

The undersigned has furnished its participating Lender with IRS Form W-8IMY
accompanied by one of the following forms from each of its partners/members that
is claiming the portfolio interest exemption: (i) an IRS Form W-8BEN (or any
successor form thereto) or (ii) an IRS Form W-8IMY accompanied by an IRS
Form W-8BEN (or any successor form thereto) from each of such partner’s/member’s
beneficial owners that is claiming the portfolio interest exemption.  By
executing this Certificate, the undersigned agrees that (1) if the information
provided on this Certificate changes, the undersigned shall promptly so inform
such Lender and, to the extent it is legally entitled to do so, (2) the
undersigned shall have at all times furnished such Lender with a properly
completed and currently effective U.S. Tax Compliance Certificate in either the
calendar year in which each payment is to be made to the undersigned, or in
either of the two calendar years preceding such payments.

 

[NAME OF PARTICIPANT]

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

 

 

 

Date:                      , 20[ ]

 

 

--------------------------------------------------------------------------------

 

EXHIBIT F-4

 

FORM OF U.S. TAX COMPLIANCE CERTIFICATE

 

(For Foreign Lenders That Are Partnerships For U.S. Federal Income Tax Purposes)

 

Reference is hereby made to the Amended and Restated Credit Agreement dated as
of July 24, 2012 (as amended, modified, supplemented or restated hereafter, the
“ Credit Agreement”) by and among (i) ZALE DELAWARE, INC., a Delaware
corporation, ZALE CORPORATION, a Delaware corporation (“Zale”),  ZGCO, LLC, a
Virginia limited liability company, TXDC, L.P., a Texas limited partnership, and
ZALE PUERTO RICO, INC., a Puerto Rico corporation (collectively, the
“Borrowers”) (ii) the Facility Guarantors from time to time party thereto,
(iii) the Lenders party thereto from time to time, and (iv) Z Investment
Holdings, LLC, as administrative agent (in such capacity, the “Administrative
Agent”) for its own benefit and the benefit of the other Credit Parties.  All
capitalized terms used in this U.S. Tax Compliance Certificate (this
“Certificate”) and not otherwise defined shall have the same meaning herein as
in the Credit Agreement.

 

Pursuant to the provisions of Section 2.26(e) of the Credit Agreement, the
undersigned hereby certifies that (i) it is the sole record owner of the
Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it
is providing this Certificate, (ii) its direct or indirect partners/members are
the sole beneficial owners of such Loan(s) (as well as any Note(s) evidencing
such Loan(s)), (iii) with respect to the extension of credit pursuant to the
Credit Agreement or any other Loan Document, neither the undersigned nor any of
its direct or indirect partners/members is a “bank” extending credit pursuant to
a loan agreement entered into in the ordinary course of its trade or business
within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of its direct
or indirect partners/members is a “10 percent shareholder” of any Borrower
within the meaning of Section 881(c)(3)(B) of the Code and (v) none of its
direct or indirect partners/members is a “controlled foreign corporation”
related to any Borrower as described in Section 881(c)(3)(C) of the Code.

 

The undersigned has furnished the Administrative Agent and Zale with IRS
Form W-8IMY accompanied by one of the following forms from each of its
partners/members that is claiming the portfolio interest exemption: (i) an IRS
Form W-8BEN or (ii) an IRS Form W-8IMY(or any successor form thereto)
accompanied by an IRS Form W-8BEN (or any successor form thereto) from each of
such partner’s/member’s beneficial owners that is claiming the portfolio
interest exemption.  By executing this Certificate, the undersigned agrees that
(1) if the information provided on this Certificate changes, the undersigned
shall promptly so inform Zale and the Administrative Agent, and, to the extent
it is legally entitled to do so, (2) the undersigned shall have at all times
furnished Zale and the Administrative Agent with a properly completed and
currently effective U.S. Tax Compliance Certificate in either the calendar year
in which each payment is to be made to the undersigned, or in either of the two
calendar years preceding such payments.

 

[NAME OF LENDER]

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

 

Title:

 

 

 

 

Date:                      , 20[ ]

 

 

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